360-degree Overview of Demand Management

The most comprehensive overview of the Demand Management process

This research intends to provide the most comprehensive overview of Demand Management - from basic definitions to examples. 

It is one of the most potent tools for value creation. Stay tuned to understand why.

The definition of demand management 

The production-related definition of demand management is the avoidance of shortage or overstock situations with the efficient use of physical and financial resources, which is ensured by segregating good demand from wasteful one.

A more generic definition by APICS explains demand management as a process that weighs both customer demand and a firm's output capabilities and tries to balance the two. 

Demand management attributes

Demand management isn't limited to forecasting and includes 
  • synchronizing supply and demand, 
  • reducing variability, 
  • increasing flexibility.
Reducing demand variability supports consistent planning and reduces costs.

Increasing flexibility helps the firm respond quickly to internal and external events.

Another crucial part of demand management is developing and executing contingency plans
when there are interruptions to the operational plans.

The goal of demand management is to meet customer demand most effectively and efficiently.

Demand management in the supply chain

Global Supply Chain Management Forum (GSCF) model defines eight key business processes that need to be implemented within and across firms in the supply chain: 
  1. Customer Service Management 
  2. Demand Management
  3. Order Fulfillment
  4. Manufacturing Flow Management 
  5. Supplier Relationship Management 
  6. Product Development Management 
  7. Returns Management.

The strategic demand management process

The scholastic view of the Demand Management process is presented below. 

The strategic demand management process

A practical example of the Demand Management process

Below is the realistic view of the Demand Management process, as realized in one of the large infrastructure companies. It assumes the balancing of
  • new requirements from end-users, including new product introduction,
  • sales and marketing plans,
  • distribution resource planning,
  • production capacity,
  • inventory levels,
  • interplant material movements,
  • financial resources (budget.)
The outcome of the Demand Management process is the Annual Sourcing Plan.

Demand management process flow


This process shows that many firms tend to manage demand within their four walls. 

However, the actual benefits will be achieved only when management integrates this process with suppliers and customers.

The procurement view of demand management

Procurement professionals, who traditionally measure their effectiveness by savings, will sooner or later face the depletion of suppliers' resources and lose their motivation for further cooperation. 

Suppliers cannot always be the sole source of benefits and patch holes in your company's balance sheet with their funding.

Perhaps that is why the concept of strategic sourcing appeared, emphasizing the early analysis of requirements to conduct negotiations with internal customers: on excessive volumes, pumped-up specs, and overstated expectations. 

All of that is called wasteful demand and requires appropriate management. 

Demand Management objectives for Procurement are to understand, anticipate, and influence end-user demand.

These negotiations are much more time-consuming and nerve-draining than the ones with suppliers - here, the opponent is usually heavyweight and charismatic and can "blackmail" buyers with operational disruptions, loss of revenue, or damage to the brand. 

As a result, Procurement would need to persuade and maneuver using the tools of economics, psychology, and internal politics.

It is an integral step of the Source-to-Pay (S2P) cycle. 
Source-2-Pay (S2P) cycle with the demand management stage highlighted

Procurement will complement its end users in the category management process with its expertise, market knowledge, contract and supplier information, experience from other sourcing projects, and a cost-conscious mindset. 

All of that will contribute to the Demand Management results.

Demand management eliminates waste.

The outcome is the separation of value demand that exactly meets the internal requestor needs from four wasteful demand types:
  • Failure demand is caused by an earlier failure to deliver the required service or by poor service design in general. E.g., the master project is delayed, and related third-party staff augmentation contracts (e.g., project management, integration, change management resources) remain indefinitely.
  • Excess demand is caused by inappropriate or missing controls. E.g., it is common practice to spend the remainder of an annual budget before the year-end for next year's requirements, nice-to-have things, or simply anything to not leave unused funds.
  • Preventable demand could be influenced or prevented from occurring. E.g., color printouts drive the pay-per-page or cartridge cost, which could be partially avoided by default black-and-white print settings.
  • Avoidable demand caused by wrong behaviors or false expectations. E.g., managers are requesting full entitlement to office equipment just because their grade allows them to.

The origins of demand

There are various points of origin for demand. Let's identify the five most important ones:
  1. New projects and initiatives are identified in the current corporate strategy.
  2. Old projects not realized in the previous strategic cycle, e.g., due to re-prioritization or lack of funds. These projects roll from one budget cycle to another.
  3. Internal demand originating from inside the company (driven by the management, people, and the corporate culture itself.)
  4. Spot requirements raised by business lines, departments, and subsidiaries to facilitate interactions with peers (internal "rub-in.")
  5. Externally-driven innovation (by suppliers, industry, society.)
Some elements of demand will be de-prioritized normally in the strategic cycle. Others need to be analyzed and eliminated in the process of demand management. 

The most likely victim is type 2 - some delayed initiatives carried over from one period to another by self-esteemed executives. This demand is visibly wasteful but highly political and sensitive, representing specific personas.  

Demand management models

Two dimensions of demand management are demand or price decisions and control over replenishment.

Types of demand management models
  • Order promising models consider a price (i.e., demand), current inventory, and future replenishment quantities as given. Each incoming customer order is processed based on real-time availability;
  • stochastic inventory control (SIC) models focus on optimal inventory replenishment;
  • markdown models determine the right price path for inventory clearance for a given amount of inventory, which cannot be replenished during the planning horizon;
  • trade promotions consider the price as a trigger for replenishment;
  • integrated pricing models recognize the interdependence between pricing and replenishment and therefore determine decisions simultaneously;
  • traditional revenue management models decide whether to accept a given order or to reserve capacity in anticipation of more profitable future orders;
  • allocated available-to-promise ( aATP) models are similar to the order promising type except for differentiating between multiple customer classes. Scarce resources are allocated to these classes according to customer profitability or other priority measures;
  • inventory rationing models extend SIC models by distinguishing and prioritizing multiple customer classes. 

Demand management techniques

Applying Demand Management objectives, Procurement needs to understand the demand, segregate the value from waste and classify wasteful types. 
Then we need to eliminate the wasteful demand and anticipate its further occurrence. 
  • The origin of demand needs to be analyzed first. The initial cleanup may happen even before the deep dive into waste classification.
  • Failure type usually results from unsatisfied requirements, so any substantial delay of a critical project would create massive failure demand.
  • The excess type is procurement bread and butter, as we are in charge of governance tollgates that should not allow it to go through.
  • Preventable demand is difficult to anticipate, requiring deep analysis and identifying specific patterns.
  • Lastly, the avoidable type is the hardest, requiring a genuine team effort involving HR, Finance, and executive stakeholders. It is usually permitted by company regulations and cannot be simply stopped by Procurement or Business alone.
  • Influencing wasteful demand creates actual value; hence it should be exercised continuously.

Demand management in practice

These are practical examples of managing demand by influencing its wasteful types.
  • Failure demand should be influenced by the mitigation of the consequences of failing projects (e.g., not accepting temporary "overhaul" solutions lasting until the production platform finally kicks in, taking a complex view on a delayed project, and not allowing incremental extensions of interrelated contracts until the profound mitigation strategy is in place). 
  • Excess types can be managed through the identification of governance loopholes. 
  • Preventable demand requires developing innovative processes or solutions that route it into the proper buying channels or stop it from occurring (e.g., implementing P-cards prevents unauthorized petty cash expenses.) 
  • Collaborative change management, e.g., HR modifying policies and Business and Procurement looking after its proper implementation, can limit avoidable demand (e.g., extending roaming quotas on C-level execs through the change of an appropriate HR policy).
Procurement always needs to look beyond its traditional realm for experimental processes and solutions to extend its toolkit for value delivery. This is the recipe to prosper in the era of Industry 4.0.

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More information on this and other exciting topics could be found in "The Technology Procurement Handbook." It represents 23 years of experience, billions of dollars worth of successful sourcing projects, and 1000s of hours spent on research, analysis, and content creation for the most demanding professional readers.
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