There is major pressure on executives of companies to deliver financial results to their shareholders. While companies often respond to this pressure by pursuing short-term profitability or unrestrained revenue growth, achieving maximum shareholder value requires a strategic balance of profits and growth. One way to achieve this balance is to become a demand-driven organization. By undertaking a strategy of demand chain management (DCM), companies can align demand generation, capture, interpretation and response to attributes of high performance.
Demand-driven Fundamentals
Demand information should be the driver of most corporate decisions; therefore, executives should take a demand-centric approach to management.
The demand chain management philosophy has four main facets: demand generation, capture, interpretation and response. Demand generation refers to all activities involved in stimulating market desire for a company's product offering. This includes field sales personnel, channel partners, marketing campaigns, promotions and branding. While important to every organization, demand generation is critical to companies like consumer goods, where branding, promotions and channel management are primary drivers of differentiation.
Demand capture obviously includes sales forecasting and the gold standard of demand measurement - forecast error - in all its permutations, including historical results, product hierarchy, account structure and time horizon. However, demand capture is based upon a more comprehensive set of demand signals, including longer-term marketing data, channel data, service and warranty data, customer communication, and the judgment of salespeople from their interaction with buyers. While most companies do an effective job of collecting source data for forecast error computation, they vary widely in their ability to capture other demand signal information.
Demand forecasting and planning processes interpret demand signals and combine the inputs into a single, unified demand plan, using collaborative processes to increase the value of the data and improve managerial judgment. The idea of demand planning as more than just sales forecasting has been gaining credence for several years. However, many companies with low unit volumes and poor access to point of sale data have only rudimentary interpretive processes and suffer the effects of poorly interpreted demand data.
Even strong demand generation, accurate data capture and proper interpretation will result in limited value if an enterprise cannot provide quick and decisive response throughout its operations and with trading partners. Integration of demand output is perhaps the least understood, and certainly least implemented, of the three major areas of demand chain management. All departments need to use the same demand information - one version of the truth - tailored to their own contextual views and driving their own planning activities. The financial impact of poor demand response can be devastating, given the sensitivity of the investment community to companies achieving their earnings estimates and the fact that large companies can take months to propagate demand changes throughout their organization.
Demand-Driven Competitive Advantage
Dr. Michael Porter, a definitive thinker on the subject of strategy and Harvard Business School professor, adheres to principles of strategic positioning which include superior long-term return on investment (ROI) through sustained profitability, as well as delivering a value proposition to provide differentiation. For example, sustained profitability is driven by a combination of revenue optimization and operational excellence. DCM optimizes revenue by preparing for anticipated demand and then better serving customers. DCM drives operational excellence by using knowledge of demand drivers to minimize the material, labor, plant capacity and outside services required to meet anticipated demand. DCM is also essential for differentiation by capturing relevant customer and market data, analyzing it, using the insights gleaned to better understand customers and then channeling the lessons learned into product refinements and new product development.
Strategies for Success
Pursuing a DCM philosophy can be a daunting endeavor, especially for companies that have historically focused on operational efficiencies or marginal use of forecast data to influence planning. The probability of rapid return on investment and long-term success increases dramatically when companies focus on five specific demand-chain management strategies.
Create effective customer relationships, the key to the demand-driven enterprise.
Despite the dramatic growth of customer relationship management systems, the concept of how customer relationships should operate is still in its infancy. To be effective, customer relationship management (CRM) needs to focus more on the R and less on the M . This also includes improving the customer and channel relationships through sales force effectiveness. Enterprises need to understand the context for building better customer relationships. Here are four key aspects of creating integrated customer relationships:
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Familiarize with your customers
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Have a shared purpose
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Improve customer communications by evaluating the content, channel and frequency of dialogue
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Develop a clearly articulated and integrated relationship roadmap
Collaborate effectively with customers, channel partners and suppliers.
The traditional struggle between manufacturers and retailers has long been viewed as a zero-sum game, and only in recent years have collaborative efforts moved beyond pioneers like Proctor & Gamble and Giant Foods and into the industry rank and file.
Although formal industry initiatives - like collaborative planning, forecasting and replenishment (CPFR) for consumer goods - are worthwhile objectives, enterprises can also realize value from a less formal collaborative architecture, so long as it is developed along DCM principles.
Develop excellence in supply chain operations.
Sales and operations planning (S&OP) is a critical process in the demand-driven organization. S&OP bridges sales forecasting and the rest of the organization, and its key component, demand planning, influences supply chain effectiveness. S&OP drives planning and influences setting of targets for inventory levels, lot sizes and reorder frequencies. It also influences execution for materials, capacity, inventory, labor and transportation. While DCM has an acknowledged focus on demand, procurement and sourcing are also important to demand-driven enterprises, as these activities make up a substantial percentage of an organization's flexibility, supply response time and, ultimately, cost of goods sold.
Establish knowledge management as a strategic priority.
Knowledge management has become the unifying solution for empowering workers to overcome the proliferation of data caused by software applications, Internet information and corporate documents. Enterprise portals have become significant productivity tools, and they offer a standard means to access, organize, share and analyze data from existing systems. Content management is also important to managing the explosion of information and increased need to share with trading partners.
Pay attention to systems integration.
The importance of systems integration has become apparent as companies attempt to operate after implementing a wide range of information systems, including enterprise resource planning (ERP), CRM, supply chain management (SCM), content management and various customized applications. Systems integration has a strategic element as well. To gain the advantages of enterprise software and Internet architecture, CIP companies don't need to adopt generic, out-of-the-box packaged applications. Instead, they must be willing to tailor deployment of technology to their particular strategies.
Conclusion
Addressing the challenges of becoming a demand-driven enterprise requires a blend of strategic thinking and tactical execution. Demand chain management is a practical approach that incorporates the principles of strategic positioning and also offers a tactical means to achieve demand generation, capture, interpretation and response.
The five DCM strategies outlined above offer companies a place to start or continue their journey of transforming themselves into demand-driven enterprises. By following the tenets of demand chain management, they can outperform their competition and generate superior shareholder value, regardless of the economic environment.
Jeff Kavanaugh is the vice president of solutions for Consumer and Industrial Products at Inforte Corp., a demand chain management consultancy based in Chicago.
