How is Supply Chain Strategy Influenced by Demand Management

How is Supply Chain Strategy Influenced by Demand Management

Demand Management is a focused effort to estimate and manage customer demand with the intention of using the information to shape operating decisions. This implies demand management is much more than just forecasting accurately. It’s about integrating demand and supply. Integrating these two sides of the business is challenging but it can facilitate improved communications,collaboration and coordination across both functional and organizational boundaries. Integrating both demand and supply will improve the overall efficiency and effectiveness.

How is it critical to your business?

Demand management is often known as demand supply integration or DSI. There are two basic sides of the business i.e the demand side and the supply side. The demand side of the business consists of marketing and sales consisting those who work to create product or brand awareness, customer, sales and downstream supply chain. Partners are also part of the demand side of the business. In contrast, the supply side consists of the core supply chain functions like sourcing, operations and logistics. These include folks that plan sources, make moves and help sell products. The upstream suppliers are also part of the supply side of the business.

In many firms the demand and supply organizations are not integrated as they do not communicate much with each other and even blame each other for problems. A famous business scholar Peter Drucker referred to this gap as the Great Divide which describes how adversely it affects firm performance. The demand supply integration attempts to bridge the great divide by facilitating cross-functional integration through a Sales and Operations planning process. Sales and Operations planning is often referred to as S&OP. The process starts with the submission of a demand forecast and a capacity forecast. These should be the best estimates of how much inventory a business will need to satisfy customer demand and how much inventory the business can produce.

In an attempt to meet customer demand inevitably these two forecasts will not match up perfectly. Either a business will commit to sell more than it can make or it’s producing more than it can sell. Both of these scenarios are problematic and lead to decreased service and increased costs or both. This is one of the most basic problems that plague businesses but it is normal to expect demand and supply mismatches. The key is to identify mismatches and develop plans to bring demand and supply back into balance and bridge the gap between them.

How to bridge the gap?

Best practice suggests that senior management should be involved in the process to provide insights that could help everyone understand strategic priorities. Likewise finance managers should provide input regarding financial goals and requirements of the firm by sharing forecasts strategy. The decision-makers have a much better idea of the opportunities and problems at hand. 

All major areas of the business must have a voice and should contribute ideas to resolve imbalances. After a Sales and Operations planning meeting plan should be aligned in a way that balances demand and supply the s&op process will produce a demand plan that gives a clear direction to the marketing and sales team. This plan may require additional efforts like promotions, advertising, price reductions. There may also be focused actions to reduce demand like price increases or reduced incentives. An operational plan is also produced through the s&op process that guides sourcing on how much to buy, it tells operations how much to produce and logistics how much to move. The additional supply requirements may require paying more for expedited raw materials or overtime pay and factories or the use of premium modes of transportation. However, these requirements are to be presented and agreed in the Sales and Operations planning meeting. 

Beyond having balanced demand and supply plans, the S&OP meeting produces a financial plan that’s aligned with corporate strategy. Firms that effectively implement and integrate supply and demand will have a competitive advantage. It must be kept in mind that integrating demand and supply is not easy. There are rather few companies that do well because of the internal power imbalances or politics. For instance, some firms are completely driven by powerful marketing and sales groups. In these organizations, the uninhibited pursuit of sales at any cost dictates the aggressive sales. Thereafter, the operational plan capacity constraints or capabilities are ignored. Often, senior management and finance are often not involved in these organizations. This is clearly a recipe for disaster because cost eventually skyrockets or service levels plummet. These firms go out of business because they either disappoint too many customers due to unrealistic promises or they cost themselves out of business by trying to expedite everything.

Another common demand supply integration problem occurs within organizations dominated by finance. Typically, the demand plan is driven by commitments that were made to Wall Street investors and the artificially forced demand plan becomes the operational plan. This scenario suffers from the same fate as there is no actual integration of demand and supply. The process was not informed by those with expertise in each area. Instead of a well-conceived plan this simply turns into an ill-advised mandate that often results in higher costs or lower service.  

The best way to integrate demand and supply and a firm is by implementing the full S&OP process. But what about the broader supply chain?  How can firms integrate demand and supply with their supply chain partners?

As mentioned earlier, the demand side of any business includes marketing sales and downstream supply chain members. Likewise the supply side of any business includes sourcing, operations, logistics and upstream supply chain members. These extended supply chain members should already be part of the existing S&OP process that integrates demand and supply within the firm. 

For instance, consider a retailer who effectively integrates demand and supply. In order for the retailer to have any idea of what their capacity forecast is in terms of what they can supply to the market, they need to be integrated with a S&OP process of their manufacturers to understand the manufacturers supply plan. At the same time the manufacturers need to know the retailer’s demand plan so they can develop a demand forecast for their own s&op process. Although the retailer and manufacturer each conduct their own demand and supply integration they both have critical inputs into each other’s individual S&OP processes. In other words, a firm’s S&OP process depends on inputs from other supply chain members. These dependencies are not limited to retailers and manufacturers. Both the concept and the process are quite complex but potential benefits are worth the effort. 
Effectively integrating demand and supply throughout a supply chain helps all businesses do things better, cheaper and faster. From a strategic standpoint, integrating demand and supply through a S&OP process reduces both demand and supply uncertainty. By reducing these uncertainties it enables strategic movement that results in lower costs, better service and more timely responses. In conclusion, integrating the demand and supply sides of the business can be challenging but if it is done well it can have great rewards for your business. If you can successfully bridge that great divide then your firm will surely achieve a competitive advantage.

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