Demand Chain Management: Enhancing Customer Value Proposition

DCM creates strategic assets for the firm in terms of the overall value creation as it enables the firm to implement and integrate marketing and SCM strategies that improve its overall performance.

The supply chain comprises all the supply processes necessary to fulfil customer demand and is managed within supply chain management (SCM). SCM focuses on the efficient matching of supply with demand but does not help the firm to find out what the customer perceives as valuable, and how this customer-perceived value can be translated into customer value propositions. Hence, SCM efficiency by itself will not increase customer value and satisfaction. Providing customer service in the value chain is largely the domain of two functional areas – marketing and SCM. Supply chains capable of implementing and executing an integrated and coordinated marketing strategy at the supply chain level focused on the ultimate customers will gain competitive advantage.¹ Thus, it is essential to understand the marketing perspective also instead of solely focusing on SCM decisions. Marketing and SCM often operate as self-optimizing, independent entities. Marketing combined with dynamic SCM provides greater flexibility to satisfy customer demand based on the needs of individual customers and their value to a firm. To be successful, firm not only needs to focus on the supply chain, but also on the demand chain. The demand chain comprises all the demand processes necessary to understand, create, and stimulate customer demand and is managed within demand chain management (DCM). DCM is defined as “The alignment of demand creation and demand fulfilment processes across functional, organizational, and inter-organizational boundaries”.² Hence, DCM can leverage the strengths of marketing and SCM and meet the challenges of customer value creation in today’s marketplace.

The Need for Marketing and SCM Integration

As customers are increasingly becoming more demanding, firms place more emphasis on customer service. Achieving better levels of customer service requires working together across different departments or functions of a firm. When working relations between marketing and SCM are poor, the coordination and communication that is crucial for the provision of overall customer value proposition may be lacking. The absence of cross-functional collaboration may result in promises made by the firm’s sales and marketing department that have not been coordinated with SCM and logistics, and marketing promotions that are not synchronized with supply chain delivery schedules. Without marketing/SCM cross-functional collaboration, firms cannot be expected to respond optimally and promptly to customers’ requirements. Collaborative behavior is based on cooperation (willingness), rather than on compliance (requirement). The deleterious results of not integrating the marketing and SCM efforts are becoming increasingly evident. A firm cannot reach its full potential in terms of developing, refining, supporting, or delivering products and services without using marketing insights to shape and refine the SCM. In addition, functional departments may divert considerable attention and effort from serving customers to internal issues like turf protection, and blame game for errors and shortfalls. The inability of marketing and SCM to effectively integrate create significant barriers to identifying and responding to customer demand, optimizing inventories, and servicing the customer base.

Demand Chain Management
Functional managers often consider marketing and SCM as separate and distinct entities from one another as they do not collaborate their activities. Despite strong arguments for an integrated approach, in many firms, the supply side still seems to be disconnected from the demand side and supply chain managers have only a faint idea of the drivers behind customer demand.³ Marketing/logistics interdepartmental relations tend to be characterized by conflict and lack of communication rather than by collaborative integration. Integrating marketing and logistics is a challenge in any firm, since there is a natural tension between these two functional areas.

A number of firms have focused their efforts on developing sophisticated supply chains such that their managerial focus became myopic, and many lose sight of their markets and their customers. Hence, along with supply chain, firms need to focus on demand chain. The demand chain is defined as “The complex web of business processes and activities that help firms understand, manage, and ultimately create consumer demand.⁴ An efficient supply chain alone provides only half the solution, hence, complete solution is suggested to be having an effective demand chain also that encourages a strategic approach to market response. Demand chain design is based on a thorough market understanding and has to be managed in such a way as to effectively meet differing customer needs. A demand chain strength that is not linked to a supply chain strength may result in a high-cost base, as well as slow and inefficient product delivery; while a supply chain strength that is not linked to a demand chain strength could result in sub-optimal outcome. DCM is a new business model aimed at creating value in today’s marketplace by combining the complementary strengths of marketing and supply chain competencies.

DCM: Marketing and SCM Integration for Optimal Outcome

Marketing is focused on the demand chain and addresses the sell-side of the firm while SCM is focused on the supply chain and deals with the buy-side of the firm. The goal of DCM is to both reduce or if possible eliminate buffers of inventory in the supply chain and at the same time deliver what the customer demand. Marketing and SCM must work together and formulate an effective DCM in order to achieve organization goals. It is relatively common to find discrete functional excellence in marketing side by side with SCM. They frequently operate as separate, self-optimizing – even adversarial – entities. Tackling one independently of the other, leads to sub-optimal solutions. In the DCM, the marketing and SCM functions are not separate; rather, they are intertwined as explained below in Figure 1.

The view of the consumer as an integral part of the chain is perhaps the most important issue in the shift from SCM to DCM. The focus of DCM is on real-time flow of demand-related information from point of inception (end-users) to the point of use (suppliers). The goal of DCM is to coordinate the demand creation and the demand fulfillment processes to gain competitive advantage by differentiating not only the products but also the delivery process, as well as to exploit synergies between marketing and SCM. The demand creation processes comprise all the activities necessary for creating demand and are closely linked to marketing, while the demand fulfillment processes comprise all the activities necessary for fulfilling demand and are closely linked to SCM. This implies that a framework of DCM may be constructed based on two interrelated parts: marketing and SCM as shown in Figure 1.

Examples of major demand creation processes are strategic marketing planning, market research, market segmentation, product development, and marketing and sales,⁵ while examples of major demand fulfillment processes are strategic supply chain planning, supply chain design, and supply chain operations.⁶ DCM highlights the interplay between marketing and SCM as an enabler of customer value creation. The ultimate goal of DCM is to gain competitive advantages by differentiating not only the products, but also the delivery process as well as to exploit the linkages between marketing and SCM. Hence, DCM has been introduced as an approach to capture the synergies between marketing, and SCM.⁷

To maximize value creation for customers, it is necessary for the functional areas of the organization such as marketing, SCM to co-ordinate efforts with each other. Collaboration has been called the driving force necessary for effective marketing and SCM integration and DCM development. The integration between the objectives of the marketing concept (to mobilize total organizational effort to satisfy customers and generate a profit) and the concept of SCM (to link organizational and inter-organizational units to improve levels of service and reduce costs) is key concept of DCM as explained in Figure 2. It is through DCM that customer value is achieved as strong collaboration between marketing and SCM leads to an environment where all are focusing on the customer value proposition as explained in Figure 2.

Demand Chain Management (DCM): Major Benefits

As in DCM, marketing insight is combined with the SCM side of supply efficiency, and a number of benefits emerge. The benefits derived from DCM include:

• Reduced level of inventory from having precise information of inventory availability.
• Reduced lead times from better visibility of demand for products.
• Increased sales from being able to confirm availability and delivery of standard and enhanced products in real time.
• Increased responsiveness by working across various sales channels, while taking into consideration production constraints.
• Improved customer service and retention resulting from an improved ability to meet delivery on time.In the collaborative system of DCM, marketing and SCM members will seek to reduce markdowns, increase sales, reduce business transaction costs, and reduce inventory. The DCM involves integration between marketing (selling) and SCM (delivering) processes and enables both parties to reduce cycle times, eliminate out-of-stocks and improve customer service in terms of in-store product availability and responsiveness. Effective marketing strategy demands sound SCM because it includes the distribution part of a marketing strategy. In environments with increasing diversity in customer needs and requirements, firms must rapidly adjust their supply to meet demand. The argument for integrating strengths of marketing and SCM is strong and compelling.

ZARA: Deployment of DCM
Spanish ladies’ apparel maker Zara, a unit of Spain’s Inditex SA and a global player in fast fashion segment, has successfully developed DCM by integrating marketing and SCM initiatives. Zara operates in a rapidly changing market characterized by fast response and short-product lifecycles. To manage the competition in fast fashion retail, Zara’s business model is focused on high availability of products, and speed of response. Zara uses the internet to gather real-time information on the needs and changing tastes of consumers – changes that are dictated by fashion shifts as well as seasonal transitions. Zara stores use handheld devices i.e. personal digital assistant (PDA) to send Inditex HQ all information regarding sales trends and insights on what customers would like to see, customer feedback and reactions, ‘buzz’ around a new style as well as their ordering needs. Rather than offering products at the lowest price by holding costs down, Zara concentrates on having the newest, unique, or most advanced products available at most affordable price.

For Zara, strong market research and the ability to bring products to market quickly and efficiently through effective DCM is the cornerstone of success. Zara’s demand chain identifies a demographic segment of 17 to 22 year olds that are fashion but budget conscious. The essential features of Zara’s supply chain design are production schedule and quality controls. Zara brings new fashion design from sketch to store rack in as little as two weeks and represents strong marketing and SCM capability and collaborative efforts. Zara has made significant operating and financial improvements by better matching supply and demand through better integration of marketing and SCM and effective development of DCM. Zara increase profitability through product availability, delivery accuracy, responsiveness and flexibility by tightly linking customer and supply initiatives.

Illustration
In a following hypothetical illustration of a firm, it is envisaged that the DCM capability on integration of the marketing and SCM generates a 1% positive impact across various income statement line items as well as asset utilization. Table 1, below represents an evaluation framework for a hypothetical illustration of a firm (base case) as well as after positive impact of DCM (new case). All figures are in millions of U.S. dollars.

With 1% improvement in sales revenue, new sales become $ 101 million. As COGS varies directly in proportion with sales, COGS has increased to $ 65.65 million. After considering the impact of 1% reduction in COGS, new COGS is reduced to $ 64.99 million. Similarly, decrease in various line items framework, caused by DCM approach with integration of marketing and SCM and corresponding increase in operating profit, net income, and ROA is shown in Table 1. Taken together, as calculated in Table 1, even a small cross-functional improvement due to DCM approach can have a profound effect on the bottom line, lift net income of a firm by approximately 16%, and increase ROA by 17%.

Demand Chain Management (DCM): Key Requirements

As DCM development is a complex phenomenon, it is influenced by a variety of tangible and intangible resources of a firm. In addition to marketing and SCM capability of the organization, major resources contributing to marketing and SCM integration and hence successful development of DCM are: IT, organization culture, and performance management/reward system.

Information Technology (IT)
DCM is an IT-led strategic concept that enables firms to rapidly respond to rapidly changing customer needs that affect market demand. DCM relies on IT capabilities to enable linkages across departments resulting in tighter integration. DCM helps in reducing distortion of demand-related information (bullwhip effects), knowledge-centric decision mechanism, web-based transparent business transactions, sales processes automation and matching of supply with demand.⁸ Although IT enables connectivity, it does not guarantee proactive information sharing among functional area.

Organization Culture
The extent to which the organization’s culture creates a willingness to share information determines how much information is shared,⁹ irrespective of the amount of investment in IT. To achieve high levels of cultural willingness, firms require top management involvement and the formation of inter-organizational teams. This enhances the level of information sharing. Developing an information-sharing culture as an organizational capability is not easy, as changing the culture within a firm is much more difficult to accomplish. Thus, the firm that can inculcate a culture in which willingness to share information among cross-functional areas are high, can take advantage of a more sustainable, non-imitable competitive advantage that should lead to relatively higher performance levels. Proactive information sharing can improve relationship strength among marketing and SCM members, enhance the ability to coordinate value-added activities of DCM and exploit the collaboration opportunities, hence; organizations with a strong information-sharing culture outperform their counterparts.

Performance Measurement and Reward System
In order to ensure successful DCM based on effective collaboration between marketing and SCM, members of both functional areas are encouraged to clearly define mutual objectives and associated performance measures and link their performance and reward systems with decision synchronization, information sharing, and incentive alignment. Clear linkage will encourage the marketing and SCM members to improve shared processes that encourage DCM development. Information sharing is required to signal the marketing and SCM members that incentives for an effective DCM development are available, timely, equitable, and performance-contingent. On the marketing side, the size of the reward can be in the form of increased sales, less price markdowns, increased inventory turns, less stock-outs, reduced inventory, and lower operating costs. On the SCM side, the size of the reward can be measured in terms of less inventory, faster response, and lower supply costs.

Conclusions

There has been a drastic increase in the pressure on organizations to find new ways to create and deliver value to customers through marketing and SCM initiatives. A new, emerging business model of DCM builds on a close alignment between marketing and SCM resources and capabilities. Effective DCM requires better utilization of organizational resources and capabilities, and hence creates customer value proposition in a constantly changing market. The goal of DCM is to create unique competitive advantages by linking together customer values with a more effective flow of products. DCM approach can help firms provide superior customer value by developing a mutual understanding of responsibilities, sharing ideas, information and resources, and working together as a team to resolve cross-functional problems of marketing and SCM. DCM facilitates firms in enhancing market responsiveness capabilities as it is based on a customer-focused organization culture and making customized value offerings and hence creates differential advantage. Through a DCM approach, firms could enhance financial and operating performance by interlinking the marketing and SCM operations, and at the same time meet the long-term strategic goals and enhance customer value. The ideas presented in this article have the potential to improve marketing and supply chain managers’ relational capability and accordingly formulate an effective DCM approach. However, it is important to note that the application of DCM is still in its infancy and needs to be researched further, both from marketing and SCM perspectives.

About the Author
Pankaj M. Madhani received an MBA degree from Northern Illinois University, USA and an MS in computer science from Illinois Institute of Technology, Chicago, USA. He holds bachelor’s degrees in chemical engineering and law, both from Gujarat University. He has more than 25 years of corporate and academic experience in India and the United States. He is currently working as an associate professor at ICFAI Business School (IBS). He has published seven books in the areas of business strategy and ERP and more than 100 book chapters and research articles in several refereed journals. His research interests include technology in business and strategic management.

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