Demand management

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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 in order to regulate financial demand. At the micro-level, a cellular service provider may provide free night and weekend use in order to reduce demand during peak hours.

Forecasting is the process of making predictions of the future based on past and present data and most commonly by analysis of trends. A commonplace example might be estimation of some variable of interest at some specified future date. Prediction is a similar, but more general term. Both might refer to formal statistical methods employing time series, cross-sectional or longitudinal data, or alternatively to less formal judgmental methods. Usage can differ between areas of application: for example, in hydrology the terms "forecast" and "forecasting" are sometimes reserved for estimates of values at certain specific future times, while the term "prediction" is used for more general estimates, such as the number of times floods will occur over a long period.

Demand is the quantity of a good that consumers are willing and able to purchase at various prices during a given period of time.

Interest rate percentage of a sum of money charged for its use

An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited or borrowed. The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, the compounding frequency, and the length of time over which it is lent, deposited or borrowed.

Contents

Demand management has a defined set of processes, capabilities and recommended behaviors for companies that produce goods and services. Consumer electronics and goods companies often lead in the application of demand management practices to their demand chains; demand management outcomes are a reflection of policies and programs to influence demand as well as competition and options available to users and consumers. Effective demand management follows the concept of a "closed loop" where feedback from the results of the demand plans is fed back into the planning process to improve the predictability of outcomes. Many practices reflect elements of systems dynamics. Volatility is being recognized as significant an issue as the focus on variance of demand to plans and forecasts. [1]

Consumer electronics Electronic equipment intended for everyday home use

Consumer electronics or home electronics are electronic equipments intended for everyday use, typically in private homes. Consumer electronics include devices used for entertainment, communications, and home-office activities. In British English, they are often called brown goods by producers and sellers, to distinguish them from "white goods" which are meant for housekeeping tasks, such as washing machines and refrigerators, although nowadays, these would be considered brown goods, some of these being connected to the Internet. In the 2010s, this distinction is not always present in large big box consumer electronics stores, such as Best Buy, which sell both entertainment, communication, and home office devices and kitchen appliances such as refrigerators.

In economics

Macroeconomics

In macroeconomics, demand management is the art or science of controlling aggregate demand to avoid a recession.

Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies. Macroeconomists study aggregated indicators such as GDP, unemployment rates, national income, price indices, and the interrelations among the different sectors of the economy to better understand how the whole economy functions. They also develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, saving, investment, international trade, and international finance.

In macroeconomics, aggregate demand (AD) or domestic final demand (DFD) is the total demand for final goods and services in an economy at a given time. It specifies the amounts of goods and services that will be purchased at all possible price levels. This is the demand for the gross domestic product of a country. It is often called effective demand, though at other times this term is distinguished.

In economics, a recession is a business cycle contraction when there is a general slowdown in economic activity. Macroeconomic indicators such as GDP, investment spending, capacity utilization, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise. In the United Kingdom, it is defined as a negative economic growth for two consecutive quarters.

Demand management at the macroeconomic level involves the use of discretionary policy and is inspired by Keynesian economics, though today elements of it are part of the economic mainstream. The underlying idea is for the government to use tools like interest rates, taxation, and public expenditure to change key economic decisions like consumption, investment, the balance of trade, and public sector borrowing resulting in an 'evening out' of the business cycle. Demand management was widely adopted in the 1950s to 1970s, and was for a time successful. However, it did not prevent the stagflation of the 1970s, which is considered to have been precipitated by the supply shock caused by the 1973 oil crisis.

In macroeconomics, discretionary policy is an economic policy based on the ad hoc judgment of policymakers as opposed to policy set by predetermined rules. For instance, a central banker could make decisions on interest rates on a case-by-case basis instead of allowing a set rule, such as the Taylor rule, Friedman's k-percent rule, or a nominal income target to determine interest rates or the money supply. In practice most policy actions are discretionary in nature.

Keynesian economics are a group of various macroeconomic theories about how in the short run – and especially during recessions – economic output is strongly influenced by aggregate demand. In the Keynesian view, aggregate demand does not necessarily equal the productive capacity of the economy; instead, it is influenced by a host of factors and sometimes behaves erratically, affecting production, employment, and inflation.

Public expenditure

Public expenditure is spending made by the government of a country on collective needs and wants such as pension, provision, infrastructure, etc. Until the 19th century, public expenditure was limited as laissez faire philosophies believed that money left in private hands could bring better returns. In the 20th century, John Maynard Keynes argued the role of public expenditure in determining levels of income and distribution in the economy. Since then government expenditures has shown an increasing trend.

Theoretical criticisms of demand management are that it relies on a long-run Phillips Curve for which there is no evidence, and that it produces dynamic inconsistency and can therefore be non-credible.

In economics, dynamic inconsistency or time inconsistency is a situation in which a decision-maker's preferences change over time in such a way that a preference can become inconsistent at another point in time. This can be thought of as there being many different "selves" within decision makers, with each "self" representing the decision-maker at a different point in time; the inconsistency occurs when not all preferences are aligned.

Today, most governments relatively limit interventions in demand management to tackling short-term crises, and rely on policies like independent central banks and fiscal policy rules to prevent long-run economic disruption.

Central bank public institution that manages a states currency, money supply, and interest rates

A central bank, reserve bank, or monetary authority is the institution that manages the currency, money supply, and interest rates of a state or formal monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base in the state, and also generally controls the printing/coining of the national currency, which serves as the state's legal tender. A central bank also acts as a lender of last resort to the banking sector during times of financial crisis. Most central banks also have supervisory and regulatory powers to ensure the solvency of member institutions, to prevent bank runs, and to discourage reckless or fraudulent behavior by member banks.

The Golden Rule is a guideline for the operation of fiscal policy. The Golden Rule states that over the economic cycle, the Government will borrow only to invest and not to fund current spending. In layman's terms this means that on average over the ups and downs of an economic cycle the government should only borrow to pay for investment that benefits future generations. Day-to-day spending that benefits today's taxpayers should be paid for with today's taxes, not with leveraged investment. Therefore, over the cycle the current budget must balance or be brought into surplus.

Natural resources and environment

In natural resources management and environmental policy more generally, demand management refers to policies to control consumer demand for environmentally sensitive or harmful goods such as water and energy. Within manufacturing firms the term is used to describe the activities of demand forecasting, planning, and order fulfillment. In the environmental context demand management is increasingly taken seriously to reduce the economy's throughput of scarce resources for which market pricing does not reflect true costs. Examples include metering of municipal water, and carbon taxes on gasoline.

Welfare economics

Demand management in economics focuses on the optimal allocation resources to affect social welfare.

Welfare economics uses the perspective and techniques of microeconomics, but they can be aggregated to make macroeconomic conclusions. Because different "optimal" states may exist in an economy in terms of the allocation of resources, welfare economics seeks the state that will create the highest overall level of social welfare.

Some people object to the idea of wealth redistribution because it flies in the face of pure capitalist ideals, but economists suggest that greater states of overall social good might be achieved by redistributing incomes in the economy. [2]

Because welfare economics follows the techniques of microeconomics, where demand planning is part of the process especially the redistribution of the funds through government taxes, fees and royalties to programs for societal good, such as roads, services, income support and agriculture support programs.

Demand management as a business process

Demand management is both a stand-alone process and one that is integrated into Sales and Operations Planning (S&OP) or Integrated Business Planning (IBP). The definition of the process and components covered in this section describe the current best practices encompassing the methods and competencies that have a track record of success with leading companies today. Much effort is put into more esoteric financial or academic approaches; however their practical value is limited by the ability of business practitioners to use on a regular basis. As those methods become more accessible and part of regular use they join the best practices, "predictive forecasting" covered in this section is a great example.

Demand management in its most effective form has a broad definition well beyond just developing a "forecast" based on history supplemented by "market" or customer intelligence, and often left to the supply chain organization to interpret. Philip Kotler, a noted expert and professor of marketing management notes two key points: 1. Demand management is the responsibility of the marketing organization (in his definition sales is subset of marketing); 2. The demand "forecast" is the result of planned marketing efforts. Those planned efforts, not only should focus on stimulating demand, more importantly influencing demand so that a company's [business'] objectives are achieved.

The components of effective demand management, identified by George Palmatier and Colleen Crum, are: 1. Planning Demand; 2. Communicating Demand; 3. Influencing Demand and 4. Prioritizing Demand. [3]

Demand Control

Demand Control is a principle of the overarching Demand Management process found in most manufacturing businesses. Demand Control focuses on alignment of supply and demand when there is a sudden, unexpected shift in the demand plan. The shifts can occur when near-term demand becomes greater than supply, or when actual orders are less than the established demand plan. The result can lead to reactive decisions, which can have a negative impact of workloads, costs, and customer satisfaction.

Demand Control creates synchronization across the sales, demand planning, and supply planning functions. Unlike typical monthly demand or supply planning reviews, Demand Control reviews occur at more frequent intervals - daily or weekly - which allows the organization to respond quickly and proactively to possible demand or supply imbalances. [4]

Time Fences

Demand Control Time Fences.jpg

The Demand Control process requires that all functions agree on time fences within the planning horizon, which should be no less than a rolling 24 months based on Integrated Business Planning best practices. [5] A time fence is a decision point within a manufacturer's planning horizon. Typically, three established time fences exist within a company:

  • Future Planning Zone - Supply is managed to match demand
  • Trading Zone - Demand is managed to match supply for production
  • Firm Zone - Demand is managed to match supply for procurement

Demand Controller

A Demand Controller is established when a company implements a Demand Control process. Unlike a Demand Planner who focuses on long-term order management, [6] the Demand Controller is responsible for short-term order management, focusing specifically when demand exceeds supply or demand appears to be less than planned, and engages sales management in both situations. The Demand Controller works across multiple functions involved in the supply and demand processes, including demand planning, supply planning, sales, and marketing.

Elements

Planning demand involves a full multiple-view process or work flow; including statistical forecast as a baseline from clean "demand history" [not shipments], using the most effective statistical models. Kai Trepte developed the Microsoft Excel add-in "Forecast X" to provide practitioners with a workstation capability to assess the best matches between data and forecast models. Increasingly "predictive forecasts" have moved from a limited use to becoming best practice for more companies. Predictive forecasts use simulation of potential future outcomes and their probabilities rather than history to form the basis for long range (5-10+ years) demand plans. Baseline forecasts are typically developed by demand planners and analysts, who may be regional or centrally located. They work under the guidance of the demand manager. Baseline forecasts are communicated to members of the demand management team. This usually includes regional sales leaders, market managers, and product managers. The team may include customer service leads who manager orders under service agreements with customers and have direct insight into customer demand. For major retailers this is often point of sale data provided to suppliers. [7] [8]

In IT

IT / IS demand managers seek to understand in advance how to best meet the needs and expectations of customers, clients, partners, and enablers. Thus, proper forecast and sizing of demand is required in order to deliver a stable and effective technology environment.[ citation needed ]

Demand management as part of project portfolio management

Romano, Grimaldi, and Colasuonno consider demand management as a harvesting activity, governed by a strategy that gives portfolios direction and a selection model intended to select the best beneficial set of activities aligned with strategic objectives. They suggest component-oriented demand management be approached proactively, with a strategy driven by business objectives, and responsibility of top management representing the chose strategic direction. [9]

See also

Related Research Articles

Supply-chain management management of the flow of goods and services, involves the movement and storage of raw materials, of work-in-process inventory, and of finished goods from point of origin to point of consumption

In commerce, supply-chain management (SCM), the management of the flow of goods and services, involves the movement and storage of raw materials, of work-in-process inventory, and of finished goods from point of origin to point of consumption. Interconnected or interlinked networks, channels and node businesses combine in the provision of products and services required by end customers in a supply chain. Supply-chain management has been defined as the "design, planning, execution, control, and monitoring of supply-chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand and measuring performance globally." SCM practice draws heavily from the areas of industrial engineering, systems engineering, operations management, logistics, procurement, information technology, and marketing and strives for an integrated approach. Marketing channels play an important role in supply-chain management. Current research in supply-chain management is concerned with topics related to sustainability and risk management, among others. Some suggest that the “people dimension” of SCM, ethical issues, internal integration, transparency/visibility, and human capital/talent management are topics that have, so far, been underrepresented on the research agenda.

Supply chain system of organizations, people, activities, information, and resources involved in moving a product or service from the point where it is manufactured to where it is consumed

A supply chain is a system of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer. Supply chain activities involve the transformation of natural resources, raw materials, and components into a finished product that is delivered to the end customer. In sophisticated supply chain systems, used products may re-enter the supply chain at any point where residual value is recyclable. Supply chains link value chains.

A management information system (MIS) is an information system used for decision-making, and for the coordination, control, analysis, and visualization of information in an organization; especially in a company.

Marketing management is the process of developing strategies and planning for product or services, advertising, promotions, sales to reach desired customer segment.

Push–pull strategy

The business terms push and pull originated in logistics and supply chain management, but are also widely used in marketing, and is also a term widely used in the hotel distribution business. Walmart is an example of a company that uses the push vs. pull strategy.

The demand chain is that part of the value chain which drives demand.

Bullwhip effect Effetto Forrester

The bullwhip effect is a distribution channel phenomenon in which forecasts yield supply chain inefficiencies. It refers to increasing swings in inventory in response to shifts in customer 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. The bullwhip effect was named for the way the amplitude of a whip increases down its length. The further from the originating signal, the greater the distortion of the wave pattern. In a similar manner, forecast accuracy decreases as one moves upstream along the supply chain. For example, many consumer goods have fairly consistent consumption at retail but this signal becomes more chaotic and unpredictable as the focus moves away from consumer purchasing behavior.

Demand-chain management

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.

Collaborative Planning, Forecasting and Replenishment (CPFR), a trademark of GS1 US, is a concept that aims to enhance supply chain integration by supporting and assisting joint practices. CPFR seeks cooperative management of inventory through joint visibility and replenishment of products throughout the supply chain. Information shared between suppliers and retailers aids in planning and satisfying customer demands through a supportive system of shared information. This allows for continuous updating of inventory and upcoming requirements, making the end-to-end supply chain process more efficient. Efficiency is created through the decrease expenditures for merchandising, inventory, logistics, and transportation across all trading partners.

Revenue management is the application of disciplined analytics that predict consumer behaviour at the micro-market levels and optimize product availability and price to maximize revenue growth. 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:

Supply-chain operations reference (SCOR) model is a process reference model developed and endorsed by the Supply Chain Council as the cross-industry, standard diagnostic tool for supply chain management. The SCOR model describes the business activities associated with satisfying a customer's demand, which include plan, source, make, deliver, return and enable. Use of the model includes analyzing the current state of a company's processes and goals, quantifying operational performance, and comparing company performance to benchmark data. SCOR has developed a set of metrics for supply chain performance, and Supply Chain Council members have formed industry groups to collect best practices information that companies can use to elevate their supply chain models.

Supply-chain-management software (SCMS) is the software tools or modules used in executing supply chain transactions, managing supplier relationships and controlling associated business processes.

Sales and operations planning (S&OP) is an integrated business management process through which the executive/leadership team continually achieves focus, alignment and synchronization among all functions of the organization. The S&OP process includes an updated forecast that leads to a sales plan, production plan, inventory plan, customer lead time (backlog) plan, new product development plan, strategic initiative plan and resulting financial plan. Plan frequency and planning horizon depend on the specifics of the industry. Short product life cycles and high demand volatility require a tighter S&OP than steadily consumed products. Done well, the S&OP process also enables effective supply chain management.

A master production schedule (MPS) is a plan for individual commodities to be produced in each time period such as production, staffing, inventory, etc. It is usually linked to manufacturing where the plan indicates when and how much of each product will be demanded. This plan quantifies significant processes, parts, and other resources in order to optimize production, to identify bottlenecks, and to anticipate needs and completed goods. Since an MPS drives much factory activity, its accuracy and viability dramatically affect profitability. Typical MPSs are created by software with user tweaking.

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.

Demand forecasting is a field of predictive analytics which tries to understand and predict customer demand to optimize supply decisions by corporate supply chain and business management. Demand forecasting involves quantitative methods such as the use of data, and especially historical sales data, as well as statistical techniques from test markets. Demand forecasting may be used in production planning, inventory management, and at times in assessing future capacity requirements, or in making decisions on whether to enter a new market.

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.

Demand modeling uses statistical methods and business intelligence inputs to generate accurate demand forecasts and effectively address demand variability. Demand modeling is becoming more important because forecasting and inventory management are being complicated by the increasing number of slow-moving items, the so-called “long-tail” of the product range, many of which have unpredictable demand patterns in which the typical “normal distribution” assumption used by traditional models is totally inadequate. In these scenarios, successfully managing forecasts and inventories requires advanced demand and inventory modeling technologies in order to reliably support high service levels.

In commerce, global supply-chain management (GSCM) is defined as the distribution of goods and services throughout a trans-national companies' global network to maximize profit and minimize waste. Essentially, global supply chain-management is the same as supply-chain management, but it focuses on companies and organizations that are trans-national. Global supply-chain management has six main areas of concentration: logistics management, competitor orientation, customer orientation, supply-chain coordination, supply management, and operations management. These six areas of concentration can be divided into four main areas: marketing, logistics, supply management, and operations management. Successful management of a global supply chain also requires complying with various international regulations set by a variety of non-governmental organizations.

References

  1. Kamal, John. "Best Practice Demand Planning Meets Unprecedented Demand Volatility". Supply Demand Chain Executive.
  2. "Welfare Economics", Investopedia
  3. Crum, Colleen; Palmatier, George (2003). Demand Management Best Practices. Boca Raton, Florida: J Ross Publishing. p. 11. ISBN   1932159010.
  4. Holmes, David; Ferguson, Todd; Reiher, Timm. "Demand Control: An Often Missing Link in a Demand Management Process".
  5. Palmatier, George; Crum, Colleen (2013). The Transition from Sales and Operations Planning to Integrated Business Planning. Indianapolis, Indiana: Dog Ear Publishing. ISBN   1457518252.
  6. Bowman, Robert. "What It Takes to Be a Great Demand Planner". SupplyChainBrain.
  7. Crum, Colleen; Palmatier, George (2003). Demand Management Best Practices. Boca Raton, Florida: J Ross Publishing. ISBN   1932159010.
  8. Trepte, Kai. "Kai Trepte". LinkedIn.
  9. "Demand Management As A Critical Success Factor In Portfolio Management". www.pmi.org. Retrieved 2019-02-23.