The term demand chain has been used in a business and management context as contrasting terminology alongside, or in place of, "supply chain". Madhani suggests that the demand chain "comprises all the demand processes necessary to understand, create, and stimulate customer demand".[1]Cranfield School of Management academic Martin Christopher has suggested that "ideally the supply chain should become a demand chain", explaining that ideally all product logistics and processing should occur "in response to a known customer requirement".[2]
Analysing the firm's activities as a linked chain is a tried and tested way of revealing value creation opportunities. The business economist Michael Porter of Harvard Business School pioneered a value chain approach: "the value chain disaggregates the firm into its strategically relevant activities in order to understand the costs and existing potential sources of differentiation".[3] It is the micro mechanism at the level of the firm that equalizes supply and demand at the macro market level.[clarification needed]
Early applications in distribution, manufacturing and purchasing collectively gave rise to a subject known as supply chain management.[4] Old supply chains have been transformed into faster, cheaper and more reliable modern supply chains as a result of investment in information technology, cost-analysis and process-analysis.
Marketing, sales and service are the other half of the value-chain, which collectively drive and sustain demand, and are known as the Demand Chain. Progress in transforming the demand side of business is behind the supply side, but there is growing interest today in transforming demand chains.
Without marketing / supply chain management (SCM) cross-functional collaboration, firms cannot be expected to respond optimally and promptly to customers' requirements.[1]
Challenges
At present,[when?] there appear to be four main challenges to progress in transforming demand chains and making them faster, leaner and better:
Linking Supply Chains to Demand
Demand Chain Information Systems
Demand Chain Process Re-Engineering
Demand Chain Resource Distribution and Optimisation
Linking supply chains to demand – "demand driven" v "forecast push"
The challenge of improving the link between demand and supply has occupied many supply chain specialists in recent years; and concepts such as "demand-driven supply chains" (Demand Driven MRP), and customer-driven supply chains have attracted attention and have become the subject of conferences and seminars.[5]
The fundamental attribute of a "demand driven" supply chain is that material movements (or replenishment execution) are directly triggered by demand itself. Those parts of a supply chain that directly respond to orders, such as "make to order" or "assemble to order" are, therefore, "demand driven".
"Make to stock" supply chains can also be "demand driven" if individual echelon replenishment quantities are determined by the need to simply replace stock that has been consumed by the immediate downstream activity (i.e.. sold to a customer, used by a manufacturing process or moved to another distribution location). This is in contrast to "forecast push" supply chains in which the customer facing echelon replenishment quantity is calculated using a forecast of future requirements and a minimum stock balance (i.e. safety stock) while all upstream activities are coupled directly to the forecast using MRP calculations.
Due to inevitable forecast inaccuracy, "forecast push" supply chains suffer excessive and unbalanced stock levels and, despite a great deal of expediting (and associated costs) are prone to service issues. Such supply chains also experience the bullwhip effect. This occurs due to forecast error being amplified as it cascades up the supply chain and it has the unintended consequence of driving up supply chain costs and service issues, due to supply capacity being unable to meet the spiky demand pattern and the entire chain becoming unstable as a consequence.[6] By contrast, "demand driven" supply chains are protected from the need to be buffered from variability and bullwhip by the impact of "process decoupling' and are thus able to meet planned service levels with significantly lower inventory levels and capacity costs.[7]
"Demand driven" supply chains do use forecasts for the purposes of planning – but not replenishment execution. Forecasts are used for capacity and financial planning which are the main components of "Sales and Operations Planning". The accuracy and strategic value of S&OP is actually enhanced when supply chains are "demand driven" because they are less prone to unplanned capacity utilisation, "fire fighting" and focusing upon resolving current performance issues (i.e.. inventory and service). "Demand driven" supply chains also use forecasts for Event Management (e.g., stock build for anticipated events) when postponement strategies are not an option.
Despite academics having, for many years, written a great deal about the benefits of driving supply chains with demand (e.g.. Forrester 1958, 1961 - "Industrial Dynamics"; Burbidge 1983 - "5 Golden Rules for Avoiding Bankruptcy"; Christopher & Towill 1995), only since 2002 have 'demand driven' concepts begun to be adopted by supply chain management software providers and industry. (e.g..Lean Planning, Demand Flow Technology, Demand Driven MRP
Information systems
Information about activities and costs is an essential resource for improving value chain performance. Such information is nowadays readily available for the supply chain, due to the widespread implementation of ERP technology (systems such as SAP), and these systems have been instrumental in the transformation of supply chain performance.
Demand chain IT development has focused on database marketing and CRM systems.[8] Demand driving activities and associated costs are still recorded in an inconsistent manner, mostly on spreadsheets and even then the quality of the information tends to be incomplete and inaccurate.[9][10]
Recently, however, marketing resource management systems have become available to plan, track and measure activities and costs as an embedded part of marketing workflows.
"MRM is a set of processes and capabilities that aim to enhance your ability to orchestrate and optimize the use of internal and external marketing resources...The desire to deal with increased marketing complexity, along with a mandate to do more with less, are the primary drivers behind the growth of MRM" [11]
Implementation of MRM systems often reveals process issues that must be tackled, as Gartner have observed
"All too often, large enterprises lack documented or standardized marketing processes – resulting in misalignments, inconsistencies and wasted effort. Marketing personnel frequently rotate job responsibilities. Along with thwarting progress toward best practices and processes, this disarray contributes to a loss of corporate memory and key lessons learned. The elongated learning curve affects new or transferred employees as they struggle to find information or have to relearn what the organization, in effect, already "knows".[11]
Process improvement
Processes in a demand chain are often less well-organised and disciplined than their supply side equivalents, partly due to the absence of an agreed framework for analysing the demand chain process. In 2009, Philip Kotler and Robert Shaw proposed such a framework.[12] Describing it as the "Idea to Demand Chain" they say:
"The I2D process can be pictured as shown in Exhibit 1; it is the mirror image of the supply chain, and contains all the activities that result in demand being stimulated. Yet unlike the supply chain, which has successfully delivered economies of scale through process simplification and process control, marketing's demand chain is primitive and inefficient. In many firms it is fragmented, obscured by departmental boundaries, invisible and unmanaged."
Budget segmentation, targeting and optimization
Demand chain budgets for marketing, sales and service expenditure are substantial. Maximising their impact on shareholder value has become an important financial goal for decision makers. Developing a shared language across marketing and finance is one of the challenges to achieving this goal.[13]
Segmentation is the initial thing to decide. From a strategic finance perspective "segments are responsibility centers for which a separate measure of revenues and costs is obtained".[14] From a marketing perspective "segmentation is the act of dividing the market into distinct groups of buyers who might require separate products and/or marketing mixes".[15] An important challenge for decision makers is how to align these two marketing and finance perspectives on segmentation.
Targeting of the budget is the final thing to decide. From the marketing perspective the challenge is how "to optimally allocate a given marketing budget to various target markets".[16] From a finance perspective the problem is one of resource and budget allocation "determining the right quantity of resources to implement the value maximising strategy".[17]
Optimization provides the technical basis for targeting decisions. Whilst mathematical optimization theory has been in existence since the 1950s, its application to marketing only began in the 1970s,[18] and lack of data and computer power were limiting factors until the 1990s.
Since 2000, applying maths to budget segmentation, targeting and optimization has become more commonplace. In the UK the IPA Awards have documented over 1000 cases of modelling over 15 years, as part of their award process. The judging criteria are rigorous and not a matter of taste or fashion. Entrants must prove beyond all reasonable doubt that the marketing is profitable.[19] It enables marketing to be brought centre stage in four important ways:[20]
First, it translates the language of marketing and sales into the language of the boardroom. Finance and profits are the preferred language of the modern executive suite. Marketing and sales strategies have to be justified in terms of their ability to increase the financial value of the business. It provides a bridge between marketing and the other functions.
Second, it strengthens demand chain accountability. In Marketing Departments awareness, preference and satisfaction are often tracked as alternative objectives to shareholder value. In Sales Departments, sales promotion spending is often used to boost volumes, even when the result is unprofitable.[21] Optimization modelling can assess these practices and support more rigorous accountability methods.
Third, it provides a counter-argument to the arbitrary cutting of demand chain budgets. Return on marketing investment models can help demonstrate where financial impact of demand driving activities is positive and negative, and so help support fact-based budgeting.
Finally, demand-chain profitability modelling encourages a strategic debate. Because long-term cashflow and NPV calculations can show the shareholder value effect of marketing, sales and service, strong arguments can be made for putting the demand chain on an equal footing to the supply chain.
In commerce, supply chain management (SCM) is the management of the flow of goods and services including all processes that transform raw materials into final products between businesses and locations. This can include the movement and storage of raw materials, work-in-process inventory, finished goods, and end to end order fulfilment from the point of origin to the point of consumption. Interconnected, interrelated or interlinked networks, channels and node businesses combine in the provision of products and services required by end customers in a supply chain.
Material requirements planning (MRP) is a production planning, scheduling, and inventory control system used to manage manufacturing processes. Most MRP systems are software-based, but it is possible to conduct MRP by hand as well.
Marketing management is the organizational discipline which focuses on the practical application of marketing orientation, techniques and methods inside enterprises and organizations and on the management of a firm's marketing resources and activities.
Vendor-managed inventory (VMI) is an inventory management practice in which a supplier of goods, usually the manufacturer, is responsible for optimizing the inventory held by a distributor.
Database marketing is a form of direct marketing using databases of customers or potential customers to generate personalized communications in order to promote a product or service for marketing purposes. The method of communication can be any addressable medium, as in direct marketing.
Service management in the manufacturing context, is integrated into supply chain management as the intersection between the actual sales and the customer point of view. The aim of high-performance service management is to optimize the service-intensive supply chains, which are usually more complex than the typical finished-goods supply chain. Most service-intensive supply chains require larger inventories and tighter integration with field service and third parties. They also must accommodate inconsistent and uncertain demand by establishing more advanced information and product flows. Moreover, all processes must be coordinated across numerous service locations with large numbers of parts and multiple levels in the supply chain.
The beer distribution game is an educational game that is used to experience typical coordination problems of a supply chain process. It reflects a role-play simulation where several participants play with each other. The game represents a supply chain with a non-coordinated process where problems arise due to lack of information sharing. This game outlines the importance of information sharing, supply chain management and collaboration throughout a supply chain process. Due to lack of information, suppliers, manufacturers, sales people and customers often have an incomplete understanding of what the real demand of an order is. The most interesting part of the game is that each group has no control over another part of the supply chain. Therefore, each group has only significant control over their own part of the supply chain. Each group can highly influence the entire supply chain by ordering too much or too little which can lead to a bullwhip effect. Therefore, the order taking of a group also highly depends on decisions of the other groups.
Demand management is a planning methodology used to forecast, plan for and manage the demand for products and services. This can be at macro-levels as in economics and at micro-levels within individual organizations. For example, at macro-levels, a government may influence interest rates to regulate financial demand. At the micro-level, a cellular service provider may provide free night and weekend use to reduce demand during peak hours.
Safety stock is a term used by logisticians to describe a level of extra stock that is maintained to mitigate risk of stockouts caused by uncertainties in supply and demand. Adequate safety stock levels permit business operations to proceed according to their plans. Safety stock is held when uncertainty exists in demand, supply, or manufacturing yield, and serves as an insurance against stockouts.
Inventory control or stock control can be broadly defined as "the activity of checking a shop's stock". It is the process of ensuring that the right amount of supply is available within a business. However, a more focused definition takes into account the more science-based, methodical practice of not only verifying a business's inventory but also maximising the amount of profit from the least amount of inventory investment without affecting customer satisfaction. Other facets of inventory control include forecasting future demand, supply chain management, production control, financial flexibility, purchasing data, loss prevention and turnover, and customer satisfaction.
The business terms push and pull originated in logistics and supply chain management, but are also widely used in marketing and in the hotel distribution business.
The bullwhip effect is a supply chain phenomenon where orders to suppliers tend to have a larger variability than sales to buyers, which results in an amplified demand variability upstream. In part, this results in increasing swings in inventory in response to shifts in consumer demand as one moves further up the supply chain. The concept first appeared in Jay Forrester's Industrial Dynamics (1961) and thus it is also known as the Forrester effect. It has been described as “the observed propensity for material orders to be more variable than demand signals and for this variability to increase the further upstream a company is in a supply chain”. Science at Stanford University helped incorporate the concept into supply chain vernacular using a story about Volvo. Suffering a glut in green cars, sales and marketing developed a program to sell the excess inventory. While successful in generating the desired market pull, manufacturing did not know about the promotional plans. Instead, they read the increase in sales as an indication of growing demand for green cars and ramped up production.
Demand-chain management (DCM) is the management of relationships between suppliers and customers to deliver the best value to the customer at the least cost to the demand chain as a whole. Demand-chain management is similar to supply-chain management but with special regard to the customers.
Supply-chain optimization (SCO) aims to ensure the optimal operation of a manufacturing and distribution of supply chain. This includes the optimal placement of inventory within the supply chain, minimizing operating costs including manufacturing costs, transportation costs, and distribution costs. Optimization often involves the application of mathematical modelling techniques using computer software. It is often considered to be part of supply chain engineering, although the latter is mainly focused on mathematical modelling approaches, whereas supply chain optimization can also be undertaken using qualitative, management based approaches.
Revenue management is the application of disciplined analytics that predict consumer behaviour at the micro-market levels and optimize product availability, leveraging price elasticity to maximize revenue growth and thereby, profit. The primary aim of revenue management is selling the right product to the right customer at the right time for the right price and with the right pack. The essence of this discipline is in understanding customers' perception of product value and accurately aligning product prices, placement and availability with each customer segment.
The following outline is provided as an overview of and topical guide to marketing:
Customer demand planning (CDP) is a business-planning process that enables sales teams to develop demand forecasts as input to service-planning processes, production, inventory planning and revenue planning.
Petrolsoft Corporation (1989–2000) was a supply chain management software company with a focus on the petroleum industry. Petrolsoft Corporation was founded at Stanford University in 1989 by Bill Miller and David Gamboa as Petrolsoft Software Group. It was later incorporated in 1992. Petrolsoft introduced demand-driven inventory management to the petroleum industry.
Active destocking in supply chain management is an active decision to reduce the inventory-to-sales ratio of a company. The inventory can include finished products, raw materials and goods in process. In general, active destocking is done following an autonomous, often financial decision by a company to improve its efficiency, free up cash and reduce its costs. Decisions for active destocking in general are made by financial executives or general managers.
Reactive destocking in supply chain management is a reduction of the inventory when expected demand goes down. When a company is only doing reactive destocking, the desired inventory to sales ratio, remains unchanged. Reactive destocking in general is done by operational managers of the logistical activities, without additional instructions. The inventory can include finished products, raw materials and/or goods in process.
↑ Porter, M. E. (1985). Competitive Advantage. Free Press, New York
↑ Oliver, R.K., Webber, M.D., 1982, "Supply-chain management: logistics catches up with strategy", Outlook, Booz, Allen and Hamilton Inc. Reprinted 1992, in Logistics: The Strategic Issues, ed. Christopher, M., Chapman Hall, London, pp. 63-75
↑ Chen, Y. F., Z. Drezner, J. K. Ryan and D. Simchi-Levi (2000), Quantifying the Bullwhip Effect in a Simple Supply Chain: The Impact of Forecasting, Lead Times and Information. Management Science, 46 pp. 436–443.
↑ Shaw, R. and Kotler, P. (2010), Marketing Efficiency: leaner, faster and better marketing; Market Leader Quarter 1 2010
↑ Abraham, M.M. and Lodish L.M. (1990) Getting the most out of advertising and promotion, Harvard Business Review, 68 (3): 50
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