the demand management process

Volume 13, Number 2 2002 Page 51

The demand management process isconcerned with balancing the customers’requirements with the capabilities of thesupply chain. This includes forecastingdemand and synchronizing it withproduction, procurement, and distributioncapabilities. A good demand managementprocess can enable a company to be moreproactive to anticipated demand, and morereactive to unanticipated demand. Animportant component of demandmanagement is finding ways to reducedemand variability and improve operationalflexibility. Reducing demand variability aidsin consistent planning and reduces costs.Increasing flexibility helps the firm respondquickly to internal and external events. Mostcustomer-driven variability is unavoidable,but one of the goals of demand managementis to eliminate management practices thatincrease variability, and to introduce policiesthat foster smooth demand patterns. Anotherkey part of demand management isdeveloping and executing contingency planswhen there are interruptions to theoperational plans. The goal of demandmanagement is to meet customer demand inthe most effective and efficient way.

The demand management process canhave a significant impact on the profitabilityof a firm, its customers and suppliers.

Improving the process can have far-reachingimplications. Having the right product on theshelves will increase sales and customerloyalty [1]. Improved forecasting can reduceraw materials and finished goods inventories.Smoother operational execution will reducelogistics costs and improve asset utilization.These improvements will be realized not onlywithin the firm, but will extend to othermembers of the supply chain.

In this paper, we further develop aframework for implementing an efficient andeffective demand management process. First,we provide a background on the eight supplychain management processes identified by TheGlobal Supply Chain Forum. This backgroundis important because demand management isone of the eight processes and it requiresinterfaces with the other seven. We thendescribe the strategic and operationalprocesses that comprise demand management,including the sub-processes and their activities.In addition, we identify the interfaces with thecorporate functions, the other supply chainmanagement processes and other firms.Finally, we present opportunities for futureresearch and conclusions.

BackgroundSupply chain management has received

substantial attention from researchers and

The Demand Management Process

Keely L. Croxton, Douglas M. Lambert and Sebastián J. García-DastugueThe Ohio State University

Dale S. RogersUniversity of Nevada, Reno

Demand management is the supply chain management process that balances thecustomers’ requirements with the capabilities of the supply chain. With the rightprocess in place, management can match supply with demand proactively andexecute the plan with minimal disruptions. The process is not limited to forecasting.It includes synchronizing supply and demand, increasing flexibility, and reducingvariability. In this paper, we describe the demand management process in detail toshow how it can be implemented within a company and managed across firms inthe supply chain. We examine the activities of each sub-process; evaluate theinterfaces with corporate functions, processes and firms; and provide examples ofsuccessful implementation.

A good demandmanagement process

can enable a companyto be more proactive to

anticipated demand,and more reactive to

unanticipated demand.

The International Journal of Logistics Management

practitioners, yet in many companiesmanagement is struggling to implementsupply chain management processes withintheir firms and across the supply chain. TheGlobal Supply Chain Forum continues todevelop the concept of supply chainmanagement and the structure for itsimplementation. The definition of supplychain management developed and used byThe Forum is:

Supply chain management is theintegration of key businessprocesses from end user throughoriginal suppliers that providesproducts, services, and informationthat add value for customers andother stakeholders [2].The Forum members identified the

following eight key business processes thatneed to be implemented within and acrossfirms in the supply chain (see Figure 1):• Customer Relationship Management -

provides the structure for how relationshipswith customers are developed andmaintained, including the establishment ofproduct/service agreements (PSAs) betweenthe firm and its customers.

• Customer Service Management - provides

the firm’s face to the customer, includingmanagement of the PSAs, and provides asingle source of customer information.

• Demand Management – provides thestructure for balancing the customers’requirements with supply chain capabilities.

• Order Fulfillment – includes all activitiesnecessary to define customer requirements,design the logistics network, and fillcustomer orders.

• Manufacturing Flow Management -includes all activities necessary to moveproducts through the plants and to obtain,implement and manage manufacturingflexibility in the supply chain.

• Supplier Relationship Management -provides the structure for how relationshipswith suppliers are developed andmaintained, including the establishment ofPSAs between the firm and its suppliers.

• Product Development and Commercial-ization – provides the structure fordeveloping and bringing to market newproducts jointly with customers andsuppliers.

• Returns Management – includes allactivities related to returns, reverse logistics,gatekeeping, and avoidance.

Supply chainmanagement is theintegration of keybusiness processes fromend user throughoriginal suppliers thatprovides products,services, andinformation that addvalue for customers andother stakeholders.

Figure 1Supply Chain Management:

Integrating and Managing Business Processes Across the Supply Chain

CUSTOMER RELATIONSHIP MANAGEMENT

CUSTOMER SERVICE MANAGEMENT

DEMAND MANAGEMENT

ORDER FULFILLMENT

MANUFACTURING FLOW MANAGEMENT

SUPPLIER RELATIONSHIP MANAGEMENT

PRODUCT DEVELOPMENT AND COMMERCIALIZATION

RETURNS MANAGEMENT

Information Flow

Tier 2Supplier

Su

pp

ly C

hai

n M

anaa

gem

ent

Pro

cess

es

Tier 1Supplier

ManufacturerCustomer

Logistics

PRODUCT FLOW

R & DProduction

Purchasing

Finance

Marketing

Consumer/End-user

Source: Adapted from Douglas M. Lambert, Martha C. Cooper, and Janus D. Pagh, “Supply Chain Management: ImplementationIssues and Research Opportunities,” The International Journal of Logistics Management, Vol. 9, No. 2 (1998), p. 2.


Each process cuts across firms in thesupply chain and the corporate functionswithin each firm. It is through the customerrelationship management and supplierrelationship management processes that mostinter-firm activities are coordinated.

Croxton et al. [3] further developed theseeight processes. Figure 2 depicts the demandmanagement process based on that research.In this paper, we examine the activities ofeach sub-process, identify the interfacesbetween functions, processes and firms, andlook at examples of successfulimplementation. The framework presented isbased on the literature and in-depthinterviews with managers in a broad array ofindustries. In addition, it was furthervalidated in four working sessions withmembers of The Global Supply Chain Forumover a period of 18 months.

Demand Management as aSupply Chain Management Process

The demand management process hasboth strategic and operational elements, asshown in Figure 2. In the strategic process,the team establishes the structure formanaging the process. The operationalprocess is the actualization of demand

management. Implementation of the strategicprocess is a necessary first step in integratingthe firm with other members of the supplychain, and it is at the operational level that theday-to-day activities are executed. Figure 2also shows the interfaces between each sub-process and the other seven processes. Theseinterfaces might take the form of a transfer ofdata that other processes require, or mightinvolve sharing information or ideas withanother process team.

A process team comprised of managersfrom several functions including marketing,finance, production, purchasing and logistics,leads both the strategic and operationalprocesses. The team might also includemembers from outside the firm. For example,the team might include customers as well as representatives from a key supplier or a third-party provider. The team isresponsible for developing the procedures atthe strategic level and seeing that they areimplemented. This team also has day-to-dayresponsibility for managing the process at theoperational level. Firm employees outside ofthe team might execute parts of the process,but the team maintains managerialresponsibility.

A process teamcomprised of managersfrom several functions

including marketing,finance, production,

purchasing andlogistics, leads both the

strategic andoperational processes.

Figure 2Demand Management

Source: Adapted from Keely L. Croxton, Sebastián J. García-Dastugue, Douglas M. Lambert, and Dale S. Rogers, “The SupplyChain Management Processes,” The International Journal of Logistics Management, Vol. 12, No. 2 (2001), p. 19.

Determine ForecastingProcedures

Determine DemandManagement Goals

and Strategy

Customer RelationshipManagement

Customer ServiceManagement

Order Fulfillment

Manufacturing FlowManagement

Product Development& Commercialization

Supplier RelationshipManagement

Returns Management

Collect Data/Information

Strategic Sub-Processes Process Interfaces Operational Sub-Processes

Plan Information Flow

Synchronize

Measure Performance

Forecast

Determine SynchronizationProcedures

Develop ContingencyManagement System

Reduce Variability and Increase Flexibility

Develop Framework of Metrics


The Strategic Demand Management Process

Demand management is aboutforecasting and synchronizing. The strategicprocess is comprised of six sub-processes thatare aimed at designing an efficientoperational system for matching supply anddemand. Figure 3 shows the sub-processes,the activities that comprise each one, and theinterfaces with the other seven supply chainmanagement processes.

There is an abundance of technology on the market to help managers with components of the demand management process. The team needs todetermine how the firm will use technologywithin the demand management process, and how information systems will need to be integrated with other members of thesupply chain to facilitate the process. It isimportant that the technology solution isconsistent with the expected benefits. Somefirms will require more investment ininformation technology than others [4]. It isalso critical that managers concentrate on thepeople and the procedures that make thetechnology effective and not rely simply onthe technology.

Determine Demand Management Goals and Strategy

The demand management process isfocused on predicting customer demand anddetermining how that demand can besynchronized with the capabilities of thesupply chain. The process team must have abroad understanding of the firm’s strategy, thecustomers and their needs, the manufacturingcapabilities, and the supply chain network. Inorder to accomplish this, information isrequired from individuals in functions as wellas the customer relationship management andsupplier relationship management processes.

With this understanding, the processteam can have a high-level discussion aboutthe goals and the focus of the process, whichmay vary across different firms and industries.For instance, business in the telecom-munications industry has become sounpredictable that Lucent Technologies, aglobal network provider, has decided to placepriority on increasing flexibility in response tothe demand, and put less focus on trying toaccurately forecast it. In industries, wheredemand is more stable, reducing forecasterror might be more cost effective thanincreasing flexibility. The discussion that the

Demand management isabout forecasting andsynchronizing. Thestrategic process iscomprised of six sub-processes that are aimedat designing an efficientoperational system formatching supply anddemand.

Figure 3The Strategic Demand Management Process

Determine ForecastingProcedures

Determine Demand Management Goals

and Strategy



Order Fulfillment




Returns Management

• Review firm’s strategies• Study supply chain network and bottlenecks• Determine focus and goals for the process

Strategic Sub-ProcessesProcess Interfaces Activities


Determine SynchronizationProcedures

Develop ContingencyManagement System


• Determine level(s) of forecasts• Determine sources of data• Analyze different approaches (VMI, CPFR, traditional)• Choose the most appropriate methods and plan

forecasting process

• Outline procedures for synchronization• Determine long-term planning requirements• Examine supplier/manufacturing capabilities• Determine allocation procedures

• Develop list of potential interruptions to supply• Determine event response procedures for each

possible event

• Link demand management performance to EVA• Determine appropriate metrics and set goals

• Determine data requirements• Determine sources of data and their value• Determine how forecast information will be shared• Consider how inputs and outputs can be used to

shape business strategy

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Volume 13, Number 2 2002 5

process team has in this sub-process will setthe tone for how demand management isstructured.

Determine Forecasting Procedures

In the second sub-process, the processteam develops a critical piece of demandmanagement; that is, forecasting. The teamneeds to select the appropriate forecastingapproaches. This includes determining thelevels and time frames of the forecasts neededthroughout the firm, identifying the sources ofdata, and then defining forecastingprocedures for each forecast required.

Different parts of the firm might needdifferent levels of the forecast [5]. Forinstance, manufacturing planning mightrequire an SKU-level forecast. Transportationplanning, on the other hand, might need aforecast aggregated at the product-familylevel but disaggregated by region. Marien [6]suggested five levels of forecasting, all basedon the time frame of the forecast. However,the decision should not be based solely on thetime frame required. Other factors play arole, such as the units being forecasted andthe use of the forecasts. Ross Products, adivision of Abbott Laboratories and a marketleader in pediatric and adult nutritionals,found that the forecasting needs of the entirefirm could be met with three forecasts, one foroperations, one for marketing and one forfinance [7].

A firm might also use different forecastingprocedures for new products or limited-timeoffers than they do for their standard products.For instance, the management team at at aglobal beverage company recognized thedifficulty in developing long-term forecasts for new products. Consequently, whenintroducing a new product, the forecastingteam now works with key suppliers and thesales organization to develop a pipeline-fillforecast; that is, a gross sales figure for theduration of the supply chain lead-time. Basedon cross-functional input and risk assessment,they determine an initial production quantity.This quantity is produced before theintroduction of the product so that thebeverage company can meet demand throughthe initial stage of the introduction. Oncemanagement observes the level of demand inthe first few weeks, they can begin to generatea reasonably accurate forecast for the future.

It is important that these strategicdecisions regarding the number of forecastsused are made collectively by a team ofmanagers and that the resulting forecasts arecoordinated. Although there might be severalforecasts used in the firm, they should beconsistent and represent one truth. Ifmanagers of each function develop their ownforecasts independently, the firm will losecontrol over the forecasting process.

Next, the team determines the sources ofthe data required to generate each forecast.These might include historical data, salesprojections, promotion plans, corporateobjectives, market share data, trade inventory,and market research. In order to determinehow to use these data, the team shouldunderstand the value of the information fromeach source; for instance, determining howgood each source is at predicting demand.

It is at this point that the team might alsoconsider Collaborative Planning, Forecastingand Replenishment (CPFR) or VendorManaged Inventory (VMI) [8]. If thesesystems are being implemented, the customeris a direct source of data. If this is the case,the team needs to interface with the customerrelationship management process team todetermine what systems will be used toefficiently transfer data between the firms.

Once the team has an understanding ofwhat type of forecast is needed, and whatdata are available, they can select aforecasting method and define a process tofollow for each required forecast. There aremany methods from which to choose, fromquantitative, such as time series methods, tomore people-driven, such as focus groups andthe Delphi approach [9]. The appropriatemethod will depend on the environment inwhich the forecasting is taking place. In fact,different methods might be used for differentproducts. In one of the companiesinterviewed, management segments productsaccording to demand variability and demandvolume in order to make decisions about theappropriate forecasting approaches. Eachproduct is plotted using a two-by-two matrixas shown in Figure 4. The quadrant of thematrix in which a product is categorized willdetermine the appropriate forecastingapproach. Quantitative methods based onhistorical data are used for products with lowdemand variability. Products with high

If managers of eachfunction develop their

own forecastsindependently, the firm

will lose control overthe forecasting process.


variability and high volume require more human input, perhaps from the salesforce or the customers themselves. If aproduct has low volume and high variability,make-to-order production is used, whichavoids the need for an SKU-level forecast andallows management to concentrate on anaggregated forecast for raw-materials orcomponents.

After the appropriate forecastingapproach is determined, the team selects thespecific forecasting method. When making this decision, it is important for the team to understand the nature of thedemand. For instance, if the demand is seasonal, they will want to select a method that incorporates seasonality. Shouldthe team decide to use a quantitativeapproach like time series or regression, theymight consider using forecasting software.There are numerous stand-alone softwarepackages on the market that can handle the forecasting component of demandmanagement and do not require significantfinancial investments [10]. It is important that the capabilities of the software packagealign with the forecasting needs of the firm.Considerations when selecting a softwarepackage include the span of statistical

methods that the system uses, the ability to adjust the forecast, the ability to use the software in a collaborative mode(either internally or externally), and thesophistication of the output reports that areoffered [11].

The team also needs to determine howoften the forecasting procedures will bereevaluated. For instance, if the nature of thedemand changes or the forecast errors beginto worsen, the team will need to convene andmake necessary changes to the proceduresbeing used.


Once the team decides on the method of forecasting and the sources of data, they plan the information flow; that is, they determine the sources of data, how this input data will be transferred, and what output needs to be communicated to whom. Input to the forecasting process will likely come from several functions, the customer relationship managementprocess, and in a CPFR environment, the customers themselves. The forecasts are communicated internally to the other process teams that are affected by them.

In addition, the firm needs to determine

Once the team decideson the method offorecasting and thesources of data, theyplan the informationflow; that is, theydetermine the sources ofdata, how this inputdata will be transferred,and what output needsto be communicated towhom.

Figure 4Segmenting Products to Determine Appropriate Forecasting Approaches

X X

X XXXX

X

XX

XX

XX

XXXX

X

High

Make-to-OrderEnvironment

People-DrivenForecasts

Data-Driven Forecasts

Low

Low HighDemand Volume

Dem

and

Varia

bilit

y


what data will be shared with other membersof the supply chain. For instance, in a CPFRenvironment, SKU-level forecasts are jointlydeveloped with next-tier customers.Management might decide to share theseforecasts in an aggregated form withsuppliers, perhaps including key second tiersuppliers. For example, Wendy’sInternational, a quick service restaurantchain, shares its forecasts with both thelettuce processors and the lettuce growers.

The team also needs to consider ifinformation systems need to be developed orenhanced in order to efficiently transferappropriate information. Within a single firm,Enterprise Resource Planning (ERP) systemscan provide consistent data that can be usedthroughout the company. In many cases,however, the demand management processneeds information to flow between firms inthe supply chain. For instance, informationsystems can be put into place to provideinventory visibility in the supply chain ormanage the information flow of a VMI orCPFR implementation. Considerable effort isoften required to integrate systems betweenfirms. In some cases, web-basedapplications, which do not require integrationof information systems between supply chainmembers, provide an effective means forsharing information with suppliers andcustomers. Companies like Moen Inc., theworld’s largest manufacturer of plumbingproducts, have developed applications toshare forecasts, production schedules andinventory levels with their supplier basethrough the Internet. A web-enabledapplication can be a first point of contact forstatus reports.

As an extension to the information flow,the team should consider ways in which boththe inputs and outputs of demandmanagement can be used to define the futurebusiness strategy. Langabeer [12]differentiates the tactical use of demandinformation from its strategic uses. He arguesthat the same information that is used in thedemand management process can be used toshape the marketing strategy and the directionthe firm takes. For instance, analyzingdemand and forecast data allowsmanagement to plan the life cycle ofproducts, including the determination ofwhen to introduce new products and phase

out existing ones. Data on where thebottlenecks in the supply chain are can beused in conjunction with product profitabilityreports to guide management on itsinvestment strategies. The process teamshould look for ways to share insight that isgained as part of executing the demandmanagement process with other key decisionmakers in the firm.

Determine Synchronization Procedures

Next, the team determines thesynchronization procedures required tomatch the demand forecast to the supplychain’s manufacturing, supply and logisticscapabilities. Frequently, this is referred to assales and operations planning (S&OP). Asshown in Figure 5, the synchronizationrequires coordination with marketing,manufacturing and sourcing, logistics andfinance. When executed at the operationallevel, this synchronization process includesexamining the forecasted customer demandand determining the requirements backthrough the supply chain. It requires not onlyunderstanding the level of demand, but alsothe velocity at which product is required ateach touch point in the supply chain. Theoutput of this synchronization will be a singleexecution plan that will balance the needsand costs of manufacturing, logistics, sales,and the suppliers to meet anticipateddemand. This execution plan will provide thebasis for the detailed manufacturing andsourcing plan that is developed within themanufacturing flow management processthrough manufacturing requirement planning(MRP), and the detailed distribution plan thatis developed within order fulfillment throughdistribution requirement planning (DRP).

At the strategic level, the team is responsible for developing thesynchronization procedures that will be usedat the operational level, including who will beincluded in the synchronization process andthe structure for how they will meet. Somefirms have a two-stage synchronizationprocess whereby a cross-functional team ofmanagers will meet, for instance monthly, todevelop an initial demand execution plan. Ifthere are any unresolved issues from thismeeting, they will be directed to a meeting ofupper-level managers who resolve them andsign-off on a final demand execution plan.

As an extension to theinformation flow, theteam should consider

ways in which both theinputs and outputs ofdemand managementcan be used to define

the future businessstrategy.


Once a firm has an effective internalsynchronization process, management shouldconsider integrating key suppliers andcustomers directly into it. For instance, abeverage company includes internal suppliersin their monthly S&OP meeting. Thesesuppliers are under the company’s corporateumbrella, but they are different strategicbusiness units and they have their ownincome statements and balance sheets.

Part of determining the synchronizationprocedures is defining policies aboutstockpiling and allocating; that is, where tostock inventory when supply is greater thandemand, and how to reposition inventorywhen demand is greater than supply. Theseguidelines will be rather generic. Within theorder fulfillment process, the customer-specific rules will be developed.

The team needs to gain a completeunderstanding of the capacity and flexibilityavailable at key points along the supply chain.They also need to determine the long-termplanning requirements, particularly in thecase of demand with high seasonality or long-term changes, such as sustained growth. Inthe case of limited capacity and a productwith seasonal demand, it might be necessaryto ramp-up production several months prior to the high demand periods. At thispoint in the process, the team might alsorecognize future capacity issues and makerecommendations to proactively addressthem before they cause problems.

It is important to realize that

different product-lines might use differentsynchronization procedures. For example,Moen Inc. has different procedures for core,custom and new products. The reason is thatthe focus of demand management changes foreach classification of products. For newproducts, the focus is on attaining the mostflexibility possible, as the demand of newproducts is the most uncertain. For Moen’score product-lines, management is interestedin driving the costs out since products aremature and competitive price pressure is high.For custom products that are low-volume, thegoal is asset optimization, which suggests anassemble-to-order system. When Moen usedthe same procedures for all products, they hadproblems because the goals of all threeclassifications could not be attained with oneset of procedures. They moved to adifferentiated system where the methods varyover the three classifications. In fact, even theorganizational structure is differentiated; thatis, different people are responsible for planningin each area.

Systems such as those provided by i2,Manugistics, and SAP [13] can beimplemented to facilitate the synchronizationprocess and help develop the demandexecution plan. These systems are designed toexamine the real-time constraints on thesources of supply and match them with theforecasted demand. Combining thefunctionality of information flow andsynchronization, some of these systems canoffer inventory deployment tools that provide

Figure 5Synchronizing the Supply Chain

Forecast

Supply Capabilities

Manufacturing Capabilities Distribution CapabilitiesDemand ExecutionPlan

Marketing Finance

LogisticsManufacturing& Sourcing

Once a firm has aneffective internalsynchronization process,management shouldconsider integrating keysuppliers and customersdirectly into it.


real-time decision support for managinginventory in the supply chain. Although thesesystems are useful, they should be used inconjunction with human decision-making in ateam setting. There are too many factorsinvolved in the synchronization process toleave it entirely to an automated system.

Develop Contingency Management System

Another important component of thestrategic demand management process isdeveloping contingency plans to respond tosignificant internal or external events thatdisrupt the balance of supply and demand[14]. For example, how should the firm reactif a manufacturing facility is unexpectedlyshut down, or a port strike interrupts the flowof raw materials? Determining reactionprocedures prior to the possible events willallow management to respond quickly in thecase that one of these events occurs. Inaddition, the process team should considerwhat will be done if there is an interruption toany portion of data flow through the supplychain due to system errors.

This contingency management systemshould be developed in accordance with theexpectations of the customers outlined in the

customer relationship management process,and with input from order fulfillment,manufacturing flow management andsupplier relationship management. Oncedeveloped, the contingency plans need to becommunicated to the affected process teams.


Finally, the team develops the frameworkof metrics to be used to measure and monitorthe performance of the process, and sets thegoals for performance improvement. Auniform approach should be used throughoutthe firm to develop these metrics [15]. Theteam should start by understanding howdemand management can influence keyperformance metrics that directly affect thefirm’s financial performance, as measured byeconomic value added (EVA) [16]. Figure 6provides a framework for examining theserelationships. It shows how demandmanagement can impact sales, cost of goodssold, total expenses, inventory investment,other current assets, and fixed assets. Forexample, better demand management canresult in higher sales by increasing customerloyalty and repeat business due to betterforecasting and the associated customer

Figure 6How Demand Management Affects Economic Value Added (EVA®)

+

+

=

% +

EconomicValueAdded

Cost ofCapital

TotalAssets Fixed

Assets

CurrentAssets

Inventory

OtherCurrentAssets

Taxes

GrossMargin

TotalExpenses

Sales

Cost ofGoods Sold

Increase customer loyalty and repeat businessImprove product availabilityImprove market share due to “fresher” productReduce returns and markdownsImprove “share of customer”

Demand Management’s Impact

Reduce storage and handling costsFewer transshipments and lower redistribution costsFewer split ordersLeverage transportation and freight consolidationFewer expedited shipmentsReduce non-cost-of-money components of inventory carrying costs

Lower safety stocksReduce obsolete inventory

Reduce accounts receivableImprove asset utilization and rationalizationImprove investment planning and deployment

Lower cost of raw materialsReduce manufacturing cost due to improved scheduling

Source: Adapted from Douglas M. Lambert and Terrance L. Pohlen, “Supply Chain Metrics,” The International Journal of LogisticsManagement, Vol. 12, No. 1 (2001), p. 10.

The team should start byunderstanding how

demand managementcan influence key

performance metricsthat directly affect the

firm’s financialperformance, as

measured by economicvalue added (EVA).

Net Profit

Capital Charge

Profit from

Operations


service improvements. Also, improvedproduct availability can lead to higher levelsof retail sales and/or lower inventory carryingcosts which can lead to a larger portion of thecustomer’s purchases in this category. Productfreshness results in better assortment andconsumer appeal. A reduction in returns andmarkdowns can lead to the companybecoming a more preferred supplier.

Cost of goods sold can be reduced as aresult of lower cost of raw materials due tofewer expedited shipments and fewer lastminute production changes by the supplier.Manufacturing costs can decrease as a resultof improved scheduling.

A number of expenses can be reduced through better planning andscheduling that comes from less demandvariability, including: storage and handling,transportation, order processing and the non-cost of money components of inventorycarrying cost.

Better demand management can lead tolower safety stocks and less obsoleteinventory which delivers higher inventoryturns and lower inventory investment.Accounts receivable can be improved sincefewer invoices will be disputed as a result ofincomplete orders and missed delivery dates.Finally, better demand management can leadto lower fixed assets as a result of improvedasset utilization and facility rationalization,and better investment planning anddeployment.

Although these holistic metrics areaffected by other activities and processes inthe supply chain, the team responsible fordemand management needs to estimate howthis process impacts the firm’s financialperformance. Doing so will help to justifyfuture investments in the process and todetermine rewards for good performance.

Once the team has an understanding ofthe impact that demand management canhave on financial performance as measuredby EVA, metrics need to be developed for theactivities performed and these metrics mustbe tied back to financial measures. Typicalprocess measures for demand managementinclude forecast error and capacityutilization. If steps are taken to activelyreduce variability or increase flexibility, it isappropriate to include metrics that monitorthe results of these activities, as well as to

measure how improvements in these non-financial measures affect financialperformance. The role of the customers inreducing demand variability and the role ofsuppliers in increasing flexibility need to bemeasured and their contributions rewarded.The team needs to confirm these measureswith the customer relationship managementteam to assure consistency across the firm.

Management should implementprocesses that positively affect the profitabilityof the supply chain as a whole, not just that oftheir firm. It is the goal of supply chainmanagement to drive behavior that benefitsthe entire supply chain while sharing risks andrewards among its members. If managementof one firm in the supply chain makes adecision that positively affects their firm’s EVAbut negatively affects the EVA of a key supplieror customer, the two firms should work out anagreement where the benefits are shared sothat the bottom lines of both firms improve.

The Operational DemandManagement Process

At the operational level, the processteam must execute the forecasting andsynchronization as it was designed at thestrategic level. Figure 7 shows the fiveoperational sub-processes, the activitieswithin each of these, and the interfacesbetween processes.


At the strategic level, the datarequirements for developing the forecast weredetermined, and the information systemswere put in place to facilitate this datacollection. In order to collect the relevantdata that were specified in the strategicprocess, the team must interface with themarketing function as well as the orderfulfillment, customer service management,product development and commercialization,and returns management processes. Whendesigning the forecasting system at thestrategic level, important input comes fromthe customer relationship management team,but at the operational level, it is the orderfulfillment and customer service managementprocesses that provide the most relevantinformation on anticipated demand. Theproduct development and commercialization

At the operational level,the process team mustexecute the forecastingand synchronization asit was designed at thestrategic level.

If steps are taken toactively reducevariability or increaseflexibility, it isappropriate to includemetrics that monitor theresults of these activities,as well as to measurehow improvements inthese non-financialmeasures affect financialperformance.


process team provides information regardingthe rollout of new products. Data from thereturns management process are used forgenerating the forecast because it providesinput to understanding the actual demand. Ifa forecaster only uses sales figures as ameasure of past demand, and does notconsider what was returned, the forecast willbe based on inflated numbers.

Forecast

With all the required data in hand, theteam develops the forecasts. It is importantthat they track and analyze the forecast errorand incorporate this feedback to fine-tune theforecasting methods. This is an importantcomponent of the learning process associatedwith good forecasting. For example, at aglobal beverage company, managers examineforecast errors and perform a root-causeanalysis when errors are unusually large. Thisanalysis involves tracing the source of theunexpected demand (or shortage of demand)to see if it is a particular customer, brand,region, or product. Once the source isknown, it is necessary to determine what thecause was and how long the change indemand will last. This provides a startingpoint for improving future forecasts.

Synchronize

The forecast provides one input formatching demand with supply. Thissynchronization process follows theprocedures determined at the strategic level.This is where the team turns the forecast intoa demand execution plan (see Figure 5); thatis, a plan for how the firm will meet thedemand. In addition to the forecast, the teammust consider capacities throughout thesupply chain, financial limitations, andcurrent inventory positioning (includingsaleable product that is being repositioned asa result of returns).

Understanding the capacity limitationsrequires the team to look both upstream anddownstream. Ideally, the team should knowboth the capacity and the current inventorylevels for key members of the supply chain.Comparing this information to the forecastwill tell the team what constraints are in thesystem. Once the constraints are identified,the team can work with the other processteams to determine how to resolve thebottlenecks, or to allocate the availableresources and prioritize demand.

Although most forecasting methods arefocused on determining the point forecast,calculating confidence intervals can provide

Figure 7The Operational Demand Management Process



Order Fulfillment




Returns Management

• Analyze data• Develop forecasts• Track errors and provide feedback

• Collect historical demand• Collect sales/marketing information• Collect customer information – CPFR/VMI

Operational Sub-ProcessesProcess Interfaces Activities


Forecast

Synchronize

Reduce Variability andIncrease Flexibility

Measure Performance

• Identify and plan within capacity constraints• Determine confidence intervals for forecasts• Develop aggregate demand execution plan• Balance risk with financial constraints• Plan rough-cut capacity for new products• Identify root causes of variability• Work within the firm and the supply chain to

reduce demand variability• Determine how much flexibility is required• Identify opportunities to increase flexibility• Work within the firm and the supply chain to

increase flexibility

• Calculate process metrics• Link metrics to EVA

Once the constraints areidentified, the team can

work with the otherprocess teams to

determine how toresolve the bottlenecks,

or to allocate theavailable resources and

prioritize demand.

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management with valuable information onwhich to base their decisions. Using pastforecast error values, the team can calculateconfidence intervals for the forecasts. Forinstance, a manufacturing firm might forecastthe demand to be 100 units and the 95%confidence interval to be 80 to 120 units.This means they are 95% sure the actualdemand will fall in this range. In addition tothe point forecast, this range could be sharedwith suppliers to provide information thatthey can use for planning, or even tonegotiate available capacity. Managementcan also use this information to determinehow much demand they want to meet. Tooffer high customer service, they shouldproduce 120, but if the cost of inventory orrisk of obsolescence is high, they mightchoose to produce only 80. In order to makethis determination, the team needs tounderstand the firm’s cost structure andstrategic objectives.

In addition to supply and manufacturingconstraints, the forecast might introduce afinancial constraint. In turning the forecast intoa demand plan, the team might need to practicerisk management. This is the practice ofbalancing risk with financial rewards. When itis not financially feasible to meet all thedemand, management must decide how to mosteffectively allocate resources. The contingencymanagement plans developed at the strategiclevel might also need to be considered if aninternal or external event causes a disruption tosupply or large forecast errors.

The team also develops a rough-cutcapacity plan for any new products soon tobe launched. At Moen, Inc., management notonly determines existing capacities, but talksto key suppliers to understand how quicklythey could respond if demand exceeds theforecast for a new product.

The output of the synchronization sub-process is a demand execution plan thatincludes aggregate production plans andinventory-positioning plans, which need to becommunicated internally and to key membersof the supply chain. Developing andcommunicating these plans requires interfaceswith the customer relationship management,customer service management, orderfulfillment, manufacturing flow management,supplier relationship management, and productdevelopment and commercialization processes.

Reduce Variability and Increase Flexibility

Many people see variability as theenemy of planning. It is easy to plan for theaverage, but it is the deviations from the normthat cause problems. Managers spendsubstantial time and money dealing with theconsequences of demand variability. Thereare two things managers can do to minimizethe negative impact of variability. One is toreduce the variability itself, and the other is toincrease the flexibility to react to it. A keycomponent of demand management is anongoing effort aimed at doing both thesethings. Increasing flexibility helps the firmrespond quickly to internal and externalevents and reducing demand variability aidsin consistent planning and reduces costs.

Management should first try to reducevariability and then manage the unavoidablevariability by building-in flexibility [17].Flexibility usually comes with a price tag so itshould not be used as a Band-Aid to fixproblems that can otherwise be avoided.There are many sources of variability in thesupply chain. One of the most problematic isdemand variability. Many managers seedemand as an uncontrollable input. Boltonstates that demand management “activelyseeks to ensure that the customer demand‘profile’ that is the input into the demand-planning process is as smooth as possible”[18]. This is the difference between demandplanning and demand management. Withinthe demand management process, the teamshould look for sources of variability andimplement solutions to reduce it.

Table 1 provides examples of sources ofvariability and potential solutions. Forexample, the team might work with thecustomer relationship management team andhelp customers better plan promotions, orimplement scheduled ordering policies [19].The team might also find that internalpractices are driving demand variability, suchas end-of-quarter loads. If the demand fornew products is highly variable, they couldwork with the product development teams toimplement controlled roll-outs where theproducts are introduced first in test marketswhere demand patterns can be evaluated. Insome scenarios, it could be the competitionthat is driving demand variability. Forinstance, demand could be affected by acompetitor engaged in end-of-quarter loading

The output of thesynchronization sub-process is a demandexecution plan thatincludes aggregateproduction plans andinventory-positioningplans, which need to becommunicated internallyand to key members ofthe supply chain.

There are two thingsmanagers can do tominimize the negativeimpact of variability.One is to reduce thevariability itself, and theother is to increase theflexibility to react to it.


or offering a promotion. In these cases, thevariability is unavoidable, but can often beplanned for when developing the forecast.“The supply chain which best succeeds inreducing uncertainty and variability is likelyto be most successful in improving itscompetitive position” [20].

Gaining flexibility allows a company tobetter manage the system variability thatcannot be eliminated – both anticipated andunanticipated variability. When a beveragecompany introduced one of its new products,demand was more than double the amountforecasted. Because management haddeveloped a flexible system, they were able tomanage through this without affectingcustomer service. Increasing flexibility caninfluence the reliability, quality, cost andspeed of the process and its products [21].The team should first determine how muchflexibility is needed. Because buildingflexibility into a system is often expensive, it isimportant that the level of flexibilitydeveloped is consistent with the needs of thesupply chain. To make this determination theprocess team needs to fully understandcustomers’ needs, demand patterns, and thecapabilities of the entire supply chain.

Once the team understands how muchflexibility is needed, they should look for waysto attain it. This involves working with theother process teams within the firm, as well aswith suppliers and customers to determinewhere there are opportunities to add flexibilityinto the supply chain. For example, the teammight work with the manufacturing flowmanagement team to find ways to introducepostponement into the manufacturing process,implement agile manufacturing practices, orfind ways to multi-source [22]. They mightwork with the customer relationship

management team to stratify customers so thatthe firm can be most responsive to a small setof key customers, or work with the productdevelopment teams to standardize materials.The team might work with the order fulfillmentteam to make changes to the network, such asreducing lead-times or increasing capacity atbuffers. Solutions might also exist from withinthe demand management process, such asimplementing VMI.

In order to find ways to increase flexibilityand reduce variability, the process team workswith the sales, marketing and manufacturingorganizations, customers and suppliers. Toincrease flexibility, they identify bottlenecks andpinch points, and develop cost-effectivesolutions. To reduce variability, the teamhighlights root causes and develops solutionsthat are consistent with the business strategy.Identifying these opportunities involves processinterfaces with manufacturing flow manage-ment, supplier relationship management,customer relationship management andcustomer service management, as well as thecorporate functions. In all cases, the team needsto consider the implications of the solutions onthe other members of the supply chain.

Measure Performance

Finally, the process team is responsiblefor measuring the performance of the processwith the metrics developed at the strategiclevel. These metrics are used internally toimprove the process and are provided to thecustomer relationship management team andsupplier relationship management team whowill convey the firm’s performance to the keymembers of the supply chain and generate thecustomer profitability and supplierprofitability or cost reports [23].

Table 1 Sources of Variability and Possible Solutions

Causes of Lumpy Demand Possible Supply Chain Solutions

Consumer promotions Plan promotions collaboratively with customers.

Sales metrics Design consistent metrics that avoid actions such as end-of-quarter loads.

Credit terms Revise credit terms with customer input to ensure that the terms of sale are not negatively affecting purchase patterns.

Pricing/Incentives Work with sales/marketing to only offer incentives that truly increase long-term sales.

Minimum order quantities Assure that all costs are included when calculating the appropriate minimum order size.

Long distribution channels Incorporate demand volatility into network design decisions.

Because buildingflexibility into a system is

often expensive, it isimportant that the level

of flexibility developed isconsistent with the needs

of the supply chain.


Research OpportunitiesIn this paper, we further developed the

demand management process and provided amore in-depth explanation of the issues andactivities involved in each sub-process. Whilewe have clarified the process and started toprovide a roadmap for its implementation,there are several research opportunities thatremain:• Further developing the strategies utilized in

the synchronization sub-process; that is,understanding how to match supply anddemand across members of the supply chain.

• Further developing the theory andimplementation of product segmentationfor determining appropriate forecastingapproaches; perhaps by validating theframework presented in Figure 4.

• Studying the use of information technologyand decision support systems to assist in thedemand management process.

• Understanding the information flowsbetween firms in the supply chain; that isdetermining what information should beshared with whom.

• Developing metrics that can be used toevaluate the performance of demandmanagment beyond the borders of the firm.

• Implementing the demand managementprocess across multiple firms in a supplychain, documenting implementation issuesand how obstacles were overcome.

ConclusionsDemand management is an important

component of successful supply chainmanagement. A well thought-out imple-mentation and seamless execution of theprocess can have substantial benefits on thefirm’s EVA through, for example, reducedinventory levels, improved asset utilizationand improved product availability. It is notenough to forecast well and have a goodoperations planning system. Demandmanagement should include finding ways toreduce demand variability and increaseoperational flexibility, and implementing agood contingency management system so thatthe firm can quickly react to unplanned issues.

Although it is possible to implementmany portions of the demand managementprocess without going outside the four wallsof the firm, the real opportunities come when

management reaches out to the othermembers of the supply chain and integratesthis process with the processes of suppliersand customers. It is through these integrationefforts that the benefits of supply chainmanagement will be achieved.

References[1] Zinn, Walter and Peter C. Liu,

“Customer Response to Retail Stockouts”Journal of Business Logistics, Vol. 22, No. 1(2001), pp. 50-53; Mike Duff, “Loyalty Waneswhen Stock is Low,” DSN Retailing Today,Vol. 40, Issue 20 (2001), pp. 37-38.

[2] Lambert, Douglas M., Martha C.Cooper, and Janus D. Pagh, “Supply ChainManagement: Implementation Issues andResearch Opportunities,” The InternationalJournal of Logistics Management, Vol. 9, No.2 (1998), p. 19.

[3] Croxton, Keely L., Sebastián J.García-Dastugue, Douglas M. Lambert, andDale S. Rogers, “The Supply ChainManagement Processes,” The InternationalJournal of Logistics Management, Vol. 12, No.2 (2001), pp. 13-36.

[4] Smith, Todd, Jay Mabe and JeffBeech, “Components of Demand Planning:Putting together the details for success”Strategic Supply Chain Alignment, JohnGattorna, Editor; Aldershot, England: GowerPublishing Limited, 1998, pp. 123-137.

[5] Helms, Marilyn M., Lawrence P.Ettkin and Sharon Chapman, “Supply ChainForecasting - Collaborative ForecastingSupports Supply Chain Management,”Business Process Management Journal, Vol. 6,No. 5 (2000), p. 392.

[6] Marien, Edward J., “DemandPlanning and Sales Forecasting: A SupplyChain Essential,” Supply Chain ManagementReview, Vol. 2, No 4, (1999), pp. 76-86.

[7] Robeano, Steven, “DemandForecasting: Reality vs. Theory,” unpublishedspeech at the National Management ScienceRoundtable, Nashville, 1991.

[8] Helms, Marilyn M., Lawrence P.Ettkin and Sharon Chapman, “Supply ChainForecasting - Collaborative ForecastingSupports Supply Chain Management,”Business Process Management Journal, Vol. 6,No. 5 (2000), p. 392; Richard J. Sherman,“Collaborative Planning, Forecasting &Replenishment (CPFR): Realizing the Promise

Although it is possible toimplement manyportions of the demandmanagement processwithout going outsidethe four walls of thefirm, the realopportunities comewhen managementreaches out to the othermembers of the supplychain and integrates thisprocess with theprocesses of suppliersand customers.


of Efficient Consumer Response throughCollaborative Technology,” Journal ofMarketing Theory & Practice, Vol. 6, No. 4(1998), pp. 6-9; Matt Waller, Eric M. Johnsonand Tom Davis, “Vendor-Managed Inventoryin the Retail Supply Chain,” Journal ofBusiness Logistics, Vol. 20, No. 1 (1999), pp.183-203; and, Larry Lapide, “NewDevelopments in Business Forecasting: VMICan be Good for Your Health,” Journal ofBusiness Forecasting Methods and Systems,Vol. 20, No. 4, pp. 11-13.

[9] Makridakis, Spyros, Steven C.Wheelwright and Rob J. Hyndman,Forecasting: Methods and Applications, NewYork: John Wiley & Sons, Inc., 1998.

[10] Elikai, Fara, Ravija Badaranathi andVince Howe, “A Review of 52 ForecastingSoftware Packages,” Journal of BusinessForecasting Methods & Systems, Vol. 21, Issue2 (2002), pp. 19-27.

[11] Safavi, Alex, “Choosing the RightForecasting Software and System,” Journal ofBusiness Forecasting Methods & Systems, Vol.19, Issue 3 (2000), pp. 6-10.

[12] Langabeer, Jim R. II, “AligningDemand Management with BusinessStrategy,” Supply Chain Management Review,Vol. 4, No. 2 (2000), pp. 66-72.

[13] www.i2.com; www.manugistics.com; www.sap.com.

[14] Dobie, Kathryn, L. Milton Glissonand James Grant, “Terrorism and the GlobalSupply Chain: Where Are Your Weak Links?”Journal of Transportation Management, Vol.12, No. 1 (2000), pp. 57-66.

[15] Lambert, Douglas M. and TerranceL. Pohlen, “Supply Chain Metrics,” TheInternational Journal of LogisticsManagement, Vol. 12, No. 1 (2001), pp. 1-19.

[16] Stewart, G. Bennett III, The Questfor Value: A Guide for Senior Managers, 2ndEdition, New York, NY: Harper Collins, 1999;Joel M. Stern, “One Way to Build Value inYour Firm, a la Executive Compensation,”

Financial Executive, November-December1990, pp. 51-54.

[17] Slack, N.D.C., The ManufacturingAdvantage, London: Mercury, 1991.

[18] Bolton, Jamie, “Effective DemandManagement: Are you limiting theperformance of your own supply chain?”Strategic Supply Chain Alignment, JohnGattorna, Editor; Aldershot, England: GowerPublishing Limited, 1998, p. 139.

[19] Cachon, Gerard, “Managing SupplyChain Demand Variability with ScheduledOrdering Policies,” Management Science,Vol. 45, No. 6, pp. 843-856.

[20] Towill, Denis R. and PeterMcCullen, “The Impact of AgileManufacturing on Supply Chain Dynamics,”The International Journal of LogisticsManagement, Vol. 10, No. 1 (1999), p. 86.

[21] Correa, Henrique Luiz, LinkingFlexibility, Uncertainty and Variability inManufacturing Systems, Aldershot, England:Avebury Publishing, 1994.

[22] Zinn, Walter, and Donald J.Bowersox, “Planning Physical Distributionwith the Principle of Postponement,” Journalof Business Logistics, Vol. 9, No. 2 (1988), pp.117-136; Remko I. van Hoek, “TheRediscovery of Postponment: A LiteratureReview and Directions for Research,” Journalof Operations Management, Vol. 19, No. 2(2001), pp. 161-184; Baris Tan, “AgileManufacturing and Management ofVariability,” International Transactions inOperational Research, Vol. 5, No. 5 (1998),pp. 375-388; and, Y. Y. Yusef and A.Gunasekaran, “Agile Manufacturing: ATaxonomy of Strategic and TechnologicalImperatives,” International Journal ofProduction Research, Vol. 40, No. 6 (2002),pp. 1357-1385.

[23] Lambert, Douglas M. and TerranceL. Pohlen, “Supply Chain Metrics,” TheInternational Journal of LogisticsManagement, Vol. 12, No. 1 (2001), pp. 1-19.

AcknowledgementThe authors would like to thank the members of The Global Supply Chain Forum: 3M,

Cargill, Coca-Cola Fountain, Colgate-Palmolive Company, Ford Motor Company, Hewlett-Packard, International Paper, Limited Logistics Services, Lucent Technologies, MasterfoodsUSA, Moen Inc., Shell International Petroleum Company, Sysco Corporation, Taylor Made-adidas Golf Company, and Wendy’s International. Their contributions included hosting visitsfor interviews, and dedicating time in Forum meetings to review and evaluate the research.


Douglas M. Lambert is the Raymond E. Mason Chair in Transportation and Logisticsand Director of The Global Supply Chain Forum, Fisher College of Business, TheOhio State University; and the Prime F. Osborn III Eminent Scholar Chair inTransportation and Logistics, Professor of Marketing and Logistics, and Director, TheInternational Center for Competitive Excellence, Coggin College of Business at theUniversity of North Florida. His publications include seven books and more than 100articles. In 1986, Dr. Lambert received the CLM Distinguished Service Award for hiscontributions to logistics management. He holds an honors BA and MBA from theIvey School of Business at the University of Western Ontario and a Ph.D. from TheOhio State University. He can be reached at The Ohio State University, 506 FisherHall, 2100 Neil Avenue, Columbus, OH 43210-1399. Phone: 614/292-0331. Fax:614/292-0440. Email: [email protected].

Sebastián J. García-Dastugue is a Doctoral Candidate at The Ohio State University.His research interests are in the use of information technology in supply chainmanagement and logistics. Sebastian has more than 10 years of experience inindustry. He worked for Ryder Argentina, Cementos Avellaneda, SolutionsInformatiques Françaises, Sud America Seguros, and as a part-time lecturer IEEC.Sebastián holds an MBA from IAE and a BA in MIS from Universidad CAECE, bothin Buenos Aires, Argentina. He can be reached at The Ohio State University, 256Fisher Hall, 2100 Neil Avenue, Columbus, OH 43210-1399. Phone: 614/247-6271.Fax: 614/292-0440. E-mail: [email protected].

Dale S. Rogers is the Director of the Center for Logistics Management, a Professorof Supply Chain Management, and coordinator of the e-Business Initiative at theUniversity of Nevada. He is also the chairman of the Reverse Logistics ExecutiveCouncil (http://www.rlec.org) and the Supply Chain Technology Council. Hereceived his BA, MBA and Ph.D. from Michigan State University. He can bereached at Managerial Sciences /028, University of Nevada, Reno, NV 89557.Phone: 775/784-6814. Fax: 775/784-1769. E-mail: [email protected].

Keely L. Croxton is an Assistant Professor of Logistics in the Department ofMarketing and Logistics at The Ohio State University. Her research interests are atthe intersection of optimization and supply chain management. She has worked inthe automotive, paper and packaging, and third-party logistics industries. Sheholds a BS in Industrial Engineering from Northwestern University and a Ph.D. inOperations Research from MIT. She has published in the Journal of BusinessLogistics, Transportation Science, and The International Journal of LogisticsManagement. She can be reached at The Ohio State University, 518 Fisher Hall,2100 Neil Ave., Columbus, OH 43210. Phone: 614/292-6610. Fax: 614/292-0440.E-mail: [email protected].

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