A business can live or die simply from having what customers need when they need it, it’s a core reason that businesses like Kmart, and subsequently Walmart thrived for such a long time. When a customer goes to a website or into a store with a specific want or need, there is little you can do to prevent them from going to another retailer if you’re out of stock. On the other hand, having too much of a good thing can equally harm a business, backstock does no good for warehousing, nor does it inspire a customer to purchase something.
So how do companies handle the intricate balancing act of having enough but not too much? A well-oiled logistics team can track, forecast, and adjust inventory sourcing and assembly times to adequately and accurately handle demand management!
What Role Does Demand Management Play in Logistics Organization?
Even though you can’t control what and when consumers buy goods, you can optimize the supply chain that it comes from so that it is where it should be when it should be. The law of supply and demand says that if demand is high, the price is right for the market, if supply is high, demand is low and the price is dropping. Demand management allows companies to achieve the market-clearinig price, where demand equals supply, but if this balance is incorrect, companies will hurt the end consumer, and moreover themselves.
Value of Demand Management
Though demand management is key to a point of purchase, its analytical processes and resulting actions are a core value add that 3PL organizations can highlight as a core competency to separate them from the herd. Providing demand management for logistics clients can save them time, money, and resources, making it a great selling point when winning over new business. Below we’ll take a look at some of the inherent value demand management can bring your clients or add to your company.
Reduce Costs, Improve Sales
By having demand drive supply, costs are reduced by not having excess product, but if demand is high, costs are also reduced because of scale, saving money across the board that can be passed to the end consumer, or kept for higher margins.
Reduce Backstock, Optimize Warehousing
Being able to plan based on historical sales data, seasonality, and analytics-backed forecasting can be the difference between lines of people waiting for the then-new, Apple iPod, or the nearly instantly clearance-priced Microsoft Zune, and all of the warehouses that ended up storing that overstock. Having room for what’s needed in warehousing is crucial to supply chain management, which is the backbone of demand management as a whole
Decrease Lead Times
If a product is made to order or an international import, lead times can vary wildly and are an extremely uncertain factor in these times. Knowing what SKUs need to be stocked ahead of time is crucial, especially with the current volatility in the import and export markets.
The largest expenditure shipping companies have to deal with is truckload freight and transportation costs, a cost that typically gets passed to the client or absorbed by the company. 3PLs will have larger insights into up-to-the-minute costs that could impact shipments of goods that will affect a retailer’s bottom line, which demand management can’t fully foresee, but can compensate for based on market trends.
6 Goals of Demand Management
Now that you know the value adds that demand management can provide you, or your clients, let’s take a step back and look at the 5 key objectives that demand management tries to achieve.
- Accurate Forecasting – Forecasting requires looking at historical data, product virality, and predictive analytics to make choices that best support your supply chain.
- Data-Based Planning – Once forecasting has been done, decisions need to be made with that data with the end goal of supply and demand parity to reach the market-clearing cost.
- Reducing Cost – Anything that affects cash flow negatively should always be watched closely for any optimizations, and demand management is a precursor to many cash-intensive investments that can be modified. With accurate forecasting and planning, money won’t be wasted on unneeded shipments or tied up in unnecessary inventory and warehousing costs.
- New Product Launches – Demand management gives key insight into what, when, and how much consumers are buying, allowing retailers to understand their customer’s needs more comprehensively. Knowing customers purchasing trends can birth new products, kitting combinations, and more.
- Improved Customer Service – Even in a best-case scenario, product can still run out, but knowing when a product will be back in stock, with a tracking system set up will instill trust within customers and clients.
- Boost Sales – At its core, demand management’s end goal is to boost sales and grow a business.
Key Components Within the Demand Management Process
For a company to successfully use demand management as a tool in their arsenal, some key components fall under the umbrella of demand management which includes:
- Modeling – Track sales trends, customer habits, and historic data to create a big picture of what could be.
- Model Assessment – Review whether a current model works, and how it can be optimized.
- Reality Check – A model is checked to make sure that it is based in the real world and not just built on conjecture.
- Mathematical Modeling – Real-world scenarios are crafted to predict the numbers.
- Data Aggregation – Once a model is sound, all of the collected data from the bullets above are combined to create a demand planning strategy.
- Forecasting – Plan for your model with predictive analytics.
- Goal Setting – When forecasting sales, the most important thing outside of a forecast being based in reality is knowing what goals you are trying to reach so you can adequately stock and plan around your objectives on financial, strategy, operation, marketing, and logistic fronts.
- Data Aggregation & Analysis – Create a big picture from your live and historical sales data to see a clear vision of what’s worked and what hasn’t to accurately predict sales, loss, restocks, and returns.
- Analytic Review – Check empirical analytics for optimization points, and holes in your data to reduce overstock and product obsolescence.
- Budgeting – Though forecasts look at future sales by reviewing historic ones, budgets need to be recalculated to compensate for growth, which will reduce warehousing costs, focus ad spend, and secure product pipelines.
- Demand Planning – Forcast for your demand with empirical and aggregate data.
- Empirical Sales Data – There is nothing more accurate than hard sales and return data. Using historical sales data to find patterns is a key focus of demand planning.
- Customer Surveys – The only people who know a product better than its creator are the people using it. Customer feedback allows companies a better look at how products are used, when, and how to make them better.
- Aggregate & Update Forecasts – Keeping accurate forecasts ensures that you are ahead of the curve, but not behind your sales trends.
- Review – Nothing is set in stone, virality, seasonality, obsolescence and other factors can dramatically shift the effectiveness of a well-thought-out plan, so always be ready to pivot.
- Supply Planning – A duty of whoever is in charge of inventory management, supply planning deals with sourcing and shipping and all of the problems that come along with it.
Demand Management vs Demand Planning vs Capacity Management
With so many terms being a combination of the words “demand,” “planning,” and “management,” let’s take a quick moment to draw some clear lines between demand management demand planning, and capacity management.
- Demand Management –The planning and management of sourcing inventory accurately to meet customer expectations and maintain or exceed profit margins is demand management.
- Demand Planning – As stated above, demand planning uses a model and historical sales data to forecast the demand of services or goods.
- Capacity Management – Capacity management is the process of making sure that the trucks moving goods can actually house what needs to be shipped and that they’re not carrying goods that aren’t needed. Inversely capacity management also dictates shipping costs, if freight is shipped with capacity management under consideration costs can be reduced.
Will Demand Management Help Inventory Forecasting?
In short, yes and no. Demand management will not help inventory forecasting, because inventory forecasting should inform demand management, but the two are forever entangled. Without demand management, you can’t accurately forecast the demand, but without forecasting your inventory you can’t control the cost. The two processes should happen in tandem using each other as checks and balances.
3 Effective Strategies of Demand Management
Now that you know what demand management is, here are some effective ways you can use it.
Have a Plan
In today’s need-it-now economy, there’s no way to fully predict what a customer wants, but using demand management, companies never have to guess what people need. Demand management starts with models, and then unravels them. Using this strategic planning style will allow plans to evolve in time to better set and keep goals.
Stock Up Not Over
After 2020, companies are no longer keeping “just enough” stock, they’re keeping the essentials and best-sellers on deck. Also, with the nightmare that supply chain sourcing has been since, there is no such thing as waiting until the last minute, demand management allows companies room for growth while also keeping a healthy balance of readily available stock.
Pivot and Kit
When launching a new product, the hope is that it will sell through, if that is not the case, kitting a new product with a highly in-demand companion product can save a launch.
Manage Demand, Drive Revenue
With a lot of moving parts and considerations both within, and out of, your control, demand management can help scale a business to new heights, but without it, one could quickly plummet to irrelevancy, or worse yet insolvency. If used correctly, demand management will reduce loss and increase cash flow, creating even better margins while decreasing the margin for error.
Goal setting, data gathering, analytics, and budgeting are all used in demand forecasting.
The two types of demand management are restricted and unrestricted.
Almost every company uses demand management to some degree, but retailers and logistic companies of all kinds should be the most well-versed in demand management.