Optimally Bridging Supply and Demand

Typically, supply and demand managers are on opposite sides of a Grand Canyon-sized chasm. Optimized Demand Management can help close that gap.

By Larry Lapide -- Supply Chain Management Review, 5/1/2007

• Long Term Supply-Demand Matching
• Medium Term Supply-Demand Matching
• Short Term Supply-Demand Matching

As stated in my April 2007 Insights column, “The noblest goal (and real purpose in life) of any supply chain organization is to optimally match supply and demand over time. I define this as optimized demand management (DM).” To foster optimization, supply chain organizations need to put on “corporate hats” when coordinating the activities of the departments involved in matching supply and demand. The reason: these always balance in the long-run, but not necessarily in the best interests of the enterprise. DM processes represent the bridges that cross wide chasms that exist among supply- and customer-facing managers (Exhibit 1). Optimize these processes and they can unlock your supply chain's potential to help win rather than just support customer demand.

My first encounter with the chasm that divides the supply and demand sides took place as a marketing manager in the Field Services Division of a computer-maker. I received a message from the VP of Manufacturing & Logistics asking if we could meet to phase out services being marketed on our older products. The parts needed were getting prohibitively expensive and resource-intensive to make, stock, and replenish. I told him I'd think about it and get back to him. I never did. Why?

Upon reflecting, we were generating revenues on these products and since my goal was to generate revenue I didn't care much about costs and inventories, so why take a negative hit on revenues? I decided I was too busy to call back.

When I switched from a customer-facing career to a supply-facing career in 1990, I started feeling guilty at not taking an enterprise view. My ensuing experiences showed that I was not unique, and that there were abundant opportunities to cross the chasms with improved DM processes. These would involve more joint decision-making among supply-side managers (focused on minimizing costs and inventories) and customer-facing managers (focused on maximizing revenues and margins). This collaborative approach led to decisions that maximize sustained profitability and other corporate goals.

Supply chain management (SCM) organizations should focus on addressing these types of supply-demand decision-making processes, and optimization should be their mantra. What are the DM processes that supply chain managers should focus more on?

In defining DM to simply be the “matching of supply and demand over time,” the phrase “over time” is important because it means at every instance of time, including during long, medium, and short-term planning as well as at every other moment of time. It extends beyond the ubiquitous Sales and Operations Planning (S&OP) and retailer-based Merchandize Planning and Allocation (MP&A) processes. It also includes balancing demand and supply between planning cycles. Three types of important DM processes are described below.

1. Long Term Supply-Demand Matching

Customer-facing managers work directly with customers to tailor service policies often without sufficient input from supply chain managers. However, the policies, such as those dealing with delivery requirements, co-managed inventory programs, and the sharing of POS data, greatly impact supply-side operations. As part of these efforts, demand-side managers also often unilaterally drive customer segmentation decisions.

Setting service policies and segments represent long-term aspects of supply-demand matching, since they set the stage for how demand will take place and the resources needed to service customers. The processes offer opportunities to jointly optimize future supply and demand, while giving supply chain managers an opportunity to take on expanded responsibilities. Their role would be to help tailor services to customer segments with the intent to optimize long-term profitability and meet strategic corporate goals.

2. Medium Term Supply-Demand Matching

S&OP and MP&A represent medium-term demand management planning processes that tactically and collaboratively balance supply and demand plans. Other related DM processes include promotions and new product launch planning.

As suggested in my April 2007 column, these are natural processes for supply chain managers to lead because they involve coordination among supply and demand-side organizations. In addition, SCM managers should drive the processes toward making decisions that optimize profitability and meet other corporate goals.

3. Short Term Supply-Demand Matching

Matching supply and demand in real time is a key responsibility of customer service and sales reps. As orders come in these individuals routinely quote customer delivery dates. Accurate estimates of these are needed to properly set each customer's expectation to a promise that can be kept.

Estimating promise dates represents an opportunity to optimally match supply and demand in the short term. Accuracy ensures efficient order fulfillment, with minimal expediting. It requires planning out how each order will be filled; assessing what supply will be available to meet its demand (in the context of expected future demand). In addition, customer priorities are to be considered when scarce supply needs to be allocated.

Often, optimization is not the norm. Either orders are filled on a first-come-first-served (FIFO) basis or according to the sales rep who screams the loudest for the earliest delivery promise dates for his/her customers. Similarly, rather than optimally planning order fulfillment, manufacturing or logistics managers often just quote standard lead times, leading to promise dates that are not necessarily optimal.

While SCM managers typically aren't in the business of promising delivery dates on a daily basis, they do have an important role to play in making sure that these supply-demand matching decisions are made in a more optimal fashion. This includes conducting in-depth and unbiased analyses when setting up the customer priorities that drive promising decisions.

I believe that optimizing the DM processes represents the next phase in the evolution of supply chain management, leading to '”commercialized” supply chains. Certainly, supply chain managers can continue to be heroes in their company if they keep driving out costs and inventories. But that's the easier path. The nobler course is to get more involved in building the DM processes that can make their supply chain a competitive weapon that helps customer-facing mangers win battles in the marketplace.