Demand and Supply Integration: A Key to Improved Firm Performance
Historically, companies have separated the processes used to plan for and manage demand and then supply of the resources and labor needed to meet that demand. The problem with this business model is that the companies using it are often unable to consistently ensure that supply meets demand. Too often, the right-hand (demand) and left-hand (supply) functions are not synchronized, resulting in a shortage of the products that customers actually want, and a surplus of products that are not wanted.
Companies are trapped in a pattern of reacting to the whims of the marketplace without developing a proactively designed supply capacity. Curiously enough, such companies are often the victims of their own success -- marketing programs that are not integrated with supply plans end up creating more demand than the company can fulfill. To create a more efficient and effective business model, companies must acknowledge that they need to integrate demand and supply systems. We call this business model Demand and Supply Integration, or DSI.
Dell serves as an early example of successfully implemented DSI. In 1999, one of this article's authors ordered a computer three weeks before Christmas. It was a gift for his sons, and as such, he had a very specific time frame in which to receive it. So when he received a confirmation email stating that the computer would be ready on February 16, 2000, he replied that he needed the computer much earlier. A service representative researched the delay and explained that the 400 megahertz Pentium chip that he had ordered was particularly popular and, as a result, was backlogged. Rather than leaving a customer dissatisfied, the service rep suggested a way around the supply chain bottleneck. For an additional $50, Dell could upgrade the Pentium chip and ship the computer within a week. The author readily agreed, and the computer was received well before December 25. The customer's needs had been met, and at a price that was reasonable to him.
What did Dell do right? First, they had a system in place so that customer service representatives could readily access sales, marketing, and supply chain information. This system allowed the service representative to do far more than empathize with the problem. He was able to work with the customer within the company's current supply chain limitations and ensure customer satisfaction. How often have you gone to a store for a specific item only to be told that it will not be available for a week or more? Frequently, that is the only assistance you receive. You either purchase the product somewhere else or become frustrated with the delay. Either way, you are less than satisfied with the store's service.
Through close relationships that facilitate information sharing at the system level, DSI allows companies to serve end users better. It empowers each member of the supply chain to develop immediate and appropriate solutions to problems as they arise. It requires that managers not only focus on their own goals, but also learn to look to the larger organization (including external supply chain members such as retailers and end users) as a whole. Goals must be agreed upon corporately and worked toward in unity.
One key element of DSI is development of an integrated sales and operations planning (S&OP) process to facilitate systemic information sharing. This provides a formalized procedure to begin synthesizing a company's operational plan with its demand plan. The operational plan consists of manufacturing, procurement, distribution, finance and related human resource plans. Operational plans include such items as monthly production schedules, extended contracts for raw materials with supply chain partners, and any plans to expand manufacturing capacity internally and/or with partners. In the demand plan, sales and marketing determine what should be sold and marketed, and when (given the supply capabilities of the firm). Demand plans may involve suppressing demand for products or services that are capacity constrained, or shifting demand from low to high-margin items.
Once more, Dell serves as a model for effective creation and implementation of a sales and operations planning process to facilitate DSI. In the fall of 2003, California's dock workers organized a strike that brought imports into the largest West coast ports to a standstill. While most companies weather such supply chain disruptions by holding weeks (or even months) of domestic safety stock, Dell's business model only provides for a few day's supply of product on hand. Regardless, Dell needed to keep end users happy. To continue providing product to its customers, Dell was left with only one option; they had to use expensive air freight to transport supplies from Asian vendors to the US. Company executives realized that one major constraint to this plan was the cost of transporting bulky cathode ray tube (CRT) computer monitors by air. Dell's demand and supply managers created an alternative plan; they determined that they could "shape demand" by offering end users the opportunity to buy flat-screen monitors for the same price as the older ones. It would still be costly to transport monitors by air, but the cost of moving the flat screens was much lower than that for the bulkier and heavier CRT monitors. Dell might not make as much money on the deal, but their end users were significantly more satisfied with their "free" upgrades. Essentially, they changed the monitor market overnight, a development for which competitors' supply chains were not prepared. This sort of dynamic solution is only possible when organizations embrace a business model that integrates demand and supply processes.
Lest we think Dell is the only practitioner of DSI, consider the relationship between Whirlpool and Lowe's. Every week, this retailer and vendor have a DSI conference call to discuss what appliances are selling in the stores, and what capacity Whirlpool has to make product. Often, the discussion revolves around a particular model that is selling at a higher than expected rate in Lowe's. As executives from both companies related in a speech to the University of Tennessee's Supply Chain Management Forum, this often results in Whirlpool quickly flexing its supply chain to make more of the high-selling product and delivering it to Lowe's customers (perhaps, in the process, shifting capacity away from products for which Lowe's is experiencing lower-than-anticipated demand). However, sometimes the answer is that Whirlpool and/or its suppliers do not have the capacity to make more of the product in question. It then becomes a question of demand shaping for Lowe's. What promotions, in-store displays, sales incentives, etc. can Lowe's implement to shift demand from the capacity-constrained model to one that the supply chain has more capacity to deliver? In this way, Lowe's, Whirlpool, and their suppliers execute DSI across the entire supply chain, recognizing that DSI is not just about managing supply, but also about managing demand.
While the stories shared here have been successes, incorporating DSI is not simple. There are many potential obstacles. The most common pitfall is misunderstanding the role of DSI within the organization. It should not be subject to company politics or artificial financial targets or quotas. Rather, DSI should be used to establish organizational financial targets without preconceived ideas of the end result. Often this requires a reframing of corporate (and even the entire supply chain) culture, a shift that only occurs with a significant investment of time and labor on the front end. In addition, DSI necessitates another company change: strong, effective customer integration. For that to occur, information must already flow easily between departments. A company must shift its focus from product and supply to customer, market, and supply chain. The transition is challenging, yet the ultimate value of DSI is undeniable.
The Department of Marketing and Logistics at the University of Tennessee has adopted the DSI model to frame research and curriculum initiatives. With both logistics and marketing integrated in the same department, as well as extensive connections to practitioners and academics around the world, the structure of the department makes it an ideal trailblazer for this dynamic integration. The department's strategic plan envisions a continuation of its unique multidisciplinary approach, producing students ready to lead DSI changes within organizations and enabling faculty to research DSI and collaborate with practitioners who are already taking steps in that direction.
Dr. Theodore P. Stank is the Dove Professor in Logistics and Transportation and the Head of, Department of Marketing and Logistics and Dr. John T. Mentzer is the Bruce Chair of Excellence and is the Executive Director of the Integrated Value Chain Forums. www.bus.utk.edu/ivc
For over 50 years, University of Tennessee (UT) faculty have played a major role in the supply chain/logistics arena -- conducting innovative research, publishing leading-edge findings, writing industry-standard textbooks, and creating benchmarks for successful corporate supply chain management. Programming is top-ranked in Supply Chain Management Review,U.S. News & World Report, and Journal of Business Logistics. Certification is available. http://SupplyChain.utk.edu
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