Demand chain - AbsoluteAstronomy.com

Concept

Analysing the firm's activities as a linked chain is a tried and tested way of revealing value creation opportunities. The business economist Michael Porter

Michael Porter

Michael Eugene Porter is the Bishop William Lawrence University Professor at Harvard Business School. He is a leading authority on company strategy and the competitiveness of nations and regions. Michael Porter’s work is recognized in many governments, corporations and academic circles globally...

of Harvard Business School pioneered this value chain approach: "the value chain disaggregates the firm into its strategically relevant activities in order to understand the costs and existing potential sources of differentiation" . It is the micro mechanism at the level of the firm that equalizes supply and demand

Supply and demand

Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...

at the macro market level.

Early applications in distribution, manufacturing and purchasing collectively gave rise to a subject known as the supply chain

Supply chain

A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer. Supply chain activities transform natural resources, raw materials and components into a finished product that is delivered to...

. Old supply chains have been transformed into faster, cheaper and more reliable modern supply chains as a result of investment in information technology

Information technology

Information technology is the acquisition, processing, storage and dissemination of vocal, pictorial, textual and numerical information by a microelectronics-based combination of computing and telecommunications...

, cost-analysis

Cost accounting

Cost accounting information is designed for managers. Since managers are taking decisions only for their own organization, there is no need for the information to be comparable to similar information from other organizations...

and process-analysis

Business process modeling

Business Process Modeling in systems engineering is the activity of representing processes of an enterprise, so that the current process may be analyzed and improved. BPM is typically performed by business analysts and managers who are seeking to improve process efficiency and quality...

.

Marketing

Marketing

Marketing is the process used to determine what products or services may be of interest to customers, and the strategy to use in sales, communications and business development. It generates the strategy that underlies sales techniques, business communication, and business developments...

, sales

Sales

A sale is the act of selling a product or service in return for money or other compensation. It is an act of completion of a commercial activity....

and service

Customer service

Customer service is the provision of service to customers before, during and after a purchase.According to Turban et al. , “Customer service is a series of activities designed to enhance the level of customer satisfaction – that is, the feeling that a product or service has met the customer...

are the other half of the value-chain, which collectively drive and sustain demand, and are known as the Demand Chain. Progress in transforming the demand side of business is behind the supply side, but there is growing interest today in transforming demand chains.

Demand chain challenges

At present, there appear to be four main challenges to progress in transforming Demand Chains and making them faster, leaner and better:

Linking Demand and Supply Chains
Demand Chain Information Systems
Demand Chain Process Re-Engineering
Demand Chain Resource Distribution and Optimisation

Linking demand and supply chains

The challenge of linking demand and supply chains has occupied many supply chain specialists in recent years; and concepts such as "demand-driven supply chains", customer-driven supply chains and sales and operations planning have attracted attention and become the subject of conferences and seminars.,

The core problem from the supply chain perspective is getting good demand plans and forecasts from the people driving demand: marketing, sales promotions, new product developments etc. The aim is to minimise out-of-stock (OOS) situations and excessive cost of supply due to spiky demand.
Much attention has been drawn to the bullwhip effect

Bullwhip effect

The Bullwhip Effect is an observed phenomenon in forecast-driven distribution channels. It refers to a trend of larger and larger swings in inventory in response to changes in demand, as one looks at firms further back in the supply chain for a product...

. This occurs when demand patterns are extremely volatile, usually as a result of sales promotion

Sales promotion

Sales promotion is one of the four aspects of promotional mix. Media and non-media marketing communication are employed for a pre-determined, limited time to increase consumer demand, stimulate market demand or improve product availability...

s, and it has the unintended consequences

Unintended Consequences

Unintended Consequences is a novel by John Ross, first published in 1996 by Accurate Press. The story chronicles the history of the gun culture, gun rights and gun control in the United States from the early 1900s through the late 1990s...

of driving up supply chain costs and service issues, due to supply capacity being unable to meet the spiky demand pattern and the entire chain becoming unstable as a consequence .

While the aim of linking the chains is clearly sensible, most of the people involved so far come from the supply side, and there has been a noticeable lack of input to these debates from Marketing and Sales specialists. Progress in modernising marketing and sales processes and information systems has also been slow; these systems and processes have been an obstacle to linking the two chains.

Demand chain information systems

Information about activities and costs is an essential resource for improving value chain performance. Such information is nowadays readily available for the supply chain, due to the widespread implementation of ERP

Enterprise resource planning

Enterprise resource planning systems integrate internal and external management information across an entire organization, embracing finance/accounting, manufacturing, sales and service, customer relationship management, etc. ERP systems automate this activity with an integrated software application...

technology (systems such as SAP

SAP ERP

The SAP ERP application is an integrated enterprise resource planning software manufactured by SAP AG that targets business software requirements of midsize and large organizations in all industries and sectors...

), and these systems have been instrumental in the transformation of supply chain performance.

Demand chain IT development has focused on database marketing

Database marketing

Database marketing is a form of direct marketing using databases of customers or potential customers to generate personalized communications in order to promote a product or service for marketing purposes...

and CRM

Customer relationship management

Customer relationship management is a widely implemented strategy for managing a company’s interactions with customers, clients and sales prospects. It involves using technology to organize, automate, and synchronize business processes—principally sales activities, but also those for marketing,...

systems . Demand driving activities and associated costs are still recorded in an inconsistent manner, mostly on spreadsheets and even then the quality of the information tends to be incomplete and inaccurate .

Recently, however, Marketing Resource Management

Marketing Resource Management

Marketing Resource Management provides the software infrastructure to support Marketing Operations Management. Marketing Operations Management is the alignment of people, process and technology to support marketing activities and improve marketing effectiveness...

systems have become available to plan, track and measure activities and costs as an embedded part of marketing workflows.

"MRM is a set of processes and capabilities that aim to enhance your ability to orchestrate and optimize the use of internal and external marketing resources...The desire to deal with increased marketing complexity, along with a mandate to do more with less, are the primary drivers behind the growth of MRM"

Implementation of MRM systems often reveals process issues that must be tackled, as Gartner have observed

"All too often, large enterprises lack documented or standardized marketing processes — resulting in misalignments, inconsistencies and wasted effort. Marketing personnel frequently rotate job responsibilities. Along with thwarting progress toward best practices and processes, this disarray contributes to a loss of corporate memory and key lessons learned. The elongated learning curve affects new or transferred employees as they struggle to find information or have to relearn what the organization, in effect, already "knows."

Demand chain process improvement

Processes in the demand chain are often less well-organised and disciplined than their supply side equivalents. This arises partly from the absence of an agreed framework for analysing the demand chain process.

Professors Philip Kotler and Robert Shaw have recently proposed such a framework . Describing it as the "Idea to Demand Chain" they say:

"The I2D process can be pictured as shown in Exhibit 1; it is the mirror image of the supply chain, and contains all the activities that result in demand being stimulated. Yet unlike the supply chain, which has successfully delivered economies of scale through process simplification and process control, marketing’s demand chain is primitive and inefficient. In many firms it is fragmented, obscured by departmental boundaries, invisible and unmanaged."

Demand chain budget segmentation, targeting and optimization

Demand chain budgets for marketing, sales and service expenditure are substantial. Maximising their impact on shareholder value

Shareholder value

Shareholder value is a business term, sometimes phrased as shareholder value maximization or as the shareholder value model, which implies that the ultimate measure of a company's success is the extent to which it enriches shareholders...

has become an important financial goal for decision makers. Developing a shared language across marketing and finance is one the challenges to achieving this goal.

Segmentation

Segmentation

Segmentation may mean:*Market segmentation, in economics and marketingBiology*A process of morphogenesis that divides a metazoan body into a series of semi-repetitive segments*Segmentation , a series of semi-repetitive segments...

is the initial thing to decide. From a strategic finance perspective "segments are responsibility centers for which a separate measure of revenues and costs is obtained" . From a marketing perspective "segmentation is the act of dividing the market into distinct groups of buyers who might require separate products and/or marketing mix

Marketing mix

The term "marketing mix" was coined in 1953 by Neil Borden in his American Marketing Association presidential address. However, this was actually a reformulation of an earlier idea by his associate, James Culliton, who in 1948 described the role of the marketing manager as a "mixer of ingredients",...

es" . An important challenge for decision makers is how to align these two marketing and finance perspectives on segmentation.

Targeting

Targeting

Targeting is to make a thing or group of things a target, to select it or them to be acted upon.* Targeting , to select objects or installations to be attacked, taken, or destroyed...

of the budget is the final thing to decide. From the marketing perspective the challenge is how "to optimally allocate a given marketing budget to various target markets" . From a finance perspective the problem is one of resource and budget allocation "determining the right quantity of resources to implement the value maximising strategy" .

Optimization

Optimization (mathematics)

In mathematics, computational science, or management science, mathematical optimization refers to the selection of a best element from some set of available alternatives....

provides the technical basis for targeting decisions. Whilst mathematical optimization theory has been in existence since the 1950s, its application to marketing only began in the 1970s , and lack of data and computer power were limiting factors until the 1990s.

Since 2000, applying maths to budget segmentation, targeting and optimization has become more commonplace. In the UK the IPA

Institute of Practitioners in Advertising

The Institute of Practitioners in Advertising is the trade body and professional institute for 250 leading agencies in the UK's advertising, media and marketing communications industry, covering the creative, digital, direct marketing, healthcare, media, outdoor, sales promotion and sponsorship...

Awards have documented over 1000 cases of modelling over 15 years, as part of their award process. The judging criteria are rigorous and not a matter of taste or fashion. Entrants must prove beyond all reasonable doubt that the marketing is profitable . It enables marketing to be brought centre stage in four important ways

First, it translates the language of marketing and sales into the language of the boardroom. Finance and profits are the preferred language of the modern executive suite. Marketing and sales strategies have to be justified in terms of their ability to increase the financial value of the business. It provides a bridge between marketing and the other functions.

Second, it strengthens demand chain accountability

Accountability

Accountability is a concept in ethics and governance with several meanings. It is often used synonymously with such concepts as responsibility, answerability, blameworthiness, liability, and other terms associated with the expectation of account-giving...

. In Marketing Departments awareness

Awareness

Awareness is the state or ability to perceive, to feel, or to be conscious of events, objects or sensory patterns. In this level of consciousness, sense data can be confirmed by an observer without necessarily implying understanding. More broadly, it is the state or quality of being aware of...

, preference

Preference

-Definitions in different disciplines:The term “preferences” is used in a variety of related, but not identical, ways in the scientific literature. This makes it necessary to make explicit the sense in which the term is used in different social sciences....

and satisfaction

Contentment

"Contentment" seems realistically defined as "enjoyment of whatever may be desired". That definition is realistic because the more contented an individual or community becomes the less extreme so more acceptable their desires will be...

are often tracked as alternative objectives to shareholder value. In Sales Departments, sales promotion

Sales promotion

spending is often used to boost volumes, even when the result is unprofitable . Optimization modelling can assess these practices and support more rigorous accountability methods.

Third, it provides a counter-argument to the arbitrary cutting of demand-chain budget

Budget

A budget is a financial plan and a list of all planned expenses and revenues. It is a plan for saving, borrowing and spending. A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods...

s. Return on marketing investment

Return on marketing investment

Return on marketing investment is the contribution attributable to marketing , divided by the marketing “invested” or risked. ROMI is a relatively new metric. It is not like the other “return-on-investment” metrics because marketing is not the same kind of investment...