WORKING PAPER 0208

From Supply Chain to Demand Chain: The Role of Lead Time Reduction in Improving Demand Chain Performance

Suzanne deTreville And Ari-Pekka Hameri

From Supply Chain to Demand Chain: The Role of Lead Time Reduction in Improving Demand Chain Performance

Authors: Suzanne de Treville1 Ari-Pekka Hameri Ecole des Hautes Etudes Commerciales (HEC) Universit de Lausanne

November 18, 2002

Submitted to Journal of Operations Management

Corresponding author: Suzanne de Treville Ecole des Hautes Etudes Commerciales University of Lausanne BFSH1 Office 616 1015 Dorigny, Switzerland Telephone: +41 21 692 3448 e-mail: suzanne.detreville@hec.unil.ch

From Supply Chain to Demand Chain: The Role of Lead Time Reduction in Improving Demand Chain Performance

Abstract
In improving demand chain performance, is it better for parties in the chain to first focus on lead time reduction, or first focus on improved information flow? Whereas supply and demand chain management theory suggests that lead time reduction is a necessary antecedent to successful information flow improvement, demand chain parties are often observed in practice to begin with information flow improvement in spite of long lead times. Parties are also observed to express uncertainty concerning how short lead times need to be if information flow improvement efforts are to have a high probability of success. In this paper, we propose a framework for prioritizing lead time reduction in a demand chain improvement project, using a typology of demand chains to set specific improvement goals concerning both lead time and information flow.

Key words: supply/demand chain management, lead time, logistics

1.0 Introduction

A Nordic pulp and paper producer was experiencing difficulties in managing its supply chain, which had become complex due to increasing customization of its products, and due to the company's shipping production from its Nordic plants throughout continental Europe. The lead time from customer order to delivery averaged six months, hence the pipeline contained six months of inventory. In spite of the substantial inventory investment and the long waiting times, service levels were unsatisfactory. Also, the long lead times were hindering the company's ability to move into custom markets, where profit margins were considerably higher than for standard products. Therefore, the company hired a well-known consulting firm to help them improve the performance of their supply chain. Although the company knew that the long lead times in the chain would need to be reduced, management decided to begin the supply chain improvement project by improving the flow of information through the chain through partnership with distributors, either through acquisition or through strategic alliance. The information flow throughout the chain was to be made more transparent through installation of an ERP-type software package. Management believed that improving information flow first would be easier to implement than lead time reduction, and that an improved information flow would facilitate lead time reduction. Eighteen months and several hundreds of thousands of dollars later, it became clear to management that the improvement project had failed. Inventories had continued to increase as a percent of sales and attempts to increase control over the chain had led neither to inventory nor to lead time reductions. The partnerships with the distributors and the information systems installed were unsuccessful in improving the flow of either information or of physical goods. To make matters worse, the management time invested in the project had caused the core businesses to be neglected.

Reacting to the problem, management decided to return to focusing on their core businesses, and to solve the supply chain problem by distributing manufacturing rather than attempting to improve the performance of their existing chain. The company acquired production facilities in each major market, creating shorter and more manageable supply chains. This solution solved the immediate problem of poor service levels and excessive inventory investment, but limited the company's ability to improve competitiveness through improved market mediation capabilities (Fisher, 1997) in their existing chain, rather than making a strategic retreat into local production. Supply chain management theory clearly specifies the limitations to improving information flows when lead times are long (e.g., Fisher, 1997, 2002; Fisher & Raman, 1997; Heikkil, 2002; Lee, Padmanabhan & Whang, 1997; Mason-Jones & Towill, 1999; Perry, Sohal & Rumpf, 1999). Fisher, Raman, and McClelland (2000: 118) described the plight of such companies: "Many products today have such long lead times that retailers can't call for a change in production--even if they have tracked early sales, have paid attention to product testing, and know without a doubt that a change is warranted. As one merchant told us, 'We do pay attention to our tests. The problem is we already own the product; the test merely reveals that it will be a dog once it gets to the stores.'" So, where is the problem here? Did the supply chain performance improvement project fail because of a lack of understanding of theory, or is there a need to more clearly articulate the relationship between the constructs of relative lead time and information flow effectiveness? Consider the supply chain described above. Should the producer have begun by reducing lead times? If so, how much should lead times have been reduced before investing in information flow? What would have been the best strategy for lead time reduction? What approaches to information flow improvement were best? Does the choice of information flow

improvement and lead time reduction approaches depend on the context, or are there certain approaches that are always preferred? Note as well that managers making the decision about whether to begin demand chain improvement efforts by reducing lead times or improving information flow are likely to be steered toward the latter in a typical course in supply chain management, since most of the classic cases taught in supply chain management courses illustrate how to improve information flow in spite of long lead times (e.g., Sport Obermeyer (Hammond & Raman, 1996) , Barilla Pasta (Hammond, 1994), and Hewlett-Packard DeskJet (Kopczak & Lee, 2001)). In our view, such confusion results from an insufficiently articulated theory concerning the relationship between lead time reduction and improvements to information flow in supply chains. Following Bacharach (1989), a theory is needed to tame the complexities and richness of the supply chain management environment--which are sufficiently complex that Choi, Dooley, and Rungtusanatham (2001; see also New, 1996) suggested modeling supply chains as complex adaptive systems--so that we can capture and understand the underlying relationships that lead to successful supply chain performance. One approach to managing complexity of empirical data is to organize such data into a typology (Bacharach, 1989). In this paper, we define a typology of supply chains according to relative lead time and information flow efficiency, proposing that the position of the company within the typology determines the approach to be followed in improving performance of the chain. The typology specifies a set of different contexts, with the likelihood of success with a given performance improvement tool depending on the context, following Bacharach's (1989) statement that theory is bounded by context. Based on the typology, we suggest a number of testable propositions specific to each context concerning the relationship between lead time, information flow, and improvement strategies.

2.0 Literature Review 2.1 Literature Concerning Supply Chains

Supply chain management has played a strategic role in operations management since the Industrial Revolution, but it is only recently that the focus has shifted from satisfying the need of the supplier for efficiency to satisfying the need of the customer for service. In the early 1980s, just- in-time (JIT) production concepts caused a new awareness of the value of market mediation: linking the decision to produce to evidence of downstream demand. Goods in a typical JIT pull system are not made to order, but are replenished under the assumption that demand is relatively stable. Because of the emphasis in JIT on minimizing demand variability through techniques such as freezing the production schedule and heijunka (e.g., Monden, 1983), market mediation under JIT often consists as much of taming demand as of adjusting production to meet demand. The objective within JIT is seldom to take full advantage of the potential of market mediation. Fisher (1997) describes the unrecognized potential for market mediation in automobile sales. Most automobiles are purchased from a small selection that happens to be available at a dealer, rather than having the automobile built to order. Nevertheless, JIT resulted in some initial mo vement toward including market mediation in supply chain management rather than only considering efficient physical supply of goods. A second outcome of JIT was a change in attitudes toward suppliers, moving from arms- length to partnership. In the early days of JIT, there was considerable emphasis on the development of relationships between suppliers and customers, for example through establishing close geographical proximity, or through increased communication. Moving from arms- length relationships to some form of alliance was emphasized in most of the classic JIT literature (e.g., Hall, 1983; Harmon, 1993; Hayes, Wheelwright & Clark, 1988; Schonberger, 1983; Suzaki, 1987). In the mid-1990s, however, authors such as Bensaou (1999) questioned

the general recommendation emerging from JIT that partnership was the preferred form of relationship with all suppliers. Bensaou (1999) described the move toward partnership with suppliers as a leap of faith, demonstrating through an empirical study of supplier relationships that the most effective level of closeness in such relationships was determined by the nature of the product, market, and partner. Williams, Maull & Ellis (2002) evaluated supply chain theory from a transaction cost economics viewpoint, noting that electronic commerce had the greatest potential to reduce supply chain-related transaction costs when the trading information to be exchanged was minimized: although gains could be realized from electronic commerce for more complex transactions through systems involving partnership such as common databases and system translators, such gains were less certain due to increased risk of opportunism. As interest in supply chain management increased during the late 1980s and 1990s, researchers began to focus on the speed and quality of information flow through the chain, with the Quick Response initiative in the apparel industry being one of the most visible efforts (e.g. Abernathy, Dunlop, Hammond & Weil, 1999; Fisher & Raman, 1996). Lee, Padmanabhan, and Whang (1997) applied Forrester's (1961) concept of industrial dynamics to the flow of information in the supply chain, demonstrating that the variability of information received by the supplier is substantially greater than the variability of demand when (a) orders form the only information concerning demand that is transferred within the chain; (b) orders are batched; (c) prices fluctuate; and (d) the customer reacts to concerns about being placed on allocation by playing a rationing game. Lee et al. (1997: 548) demonstrated that this "bullwhip effect," that is, the distortion of demand variance which is amplified as it moves upstream, results from "strategic interactions among rational supply chain members," in contradiction to Sterman's (1989) conclusion that the bullwhip effect arises from irrationality or misinterpreted feedback. Lee et al. (1997) also demonstrated that

the bullwhip effect becomes more severe as lead times increase, although some bullwhip effect is present even with a lead time of zero under the conditions specified above. The bullwhip effect theory appears to apply to all supply chains that attempt market mediation: avoiding the conditions leading to the bullwhip effect is recommended for all supply chains. Frohlich and Westbrook (2002) proposed a typology of supply (demand) chain integration according to whether the producing company was linked upstream to suppliers or downstream to customers, demonstrating that for manufacturing companies, upstream and downstream integration combined resulted in more improvement in chain performance than either upstream or downstream integration alone, although one-sided integration resulted in a higher level of operational performance than no integration. Higher levels of integration resulted in higher levels of performance (see also Frohlich & Westbrook, 2001). Frohlich and Westbrook (2002) also emphasized that both supply and demand integration within the chain have been greatly facilitated by the introduction of the Internet, which they credited with eliminating many of the trade-offs previously inherent in improving information flow. Rabinovich, Dresner and Evers (2002: 6) described implementation difficulties in improving demand chain performance, noting that "...although there is substantial evidence that learning about demand before undertaking production acts [as] a substitute for product inventories, it is not understood what the most effective way is to achieve that substitution." In their study, implementation of an enterprise-wide information system-- hypothesized to improve demand chain performance--led instead to an increase in inventory speculation among demand chains surveyed. Rabinovich et al. (2002) concluded that improved demand chain performance was more likely to result from operational initiatives such as lean production that resulted in lead time reduction, than from direct investment in information systems to improve information flow.

Whereas most of the supply chain recommendations arising from JIT theory and from an understanding of the bullwhip effect were expected to apply to all supply chains, Fisher (1997) noted that the new supply chain management tools and concepts being widely implemented did not appear to be resulting in improved supply chain performance, which he attributed to lack of a framework for choosing the right type of supply chain for a given context. He proposed that the choice of supply chain management approach should depend on the nature of the demand for the product: the supply chain for functional products should emphasize physical supply of goods, and the supply chain for innovative products should emphasize market mediation. Whereas many aspects of demand for a given product--such as product life cycle, the predictability of demand, the product variety, and lead times--were noted by Fisher (1997) to be important, he proposed that it sufficed to know whether the product was functional or innovative to determine the appropriate supply chain. Fisher (1997) also noted that many products were shifting from being functiona l to being innovative as companies attempted to improve competitiveness through product development. Vollman, Cordon, and Heikkil (2000) suggested that the term supply chain be replaced by the term demand chain to emphasize the shift in emphasis from efficient supply to meeting the needs of the customer. Combining Fisher's (1997) division of supply chains according to whether product demand is functional or innovative with Vollmann et al.'s (2000) suggested change of terminology from supply to demand chain management, we propose the following definition: Definition: A demand chain is supply chain that emphasizes the market mediation function over its role of ensuring efficient physical supply of the product. Corollary: A given supply chain can be decoupled into an upstream supply chain and a downstream demand chain through a decoupling point (e.g., Naylor, Naim & Berry, 1999).

Childerhouse, Aitken, and Towill (2002) developed an integrated framework for "focused demand chains," incorporating a classification system for demand chains--which they distinguish from supply chains--based on five variables: (a) duration and stage of product life cycle, (b) time window or delivery lead time, (c) volume, (d) product variety, and (e) variability of demand, which they refer to as DWV3 , with the classification of product demand determining the market mediation strategy--MRP, Kanban, postponement, or design and build--to be followed for a given type of demand chain. The focused demand chain framework was successfully implemented in a major UK lighting producer, supporting their proposition that choice of demand chain strategy was facilitated through the DWV3 classification system. Heikkil (2002) studied attempts to improve information flow in six demand chains within Nokia Networks. Each of these demand chains was having difficulties with market mediation. In each case, Nokia offered a reduction in lead time from four months to ten days in exchange for improved information concerning demand. Although according to Fisher's (1997) framework, lead time reduction followed by market mediation should have been the appropriate supply chain management approach in each of these cases, response to the overtures made by Nokia ranged from enthusiastic to negative, and the outcomes of the projects varied considerably. On the basis of these cases, Heikkil (2002) concluded that Fisher's (1997) proposition--that the choice of market mediation or physical efficiency for a given chain depended essentially on the nature of demand--was too simple. Heikkil (2002) proposed that a variety of demand and supply chain structures were required to cover the entire universe of customer needs and situations. In his model of demand chain management, Heikkil (2002) added constructs such as duration of relationship, trust, and customer perceptions of the support received from the supplier to the nature of demand in determining

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whether a given chain should be more focused on efficienc y or market mediation (customer satisfaction). In summary, interest in demand chain management began in the 1980s with JIT production. Demand chain management techniques were initially assumed to be universally applicable, but now are seen to apply to chains requiring market mediation more than efficient delivery of goods. There is increasing evidence that tools for improving information flow in the demand chain do not apply to all contexts, and that implementation of demand chain improvements may be problematic.

2.2 Lead Time Reduction

Interest in lead time reduction was originally awakened by JIT production, even though lead time reduction was considerably less emphasized in JIT than waste--especially excess inventory--reduction (e.g. Blackburn, 1991; Hall, 1983; Monden, 1983; Schonberger, 1982; Suri, 1998; Suzaki, 1987; Womack, Jones & Roos, 1990). Whereas JIT is primarily focused on repetitive manufacturing (Suri, 1998), Goldratt (1984) addressed lead time reduction in a job shop environment, drawing attention to the impact of bottleneck resources and lot sizing on lead times. Results from lead time reductions from JIT and related initiatives led to identification of a competitive strategy based solely on speed, referred to as "Time- Based Competition" (TBC, e.g.; Blackburn, 1991; Holmstrm, 1995; Schmenner, 1988; Stalk, 1988; Stalk & Hout, 1990, Suri, 1994). Schmenner (2001) proposed that companies having emphasized flow, implying a focus on speed and variability reduction, would outperform companies emphasizing other goals. Whereas much of the literature on lead time reduction was largely anecdotal and exploratory, Hopp and Spearman (1996) compiled a set of the mathematical principles determining lead time, which they referred to as "factory physics." Suri (1994, 1998)

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developed a manufacturing strategy entitled Quick Response Manufacturing 1 (QRM) based on the same mathematical principles described by Hopp and Spearman (1996). Factory physics and QRM formalized the relationship of bottleneck utilization, lot sizes, and variability to lead times. The underlying mathematical relationships had been well-known in the field of queuing theory for many decades (Suri, Diehl, de Treville & Tomsicek, 1995), but the work by Hopp and Spearman (1996) and Suri (1994, 1998) represented the first comprehensive application of these principles to the general theory of operations management. Eriksen and Suri (2001) described demand chain improvement at John Deere Horicon works through use of supplier lead time as a key metric, and through working together with suppliers to implement QRM princip les so that supplier lead times could be reduced. Although the set of mathematical principles driving lead time reduction are commonly known and accepted among researchers in the field of operations management, such knowledge does not appear to have been widely disseminated to practitioners (see also Suri 1994, 1998). Lead time reduction is often described in the operations management literature as arising from initiatives such as JIT/lean production or agility (e.g., Naylor et al., 1999) rather than from identifying and reducing congestion at bottlenecks, reducing lot sizes, and moving to a product layout, which facilitates managing these mathematical relationships (Suri, 1998). Kourteros, Vonderembse, and Doll (1998) proposed that time-based manufacturing was related to shop- floor employee involvement, setup time reduction, cellular manufacturing, quality improvement efforts, preventive maintenance, dependable suppliers, and pull production, but did not relate these constructs to the mathematical principles that drive lead time.
1

The ressemblance in terminology between the supply chain strategy Quick Response and the manufacturing strategy Quick Response Manufacturing is coincidental.

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3.0 A Typology of Demand Chains

We propose that two primary constructs determine the context of a given demand chain: the efficiency of information flow concerning demand, and the lead time relative to the period of time during which demand can theoretically be observed, as stated earlier. We define three levels of information flow in a given chain: (a) level IF I, in which information concerning demand flows is transferred upstream in real time without distortion; (b) level IF II, in which information concerning demand is transferred upstream, but with moderate delays and distortions; and (c) level IF III, in which no effort is made to transfer demand information. Relative lead time is similarly classified into three levels according to demand information available when production begins. To facilitate operationalization of the construct of relative lead time, we define two time periods: T1, representing the number of time periods in advance that accurate information concerning demand is potentially available, and T2, representing the number of time periods in advance that some information concerning demand is potentially available, for example through observing early sales (e.g., Fisher & Raman, 1996). We define the three categories of relative lead time as follows: (a) category LT I, in which the lead time is less than T1, making it feasible to begin production after completely observing demand; (b) category LT II, in which the lead time is between T1 and T2, making it feasible to observe some--but not all--demand prior to beginning production; and (c) category LT III, in which the lead time is greater than T2, making it necessary to begin production before observing any demand. Demand chains, then, can be classified by lead time performance relative to the time horizon of observed demand, and by the efficiency of the information flow through the chain with respect to speed of information flow and distortion of information transferred. Demand chain strategy consists of choosing a desired position on the demand chain matrix, and specifying a trajectory for achieving that position. The typology is shown in Figure 1.

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[insert Figure 1 about here]

3.1 Classifications of Information Flow

At level IF III, the only information that the upstream members of the chain receive concerning demand comes from the order itself, which creates a "bullwhip effect," and results in substantial information distortion, especially when combined with price changes, order batching, or rationing (Lee, Padmanabhan & Whang, 1997). Examples of a level III information flow are seen in Campbell Soup's supply chain behavior prior to elimination of price discounts (e.g., Fisher, 1997), and in the supply chain for Hewlett Packard's inkjet printers prior to implementation of a postponement strategy (Kopczak & Lee, 2001). At level II, the bullwhip effect is minimized, and there is some effort to transfer demand information upstream in the chain. Tools used in establishing a level II information flow range from simple--such as a JIT kanban-based pull system--to sophisticated, leading Fisher, Raman, and McClelland (2000) to refer to them as "rocket science retailing." Partnership and other forms of strategic alliance can also be used to achieve a level II information flow. A level I information flow typically requires an electronic link between demand chain levels. The development of the Internet has greatly facilitated such a real time, undistorted information flow (Frohlich & Westbrook, 2002). Examples of level I informatio n flow can be found outside of the Internet, however: consider the link between automobile assembly and seat manufacturing at Toyota Motor Manufacturing (TMM), in which automobiles exiting the paint line transmit a signal to the seat supplier so that the seat for that automobile can be manufactured and delivered to TMM by the time the automobile reaches the point in the assembly process where the seat is installed (Mishina, 1992). A level I information flow is required for demand chains supplying a mass cus tomized product, such as the Levi's Personal

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Pair program (Abernathy et al., 1999), in which jeans were produced to customer order with a lead time of two weeks, or a product that is built to order.

3.2 Classifications of Relative Lead Time

The second va riable is the lead time relative to the time during which accurate information concerning demand is available, whether or not such information is transferred to the upstream parties of the chain. As mentioned previously, it is possible in many chains to specify a decoupling point that separates an upstream supply chain from a downstream demand chain. In such a case, the relevant lead time for that chain is the lead time from the decoupling point to the customer. Consider a demand chain that has a lead time between decoupling point and final customer that is longer than the period of time during which some information concerning demand is theoretically available. If the lead time is longer than the period of time during which demand information is available, then production must be committed prior to observing demand, hence transfer of demand information does not improve the performance of the demand chain. Proposition 1: The information flow performance cannot exceed the relative lead time performance. For a demand chain in category LTi, IFj, i must be less than or equal to j.

3.3 Demand Chain Matrix Trajectories

Progress in demand chain integration usually takes place along one dimension at a time: either improving relative lead time, or improving information flow, but not both simultaneously. Moving along a single dimension at a time rather than attempting to move along two dimensions simultaneously appears to be preferable for two reasons: (a) success is more likely when demand chain participants focus on a single goal, rather than risking confusion and distraction from concentrating on two challenging goals simultaneously, and

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(b) the tools required to achieve information flow depend on the level of relative lead time performance. As an example, Nokia's efforts to improve demand chain performance began with reducing lead times from four months to ten working days--achieving level LT I in some cases, LT II in others--followed by improved communication of demand data (Heikkil, 2002). Proposition 2: Movement within the demand chain between positions occurs along one dimension at a time--that is, either horizontally or vertically--rather than along the diagonal. Each move on the demand chain matrix is associated with a set of possible tools. The suggested "toolbox" for each move is shown in Figure 2. [insert Figure 2 about here] Proposition 3: The appropriate tools to accomplish a given move on the demand chain matrix are a function of the position on the matrix and the dimension along which the move is planned to occur. 3.3.1 Starting Position: LT III Consider a demand chain that is at level LT III. As proposed earlier, such a demand chain is unable to achieve an information flow better than level IF III irrespective of what investments are made in information technologies, partnerships, or other demand chain management tools, hence the positions LT III/IF II and LT III/IF I are labelled as infeasible on the typology matrix in Figure 1. The lack of communication between downstream and upstream operations makes market mediation attempts in such demand chains particularly vulnerable to the bullwhip effect. Successful market mediation is not possible in a demand chain positioned at LT III/IF III, consistent with Fisher (1997; Fisher, Raman & McClelland, 2000). The only possible move in the demand chain matrix from the position LT III/IF III is downward along the LT dimension, reducing the lead time from the decoupling point enough

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to permit the observation of some demand. Lead time reduction can be achieved either through application of factory physics (e.g., reducing bottleneck utilization, lot sizes, and variability), or through a reevaluation of the position of the decoupling point in the chain. If lead time reduction from the decoupling point is infeasible, the n the chain should cease attempts to achieve market mediation, and should transform itself back into a traditional supply chain, transferring management attention to efforts to increase demand for what has been produced. Proposition 4: Demand chains located at position LT III/IF III are not able to achieve market mediation, hence traditional supply chains--focusing on efficient supply with no efforts at market mediation--will outperform demand chains at this position.

3.3.2 Starting Position: LT II

Consider a demand chain at level LT II/IF III. This chain would theoretically be able to observe some demand prior to beginning production, but has not taken the steps required to eliminate bullwhip effect factors and make use of potentially observable data. The level LT II/IF III is dominated strategically by both LT II/IF II and LT I/IF III: parties should either invest in reducing lead times to improve the quality of demand information available, or invest in information flow to make maximum use of available demand information. As stated earlier, the best information flow performance available to this chain is IF II. Which direction is best for the chain to take? In order to simplify the problem, let us consider the situation in which reducing lead times to level LT I and improving information flow to level IF II are equally feasible, represent the same level of difficulty, and have the same cost. Let us define four total implementation costs, which include not only financial costs, but also an estimation of the effort and risk involved (see Figure 1): X1 for a move from LT II/IF III to LT I/IF III, X2 for a move from LT II/IF III to LT II/IF II, X3 for a move from LT I, IF III to LT I/IF II, and X4 for a move from LT II/IF II to LT I/IF II. While an

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improvement in information flow might reduce lead times to some extent through an inverse planning loop effect (Stalk, 1988), in most cases the improvement in information flow will not result in a change in level from LT II to LT I. Therefore, we will make the assumption that X1 = X4: the cost of reducing lead time from level LT II to LT I does not decline with an improvement in information flow. Conversely, we will assume that X2 > X3: it is clear that the availability of accurate demand data reduces the cost of improving information flow. Consider the two possible trajectories between position LT II/IF III and LT I/IF II: the chain can move through position LT I/IF III at a cost of X1 + X3, or through position LT II/IF II at a cost of X2 + X4. Since X1 = X4 and X3 < X2, then X1 + X3 < X2 + X4: the trajectory through LT I/IF III is expected to cost less than the trajectory through LT II/IF II. Proposition 5: If the total cost of reducing lead times from LT II to LT I is approximately the same as the total cost of improving information flow from IF III to IF II given a lead time classification of LT II, then the trajectory LT II/IF III - LT I/IF III - LT I/IF II will cost less than the trajectory LT II/IF III - LT II/IF II - LT I/IF II. The supply chain management literature is rich with examples of chains moving from level IF III to IF II with lead times at level LT II, including transmission of POS information from retail stores to Barilla Pasta to permit smoothing of replenishment (Hammond, 1994); and Sport Obermeyer's collection of early sales data (e.g., Fisher, Hammond, Obermeyer & Raman, 1994)). These cases represent successful improvement of information flow. The discussions of these cases, however, are as focused on implementation challenges as on results. The reasons for remaining at a lead time level of II vary. Barilla management was concerned that lot size reductions would result in too low capacity utilization. Sport Obermeyer had difficulties in reducing lead times because of producing overseas. Blocher, Garrett, and Schmenner (1999) give an excellent example of a pharmaceutical firm limited in

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its ability to reduce lead times because the Federal Drug Administration approvals specified the production lot size. Therefore, whether due to "mental models" (Senge, 1990) concerning lot sizes and production efficiency (Fisher, 1997) or due to actual production constraints, there are situations in which a demand chain will not be able to move to position LT I before attempting to improve the information flow. The cases evaluated by Heikkil (2002) give some insight concerning the improvement of information flow at a lead time level II. The lead time reduction from four months to ten days carried out by Nokia brought one of the six cases to a level of LT I. In this case, improving information flow to a level IF II was relatively easy and successful. In the other five cases, the lead time reduction resulted in a level of LT II. Heikkil (2002) demonstrated that improving information flow in these cases required not only clear evidence that such a change would be beneficial to all parties, but required substantial investment in relationship development in order to build trust and commitment. Although Heikkil (2002) suggested that the constructs related to the quality of the relationship apply to information flow improvements in all demand chains, we suggest that the dependence on relationship quality is much higher in the context of longer lead times (see also Williams et al., 2002). In relationships with a low value of these relationship-related constructs, the implication of Heikkil's research is that a level II information flow might not be achievable, hence reversion to a traditional supply chain strategy might be preferred for such a chain. Proposition 6: At a leve l II lead time, chain relationships exhibiting high levels of constructs such as duration of relationship, trust, and customer perceptions of supplier support will be more likely to succeed at improving information flow from level III to level II than chains exhibiting low levels of these constructs, following Heikkil (2002). 3.3.3 Starting Position: LT I

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Consider a demand chain that is in category LT I. If the members of this chain have made no investment in transferring the available demand information upstream, then the variability of orders will be higher than the variability of demand. The increased variability as observed by the upstream members of the supply chain will result in increased inventory and reduced demand chain service levels with respect to markdowns and stockouts. This distortion of demand will increase still further if rationing, price promotions, or other sources of order batching are used in the demand chain (Lee et al., 1997). Such a chain would be in category LTI/IFIII. Moving to LT1/IFII requires nothing more than eliminating practices encouraging order batching, and ensuring that the available demand information is transferred upstream in a timely manner. Because manufacturing can begin after accurate demand information is available, no complex forecasting systems are required. The famous Bennetton case is an example of a technique that allowed a demand chain to move to LT1/IFII. The postponement strategy followed by Bennetton in product design allowed lead times for dyed garments to be short enough that production occurred in response to actual demand observed at retail outlets (for a complete discussion of postponement, see van Hoek, 2001)+. Early electronic data interchange (EDI) systems permitted the rapid transfer of demand information upstream (Heskett & Signorelli, 1984). In general, demand chains at a level of LT I should always strive to reach an information flow level of II or better. Proposition 7: Demand chains at a level of LT I which have achieved an information flow of level II will outperform those at a level IF III. Consider a demand chain that is in position LT1/IFII, and is considering a move to LT1/IFI. The position LT1/IF1 is required for mass customization. It is generally agreed that the strategic and competitive possibilites inherent in a mass customization strategy are tremendous. Also, many experts in the area of mass customization are cautioning that attempting to implement a mass customization strategy in the presence of long lead times is

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likely to lead to failure (e.g., Tu, Vonderembse & Ragu-Nathan, 2001). Long production lead time is probably the primary reason why mass customization has been slow to gain momentum. According to Frohlich and Westbrooks (2002) claim that the Internet has created a wide variety of new possibilities to improve the level of information flow through the transfer of real-time demand information, we might expect to see a substantial increase in the number of firms having achieved level LT I/IFI over the next several years. Proposition 8: Demand chains at position LT I/IF I are more likely to succeed at mass customization than demand chains in other positions on the demand chain matrix.

4.0 Conclusions
We began this paper with the story of a Nordic pulp and paper producer which had failed to improve information flow in their demand chain. According to our typology, where was this chain positioned? What would our theory have suggested concerning improving the chain performance? The producer's lead times were clearly at level LT III, therefore any efforts to improve information flow so as to permit better market mediation were doomed to failure. The producer had a choice of reducing lead times or reverting to traditional supply chain management. Given that traditional supply chain management was inconsistent with the producer's efforts to customize products, lead time reduction was a requirement for the producer to accomplish its product customization strategy. Lead time reduction could have been accomplished through applying factory physics and QRM principles to existing operations, through establishment of a decoupling point in combination with a postponement strategy, or through dedicating fast and flexible capacity to customized products. Our experience has been that managers in many companies believe that reducing lead times is difficult and expensive, and that information systems will make lead time reduction easier. We have watched many companies fail. We have also watched companies begin with

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efforts to improve information flow, recognize that little improvement was taking place, and revert to lead time reduction, ending up with a successful demand chain improvement. Our typology has allowed us to establish a set of contexts for demand chain that permit us to address questions of how demand chain improvement should take place in a given chain--that is, what tools are appropriate, why a given tool is likely to succeed in a given context, and when parties in the chain should move from lead time reduction to information flow improvement (Bacharach, 1989). We have argued that demand chain theory is bounded by context: propositions that apply to one position in the typology do not necessarily apply to other contexts. Our goal in writing this paper is to organize what we know about improving information flow and reducing lead times into a theory of demand chain improvement so that we can better make sense out of the tremendously diverse and complex set of cases that have emerged from the field (Bacharach, 1989), and so that we can better communicate to managers the body of knowledge that we have amassed concerning how to improve the performance of a given supply or demand chain. As Lewin (1945: 129) said, "Nothing is as practical as a good theory."

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Manage as traditional supply chain

Information Flow Effectiveness III Unmanageable as a demand chain II I

III Relative Lead Time

Infeasible

Infeasible

Uncompetitive II
X1

Rocket Science Retailing (Fisher, 2000)

X4

Infeasible

X2

I Uncompetitive

X3

Acceptable performance

Permits mass customization and build to order

Figure 1. A typology for demand chain management.

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LT III/IF III to LT II/IF III or LT I/IF III: LT II/IF II to LT 1/ IFII: Lot size and set-up time reduction Bottleneck utilization, i.e. matching production plan to capacity Product layout to support flow Revise production allocation policies Reducing variability by minimising rework, scrap and downtime Postponement according to introduction of product variability Positioning of decoupling point Inventory and production control (e.g. kanban) Mathematical modeling tools Improved equipment and technology Product design, i.e. modular products and design for manufacturing and assembly

LT II/IF III to LT II/IF II: Partnership or other form of strategic alliance Tools and systems to collect, analyze and share of data Forecasting

III III II I

II

LT I/IF III to LT I/IF II: Eliminate bullwhip factors Simple and transparent systems to communicate demand information (e.g. EDI, POS) Vendor managed inventories

LT I/IF II to LT I/IF I: Internet-based systems Close partnerships based on computer integrated control

Figure 2. A suggested toolbox for demand chain performance improvement.

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