Aligning Demand Management With Business Strategy
By Jim R. Langabeer II -- Supply Chain Management Review, 5/1/2000
The nature, intensity, and distribution of market demand determine the degree of competitiveness in any industry. Competitive intensity, in turn, shapes the industry's overall level of economic returns.
This relationship between demand, competition, and economic returns is not just a casual one—it determines which enterprises will retain merely marginal returns and which will reap superior profits. To date, few companies have undertaken a deep, sophisticated analysis of demand—and have acted upon its strategic potential. For the most part, they've only explored the tip of the demand "iceberg." This article examines the role that strategic demand management must play in improving competitiveness for corporations and provides a framework for aligning demand management with business strategy.
Linking Strategy and DemandRegardless of industry, business strategy can be defined as the unique managerial process of establishing organizational direction that differentiates the company from competition, resolves a number of multidimensional decisions, and remains dynamic amidst continual market changes.1
If a company is to develop a business strategy to address these "Four Ds" effectively, it must focus on doing two things really well:
- Analyzing the true demand for products in the company's "capability portfolio." (This term is used to represent all of the options available to the company—including both current products and future and conceptual capabilities. This requires companies to think about building strategies that leverage those capabilities, whether they are financial, logistics, marketing, technological, intellectual, or physical.)
- Dynamically assessing the various portfolio options using both intuitive and analytical tools, such as market intelligence and computer simulation, to select the product markets with the highest economic viability.
Given this focus and despite most business strategists' failure to recognize it, strategy is built upon insight into market demand. Exhibit 1 presents a model of the linkages between strategy and market demand. This model shows how a company's strategy is based on differentiating itself from the competition, while pursuing a certain direction in the marketplace. This direction and differentiation is shaped by the decisions that executives make regarding which opportunities to pursue and how to pursue them dynamically. As a company addresses these decisions over time, patterns begin to form that alter strategy. For this reason, the arrows in the exhibit are bidirectional. Thus, while the strategy shapes the decisions to be made, different decisions shape different strategies.
The strategic responses to changing demand signals can be grouped into four areas: growth strategies, portfolio strategies, positioning strategies, and investment strategies. Each of these strategies uses demand data as the primary input, while others, such as financial strategies, often use demand only as a secondary input.
Growth strategies help organizations create economies of scale and synergies by merging or acquiring a related or unrelated business. Demand management helps to validate growth strategies because growth should be pursued only if the industry supply/demand curve can be shifted through supply consolidation. Portfolio strategies create a plan for managing the combined life cycles for each asset and product in the portfolio. Demand data create the framework for classifying a product's maturity and for determining when to introduce new products and when to phase out existing ones. Positioning strategies create the framework for determining product placement within the various distribution channels. Forward positioning of inventory based on demand and placing the highest-value products in the most strategic channels are just two examples of how demand data can be leveraged. Finally, investment strategies are created for the portfolio of assets and products to help manage capital and marketing expenditures associated with each product. Obviously, demand data must be the guide to help determine which products are worthy of future investment and which ones are not.
Exhibit 2 provides an overview of how demand management is integrated with corporate business strategies. As the exhibit shows, intelligent companies can effectively deploy demand data to guide strategic responses in a number of ways.
An Evolving View of Demand ManagementDespite the strong connection between demand and strategy, companies only now are beginning to explore the depth of demand management. Complicating their efforts is the concept's generic quality—that is, it falls under the umbrellas of multiple disciplines and departments, including production, logistics, supply chain, marketing, sales, planning, and finance. Furthermore, demand management is a somewhat abstract and complex concept for traditional industrial companies focused on mass production and distribution. For these reasons, the concept has been mostly ignored by strategists and senior executives.
The definition of demand management is, in fact, still evolving. To get a sense of where we are now in that evolutionary process, we first have to understand two other terms—supply chain and demand chain.
The supply chain has evolved from its early emphasis on purchasing and raw materials acquisitions to a much broader perspective that incorporates processes and activities that push products from suppliers through to the end-market. There appears to be general acceptance of this definition across industries.
At present, the term "demand chain" is being used to define a component of a company's supply chain that focuses more on the end-market consumer, where demand is actually pulled from the market to develop more accurate supply requirements and production plans.2 The demand chain can be seen as a collection of processes and activities that networks of individuals and groups, both internal and external to the company, use to manage and pull demand from the market. Demand chains thus perform demand management, which initially can be described as "focused efforts to estimate and manage customers' demand, with the intention of using this information to shape operating decisions."3
Even with this initial definition, it is easy to see how demand management can affect a company's operations. For example, the analysis of downstream demand (that is, demand for finished product by the market) may suggest major changes in intensity (for example, higher demand for product X). An alignment to this demand forecast could lead to increased production plans, capacity expansions, need for additional transportation assets such as trucks or railcars, and increased need for raw material supplies. Although this functional alignment is necessary and beneficial, it will not alter an organization's profit structure radically.
There are three problems with this kind of surface functional alignment as it typically plays out:
- The "alignment" is somewhat illusory. In most cases, the absence of enabling technology, weak collaboration between departments, and limited acceptance of forecasting mean that real alignment is not taking place.
- This narrow view of the demand chain mandates that demand management is equivalent to demand forecasting, which we know is not the case. A forecast is only one component of demand management, which also includes collaboration around various scenarios and generation of strategic and operational plans from the forecast.4
- Demand in this context mostly means tactical alignment and coordination. This type of alignment does ensure that each department bases its individual decisions on the same fundamental information. Put another way, the production department bases its plans on the same information that is used in the sales plans, which is equivalent to that of the finance group's cash-flow projections. Demand management under this narrow definition might provide insight into operating volumes and variables, but it offers little insight into strategy. In other words, demand management now is being used primarily as a vehicle for managing supply chain efficiencies, not for maximizing strategic effectiveness.
Companies need to move from the traditional tactical view of demand management to a more strategic perspective. The tactical definition of demand is formally expressed as a functional equation in simple terms, such as:
D = f (HS, L)
where demand (D) is a function of both historical sales (HS) and a lift factor (L).
One problem with this definition, however, is that in most competitive and changing environments, the past is not a reasonable guide to the future. Further, at the strategic level, demand should be used not only to capture a forecast but also to create a collective and highly probable scenario for the future. These scenarios play out in several forms (What will happen to our products' sales in the near future? How will market behavior affect us? Should we keep producing the same products at the same levels?).
These emerging requirements mean that in addition to redefining demand, companies need to define a set of goals that distinguish the uses and value of strategic demand management. These goals can be expressed as follows:
- To understand the dynamic relationship between a company's strategies, its capability portfolio characteristics, and the overall market demand for those products.
- To comprehensively understand the nature, intensity, and distribution of demand patterns.
- To map the relationship between supply and demand, in order to predict and influence market economics.
- To convert these demand scenarios into long-term strategic plans as well as short-term production, marketing, financial, and logistical plans.
To make the demand chain more strategic, companies need to become more sophisticated in applying demand management. In particular, they need to link executive decisions at the highest level with the output of demand management (that is, a shared forecast, plan, and strategy for the future). The following discussion explains how to achieve those goals.
An Expanded View of Demand Chain ManagementContrary to the conventional view, the past is not necessarily a good indicator of future demand—particularly in highly competitive markets. In reality, it is not enough to merely use basic forecasts that average historical demand. A more strategic approach to demand management is to use all available intelligence and market data to analyze demand and create more accurate scenarios for the future. Accordingly, a new definition of strategic demand management emerges:
D = f (C, D1, D2, P, CB, S, E, B)
where demand is a function of competition (C), organizational direction (D1), portfolio differentiation (D2), price elasticity (P), consumer buying behaviors (CB; e.g., trends, fads, tastes, regional differences), seasonality (S), exogenous influences and causal factors (E, such as market indices and competitive events), and brand equity (B, which itself is a function of name recognition, positioning, exposure, and promotions).
Demand management now becomes a function of both exogenous influences (i.e., things occurring outside the company, such as competitive events) and various endogenous factors, which reflect the strategies used to respond to these external influences.
With this expanded view of demand management, it becomes clear that the demand chain is more than just a subset of the supply chain. Instead, the demand chain represents the linkage between the supply chain, marketing and commercial management, and corporate executives. Exhibit 3 shows how demand signals are transmitted between supply chain components to improve the chain's ability to work on shared scenarios. It also depicts how the supply chain forces tactical deployment of demand data.
Elements of Strategic Demand Chain Management
The demand chain is called a "chain" for an important reason: It involves coordination and planning between multiple internal and external groups. The demand chain represents the entire network of executives, dealers, retailers, suppliers, assemblers, sales representatives, production planners, and transportation analysts that all must be synchronized through a common plan for managing demand. This demand chain is one component of the supply chain, but it is also one component of the marketing, sales, and financial processes that constitute a company's overall value chain. Thus, while the supply chain can perform many functions of the demand chain, the latter is broader in many areas—as it focuses on creating collaborative scenarios for the future. Yet at the same time, the demand chain is narrower in some respects than the supply chain since it focuses strictly on the demand side of the equation.
Within the demand chain, all activities focus on demand management. The five key activities can be categorized as follows: dynamically analyze demand; analyze products, markets, and customers; perform a capability analysis; define optimal scenarios and plans; and deploy the business strategy. These activities represent a process flow, where one must be followed by the next.
In the first phase, the company would combine direct demand signals from forecasts and projects based on historical figures of current consumers with indirect demand analysis from business intelligence and market research. The organization uses both of these inputs as it dynamically analyzes the demand patterns for its current and potential markets. This dynamic analysis must be sophisticated enough to address the four strategic issues of demand management (i.e., growth strategies, portfolio strategies, positioning, and investment strategies). A combination of demand simulation and other tools, such as game theory and benchmarking, must augment the demand data gathering and analysis process. The focus of this activity is to address some fundamental questions, such as:
- Are we in the right market space?
- Is there a future in these markets?
- When should we introduce new products?
- Should we pursue a merger or acquisition? And with which companies?
- Is there a balance to global and local supply and demand? What will be the effect on pricing?
- What is making other products sell better—for example, first-mover advantage, brand equity?
All of the answers to these key strategic questions lie in a company's ability to analyze demand signals in a sophisticated way.
The second key activity of strategic demand management is to employ advanced planning, forecasting, and simulation to determine which products, markets, and customers have the highest potential. Leveraging the latest technology, companies can use a variety of demand data sources, published in any number of electronic formats, to "crunch" thousands of pieces of consumer demand data. One sophisticated approach would be to use Internet "intelligent agents" and artificial intelligence in combination with market research and business intelligence from the field. A company could, for example, use agents to "retrieve" and estimate the number of similar competing products via the Internet. Based on the number of "hits" the products receive, the company could determine product growth rates and life cycle. This information would help the company make optimal directional and portfolio decisions in its business scenarios and forecasts.
The next step is to map products with the highest economic value against organizational capabilities. The company needs to ensure that adequate financial, marketing, production, technological, and human resources exist (or can be acquired rapidly) to pursue these products. The goal here is to determine whether the company has the right capabilities to compete in each marketspace. The fourth activity is to finalize strategic plans and formulate strategies. In the last phase, these strategies are deployed and then continually evaluated.
Future of Demand Chain ManagementAs companies begin to use demand management more strategically, the demand chain will continue its evolution. As it evolves, demand management will move from its focus on production and supply issues to corporate profitability by focusing on strategic issues of future market demand. Exhibit 4 shows the evolution across three phases—tactical, operational, and strategic.
Different performance metrics will be used to gauge strategic demand-chain effectiveness. The tactical focus in most organizations today is on working capital reductions, which is a function of current assets minus current liabilities. Because most current assets (inventory, cash, short-term securities) and current liabilities (such as short-term debts) are fairly fixed, the tactical goal is inventory reduction. To reduce inventory, supply chain managers are using several logistics techniques, such as moving production planning systems toward "make to order." These efforts, however, usually increase both the order-fulfillment cycle time and stockout rates, while decreasing customer-service levels. At the same time, automation is being applied to make the chain more efficient through such initiatives as vendor-managed inventory and efficient consumer response. These efforts typically lead to increased investments in supply chain technology that focus on efficiency. They address such issues as how to manage inventory better, position warehouses, and predict historical demand.
In the strategic demand chain, however, the performance metric will move toward improved profitability through customer value-added or economic value-added measures. Although optimizing working capital certainly will remain an objective, the primary measure of the strategic demand chain will edge away from the current focus on inventory reduction. Demand planning processes will be forced to show their linkages with forecast accuracy, probability of the planning scenario, and organizational profitability. Additionally, the technology investments will be made to better understand demand for products in the capability portfolio and to build execution strategies in the appropriate marketspace. Finally, the data for corporate executive information systems will be derived from demand data.
Going forward, the key to competitive business strategy will be a company's ability to estimate, manage, and influence demand for products in their capability portfolio. Complete understanding of the shifts, directions, and intensity of demand can provide companies with invaluable input to their most strategic decisions. Further, it can serve as the principal guide to creating portfolio, positioning, investment, and growth strategies.
The bottom line is that business strategy and demand management must be completely aligned in both theory and practice. As technology becomes more sophisticated in its ability to leverage historical demand data, industry projections, and business intelligence around collaborative planning processes, this alignment will only continue to get tighter. Companies serious about improving their performance and economic returns can start by thoroughly understanding demand, analyzing capabilities, and crafting strategies that help to manage and influence their future marketspace.
| Strategy | Examples of How To Use Demand Management |
| Growth Strategy | • Perform "what if" analyses on total industry volume to gauge how specific mergers and acquisitions might leverage market share. |
| • Analyze industry supply/demand to predict changes in product pricing structure and market economics based on mergers and acquisitions. | |
| • Build staffing models for merged company using demand data. | |
| Portfolio Strategy | • Manage maturity of products in current portfolio to optimally time overlapping life cycles. |
| • Create new-product development/introduction plans based on life cycle. | |
| • Balance combination of demand and risk for consistent "cash cows" with demand for new products. | |
| • Ensure diversification of product portfolio through demand forecasts. | |
| Positioning Strategy | • Manage product sales through each channel based on demand and product economics. |
| • Manage positioning of finished goods at appropriate distribution centers, to reduce working capital, based on demand. | |
| • Define capability to supply for each channel. | |
| Investment Strategy | • Manage capital investments, marketing expenditures, and research and development budgets based on demand forecasts of potential products and maturity of current products,. |
| • Determine whether to add manufacturing capacity. |
| Author Information |
| Jim R. Langabeer II is vice president of global consulting for Demantra Inc., based in Cambridge, Massachusetts. |
| Footnotes |
| 1 Langabeer, Jim R. and Napiewocki, John. Competitive Business Strategy for Teaching Hospitals, Westport, Conn.: Quorum Books/Greenwood Publishing, 2000. |
| 2 Blackwell, Roger & Blackwell, Kristina. "The Century of the Consumer: Converting Supply Chains Into Demand Chains," Supply Chain Management Review, Fall 1999. |
| 3 Ibid. |
| 4 Lapide, Larry. "Demand Planning and Forecasting: There Is a Difference. Advanced Manufacturing Research," AMR Report on Supply Chain Management, Feb. 1998, 3–26. |
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