Demand chain

Demand Chain

The Demand Chain is that part of the Value Chain which drives demand.

Concept

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

Early applications in distribution, manufacturing and purchasing collectively gave rise to a subject known as the Supply Chain . Old supply chains have been transformed into faster, cheaper and more reliable modern supply chains and a result of investment in information technology, cost-analysis and process-analysis.

Marketing, sales and service 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" 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". This occurs when demand patterns are extremely volatile, usually as a result of sales promotions, and it has the unintended consequence 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, and the poor quality of information systems and processes in marketing and sales 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 technology (systems such as SAP), and these systems have been instrumental in the transformation of supply chain performance.

Demand chain IT development has focused on customer information and CRM 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 systems have become available that plan, track and measure activities and costs as an embedded part of marketing workflows. Ideation plans, activities and costs can be tracked using workflow systems such as Sopheon Accolade , or Innovation Framework . Marketing production plans, activities and costs can be tracked using MRM systems such as Aprimo and Assetlink . Demand forecasting can be automated using systems such as John Galt . Users of these systems report benefits of 10-30 percent in financial efficiency and time savings

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 Profitability and Optimisation

Demand Chain costs - marketing, sales and service activities - are substantial and allocating them optimally to maximise value has become an important goal for many marketing organisations .

When organisations make the effort to demonstrate and optimise the profitability of marketing they can do so. In the UK the IPA Awards have documented over 1000 cases of modelling over the 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 .

Profitability and optimisation modelling is a great opportunity for demand-chain professionals - in marketing and in sales. They can communicate the expected results of their marketing strategies in terms that make sense for top management. In particular it allows them to compare alternative decisions and select the best, even when there is a significant number of choices to weigh up. 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. Traditional accountability in marketing saw awareness, preference and satisfaction being tracked as objectives in their own right. In sales, volumes were often more important than profits, and consequently sales promotions run to boost short-term volumes while losing profits.

Third, it provides a counter-argument to the arbitrary cutting of demand-chain budgets. Finance makes deeper cuts in marketing than any other area of the business, according to my own research. The reason is that marketing is a big budget where cutting only seems to hurt the agency. Marketing profitability modelling is a tool that demonstrates how short-term cuts destroy rather than build value.

Finally, demand-chain profitability modelling encourages a strategic debate. Because long-term cashflow and NPV calculations can show the shareholder value effect, strong arguments can be made for making the Demand Chain the centrepiece of the financial strategy of the enterprise.