Demand management is a planning methodology used to forecast, plan for and manage the demand for products and services. This can be at macro-levels as in economics and at micro-levels within individual organizations. For example, at macro-levels, a government may influence interest rates in order to regulate financial demand. At the micro-level, a cellular service provider may provide free night and weekend use in order to reduce demand during peak hours.
Demand management has a defined set of processes, capabilities and recommended behaviors for companies that produce goods and services. Consumer electronics and goods companies often lead in the application of demand management practices to their demand chains; demand management outcomes are a reflection of policies and programs to influence demand as well as competition and options available to users and consumers. Effective demand management follows the concept of a “closed loop” where feedback from the results of the demand plans is fed back into the planning process to improve the predictability of outcomes. Many practices reflect elements of systems dynamics. Volatility is being recognized as significant an issue as the focus on variance of demand to plans and forecasts.
Demand management as a business process
Demand management is both a stand-alone process and one that is integrated into sales and operations planning (S&OP) or integrated business planning (IBP).
Demand management in its most effective form has a broad definition well beyond just developing a “forecast” based on history supplemented by “market” or customer intelligence, and often left to the supply chain organization to interpret. Philip Kotler notes two key points: 1. Demand management is the responsibility of the marketing organization (in his definition sales is subset of marketing); 2. The demand “forecast” is the result of planned marketing efforts. Those planned efforts, not only should focus on stimulating demand, more importantly influencing demand so that a business’s objectives are achieved.
The components of effective demand management, identified by George Palmatier and Colleen Crum, are: 1. planning demand; 2. communicating demand; 3. influencing demand and 4. prioritizing demand.
Demand control is a principle of the overarching demand management process found in most manufacturing businesses. Demand control focuses on alignment of supply and demand when there is a sudden, unexpected shift in the demand plan. The shifts can occur when near-term demand becomes greater than supply, or when actual orders are less than the established demand plan. The result can lead to reactive decisions, which can have a negative impact of workloads, costs, and customer satisfaction.
Demand control creates synchronization across the sales, demand planning, and supply planning functions. Unlike typical monthly demand or supply planning reviews, demand control reviews occur at more frequent intervals (daily or weekly), which allows the organization to respond quickly and proactively to possible demand or supply imbalances.
The demand control process requires that all functions agree on time fences within the planning horizon, which should be no less than a rolling 24 months based on integrated business planning best practices. A time fence is a decision point within a manufacturer’s planning horizon. Typically, three established time fences exist within a company:
- Future planning zone – Supply is managed to match demand
- Trading zone – Demand is managed to match supply for production
- Firm zone – Demand is managed to match supply for procurement
A demand controller is established when a company implements a demand control process. Unlike a demand planner who focuses on long-term order management, the demand controller is responsible for short-term order management, focusing specifically when demand exceeds supply or demand appears to be less than planned, and engages sales management in both situations. The demand controller works across multiple functions involved in the supply and demand processes, including demand planning, supply planning, sales, and marketing.
Mastering Demand Management Across Your Organization’s Processes
Most supply chain professionals have developed reliable strategies for supply chain planning and inventory management. But relatively few have mastered demand management. In fact, it’s a term that doesn’t get much discussion in supply chain circles.
To put it simply, demand management is a discipline that analyzes the supply chain from the customer’s point of view and then orients all processes to meet the customer’s needs. It can involve a wide range of disciplines, depending on the unique processes of your organization. More than likely, it will encompass:
- Forecasting. Successful forecasting is more than just loading data into a spreadsheet, forming a basic view of projected sales based on that data, and then adjusting the business plan to work towards the forecast. It should involve multiple scenarios, so that your company can be prepared for virtually any unexpected twist or turn.
- Supply planning. It’s an ever-changing marketplace out there—one in which new suppliers continue to spring up around the globe even as your old, trusted supplier in the next town goes out of business. But if you merely react to these changes, you’ll always be one step behind your competitors who anticipate and prepare for them. By maintaining deep visibility into the capabilities and business health of all your suppliers, you’ll position your organization for continued success no matter what happens in the global business climate.
- Demand analysis. Your decision-makers may believe that your greatest spike in demand occurs in July of every year. But dig deeper. If you’re basing your decisions off of sales data, you may not be getting the full story. Most ERP systems record sales based on when a product shipped—not based on when it was first ordered. Only by keeping an accurate view of order history can you paint a realistic picture of your company’s demand—and then work to meet that demand year after year.
- Sales and operations planning (S&OP) or Integrated Business Planning (IBP). The idea that the supply chain organization can operate in a silo, free from the input of executives, is long gone. Over the past 20 years, organizations that make and sell products have embraced S&OP as a way to involve a wider range of stakeholders in every supply chain decision—and to incorporate supply chain information and needs into every business decision. More recently, IBP has emerged as an improvement to the S&OP process. When executed effectively, the outcome of IBP or S&OP is a better bottom line.
A Five-Step Approach to Effective Demand Planning Implementation
Good handling of market demand data is one of the most vital concepts in any supply chain. The correct management of demand information can greatly influence the level of integration and responsiveness and has a direct impact on customer service and inventory levels. If customer demand is the activating element in the supply chain, it’s quite clear that a multi-step operational supply chain management process to create reliable demand forecasts can play an active role in improving supply chain effectiveness. But how to create powerful demand planning implementation? The five-step approach outlined below provides guidance.
How to Create a Demand Planning Process
1. Start with a demand analysis
It’s an old saying: ‘garbage in, garbage out’. Any forecasting process starts with analyzing and understanding your sales history and cleaning up your dataset. In addition to the typical data cleansing tasks, it’s also important to establish a focus for the forecasting process: which items do we need to review?
Doing a customer-product segmentation prior to the demand planning implementation is a great help in this respect. Additionally, opting for a separate forecast for the recurring items and promotional, project or tender items will sharpen your focus. High-volume, fast-moving items that can be forecasted accurately based on statistics should be left to the automated forecast of the demand planning tool. However, you should always incorporate an exception-based review list.
2. Rely on a quantitative baseline forecast
Statistics should always be your starting point rather than the finishing post. This not only makes life easier for Sales but also helps to remove bias from the forecast because people have a natural tendency to over-forecast. Furthermore, it will free up extra time for your sales team to focus on lumpy and erratic figures.
At the same time, you should be very careful with statistical forecasting. In general, the forecast statistics are too complex and often poorly understood. If you have an effective process and a good tool, statistical forecasting can easily generate 30-40% more efficiency. If the results applied incorrectly, however, the only outcome will be frustration. So look for a knowledgeable partner who can help you select the right level of complexity for your business and ensure you benefit from improved performance as a result.
3. Strive for a collaborative demand planning implementation process
We can’t overemphasize the importance of gaining extra input for the statistical forecast from the right people, both from within the company and from key customers and distributors. Demand can be influenced by a myriad of factors, and way more than any statistical model can currently handle, so, statistics alone can’t do the job!
You have to rely on a collaborative process within and beyond company, boundaries to receive the additional, crucial demand information such as about product launches, substitutions, and end-of-life products, for instance. Other types of relevant information include promotions, price changes, and marketing campaigns, and projects and tenders could also be a disruptive factor in your supply chain. This extra demand information is typically managed via reviewing lists. Besides these, it can be very useful to ask your sales team to validate the statistical forecast, which is often easier to do on an aggregated level.
But it doesn’t end with your sales team’s contribution. You should stop trying to guess what your most valuable and important customers will buy. Instead, go and talk to them and set up a collaborative forecast approach. Do the same for your other important channel partners too.
4. Invest in performance management
The numbers tell the tale! In return for all your efforts to improve the forecast, you should also be able to measure your progress. Reducing the forecast error will improve service while lowering cost and inventory, so it’s worth ensuring that the forecast accuracy is monitored effectively.
In a typical situation, Supply Chain will generate the statistical forecast, Marketing or Product Management will add information about promotional campaigns, new product launches, and end-of-life products, and Sales will add customer data. Ensure that your tool enables you to check the added value of each of the different forecast versions and include a feedback cycle.
At the very least, follow up on these three key metrics: the mean percentage error, the mean absolute percentage error (MAPE) and the stability of the forecast accuracy.
5. Hold a demand review meeting
The final step in demand planning implementation should be a demand review meeting, led by the demand manager or the S&OP manager. Supply Chain is the only department that can be regarded as being ‘neutral’ with regards to Sales, Operations, and Finance and hence is in the best position to chair demand review meeting
The 8 Major Barriers to Effective Internal Demand Management
Buyers are frequently faced with significant obstacles before the appropriate sourcing option can be pursued. As is often the case, internal demand constraints act as effective barriers to the appropriate choice of reactive or proactive supply management.
- Product or service over-specification
In many organisations, the buyer’s internal client often seeks to over-specify the product or service required. This is often referred to as the “gold-plating” of requirements, where the product or service is specified in a way that exceeds the organisation’s requirements. This can be in terms of technical requirements and/or commercial considerations. Subsequently, the internal client’s (and buyer’s) requirements are far more difficult and/or costly to service.
- Premature establishment of the specification
If internal clients build a supplier’s offering into their design before the organisation has had an opportunity to negotiate with the supplier, the buyer may become locked into the supplier. If the buyer’s purchasing team starts to negotiate with the supplier after the organisation has accrued significant sunk costs in their solution, then it will be negotiating with a supplier that effectively has a monopoly position.
- Frequent changes in the specification
Organisations that procure complex services often experience a problem associated with the potentially high level of specification change because of the level of uncertainty that surrounds such purchases. However, these pre- and post-contractual problems may be exacerbated by internal client behaviour. The resulting frequent changes to the specification, again after it has built up significant sunk costs in the supplier’s solution, will leave the organisation vulnerable to opportunistic behaviour, even at the pre-contractual stage. Furthermore, the supplier may have to make costly, last-minute alterations to their processes in order to accommodate the changes, thus increasing the nuisance value of the customer to the supplier.
- Poor demand information
A significant demand management problem relates to the inability of the organisation to access (and analyse) accurate demand information. Poor demand information leads to supply chain players keeping high levels of inventory as insurance, which is against the principles of lean supply. Furthermore, the late placing of orders due to poor demand information makes it difficult for the supplier to pre-plan its production activities and may require the supplier to pay a premium for its own inputs, which it will seek to pass on. Poor demand information clearly puts the organisation in a poor negotiating position in relation to the supplier.
- Fragmentation of spend
This is a very common demand management problem. Most organisations buy ‘equivalent’ products from a large pool of different suppliers, often through small quantity orders placed at frequent intervals. This situation is often due to internal clients having their own personal preferences for certain products and having their own favourite suppliers. Each separate transaction is of limited value, thus increasing product costs, and the multiple interactions will also lead to higher transaction costs. Leverage opportunities are not possible and the attractiveness of the buyer to the supplier is significantly reduced.
- Maverick buying
In most organisations, there is a fairly high incidence of internal clients, either buying outside the contracts that have been set up, or buying using procedures that are not compatible with optimising value for money. Therefore, the maverick buyer is unlikely to have access to the requisite supply market information and will not possess the necessary competence in contracting and negotiating. As a result, there will be a further fragmentation of the organisation’s spend, resulting in loss of commercial leverage and the organisation being faced with higher prices. Maverick buying diminishes the relationship between volume and value that underpins the agreements with approved suppliers, thereby destroying the credibility and relative power of the buyer.
- Inter-departmental power and politics
Individuals or departments will have power resources, which can be drawn upon to either help, or hinder, change within an organisation. At the heart of this is the concept of the principal-agent problem. Managers within departments may have conflicting loyalties when working within organisations. They have loyalty to the organisation, which pays their wages, but also to their department, themselves and their careers. When these loyalties are in conflict, most managers will take action that favours the latter. Internal clients will often, therefore, make sourcing decisions that will secure their own personal advantage rather than furthering the wider interests of the organisation. When the person or department has a high level of intra-organisational power, they will have the ability to obstruct any drive to improve internal demand management, if they so desire.
- Risk adverse nature and culture of an organisation
The very nature and unique culture of an organisation may act as a further barrier to more effective demand and (subsequent) supply management. Organisations, which tend to be highly risk averse, may find it difficult to adopt the necessary organisational changes required to overcome some of the internal demand problems highlighted thus far. Although not necessarily a direct cause of ineffectual demand management, an organisation’s overriding culture can still act as a serious barrier to change.
In summary, the existence of these barriers often reduces the attractiveness of the buyer to the supplier. Depending upon the specific market conditions, the existence of these barriers can increase the leverage that the supplier has over the buyer. Subsequently, the buyer may be unable to achieve the desired outcomes (value for money) from the relationship.
In order to maximise value for money, organisations must first overcome internal demand problems discussed and then select the appropriate sourcing option to maximise their ability to leverage suppliers.