Demand management during an economic downturn
Lack of a clear step-by-step procedure for supply chain management is hampering its goal of providing seamless integration across the business network. Demand management is most important.
Though supply chain management philosophy has been around for more than two decades, lack of a clear step-by-step procedure is hampering its goal of providing seamless integration across the business network.
Demand management is the most important process of supply chain management philosophy. Whether one operates in a make-to-stock or an engineer-to-order environment, one has to go through the demand management process.
The output of the demand management process is used to drive the entire supply chain. In fact, the output is not limited to material supply chain; it also guides the financial and information supply chains. It is essential to quickly diagnose the demand management process, and address existing gaps for sustainable completive advantage.
During an economic downturn like what we are experiencing today, demand for the products and services declines, so we immediately turn our attention to cost cutting and improving the efficiency of our supply operations. In this process we neglect the most important revenue-generation mechanism supported by the demand management process.
Instead of focusing only on cost cutting, we need to pay attention to our existing demand management process to generate more business and improve profitability. We are actually reacting to the situation by cutting costs. If we want to respond to the situation, we have to revisit our demand management process and accelerate the demand generation process.
How to audit the demand management process
Demand management process has eight sub-processes, each of which plays an important role in the overall demand management. The importance of each process varies from industry to industry. For example, divergent supply chains have a very complex sales and distribution network, so "Sense" has a special importance. But this may not be important for a convergent type of the supply chain. There is a need to audit the demand management process in the context of supply chain.
Understand: The first requirement for auditing the demand management process is to ensure that there is an organization-wide understanding of sources and drivers of demand. There's more to the equation than just the expected shipments. Demand dimensions and hierarchies are worth addressing in this phase.
Sense: Collecting intelligence inside and outside of the organization is critical, as these variables directly or indirectly influence the demand drivers. This phase also covers the selection of most appropriate forecasting methodology. We might have to determine whether to apply different techniques for different products, regions or time periods. If too much emphasis is placed on historical data, the organization will need to focus heavily on data cleansing and normalization. Intelligence gathered from outside the organization plays a particularly important role in decision making during an economic downturn. Sensing is not just forecasting, and forecasting is not just extrapolation.
Communicate: It's all about how fast and precisely we communicate across the supply chain. There should be no surprises. It's better to know early than late about good news and bad. The information flow should be structured and timely to relevant customers. It should contain numbers and assumptions behind them, as well. Information should be synthesized and distilled so that it helps in quick decision making. Organizations should set up timely meetings for review and a feedback loop with clearly defined responsibility. After all, it is the consensus which reduces uncertainties.
Consolidate: Demand aggregation and disaggregation are important activities from the operational point of view. The unit of measure for financial planning is currency, but actual procurement, manufacturing, storing, distribution and selling happens in different units of measure such as pieces, boxes and pallets. Forecasting at SKU level is always good, but is it always necessary? Sometimes due to technological constraints or inaccurate numbers, we have to settle down at the product family or geographical dimensions like region. Another challenge is how should we conduct the aggregation process? Which dimension (product, time, geography, channel or class) should we consider first?
Prioritize: Here, the focus is on order profitability. Are we prioritizing the orders which are more profitable? Are we prioritizing the orders which are going to get us more business in the future? Which channel is more profitable? Which customer is more profitable? Which product is more profitable? What combination of product, channel, customer and region is most profitable? We should not be planning the order priorities so that the bottom line gets affected.
The above diagram (figure 2) shows the sample audited result of the demand management process. Each sub-process is measured qualitatively and quantitatively using various indicator variables, and finally the score is converted to a 5-point scale (0 being the lowest maturity, 5 the highest). In the sample radar graph we can see that the organization's demand management process is very poor in the three sub-processes: "consolidate," "priorities" and "measure." The organization should focus on these three processes to streamline the demand management process. The organization can also use this for external benchmarking against the best in the industry.
Shape: Does current demand pattern meet the business objective? How much is the difference between actual and planned performance? How large will this gap be in the near future? What type of intervention is required to be on the track? In this phase we try to adopt any number of strategies - such as marking products up or down, creating sales incentives, cross selling, introducing new products, withdrawing products from the market, or substituting products -- to ensure that the demand pattern aligns with the overall business objective. During this phase a what-if analysis has to be carried out to finalize the sequence of intervening events.
Respond: Once the priorities are decided, the next challenging task is how to fulfill it. Here the supply chain capability plays a vital role. In an economic downturn, supply chain flexibility is the key capability for success.
Measure: Finally, we need to measure the overall performance of the demand management process through business value. For example, we need to measure demand planning cycle time, forecast accuracy, fulfillment performance, and trade and promotional planning performance.
Considering the industry environment in which the organization is operating, the demand management audit graph gives the guideline for improving the overall demand management process. Sensing, Prioritizing and Shaping are the most important processes in this economic downturn because collectively, they have direct impact on the profitability of the business. Improper sensing may give rise to shortages of products which have buyers, or it may also increase the inventory of non-selling products. Similarly, if we do not prioritize our orders, we may end up in serving a non-profitable customer. Shaping helps to bridge the gap between the current and future performance of the organization. It guides the organization to select the most appropriate intervention technique available.
Milind Patil is head of the Supply Chain Center of Excellence at Patni Computer Systems Ltd.
- Edited by Renee M. Robbins, managing editor, MBT www.mbtmag.com