Demand Management

24th September 2022 0 By indiafreenotes

Demand management is a planning methodology used to forecast, plan for and manage the demand for products and services. This can be at macro-levels as in economics and at micro-levels within individual organizations. For example, at macro-levels, a government may influence interest rates to regulate financial demand. At the micro-level, a cellular service provider may provide free night and weekend use to reduce demand during peak hours.

Demand management has a defined set of processes, capabilities and recommended behaviors for companies that produce goods and services. Consumer electronics and goods companies often lead in the application of demand management practices to their demand chains; demand management outcomes are a reflection of policies and programs to influence demand as well as competition and options available to users and consumers. Effective demand management follows the concept of a “closed loop” where feedback from the results of the demand plans is fed back into the planning process to improve the predictability of outcomes. Many practices reflect elements of systems dynamics. Volatility is being recognized as significant an issue as the focus on variance of demand to plans and forecasts.

Macroeconomics

In macroeconomics, demand management it is the art or science of controlling aggregate demand to avoid a recession.

Demand management at the macroeconomic level involves the use of discretionary policy and is inspired by Keynesian economics, though today elements of it are part of the economic mainstream. The underlying idea is for the government to use tools like interest rates, taxation, and public expenditure to change key economic decisions like consumption, investment, the balance of trade, and public sector borrowing resulting in an ‘evening out’ of the business cycle. Demand management was widely adopted in the 1950s to 1970s, and was for a time successful. It caused the stagflation of the 1970s, which is considered to have been precipitated by the supply shock caused by the 1973 oil crisis.

Theoretical criticisms of demand management are that it relies on a long-run Phillips Curve for which there is no evidence, and that it produces dynamic inconsistency and can therefore be non-credible.

Today, most governments relatively limit interventions in demand management to tackling short-term crises, and rely on policies like independent central banks and fiscal policy rules to prevent long-run economic disruption.

Demand management as a business process

Demand management is both a stand-alone process and one that is integrated into sales and operations planning (S&OP) or integrated business planning (IBP).

Demand management in its most effective form has a broad definition well beyond just developing a “forecast” based on history supplemented by “market” or customer intelligence, and often left to the supply chain organization to interpret. Philip Kotler notes two key points:

1. Demand management is the responsibility of the marketing organization (in his definition sales is subset of marketing);

2. The demand “forecast” is the result of planned marketing efforts. Those planned efforts, not only should focus on stimulating demand, more importantly influencing demand so that a business’s objectives are achieved.

The components of effective demand management, identified by George Palmatier and Colleen Crum, are:

1. Planning demand;

2. Communicating demand;

3. Influencing demand

4. Prioritizing demand.

Demand control

Demand control is a principle of the overarching demand management process found in most manufacturing businesses. Demand control focuses on alignment of supply and demand when there is a sudden, unexpected shift in the demand plan. The shifts can occur when near-term demand becomes greater than supply, or when actual orders are less than the established demand plan. The result can lead to reactive decisions, which can have a negative impact of workloads, costs, and customer satisfaction.

Demand control creates synchronization across the sales, demand planning, and supply planning functions. Unlike typical monthly demand or supply planning reviews, demand control reviews occur at more frequent intervals (daily or weekly), which allows the organization to respond quickly and proactively to possible demand or supply imbalances.

Time fences

The demand control process requires that all functions agree on time fences within the planning horizon, which should be no less than a rolling 24 months based on integrated business planning best practices. A time fence is a decision point within a manufacturer’s planning horizon. Typically, three established time fences exist within a company:

  • Future planning zone: Supply is managed to match demand
  • Trading zone: Demand is managed to match supply for production
  • Firm zone: Demand is managed to match supply for procurement

Demand controller

A demand controller is established when a company implements a demand control process. Unlike a demand planner who focuses on long-term order management, the demand controller is responsible for short-term order management, focusing specifically when demand exceeds supply or demand appears to be less than planned, and engages sales management in both situations. The demand controller works across multiple functions involved in the supply and demand processes, including demand planning, supply planning, sales, and marketing.

Components

  • Modelling: It is the process of representing reality in a simplified way that allows us to understand and predict behavior. In other words, it is a means of understanding the past to anticipate the future better.
  • Demand Forecasting is the process of making predictions about future events based on past data. This data can come from many sources, including historical sales.
  • Demand planning: Making a demand plan requires the right tools, information, and operation. Depending on its strategic objectives, product positioning, and inventory needs, it may be different for each organization.
  • Supply Planning: It determines the correct quantity of materials, parts, and products to produce or procure to meet customer demand. It ensures that an organization has the proper inventory to meet customer demand while maximizing profits.

Advantages and Functionalities

Advantages

  • Helps to build a foundation for merchandising, budgeting, and logistics processes.
  • Monitor supplier transactions and check for growth or decline, respectively.
  • Monitor all related expenditures.
  • Build a strong relationship with customers and suppliers. Also, ensure that relationships last with reasonable pricing and other offers.
  • Allows you to boost supply chain operations.
  • It helps to create more revenues.

Functionalities

  • Point out the critical delivery dates.
  • Make out the future needs.
  • Point out the frequency of demand.
  • Link the requirement to the budget.
  • Based on past spending and future demands, analyze the expenditure.
  • It integrates with strategy, procurement, requirement, and market analysis.
  • In the case of strategic purchases, manages industry analysis and commodity analysis.

Demand management process

  1. Planning Demand

This process analyzes customer requirements in advance and forecasts IT resources.

Built primarily for IT administrators, this component analyzes, evaluates, and projects customers’ future requirements within an IT environment.

It uses statistical analysis, best practices, and current demand cycles to evaluate future customer needs.

It also serves as an input to capacity planning to provision required IT resources based on current and expected future demand.

  1. Communicating demand

Communicating demand is an essential component of demand management. Therefore, management will implement qualitative methods to forecast the market and share with the stakeholders.

Once the firm understands the demand, it is vital to make it known to several aspects of the business to ensure they leverage the production accordingly.

  1. Influence demand

As part of supply chain management (SCM), Businesses should focus on retaining customers, service levels, and supplier relationships.

Companies should build additional policies to face sudden changes in demand and supply.

  1. Prioritizing demand

Identifying and prioritizing projects forms an essential part of the demand management process.

Organizational capacity, risk assessment, financial value, and implications must be carefully assessed while forming policies.

Challenges

While implementing demand management faces some fundamental challenges. They are

  • Lack of knowledge about automated algorithms.
  • Maintaining balance for sales and retailers to generate demand design to find the timing, level, and location.
  • Lack of organized data structure for receiving, storing, and retrieving the point of sale information from retailers.

Factors that affect demand

Many factors will influence demand. Here I am listing a few factors.

External factors

  • Market situations: It is a significant factor that directly affects the demand for example, recessions and strikes.
  • Competitor’s step: If your competitor starts giving the same product or services with good quality at less price, then there will be a chance of a sudden reduction of demand for your product or service.
  • Seasonality: Some products’ demand increases or decreases depending on seasons. For example, ice cream, woolen cloths, umbrellas, school bags, etc.
  • Trends: Market trend is one of the major factors that increases or decreases demand.

Internal factors

  • Pricing approach
  • Maintenance
  • Customer relationship
  • Promotion and advertisement for products/services
  • Product alteration

Demand management vs demand planning

Demand Management Demand Planning
It is the process of understanding, anticipating, and managing customer demand. It is designing and building a plan to meet desired customer demand at a minimal cost.
It includes forecasting future demand, setting targets for meeting that demand, and taking steps to ensure that the necessary supplies are available when customers want them. It usually includes determining what products to make, how much of each product to make, when to make them, and where to make them.
Considers customer demand in the short term Considers customer demand in the long term