Organizational Strategy

The following topics are discussed under this section:

Goals of Organizational Strategy

  • Whatever strategy the corporation adopts to satisfy customers, grow, compete, organize itself and make money the supply chain has to operate in a manner that furthers those goals.
  • Four types of organizational strategy:
    • Customer focus and alignment
    • Forecast driven enterprise
    • Demand driven enterprise
    • Product type driven supply chain

Customer Focus and Alignment

  • When it comes to supply chains, its’s what’s good for the customers that counts and not what’s good for the nucleus company or even what seems to be good for the supply chain itself.
  • Supply chain management needs to be focused on giving the final customer the right product at the right time and place for the right price.
  • It’s about the balance of quality, price and availability (timing and place) that’s just right for the supply chain’s customer.
  • There are some basic premises that can help you get started in determining the appropriate balance:
    • Serving the end user customer is the primary driver of the supply chain decisions.
    • Organizations in the supply chain have to make a profit and stay in business to serve the customer.
  • Functional teams in the organization will provide their input and research on the optimal balance for the supply chain to meet customer needs.
  • Design engineers or better yet design teams from across the network design products that are right for the end customer and can be sold profitably.
  • Market research looks for the true, and not always obvious, needs in potential consumers that the supply chain can be engineered to satisfy profitably.
  • Logistics strategy begins with data about customer demands for availability of materials, components, service or finished products, depending upon the customer and then it looks for ways to move products in a cost effective way with acceptable risk.
  • Successfully managing for sustainability requires a strategic mindset, involving numerous personal and financial resources and a commitment from suppliers from first to lower tiers of the supply chain as well as consumers further up the supply chain.
  • Departments must cooperate with other departments in their organization and with their counterparts at suppliers.
  • This type of collaboration between supply chain partners necessitates breaking down cultural barriers and building a culture of trust to ensure that the focus is an end-to-end supply chain activities and not just discrete supply chain processes.
  • Creating and managing a sustainable supply chain requires an organization to be informed, exercise leadership and cooperate with all supply chain partners in achieving positive results on the triple bottom line.

Forecast Driven Enterprise

  • This strategy is one in which the nucleus firm, usually the manufacturer, utilizes a forecast an estimate of future demand as the basis of its organizational strategy.
  • It’s difficult to predict even the most stable demand – say, for a product like diapers.
  • The chain of demand begins at the far retail end of the supply chain and works its way back towards the source of raw materials used in marking the product. The traditional way of attempting to satisfy their demand is to forecast it.

(Definition) Safety Stock is a quantity of stock planned to be in inventory to protect against fluctuations in demand or supply.

Demand Driven Enterprise

  • The bullwhip effect is driven by demand forecasts. The solution is to replace the forecasts with actual demand information.
  • In the demand driven chain, supply management is focused on customer demand.
  • Instead of manufacturers planning their operations based on factory capacity and asset utilization, the demand driven supply model operates on customer centric approach that allows demand to drive supply chain planning and execution moving the “push-pull frontier”, back up the chain at least to the factory.
  • Instead of producing to the forecast and sending finished products to inventory, the production process is based on sales information.
  • There is no fixed production schedule in a strictly demand driven supply chain.
  • Product is turned out only in response to actual orders “on demand”.
  • Note, however, that on the supplier side of the plant, forecasts still determine delivery of raw material. The art of forecasting remains crucial, even in a demand driven chain.

Pull system entails the following:

  • In production, the production of items only as demanded for use or to replace those taken for use.
  • In material control, the withdrawal of inventory as demanded by the using operations. Material is not issued until a signal comes from the user.
  • In distribution, a system for replenishing field warehouse inventories where replenishment decisions are made at the field warehouse itself, not at the central warehouse or plant.

When a supply chain works in response to forecasts it’s called a Push chain or push system and it entails the following:

  • In production, the production of items at required times based on a given schedule planned in advance.
  • In material control, the issuing of material according to given schedule or issuing material to a job order at its start time.
  • In distribution, a system for replenishing field warehouse inventories when replenishment decision making is centralized, usually at the manufacturing site or supply facility.
  • Everything in a push system is pushed downstream from one point to the next according to schedules based on the forecasts.
  • The challenge in changing from forecast driven (push) to demand driven (pull) system is in reducing inventory without also lowering customer satisfaction.
  • The decision to switch to a demand-pull process trades one type of risk for another:
    • In the forecast-push process, the risk is related to the buildup of inventory all along the chain. Not only does inventory cost money while it sits in a retail stock rooms, distribution center or production storage area, it runs the risk of becoming obsolete or irrelevant for a number of reasons. In a world of rapid innovation, inventory obsolescence is a very real threat.
    • In the demand-pull, make-to-order model, on the other hand, the risk is that orders will begin to come in above capacity and all along the chain there will be expensive activity to run the plant overtime, buy more and faster transportation or sweet-talk customers into waiting for their orders to be filled or substituting a different product.
  • Running short pf stock is also a risk in the forecast driven chain. Forecasts can be wrong in either direction. That’s why the safety-stock builds up at each point where orders come in.
  • One technique to prepare for uncertain demands is Kitting, which is preparing (making / purchasing) components in advanced, grouping them together in a Kit, and having them available to assemble or complete when and order is placed.
  • In reality, most organizations pursue a push-pull strategy and the point where push moves to pull is the key strategic decision.
  • Once that decision has been made, building a demand driven enterprise can require significant changes in sully chain processes. The following are some major steps:
    • Provide access to real demand data along the chain for greater visibility of the end customer.
      • The first requirement is to replace the forecasts with real data. The only supply chain partner with access to these data first hand is the retailer.
      • Visibility is a necessity for building a pull system and pioneers like Walmart have led the way in that regard.
      • With point of sale scanning and radio frequency identification (RFID) a retailer can alert its suppliers to customer activity instantaneously.
      • Instead of producing to monthly forecast, manufacturers with that kind of immediate signal from the front lines can plan one day’s production runs at the end of the preceding day. They produce just enough to replace the sold items.
    • Establish trust and promote collaboration among supply chain partners.
      • Collaboration is implied in the sharing of information.
      • In return of receiving real-time data that allow reduction of inventory, suppliers and distributors have to agree to change their processes in whatever ways may be necessary to make the new system function without disrupting customer service.
    • Increase agility of trade partners.
      • Because the inventory buffers with not exist or will be much reduced in this demand-driven supply chain, the trade partners need to develop agility-the ability to respond to the variability in the flow of orders based on sales.
      • When making to forecast, a plant can run a larger volume of each product to send to inventory. But when making to order, the plant may have to produce several different types of products in a day. There will be no room for long changeover times between runs of different products; therefore, equipment, processes, work center layouts, staffing, or siting or all these things may have to change to create the capacity required to handle the new system.

Product Type Driven

  • Company can have more than one supply chain, depending upon the types of products that are passing along the chain and other variables.

Functional Products

  • Functional products that change little from year to year have longer life cycles (perhaps more than two years), relatively low contribution margins, and little variety. Because demand for them is stable, they are fairly easy to forecast, with a margin of error of about 10%, very few stock out and no end-of-season mark downs.
  • The appropriate supply chain for these products should emphasize predictability and low cost with performance indicators such as the following points:
    • High average utilization rate in manufacturing.
    • Minimal inventory with high inventory turns.
    • Short lead time (consistent with low cost).
    • Suppliers chosen for cost and quality.
    • Product design that strives for maximum performance and minimal cost.
  • However, make-to-order functional products, such as replacement parts for customized equipment, usually have long lead time (six months to a year).

Innovative Products

  • Innovative products have unpredictable demand, relatively short life cycles (three months for seasonal clothing) and high contribution margins or 20 to 60 %.
  • They must have millions of variants in each category, an average stock out rate from 10 to 40 %, and end-of-season markdowns in the range of 10 to 25 % of regular price.
  • The margin of error on forecasts for innovative products is high -40 to 100 % but the lead time to make them to order may be as low as one day and generally is no more than two weeks.
  • The supply chain for innovative products should emphasize market responsiveness rather than physical efficiency, with performance indicators such as the following:
    • Excess buffer capacity and significant buffer (or safety) stock of parts or finished items.
    • Aggressive reduction or lead time.
    • Suppliers chosen for speed, flexibility, and quality (rather than cost).
    • Modular design that postpones differentiation as long as possible.
  • Innovative products, with their high margins and unpredictable demand, justify the extra expense for holding costs.
  • The idea that the same types of product can be either functional or innovative implies that one company might have more than one supply chain.
  • New information technology makes it possible to have multiple, dynamic chains that can accommodate different product and information flows.

  • Staples
    • These have steady, year-round demand and low margins, for example: white underwear.
    • It is advised to stock staples only in relative outlets in small quantities and transporting them in truckload quantities.
    • A full truck, is cost-effective for the shipper than a partially loaded vehicle.
  • Seasonal Products

These could include outdoor patio furniture, holiday décor, etc. for which the demand is more predictable since it is tied to the holiday or season.

  • Fashion Products

These are innovative items, with unpredictable demand. For example, Zara, the Spanish clothing manufacturer has two supply chains, one for staples and other for fashion clothing. To get the faster response time, Zara uses European suppliers for the fashion items. But for the more predictable demand items, it uses eastern European supplier that have poor response time (not a concern) and lower cost.

  • In addition to varying supply chain by product type there are several other variables to consider – store type and time in season or product cycle.

Demand Management Functional Responsibilities and Interfaces

Demand management has functional responsibilities and interfaces that include:

  • Product Development and brand management
  • Marketing
  • Sales
  • Operations

Demand management serves as an intermediary between product development and brand management, marketing, sales, and operations so that all of these functions plans, communications, influences, and priorities are coordinated to maximize and satisfy demand.

Demand management interfaces with product development, marketing, sales and operations to help the organization and the extended supply chain integrate the right services into their product offerings. Rather than producing and then selling, demand management helps organizations generate product-service packages that can meet specific customer segment needs in terms of what is delivered and when it is delivered.

Product development and brand management

  • Product development or design and brand management are typically long-term strategic tasks that can benefit from integration with demand management because it promotes the balanced needs of the supply chain.
  • Elements that are not perceived as a value to the customer should be eliminated from the design of the product-service package. This is one of the principles of lean thinking: If the customer does not understand or value the results of a supply chain activity, it is not value-added and can be eliminated.
  • Demand management can influence product and brand management to consider the processes throughout the whole supply chain, such as the ease and expense of sourcing raw materials for product, manufacturing it, warehousing it, transporting it, displaying it, servicing it, repairing it, returning it, and reusing or recycling it at the end of its life.
  • Demand management can provide a collaborative venue for multiple departments or supply chain stakeholders to provide input, consider the feasibility of options or strategies, and, after some amount of iteration, arrive at the product-service package and brand design with the highest potential for mutual profit.

Marketing

  • Demand management relies on marketing because marketing must provide input to the demand plan. The input is necessary because marketing and sales are the people who are closest to prospects and customers.
  • Marketing staff are responsible for finding potential customers and identifying needs the company can solve, creating and maintaining customer demand with communications and promotions, helping to refine product design and packaging to meet customer needs, forecasting demand throughout a product’s life cycle, and pricing products and services to be affordable and profitable at the same time.
  • Demand management interfaces with marketing in the medium and short term to tailor demand to meet available capacity. Tailoring demand from a marketing perspective includes setting existing and potential customers’ expectations regarding the types of demand that the organization will accept or consider. That is, if customer know the rules of the game they will be more likely to happily work within those rules. This helps avoid situations such as frustrating a potential customer by having to reject and unprofitable customization request that likely took some time to prepare.
  • Another way demand can be tailored is by raising or lowering prices either semi-permanently or through promotions. Price reductions can simulate demand in times of excess capacity, and returns to regular pricing can help when there is insufficient capacity.

Sales

  • Sales departments work with customers on a daily basis and make delivery promises. The primary interface demand management has with sales is to implement the demand plan commitments regarding influencing or prioritizing demand. Another interface is ensure that the demand plan supports the organizational strategy.
  • Salespersons desire to eliminate order backlogs, which means sales staff is not typically interested in minimizing inventories. Their priority is to increase sales by providing the right quality of supplies at the right place. For similar reasons, a high priority for sales is time to market, especially if the product or service must be ready for a particular selling season, be presented at a trade show or convention, or beat the competition to the market. Demand management can champion these requirements with product development, marketing, and operations.
  • Demand management can work with sales to manage demand in such ways as convincing product and brand management to raise or lower prices for ordering in bulk or for accepting delayed shipments. Another role for demand management is to educate sales staff on the limitations of product development, marketing and operations.

Operations

  • Interfacing between the demand side of the organization and manufacturing planning and control is a vital task for demand management because most operations professionals are highly specialized.
  • Demand management can also facilitate the understanding between operations and the other parties at S&OP meetings, such as by accommodating the requirements of profitable customer segments in production plans.

Collaborative Planning, Forecasting and Replenishment (CPFR)

  • Collaborative planning, forecasting and replenishment (CPFR®) is a way to integrate the elements of demand management among supply chain partners.
  • CPFR is:
    • A collaborative process whereby supply chain trading partners can jointly plan key supply chain activities from production and delivery of raw materials to production and delivery of final products to end customers. Collaboration encompasses business planning, sales forecasting, and all operations required to replenish raw materials and finished goods.
    • A process philosophy for facilitating collaborative communications.

CPFR Model

The VICS CPFR model is broken into four major activities comprising eight collaboration tasks, with two tasks listed under each of the four activities. The eight collaboration tasks are further associated with 16 enterprise tasks carried out either by the buyer/retailer or seller/manufacturer.

CPFR Collaboration Activities and Tasks

The enterprise tasks function as links between the collaboration tasks and the overall operation of the enterprise. These links serve to eliminate redundancies and discrepancies that occur when the manufacturer and the retailer carry out those tasks in isolation.

Strategy and Planning

  • The purpose of strategy and planning is to establish rules for the relationship, define the mix of products, and develop plans for upcoming events.
  • There are two specific collaboration tasks to be completed within this area:
    • Collaboration arrangement:

      Collaboration arrangement involves setting business goals, defining the scope of collaboration, and assigning roles, responsibilities, checkpoints and escalation procedures.

    • Joint Business Plan:
      A joint business plan identifies significant events such as promotions, inventory policy changes, store openings and closings, and product introductions. Marketing planning is the responsibility of the manufacturer, while the retailer takes care of category management.

Demand and Supply Management

  • In this area, the partners forecast consumer demand at the point-of-sale and determine order and shipment requirements. The model specifies two tasks:
    • Sales Forecasting
      The manufacturer analyzes market data, while the retailer forecasts point-of-sale (POS) numbers.
    • Order planning/forecasting
      The manufacturer conducts demand planning, while the retailer undertakes replenishment planning.

Execution

  • This area, which is also known as the order-to-cash cycle, involves placing orders, preparing and delivering shipments, receiving and stocking products at the retail site, recording transactions, and making payments.
  • The model identifies two execution tasks:
    • Order Generation
      The manufacturer does production and supply planning, while the retailer conducts the activities associated with buying.
    • Order Fulfillment
      This involves logistics and distribution management for both manufacturer and retailer.

Analysis

  • In the analysis phase, the supply chain partners monitor planning and execution activities to identify exceptions.
  • They also aggregate results and calculate key performance metrics, share insights, and adjust plan as part of continuous improvement.
  • Analysis involves the following two tasks:
    • Exception Management
      This involves execution monitoring by the manufacturer and store execution by the retailer.
    • Performance Assessment
      Manufacturer and retailer keep scorecards to access each other’s performance.

Technology

  • CPFR is at heart about developing effective business processes to synchronize supply chain operations across enterprise boundaries.
  • The success of CPFR depends upon willingness to work with shared data efficiently in real time.
  • CPFR software solutions include systems that allow enterprise partners to:
    • Share forecasts and historical data.
    • Automate the collaboration arrangement and business plan.
    • Evaluate exceptions.
    • Enable two-way, real-time conversations, revisions and commentary.

CPFR Benefits and Challenges

Instituting CPFR and realizing its benefits may require meeting several predictable challenges:

  • Increased costs
  • Resistance to data sharing
  • Bridging internal functions

When setting up a CPFR relationship, cross-functional teams might bring together marketing and sales, financial product specialist, logistics specialists, and demand planners who would collaborate among themselves and speak with a single voice to the customer.

Linkages to Match Organizational Strategy

Planning Demand (fixed high capacity strategy)

  • The organizational strategy is to meet demand to the maximum extent possible by providing the necessary capacity to meet peak demand at any time.
  • Ensuring that capacity will be available requires a focus on planning demand, especially in terms of long-term planning.
  • Such a strategy could be pursued if the costs of maintaining excess capacity are considered less than that of losing business.

Communicating Demand (highly variable capacity strategy)

  • The organizational strategy is to match supply to demand as closely as possible by being flexible enough to increase or reduce capacity spontaneously as demand changes.
  • Matching strategies such as these require a focus on communications so that the changes in supply can be proactive rather than reactive.
  • Such strategies may employ a great deal of contract work, outsourcing, and flexible work scheduling.

Influencing Demand (moderately variable capacity strategy)

  • The organizational strategy is to level production and carefully manage demand to meet optimal capacity.
  • The focus is on influencing demand so that there is little need to change capacity.
  • Sometimes this process is called demand shaping because it involves convincing customers to buy certain models based on excess inventory.
  • Demand is influenced by carefully scheduling delivery of products and services and timing promotions to operational requirements.

Managing and Prioritizing Demand (fixed average capacity strategy)

  • The organizational strategy is to control demand to the maximum extent possible through scheduling, promotions, queues, and rationing.
  • The focus is on managing and prioritizing demand because fixed average capacity will be by definition result in periods of insufficient supply.
  • This strategy could be beneficial for products or services that require development and retention of expert personnel or other expensive resources.

Managing and Prioritizing Demand

  • 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

  • Principle 1:
    • 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.
  • Principle 2:
    • 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

  • 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.

Plan phase

  • 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.

Do phase

  • 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.

Check phase

  • 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.

Act phase

  • 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

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

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

  • 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.

Elements of the Demand Management Process

The Demand Management Process is a process that weighs both customer demand and firms output capabilities, and tries to balance the two. Demand management is made up of planning demand, communicating demand, influencing demand and prioritizing demand.

Demand management seeks a balance between the extremes of trying to satisfy every demand and satisfying only demands that current capacity can handle.

Demand Management

Demand Management

 

 

 

  • 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:

  1. 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.
  2. 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.