For most of us, we’re experiencing unprecedented economic challenges. The implications to the supply chain management profession are profound. We’ve gathered some of the industry’s brightest minds to discuss these challenges and seek innovative solutions. We hope you enjoy the Kinaxis Supply Chain Expert Series as we challenge these experts on these issues.
Dr. Lapide managed the launch of MIT’s Supply Chain 2020 Project. He is currently an advisor to it, oversees CTL’s Demand Management initiatives, and is responsible for its Strategy Alignment training workshops. He is also directs the research supporting the Demand Management Solutions Group, a consortium of companies looking to advance DM strategies, principles and methods.
Dr. Lapide has extensive experience as a consultant, high-tech manager, software market analyst, and business researcher. He is a frequent presenter at supply chain events and has written numerous publications, including his co-authorship of a book on e-business and SCM. He has worked at AMR Research, Accenture, Data General and A.D. Little. Dr Lapide holds an SMEE from MIT and a Ph.D. in OR from the Wharton School.
Kinaxis: What is DMSG and when was it started?
Larry: The Demand Management Solution Group (DMSG) got started about 6 to 8 months before the initial kick off meeting. In August 2006, I had a roundtable where we invited people to come in and talk about the concept of demand management — matching supply and demand. It was an area that I had started focusing on from a research perspective. It is a very conceptual process, but I wanted to run a roundtable so we could start to get input from some of the practitioners and the thought leaders in the industry on the concept. At that initial roundtable, we announced, in consortium with Larstan Publishing, the DMSG initiative. We were going to assemble a group to do ongoing research in the area of demand management over a 2-year period.
We spent the next 6 months assembling that group of member companies and we officially launched the group in January of 2007. We had our first meeting a couple of months later where we convened the group to define the research question we were trying to address, which is: What strategies, principles and methods can be leveraged to optimally match supply and demand over time?
The DMSG, which has since completed its initiative, was a group of representatives from thought-leading companies who would meet approximately quarterly. The group did research around demand management – including running several market surveys and sponsoring theses work of MIT students. I in particular, wearing my MIT hat, also did some research inside of MIT with some of our sponsors, as well as worked with the members at each of the meetings we held.
All in all, it was a successful joint research effort.
Kinaxis: What are the business issues a company would be trying to solve or address by using a Demand Management solution?
Larry: The buzz word in early 2007 was ‘demand shaping’. Demand shaping is a concept that has to do with changing demand and creating it – but doing that in the context of aligning with the supply side. Demand shaping, in general, is done by sales and marketing organizations. What we were seeing in industry is that frequently sales and marketing organizations put action plans in place, and executed against them, often regardless of whether the demand shaping plans lined up well with supply. So they could for example, line up sales for what they did not have, or not sell what they did have a lot of.
So demand shaping is really about demand creation and shaping demand with supply in mind. And I think that is the key thing.
There is usually what I call a chasm —sales and marketing on one side working up how they are going to shape and create demand, but their decisions are made independent of the supply side. What we are trying to do is bridge that chasm (in fact, this bridge image and story is the identifier we used for the whole group). Demand management processes are bridging processes between the demand side of a company and the supply side, so the two organizations can make joint decisions.
Why this is so important comes down to the goals of the company. In other words, the demand side typically has goals for revenue generation; the supply side typically has goals of inventory and cost reduction; and the demand management processes have profitability goals— which takes both sides into account. So demand management processes are really processes that are put in place to ensure that corporate goals of profitability and other corporate strategic objectives have priority, while still measuring the demand side with revenue goals, and still measuring the supply side on reducing costs and inventories.
The DMSG looked at 3 different bridging processes:
The first is customer segmentation and service differentiation – which is aligning service programs to different customer segments. Companies develop specific offerings to different customers where they can get greater profitability and service them better.
The second piece is sales and operations planning processes. That is the linchpin process in the sense that it is a process that many companies embrace and it becomes the key process for matching supply and demand.
And the last piece is order promising and fulfillment – more of an executional or real-time process. Of course, this is where we promise a date to a customer based upon an order they plan to place. Companies should not conduct order promising and fulfillment simply by a first-come, first-serve method, but do it in concert with customer priorities, where they are giving greater priority to customers who give them more profit than ones that don’t.
So the first one is strategic, the second one is a little more tactical and the third is executional, but all three processes link to profitability and must involve joint decision making between the supply side of the house and the demand side of the house.
Kinaxis: In that context, I have heard you refer to the efficient perfect order, could you elaborate on that?
Larry: The term ‘perfect order’ has been around for quite some time—it measures the percent of orders that we execute perfectly. Usually it’s the way the customer would see it: did we give the customer exactly what they want?…was it on time?… with the quality they want?… with the right product mix?…and no split shipments? It’s all about delivery and what they get delivered.
That’s very good, but at a point that may be very expensive to do that at the 100% level. The issue becomes what if, to get a customer order filled, we had to expedite it? So we had to do something differently than we were planning to do. Now we start to bring in what we call the ‘efficient perfect order’. We may have gotten all of our orders to the customer correctly in the way the customers wants to see it, but we might have had to expedite half of them or we might have had to do something special to get the shipment done on time. That becomes a profitability story because we are incurring greater costs to make it happen.
The efficient perfect order is a much harsher, harder criteria but it is a criteria that ties better with the profitability story. And so, for example, you don’t get credit for an order if you had to expedite it, and you don’t get credit for filling an order correctly if it was an online order that should have been done with no manual intervention but someone had to touch it and fix it before it went into the system – these are the types of things that impact profitability that wouldn’t have been captured in a perfect order, but do get captured in the efficient perfect order.
Kinaxis: Can you describe briefly the maturity model associated with the findings of the DMSG?
Larry: Well after the DMSG conducted extensive research, we came up with the ideal stage of Demand Management, and that is optimized demand management. In order to optimize the matching of supply and demand, your demand management processes have to be aligned to achieve strategic goals—that is the ultimate.
So we looked at that ideal stage and asked what kind of architecture, in terms of functionality and processes, needs to be put in place in companies to achieve that ideal stage. And we broke it down into what you have to do in each one of the three processes that are a part of demand management that we had defined, and then we looked at all the supporting processes –the information you need to do it, how would you align your processes, and the supporting tools and techniques needed.
Kinaxis: What are the anticipated benefits of achieving a high level of maturity in the DMSG model?
Larry: Again, it goes back to greater profitability. Most people say that they always focus on greater profitability, but if you are just reducing costs sometimes that impacts revenues detrimentally — in other words if I take one extreme, I might reduce my inventories down to a level where I have impacted demand. Moreover, if I just tried to optimize the revenue side, without regard for profitability, I might be selling things I can’t make any money on, and I might be accommodating my very large customers to a point where my profitability on them is not very much, if anything.
And so we would say that with demand management the major benefit is profitability improvement. But whatever your strategic goal is — it might be something else – we would say that the benefits are all around better achieving your goals — whether that be maximizing share, maximizing revenue, maximizing margins. Whatever the goals are that you want to put in place for your demand management solutions, the major benefit is in improving those… with a lot of it doing with improving profitability of course.
Kinaxis: And the maturity model as described in the perfect state is, of course, linking the goals to the operations…
Larry: Exactly — and linking the goals to all the demand management processes, so that they are all in sync with each other. You don’t want a demand management process that is trying to reach some strategic goal that is different than, or not in harmony with another process that is trying to do something else. And so it really has to do with what are my strategic goals, and how do I align and maximize my processes to achieve those goals.