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Demand Management: Linking the Market to Operations ManagementDemand Planning
All businesses, whether they be commercial, profit-seeking companies or not-for-profit altruistic enterprises, manage demand. It is so common, that we might not even be aware that we are doing it. We do it in our everyday lives, as we manage the inventory of food in our refrigerator, save for our children’s education, or enjoy some leisure time on the weekend. Multinational corporations employ teams of Demand Managers and Planners to gather data, analyze it, and create sales forecasts for input into sales and operations planning systems. We all manage demand, but for commercial businesses competing in the new economy to become and remain profitable, it must be done extremely well.
The business environment of the 21st century is changing rapidly. Nowhere in the world, it seems, is an entrepreneur or multinational corporation immune from the forces of technology, unfettered access to information, consumer empowerment, globalization, and government policy. Data flies around the world at the speed of light, and as it is converted to information it influences attitudes, behavior, and tastes overnight—sometimes in dramatic fashion. We have come to depend upon this new characteristic of the Information Age. But it comes with a challenge:
How do we relate to our customers—present, past, and future—in such a volatile commercial climate? How do we avoid the chaos, or turn it to our advantage?
A robust approach to Demand Management (DM) is an essential component of any business system in the new economy. It can provide competitive advantages in a number of different ways. First, let us define DM.
What is Demand Management?
It is tempting to define Demand Management in terms of one of its most ubiquitous and influential activities: forecasting. While forecasting sales and estimating overall demand is certainly part of Demand Management, DM involves much more than this one task.
The DM function in a company is responsible to recognize all potential demands on its production system. Such demand can be external to the organization (such as when customers place orders with the company or signal their intent to purchase), or it can be internal (such as the needs for raw materials, components, and subassemblies required to make finished goods, or spare parts for repair needs, or future promotional activity that will be planned in the marketplace. It is the responsibility of Demand Management to identify and capture all of these demands and interpret them.
Demand Management provides an essential bridge between the marketplace and internal operations of any company. The function exists just inside the Manufacturing Planning and Control (MPC) System boundary. While Sales and Marketing professionals interact constantly with external customers, it is DM that metabolizes those interactions, so that they may be understood and fulfilled by the business.
In short, Demand Management activities include demand (sales) forecasting, customer order promising, customer order management, and communication within and outside the company in efficient and effective ways. DM helps coordinate all demands for capacity (inventory, production time, resources, and so forth) that have been placed upon a company with planning and control activities. It is therefore essential that the DM function be responsive, articulate, and unambiguous.
As many companies seek to grow beyond their modest roots, perhaps as a single location sole proprietorship, a formally structured DM function can provide many advantages that support that growth. Even small companies can benefit from building a professional DM function.
Demand Management facilitates an agile business system:
Modern technology provides the ability to access new information about customer response to our products overnight, or even in real time. However, speed might not be as desirable an attribute as agility. Businesses must be prepared to act intelligently on new information at the earliest opportunity, quickly but effectively. Companies must be both responsive and efficient. Demand Management supports efficient and effective planning and control functions.
As a bridge between the marketplace and internal company operations, a good DM process will simultaneously support the traffic flow of data from the market into the business, while ensuring that data does not overwhelm internal operations. This is the process of conversion of data into information that is supported by DM. Management within a business can use DM output as an indispensable decision support tool, contributing to both strategic initiatives and tactical execution. DM provides stability, even in volatile times.
Demand Management endorses integration of business processes:
Professional Demand Management promotes communication, team play, and collaboration. DM will interact not only with Sales and Marketing functions, but also with key personnel from Finance, Production (Operations), and other logistics functions in the company. Best in Class organizations encourage this collaboration through a formalized Sales and Operations Planning process (S&OP) where Senior Management connects regularly with planners and functional managers in an effort to constantly balance supply (capacity) with demand (priority).
Demand Management is not a “one size fits all” solution. Its configuration will differ depending upon the product delivery strategy within which the business intends to operate: make-to-stock (MTS), make-to-order (MTO) or assemble to order (ATO). Working with a good software provider will allow a company to express its particular strategy of going to market, enabling the solution to be tailored to the needs of the organization.
DM activities may be centralized into one functional area within a company or the may be spread amongst various functional departments. This will depend upon the history of the company, its culture, and the specific skill sets of individuals working in the organization. Naturally, as the DM responsibilities become more complex, supported by technology, the company will be motivated to hire quality personnel to manage the process.
In any case, DM must be aligned with the strategic direction of the company.
Demand Management recognizes the influence of time-based competition:
In the 21st Century, new products are being introduced into the marketplace at a pace never before seen in human history. To the swift go the spoils. But a challenge that is endemic to new product introductions, as well as products that exhibit shortened product life cycles, is that sales history is limited. Frequently, history is nonexistent. And we may have only one chance to get it right.
Demand Management, properly configured, will allow planners to go beyond simply forecasting from history. It will encourage managers to challenge assumptions regarding the data. It challenges analysts to capture new input from a wide variety of areas. DM will allow fast recognition of sales trends and quick assessment of early acceptance by the marketplace. As Sales and Marketing operatives participate positively in the process, DM can incorporate that input into the broader perspective. DM will recognize all demands that are being put on the organization, and it will coordinate them so that senior managers can plan with confidence.
Demand Management embraces Collaborative Planning, Forecasting and Replenishment (CFPR):
Demand Management is a key enabler to CFPR initiatives, where a company seeks to establish closer strategic relationships with both suppliers and customers. By sharing knowledge, suppliers and customers along the supply chain can work together to drive waste out of the value chain. Knowledge, it is said, can be an inexpensive substitute for inventory, and CFPR initiatives have resulted in significant inventory reductions along the chain while simultaneously increasing customer service and sales performance dramatically. Implementing CFPR can result in significant organizational and business process improvements on many levels.
Demand Management plays a major role in initiatives to improve “the Forecast”:
A Demand Management approach, supported by appropriate demand forecasting and planning software, can lead to dramatic improvements in forecast accuracy and will encourage the development of a single, collaborative sales forecast that is widely respected within the company.
As business evolved out of the supply-oriented “push” strategies that were so common in the late 20th Century, and grew into the demand-responsive “pull” environment of the 21st Century, forecasting grew from a predominantly clerical function into one that requires professionalism, business acumen, and collaborative spirit. Companies have started to pay attention to the sales forecast, as it forms an important input to strategic and tactical decision-making. The simple act of measuring forecast performance seems to improve forecast quality. DM forces the business to pay attention to the forecast, and continuously improve it. Today’s software capabilities allow a high level of statistical sophistication to be introduced into the forecast, even as the effort required to produce the forecast is reduced.
All of this translates into better decision support mechanisms for the business, as well as enabling tighter control over waste and inefficiency. Demand Management positively influences and supports long-term, sustainable profits, and growth.
Contact us if you would like to learn how DemandCaster can help you reap the benefits of effective Demand Management.