In this two part article Peter Hunt describes Demand Management as a source of value improvement. In part 1 we cover the background, context and foundation for Demand Management and in part two we will consider the catalysts and key tools.
Part 1 – Background
Demand Management is not a new concept. Its origins lie in fiscal management and economic theory wherein demand and supply can be influenced by the level of interest, taxation, the availability of credit etc.
From the late 1970s demand management became increasingly used across many sectors in an effort to balance customer requirements (demand) with the capability and capacity of the supply chain (supply) through forecasting demand and synching with marketing, production, procurement and distribution.
By getting this right the supply chain was able to deliver efficient consumer response and achieve reductions in working capital (inventory), wastage and obsolescence, whilst improving asset utilization and productivity.
More recently the scope of demand management has extended from a focus on volume alone, to incorporate other value levers including specification, (the level or pattern of) consumption, service level, quality, delivery and packaging requirements and the total cost of acquisition and ownership.
One of the foundations for this extended scope of demand management is an objective challenge of the buying organizations’ business needs, i.e. a challenge of their desired or target outcomes in an effort to balance these with the associated value levers to ensure a ‘right-sized’ solution.
It’s this more recent scope of demand management that we will focus on as a source of value improvement.
ADR has worked with many private and public sector clients to design and embed category management processes through coaching and experiential learning. See example in Figure 1.
Understanding an organizations’ business needs is an essential step early in the process. This provides important insight to develop the category strategy, define the supplier(s) capability needs and thereafter to manage their performance. Further, given that business requirements will be influenced by the business climate, stakeholder and consumer direction, technology, commodity markets etc. it follows that redefinition or refresh of the business needs is equally essential during the ongoing management phase to help manage and optimize the life-cycle of the category strategy.
Hence business needs analysis is a prerequisite in strategy development, sourcing and supplier relationship management.
WHAT ARE BUSINESS NEEDS?
The specification and / or a scope of work will form part of the business needs, but in addition we must understand:
- The associated needs in relation to e.g. assurance of supply and delivery, quality, service, cost, innovation, risk, regulatory and environmental issues etc., and
The ‘Why?’ is of critical importance because it leads us to understand the relative priority as well as the desired business outcomes, i.e. what we are trying to achieve from the procurement and what’s driving the demand. If you were to ask these questions to a cross functional team the likelihood is that you’d receive different responses.
For example, consider cookie tins in the food supply chain. The cookie manufacturing operations team may prefer standardization of size and shape to optimize plant utilization and efficiency. Procurement and the supply chain may support this to enable aggregation and scalability benefits and to buffer forecasting and reduce shortage risk.
Marketing on the other hand, may prefer unique shapes, innovative designs and high quality finishes because it regards the tin as advertising collateral – a conduit to strengthen the brand and brand recognition through retention and future use of the tin.
Challenging and unifying these perspectives will create a set of fit for purpose business needs which, together with the other steps in the process, will inform the category strategy.
This concept of challenge using different stakeholder perspectives and desired outcomes and demand drivers lies at the heart of demand management. At its ultimate conclusion, it allows an organization to place a ‘value’ on individual features or components of a product or elements of a service or process, i.e. to challenge the cost of provision or the benefits derived and, indeed, whether the intended benefits are in fact being achieved. Consider the examples in Figure 2 to amplify this.
Accepting that the route to clearly and optimally defining desired outcomes requires perspectives from the right stakeholders it follows that engagement / formation of a cross-functional category team is critical. This is critical both early in the category strategy development (pre-sourcing) phase as well as in the ongoing category management phase, when the focus will be on supplier relationship and performance management and continuous improvement.
In part two of the article on Demand Management, Peter Hunt will discuss the catalysts and some of the key tools to support Demand Management.