demand based service strategies

You know you have a demand management problem if production and supply are always out of sync with incoming orders. You know you have a problem if, even with long lead times, you can't meet customer delivery expectations. Or if, despite high inventory levels, you're missing out on potential sales because products are out of stock. In today's marketplace and uncertain economy the cost of such miscues -- obsolete inventory and lost customers -- can be high.

A lean value chain begins with the customer. While many people say they understand this precept in theory, many lean initiatives start off on the wrong note by focusing internally on the factory floor or back office. Unfortunately, volatile order volumes can wreak havoc with any attempt to reduce work-in-process inventory and create a steady material flow. In many cases this volatility is self-inflicted, which is where demand management comes in.

Demand management helps everyone in the company see true customer demand. In the retail sector true customer demand is the point of sale when the consumer hands over his or her cash or credit card. In other sectors it's the ultimate consumption point that should trigger replenishment back through the fulfillment chain starting with the manufacturer and on through distribution.

Demand management harmonizes the activities of sales and marketing -- which tend to focus on orders and dollars -- and operations -- which is all about output and units. The goal is to better align sales policies such as promotions, pricing structures, packaging and delivery frequency -- which tend to increase demand volatility -- with production capabilities. Removing such volatility reveals actual capacity requirements, reducing capital needs and improving service levels. Not overproducing and removing extra inventory eliminates labor costs that relate to handling that excess inventory.

Demand Segmentation

Most approaches to production planning treat all products the same. By analyzing and segmenting products, a company can optimize planning, control and manufacturing. Plotting the volume and variability for each product segment can lead to more predictable and responsive production processes, and reduce inventory at the same time. Demand segmentation will determine, for example, if a product should be made using a "pull" system, if it should only be produced on a made-to-order basis, or even if it should be discontinued altogether.

On the chart above, product families that fall in Quadrant 1 exhibit steady, high volume demand, making them ideal candidates for a pull system. A low volume, highly variable product that falls in Quadrant 3 suggests a make-to-order strategy. It's also a candidate for discontinuation.