What is the Demand Management Process?
Demand management is a strategy for actively managing demand for products and services. It can be applied at both a business level and a macro / economic level. A company may apply demand management to align customer demand with product availability.
An example of demand management is when utilities increase electricity rates during periods of high demand.
As an example for macro-level demand management, government bodies may apply demand management at the macro level by adjusting interest rates to moderate consumer demand.
Feedback With Supply Chain
At a business level, this entails an active exchange of information with supply chain. Traditionally, a company’s sales organization has been accountable for generating demand for a company’s products, while the supply chain has been tasked with making products to satisfy this demand. If the sales team generated unexpected product demand through a large customer win, then it was up to supply chain to figure out how to ramp up production to satisfy the surge in demand.
Roles Become Interdependent
With a demand management process, the roles of sales and supply chain become interdependent. The supply chain organization regularly shares data on product availability, and the sales and marketing organizations manage demand to meet capacity constraints. Instead of operating as two distinct organizations, demand management dictates that the salespeople and supply chain organization operate in harmony.
1. Adopt a Culture of Demand Management
Successful sales organizations foster a culture of strong motivation and competition among its associates. They are relentless in their pursuit of new wins at large customers, and success is rewarded with champagne celebrations and award trips to exotic locales. No one is concerned with how supply chain manages the new orders; their job is over once the new customer signs on.
With a demand management policy, this same team may now be tasked with curtailing product demand to meet capacity constraints. It can be challenging for a hard-charging salesperson to reverse course and work to actively manage demand against capacity constraints. But, this is how an effective demand management strategy operates – The activities of entire organization is now synchronized with product availability, and it is now part of their job to manage order flow to unlock efficiencies in the supply chain.
Align Incentives. Culture shifts are always challenging, but can be overcome by building awareness and building incentives to meet the strategic goals of the program. Instead of being rewarded solely on revenue growth, a portion of incentives may be tied to the accuracy of their own planning. It is also common to incentivize associates based on gross margin, which generally increases under an effective demand management program.
2. Agree on Objectives
When implementing a new demand management process, you can have very specific goals tied to your specific company. For instance, your business may be nearing capacity at a particular manufacturing plant, so you may identify a strategic goal to prolong investment at this facility for a period. You will want to manage product mix to squeeze every last bit of output from that facility before making new capital investments.
While you may have some strategic objectives at your business, demand management programs frequently are deployed with the overarching strategy to reduce inventory and increase service levels.
3. Assign Ownership
By its very nature, a successful demand management activities drive collaboration within the business. Instead of relying solely on supply chain to manage the production against demand, the entire business is involved in managing demand against available capacity.
For this reason, the sales and marketing teams are jointly accountable with the supply chain planning organization. Successful implementations of demand management include the role of a demand manager, who partners with both sales and operations to optimize both production cost and customer service levels.
Both operations and sales management should accept the idea that they are each accountable for the outcomes of the other function.
- If operations is solely focused on cost efficiencies, then the business will drive cost savings at the cost of lower customer service levels.
- If the sales organization does not actively manage demand with the customer base, then the business will suffer through periods of excess inventory.
By making each other’s objectives a priority, the company can deliver products in a cost-optimized manner while still delivering on customer service levels.
4. Define Time Fences
Your options for meeting excess demand vary depending on the time horizon of the predicted demand.
Demand management principles dictate three discrete horizons; each time horizon affords different opportunity to manage either demand or capacity. It is best practice to define these horizons in advance, so that all stakeholders are aligned on the related actions for demand management in each scenario.
Three Time Horizons
Short Time Horizon: Demand Management Only
Assume you have an unexpected demand for 10,000 units of a product for delivery in two weeks, but you only have only have 6,000 units on hand. The lead time to produce this SKU is six weeks. What are your options to satisfy demand within this short time horizon?
In this case, the best option is to manage customer demand, either through an equitable allocation methodology or mute demand through flexible pricing or other tools. With this short time horizon, it is simply too costly to expedite the manufacturing processes to accommodate the customer needs. This period is referred to as the ‘Firm Zone‘, as no opportunity exists to manage supply in this short of period.
Long Time Horizon: Supply Management Only
Now, let’s assume that you expect market conditions will generate incremental demand of 10,000 units for this same product, but the demand won’t materialize until 6 months into the future.
In this case, the expected demand occurs well beyond the lead time for this SKU. For this reason, this incremental demand should be satisfied solely within the supply chain organization. This period is referred to as the ‘Future Planning Zone‘, as this period provides sufficient opportunity for long-term strategic planning.
Mid Time Horizon: Both Demand and Supply Management
Finally, assume the incremental demand is predicted to occur one month into the future. This is shorter than the typical lead time of the product, but you can still satisfy demand with some incremental costs. In this scenario, both the operations and sales leaders collaborate to both manage demand and capacity in a cost-optimized fashion.
Supply chain may satisfy a portion of the excess demand through marginally higher throughput, but it might be too expensive to satisfy all the demand. Thus, the sales and marketing organization may manage the remaining demand through market pricing or other customer negotiation.
This period is referred to as the ‘Trading Zone‘. This time period allows some flexibility in supply chain, albeit at slightly higher cost. Thus, the demand controller may elect to ‘trade’ slightly higher costs for better service levels, based on business need.
5. Consistent Methodology
Imagine the consequences if the business made decisions based on a predicted shift in demand, only to constantly revise the predictions based on wholesale changes to the prediction model. The business operations would always be scrambling, trying to catch up to the latest forecasts.
Alternatively, consider the impact if the business management continuously altered the definition of the time fences based on complaints from the customer or sales team.
“Sure, we agreed to manage short-term demand surges solely on the demand side, but this customer is really upset. I would like to push operations to expedite these orders to their two day delivery window. Just this one time.”
If you have many of these one-off cases, then you are simply reverting back to a state of chaos, with no optimization of costs or product allocation. In short, effective demand management relies on consistently applied methodology whenever possible.
Repeatable Statistical Forecasting
Reliable planning nearly always incorporates some form of statistical model. It may be simple, driven by high-level assumptions of customer demand. Large planning teams may employ a sophisticated prediction models that utilize innumerable inputs. Whatever the case, the prediction model should be well-understood and repeatable.
While wholesale changes to the forecast model will create problems, the forecast should evolve over time with learnings from prior planning periods. If the planning team realizes that promotions are having less impact than initially estimated, then it may make sense to adjust predicted impact to align with past results.
Discipline With Time Fences
If business management is persuaded to act differently based on whoever is screaming the loudest, then the benefits of demand management will be lost. It’s critical that the company adhere to the time fences agreed upon by all parties. This is the only way the planning team can effectively plan for changes in the market.
Respect Process Owners
It is essential that the process owners are allowed to perform their assigned activities, without interference from company leadership. If you hire a demand manager to solve demand management issues with a particular product portfolio, then you should abide by their recommendations on how to manage demand in each circumstance even if it is inconvenient. If it becomes public knowledge that their planning decisions are often overruled by senior leaders at the company, then the demand management process will be much less effective.
Periodic Planning Reviews
Successful implementations of demand management require a lot of communication. To that end, it’s important that the planning teams meet frequently to exchange information and assess the market impact of demand surges or supply interruptions.
6. Keep it Simple
Demand management can be a highly complex program, and larger companies certainly have the resources to invest in new headcount. However, demand management can also be applied at smaller businesses in a simplified manner, without a lot of management structure.
Focus on Key Principles
For your organization, demand management may be as simple as managing advertising spend to manage demand. Or, you may implement a pricing policy that enables rapid price changes based on anticipated stock levels in the near future. This type of demand management is frequently seen in e-commerce companies, as their sales channels enable quick price adjustments based on demand and capacity.
Apply to High Volume Products First
For most product portfolios, the top 10% of products generate over half of the volume. If it’s overwhelming to apply demand management across an entire portfolio of 2,000 SKUs, you can likely achieve substantial efficiency by focusing on the top 200 products. Start small, and define your process before rolling out to the broader operations.
By adopting a demand management strategy, your company can cost optimize its production, while maximizing customer service levels. By following these best practices, you can improve the effectiveness of a demand management strategy in your company.