Demand Management: Improving Company’s Efficiency and Profitability

Demand management is the practice of managing demand for a product or service in order to gain control over costs and revenue.

managers looking into demand management

Published 30 Sep 2022

What is Demand Management?

Demand management is the practice of planning, controlling, and regulating the product demands or services to ensure the correct supply level is available to meet customer requirements. Manufacturing and service businesses can benefit from this process by combining demand planning and control. By managing demand effectively, companies can improve their overall efficiency and profitability.

Pricing discounts, promotions, and marketing campaigns are all possible methods of managing demand. However, the most effective approach will vary depending on the specific business and product involved. Demand management must be tailored to each organization’s needs to succeed.

Implementation of demand management can result in significant benefits for businesses, including improved resource utilization, reduced inventory costs, and increased customer satisfaction. In today’s competitive marketplace, those companies that can effectively manage their demand will be well-positioned to succeed.

Benefits of Demand Management

In today’s business world, it’s more important than ever to be able to manage demand. Managing your company’s demand can save money and make your operations run smoothly. Effective demand management offers the following benefits.

  • Simpler product and service delivery – Confidence in the company’s ability to deliver products and services is enhanced; product rollouts are made simpler.
  • Creates a solid foundation – This practice helps in developing merchandising, budgeting, and logistics procedures.
  • Easy monitoring of transactions – It’s easy to check supplier transactions for growth or decline and track all associated costs.
  • Stronger customer relationships – Maintaining long-term customer relationships is easier with fair pricing and applicable discounts.
  • Supply chain support – Demand management procedures, such as robust modeling, forecasting, and demand and supply planning, help operations run more smoothly.

What are the Functions of Demand Management?

Today, successful demand management teams are customer-centric: it’s all about being able to anticipate and fulfill consumer demands with the appropriate goods and services. Three areas of concentration are improved customer care, more accurate forecasting, and reduced expenses.

Some of the main functions of demand management include:

  • Improve customer service – Increasing client satisfaction and improving service by understanding customer needs and behaviors.
  • Greater accuracy in forecasting Predictive analytics initiatives help business leaders make better decisions and enhance supply chain management.
  • Reducing costs – Forecasting optimization improves inventory planning and, as a result, minimizes safety stock requirements.
  • Enhancing existing goods and mastering new product launches – Create new goods that are customer-friendly and modify them based on suggestions.
  • More efficient planning – Minimize surpluses by maintaining the right balance of demand to supply and avoiding data inaccuracies.

Different Components and Processes

Each demand management approach has features that allow you to find and focus on your customer’s demands. Managers construct the optimum strategy for improving overall company performance and optimizing the supply chain from beginning to end based on the data collected by each component.

Modeling

Demand planning teams must gather data from other departments regarding sales and demand drivers, such as innovation and social media. Modeling develops the relationships between various demand drivers and the company’s sales.

Forecasting

Forecasting is a term that refers to predicting future demand for goods and services. Demand forecasting uses predictive analytics to predict future demand for services or products—forecasts of anticipated sales and revenue help supply decisions based on past performance.

Demand Planning

The demand planning stage attempts to forecast product or service demand to ensure that you can satisfy clients. Demand planning aims to find that delicate balance between adequate inventory levels to fulfill orders without accumulating an inventory surplus.

Supply Planning

Supply or inventory management is responsible for supply planning, which is the portion of demand management concerned with supply. The objective is to identify and address the most pressing difficulties while developing plans that span multiple tiers and simulating potential responses to minimize inventory and customer care costs.

Predicting Customer Demands

Demand management aims to deliver the correct product or service to the customer at the right time and quantity. Consequently, businesses must anticipate consumer behavior and understand what drives demand. Companies can predict customer demands in several ways, including:

Minimum Order Quantity (MOQ)

Companies often require customers’ minimum order quantity to make production economically feasible. The MOQ is the smallest amount of a product that a company is willing to manufacture.

Cross-docking

Cross-docking involves bringing together products from different suppliers before distributing them to retailers at a central location. Cross-docking helps to reduce inventory levels, transportation costs, and lead times.

Bulk Shipment

Bulk shipment is the transportation of large quantities of goods at once. It’s often possible to reduce transportation costs per unit using bulk shipments.

Vendor-Managed Inventory (VMI)

In VMI, the supplier manages the inventory at the customer’s site. VMI can improve inventory management and reduce costs by reducing the need for safety stock and minimizing stockouts.

Economic Order Quantity (EOQ)

EOQ is the quantity of a product that minimizes the total cost of ordering and holding inventory. The EOQ model considers the trade-off between ordering and maintaining inventory costs.

Use Cases

Different industries can use and benefit from demand management in different ways. Here are some sectors and examples of how they use demand management:

Automotive Manufacturing

Automotive firms struggle to anticipate and react to shifting customer needs. Automobile manufacturers spend a great deal of time and money expanding supply chain visibility and verifying that their suppliers can meet demand changes. 

Therefore, manufacturers are moving away from tighter financial and operational cooperation and standard contracts in favor of new systems. Manufacturers that use demand management have faith in their suppliers’ financial stability and ability to react to changes in demand.

Hospitality

In the hospitality business, Hotel Demand Management (HDM) takes a comprehensive approach to marketing, finance, distribution, and revenue. The use of helpful information eliminates significant decision-making uncertainty. 

Managing overall demand in real-time improves existing customer connections and assists teams in predicting income and strategically utilizing numerous distribution channels to reach targeted client groups.

Public Utilities

Utilities employ demand-side management techniques to meet government requirements while assisting customers in saving money. Energy efficiency programs, the most common demand-side management initiative, provide clients incentives to improve their efficiency and decrease overall electricity usage worldwide.

Activities in Demand Management

Demand management activities assist teams in going deeper and creating strategies to support a more efficient supply chain. It involves various activities, such as capacity management, chain management, communication, modeling, shaping, sensing, and prioritizing.

Demand Capacity

Demand management helps you organize capacity requirements, such as production time and materials. Capacity planning is vital since it has a direct influence on cost centers. Operating costs are affected when demand and supply are out of sync; therefore, coordination is critical to maintaining alignment.

Demand Chain

The demand chain is concerned with receiving products or services as and when required, often known as pull. In the online economy, the demand chain-based e-fulfillment approach compresses time. It is pull-oriented from the client, relying on real-time event monitoring, inventory planning, and information for forecasting and planning.

Demand Communication

In the collaborative demand management system, you share forecast demand with all stakeholders, departments, and teams that will be affected by it. Everyone collaborates toward a common aim in a transparent manner.

Demand Modeling

Demand modeling involves forecasting demands starting at the bottom. This process separates external and internal factors and the demand stream to determine how each influences purchases.

Demand Shaping

Demand Shaping is a supply chain management technique in which a firm uses price cuts, incentives, and other approaches to encourage clients to buy specific goods. Demand shaping aids in matching demand for a particular product to the anticipated production volume.

Demand Sensing

Demand sensing is a game-changer in high-demand e-commerce situations. It requires near-real-time data. Mathematical methods that predict how a product or service will affect market demand may increase demand sensing.

Demand Prioritizing

Identifying and prioritizing initiatives are the basis of demand management. You may establish policies based on essential items by looking at potential risk factors, organizational capacity, financial value, and consequences.

Demand Management Strategies

Superior demand management necessitates high-quality data that must be analyzed regularly—often daily, depending on the context and type of business. Forecasts are updated based on this data to shape tactics. Nowadays, demand management strategies continue to focus on cost reduction, revenue growth, and improved operations.

But, with the COVID-19 pandemic affecting the global events on product demand and supply chains, several strategies have gained prominence, such as the following:

More Robust Contingency Plans

What-if exercises prepare companies for emergencies and test the effects of changes without production schedule disruption. Using theoretical exercises, you can test your team’s ability to adapt to changing conditions, how inventory levels are affected, and whether KPIs are affected.

Flexible Forecasting

Manufacturers should strive to be confident in any scenario. One approach is to examine previous demand and forecasts to measure forecast accuracy, with a view on whether the technique needs changing regardless of present fluctuating circumstances. 

Using various forecasting techniques depending on market situations, selling characteristics, and lifecycle segments is one of the most effective methods to increase flexibility.

Concentre on Adaptable and Resilient Procedures

Some firms are moving toward multi-sourcing to prevent supply chain disruptions. Analyzing each supplier’s risk and that of its sub-suppliers and intermediary steps can help you get your product on time in any scenario.

Less Focus on the Just-In-Time (JIT) Model

JIT manufacturing model was the cutting-edge approach pre-pandemic. Lean inventory is becoming less important for businesses, and more emphasis is being placed on methods to avoid delivery delays that might cause them.

Best Practices in Managing Demands

There are some global practices that companies can put in place to increase the accuracy of their demand planning and make better decisions about their inventory.

Creating an Environment in Which Demand Management is Encouraged

When senior executives embrace a demand management culture, the entire organization’s operations become tied to product availability. The culture now has a single responsibility: to improve supply chain efficiency.

Agreement and Action on Goals are Required

The organization’s goals should be clear to everyone involved in demand management. Achieving the objectives requires putting them into action and holding those accountable.

Set Reasonable Timeframes

The timeframe for implementing demand management should be realistic. Getting buy-in from all stakeholders is essential before setting a deadline for implementation.

Maintain an Effective Approach

Successful demand management requires the right mix of people, processes, and technology. Effective demand management necessitates using an industry-standard technique that is consistently applied.

Use Reliable Statistical Forecasting

Every good strategy has statistical modeling in it. The prediction model should be proven accurate, precise, and reliable and must keep up with the company’s evolution.

Respect Process Owners

Process owners must carry out their assigned tasks without being interfered with by company management. Businesses should accept process owner input even if their suggestions contradict previous approaches or methods.

Challenges of Demand Management

Demand management is often a struggle because of consumer pull. Consumers demand more and faster—much anticipating same-day delivery and immediate responses. Business executives must change to adapt to the changing demands of customers. Other challenges include:

Distanced Customers

Distanced customers are those who are not able to physically visit the store. You need to balance sales and work with retailers to predict when, where and how much to promote. A co-planning relationship with customers, especially those who make up most of your business, can help reduce demand volatility.

Lack of Point-of-Sale (POS) Data

Using POS data can help companies have a better understanding of customer demand. This information can help with co-planning efforts with suppliers and customers. This data can also help predict upcoming shifts in demand, which will keep consumers happy.

Single-Source Supply

Many manufacturers still depend on one supplier for components or materials. It can be risky because if the supplier fails, the manufacturer may not be able to meet customer demand.

Fast Pace of Change

Companies that want to succeed in a fast-paced and complicated business world must improve their forecasting accuracy. That means being able to adjust quickly when a forecast is wrong.

How Do You Handle Demand Management?

By implementing integrated, analytics-based processes, demand management becomes much more effective. Companies that are successful in this area use predictive analytics, market intelligence, and top-tier technologies to reach their revenue growth goals.

Effective demand management requires more than forecasting and incorporates demand sensing and shaping techniques. By regularly analyzing Key Performance Indicators (KPIs) and other metrics, demand managers can make ongoing adjustments to shape future demand.

Lastly, data sharing allows you to gain a high level of Supply Chain Visibility (SCV), which is another demand management approach. With SCV, schedulers and planners receive alerts when order fulfillment issues or low inventory levels could jeopardize meeting customer demands.

 

FAQs about Demand Management

Most, if not all, departments within companies use demand management directly or indirectly to meet future needs so that every business area can run smoothly without overworking any one system. Some of the industries that use demand management are:

  • Marketing and sales
  • Finance
  • Research and development
  • Production
  • Quality control and logistics

The advantages of demand management are many, but some of the most significant ones are:

  • Better forecast accuracy
  • Better product forecasting
  • More accurate supply chain scheduling and operations
  • Increased Salesforce confidence
  • A more significant competitive advantage

The disadvantages of demand management are:

  • Lack of right people with the right skills
  • Management that refuses to take risks
  • Segregated teams
  • Inadequate or poor demand data

The goal of demand management, like demand planning, is to maintain a balance between supplies and demands. However, while demand management focuses on consumer needs in the present or near future, demand planning takes a more long-term view.

Demand management refers to the ability to identify variations in potential demand. Capacity management, on the other hand, is a response to actual demand that aims to ensure resources are adequately available for business activities and production to continue thriving despite any changes or fluctuations.

Robertson Paredes

SafetyCulture staff writer

Rob Paredes

Rob Paredes is a content contributor for SafetyCulture. He is a content writer who also does copy for websites, sales pages, and landing pages. Rob worked as a financial advisor, a freelance copywriter, and a Network Engineer for more than a decade before joining SafetyCulture. He got interested in writing because of the influence of his friends; aside from writing, he has an interest in personal finance, dogs, and collecting Allen Iverson cards.

Rob Paredes is a content contributor for SafetyCulture. He is a content writer who also does copy for websites, sales pages, and landing pages. Rob worked as a financial advisor, a freelance copywriter, and a Network Engineer for more than a decade before joining SafetyCulture. He got interested in writing because of the influence of his friends; aside from writing, he has an interest in personal finance, dogs, and collecting Allen Iverson cards.