Managing and prioritizing demand requires an organization or supply chain wide view of demand.
It involves optimizing demand across the system as measured by optimum organizational profit, demand volume, sales revenue, and customer service, including customer retention.
This is a management activity because it involves setting and enforcing policies to promote this optimization process.
It is a prioritization activity because it involves making judgement calls to decide what actions or customers are more important than other when capacity is limited.
Organizations must manage and prioritize demand because sales will differ on a regular basis from planned demand in total volume and/or in product mix and because supply often cannot produce products in the exact timing and mix specified by the demand plan.
Demand Management and Prioritization Policy
Demand management and prioritization policy should clearly indicate who is allowed to manage and prioritize demand.
Responsibility for managing and prioritizing demand should be restricted to appropriate management levels in the supply organization based on the level of risk involved in the decision.
The highest prioritization decisions involving strategic risks should be made at the executive level, while supply managers should be responsible and held accountable for lower level demand management and prioritization decisions.
A key policy best practice is to retain responsibility for these lower risk decisions at the management level rather than delegating this responsibility to individual salespersons.
Another policy best practice is to retain this management and prioritization power in the demand side of the organization rather than delegating the power to the supply organization.
Demand Management and Prioritization Process
One principle is that the organizations intent is to fulfill demand whenever it is feasible and will result in an increase in marginal profits, even when this demand comes from unexpected sources.
The prioritization process in this case involves finding ways to make the unexpected orders become profitable if they would not otherwise be profitable.
Another principle is that when demand differs from supply within a time frame that allows for supply capacity or operations to be changed without impact on costs or other operations, prioritization is not necessary.
It is the supply organizations responsibility to manage supply in this case.
When there are cist implications to a supply and demand mismatch, management and prioritization is necessary to match supply.
Determining when management and prioritization is necessary involve determining ways to delay commitments until the last possible moment so that prioritization is not necessary for as many operations as possible.
This is done by delaying decisions until a necessary decision point is reached such as when raw materials need to be ordered or a batch process must be started to keep operations running smoothly and at acceptable cost.
These decision points when they relate to operations are called time fences.
Decision points such as time fences should be set in consultation with both the supply and demand side of the organization so that they reflect the optimum balance between production costs and customer service.
Tools for collaborative demand management and prioritization include sharing information on actual capacity or working with retailers well in advance of perceived shortage periods.
Influencing demand describes the activities of product and brand management, marketing, and sales to convince customers to purchase the organizations products and services so that the organizations business objectives are met or exceeded.
Another aspect of influencing demand is the requirement for the demand side of the organization to influence the product development and supply sides of the organization to recognize a support actual customer expectation and requirements.
One iterative process that can be used to ensure that demand-influencing activities are being continually adapted to current situations is to use a structured process such as the plan, do, check, act model.
Plan, do, check, act model
This model is four-step cycle that incorporates performance measurement, feedback, and re-planning into the processes of planning and executing activities.
It is a model that can be applied to any process, including the other aspects of the demand management and S&OP integration processes.
During the plan phase of the demand-influencing cycle, product/brand management, marketing, and sales perform research and develop detailed strategies and tactics for influencing demand.
The plan should include a budget, a schedule, and a list of tasks assigned to specific individuals for accountability.
The plan should also set measurable targets indicating the increase in demand that the activities should generate.
The plans are reviewed and approved prior to the S&OP meetings and are adjusted as needed during those meetings, resulting in commitments to execute a consensus plan.
During the do phase, product and brand management, marketing, and sales execute the plans.
Product and brand management professionals launch, manage, and retire products.
Marketing professionals work to create demand and reinforce the brand value.
Salesperson work to acquire new customers and retain and develop existing customers.
Sales and marketing professionals may be required to provide the demand manager with periodic data on their results during execution.
The marketing and sales managers and the demand manager exercise management and control during this phase by serving as problem solvers and by verifying that the correct activities are occurring.
During the check phase, the demand manager and/or other demand-side managers review metrics against the plan and document other feedback, such as customer opinions on product pricing, features and customer service levels.
A key aspect of this phase is to determine the root cause of any differences between plan and actual results, that is, whether they arise from identifiable internal or external factors.
These activities are performed periodically rather than waiting until the processes are complete.
Dashboards are common way to track and monitor metrics for demand-influencing activities.
During the act phase, the demand manager leads the re-planning efforts to respond to variances from the plan and address root cause of the variances.
Re-planning may call for increased or decreased investments in various activities depending on what is and is not proving effective.
The re-planning process could be part of the lead up to the monthly S&OP process, or it could be performed more frequently if required. However, many marketing efforts take a long time to show measurable results, so a long term focus is typically necessary.
Using this model allows organizations to control their demand-influencing activities to the fullest extent possible.
Communicating demand rests on several principles of effective communication:
Communicate soon to minimize surprises
Communicating soon to minimize surprises is the principle that information communicated promptly is of far greater value than delayed communications for any reason. This is true for both good news as well as for information that is still uncertain.
Developing a culture that reward early sharing of good and bad news could improve demand communications significantly.
Structure communications to ensure that they occur
Structuring communications to ensure that they occur means that communications cannot be taken for granted.
A structured process must be more than just assuming that transactional data will be forwarded along by organizations information systems.
While data automation has freed an organization professionals from spending all their time on this level of communications, technology is no substitute for interpersonal relationship and consensus building.
Person-to-person interaction is needed when setting priorities, explaining nuances, and resolving conflicts.
The following picture shows communication structure for communicating demand:
Starting with demand plan inputs, communications occur in both directions regarding inputs, including assumptions and uncertainties.
During the consensus review, a key communication step is to challenge and validate assumptions and to acknowledge uncertainties.
The result of this process is a consensus demand plan that is integrated with finance plans and supply plans during the sales and operations planning process.
Communications in the S&OP process of reconciling and synchronizing plans must be structured so that all parties consistently feel listened to and understand the rationale behind the consensus numbers.
Communications can lead to greater buy-in and commitment to action that will be needed to realize the plans.
An output of the S&OP process is that the supply side of the organization uses the consensus numbers to perform master scheduling and supply planning.
Finally, monitoring performance and providing feedback is a communications process that links to demand-influencing and prioritization activities, to master scheduling and supply planning, and to the S&OP process itself.
One way to ensure that these communications occur and feedback is used to keep the plans realistic is to rely on a full-time demand manager.
Demand manager is an organizational position that is responsible for:
Gathering information on demand volume and timing by product, product family, and/or customer segment.
Performing analytical work on the data and the demand plan.
Building consensus on a demand plan.
Communicating demand information to and from the various stakeholders involved in input, planning, execution, monitoring, and revision of the demand plan.
The demand manager may also play a lead role in the S&OP process, for example, by creating various scenarios of demand for supply and finance in an effort to tie the demand plan to the business goals.
A best practice is to have this be a full-time position because of the importance and multifaceted nature of the responsibilities.
The demand manager is at the center of communications because this position serves as an intermediary between supply and demand organizations areas.
The demand manager is the recipient of feedback from the demand side of the organization regarding whether their demand-influencing or prioritization efforts occurred as planned or produced less or more demand than was planned for.
When actual demand varies from plan, the demand manager could request additional influencing or prioritization efforts or start the process of altering supply, demand, or financial plans as needed.
When demand is less than was planned for, the demand manager informs the supply organization so that they can alter the supply plan to keep supply and demand as synchronized as is feasible given the costs to change ongoing operations.
The following picture shows the use of a demand manager as a communications focal point:
Focus communications to fit audience
Being effective in communicating demand requires ensuring that the right individuals receive timely communications regarding changes in demand or the results of demand-influencing and prioritizing activities.
Information must be disseminated to fit the needs of the person receiving the information, such as providing demand data in dollars for finance but in units for operations.
Focusing communications also requires that each person receives just the information he or she needs to make an informed decision.
A key tool to help focus communications to fit the audience is to use dashboards, which are software presentations of key information from the organizations information systems.
Dashboards can be tailored by each user to show just the key performance indicators and information useful to that person.
The following elements are important to include in demand dashboards for demand consensus review:
Historical demand data for the past three months or more, with relevant key performance indicators and metrics for each month.
Demand plan for next 18 months or more.
Prior demand plan.
Assumptions made in demand numbers and pricing assumptions.
Planned branding, marketing, and sales promotions activities.
Key risks, opportunities, economic trends, and competitor actions.
Nuances and uncertainties.
Events and issues of note and decisions that were made.
Collaborative demand communication
Supply chain managers can counteract supply chain demand variability such as the bullwhip effect by communicating demand effectively to all parties in the supply chain. On a basic level this involves order processing.
Order Processing is the activity required to administratively process a customer’s order and make it ready for shipment or production.
From a collaborative demand management standpoint, this may involve producing and forwarding a sales order to the most efficient supply channel:
An inventory storage location, authorizing the goods to be shipped.
A production plant, authorizing production and specifying all information required by the master planner (what, how much and when)
The demand manager or another demand-side professional may also send a copy of the sales order to the customer to communicate the terms and conditions of the sale. In this way, demand management serves as a n intermediary between the customer and production planning.
Organizations can also use information-sharing tools such as collaborative planning, forecasting, and replenishment (CPFR) to find a balance between the desires for centralized supply chain planning to provide network integration and optimization and allowing each local region to analyze its own market from a local perspective. Each regional partner can be encouraged to share this local expertise with the larger network.
Planning demand is one element of demand management and is not to be confused with demand planning, which is the larger process of forecasting and demand management that is the subject of this entire section.
A key output of the demand planning process should be regular updates to the demand plan.
The Demand Plan
The demand plan is a consensus document requesting products and services from the supply side of the organization to meet the expected future demand for the organizations products and services in each period.
It is an estimate of how many products customers will purchase, at what price, and on what time table so that the organization and its suppliers can determine how much to produce, when to produce it, and when to ship it.
The demand plan is based partly on forecasting and partly on commitments by the demand side of the organization to generate the necessary demand to meet the plan and the goals set in the organizations business plan.
Demand Plan Inputs
The demand plan influences and is influenced by forecasting, by commitments, by product and brand management, marketing, and sales to create, influence, manage and prioritize demand and by business plan and strategy.
Other key inputs to the demand plan are the assumptions used and uncertainties encountered by the persons responsible for preparing the forecasts, the product and brand management plans.
These assumptions and uncertainties should be documented, reviewed, and challenged in the monthly S&OP review process to validate that the demand plan is realistic.
Knowledge of assumptions and uncertainties will also help the organization determine the best way to arrive at a consensus regarding demand plan numbers.
Uses of Demand Plan
The demand plan is used by multiple areas of the organization because it indicates demand both in units and in monetary amounts.
In this way, each audience for the demand plan can view the information in the most meaningful terms.
Operations, logistics, customer service, and product development can view the plan in units
Finance can view the plan in monetary amounts
Marketing and sales can view both units and monetary amounts
A key control to keep demand plans realistic is to treat the demand plan as a request for product from supply side of the organization.
In making this request, the demand side of the organization is stating that it is committed to creating this amount of demand and selling the products in the requested amounts.
Holding the demand side of the organization accountable for the consequences of producing too much inventory can be an effective control over unrealistic demand plans.
Close scrutiny of the demand plan can also reveal when inputs may be biased or assumptions unrealistic.
Planning Horizon and Revision Period
A best practice is to produce a demand plan that has at least an 18-month planning horizon and to revise it by re-planning on regular basis.
An 18 month minimum horizon has other advantages:
It provides a sufficient horizon so that each periods demand has been planned and reviewed multiple times, with increasing accuracy each time.
Planned product and brand management and marketing activities typically span at least an 18 month horizon, and sales activities typically span at least 12 month horizon, so the most current and reliable information on internal plans and likely actions of customers and competitors falls within 18 month range.
If the demand plan does not seem to be capable of achieving the goals in the business plan and strategy, a longer horizon allows organizations time to plan and execute additional activities to meet the revenue goals.
If the demand plan shows a need to increase capacity, it gives the organization sufficient time to approve and execute capital expenditures.
When it comes time to generate the annual business plan, by midyear the demand plan will show the next years projected demand and can be used as a key input to the business plan.
Demand management is a key part of the sales and operations planning (S&OP) process and the integrated business planning functions at an organization because it results in a demand plan that is used in and modified by these integration processes.
The S&OP is a disciplined monthly review process by management to evaluate and ensure conformance of sales and operations with the business plan.
The S&OP process involves a series of meetings between supply-and demand-side professionals and executives to synchronize plans and arrive at a single set of demand numbers.
Demand Management is defined is defined as:
The function of recognizing all demands for goods and services to support the marketplace. It involves prioritizing demand when supply is lacking and can facilitate the planning and use of resources for profitable business results.
In marketing, the process of planning, executing, controlling, and monitoring the design, pricing, promotion, and distribution of products and services to bring about transactions that meet organizations and individual needs.
Demand management is the art of synchronizing supply and demand plans. Demand management is necessary at each of the levels at which supply and demand plans are generated:
Long-term strategic needs, including long-term forecasting, product development, or capacity development.
Medium-term aggregate demand forecasting and master planning.
Short-term demand forecasting and item-level master scheduling.