Demand leveling

Demand leveling is the deliberate influencing of demand itself or the demand processes to deliver a more predictable pattern of customer demand. Some of this influencing is by manipulating the product offering, some by influencing the ordering process and some by revealing the demand amplification induced variability of ordering patterns. Demand levelling does not include influencing activities designed to clear existing stock.

History

Demand management has been approached in a variety of ways:

For one method of demand management it is instructive to look at Toyota in its home market, Japan. Toyota sales teams sell cars door-to-door whereby they build customer profiles and relationships. The sales process is low intensity but includes test drives, financing, insurance and trade-in deals [The Machine that changed the World, Womack, Jones and Roos, Macmillan Publishing, p183, ISBN 0892563508] . The sale itself is by special order placed with their representative. This means that orders can be predicted reasonably accurately in terms of vehicle numbers some way in advance. Finer specific vehicle details may only become known with the order. However, the order is often for delivery in the future so these details can usually be planned before build.

Because the customer is getting the exact car they want there is less negotiation around price as indeed the fact that the build is to order removes the incentive of the manufacturer, or their agent, to discount existing stock. The aim of this system is to maximise the revenue from the customer in the long term. This leads to the sales team handling after-sales issues of diverse kinds for an extended period to keep customer loyalty and the relationship which will sell the next car. Between purchases the sales team remain in touch for all aspects of customer satisfaction with their cars including feedback for product design on changing customer preferences in the market.

The Japanese market does not have the seasonal, promotional or other demand surges that are a characteristic of Western automotive markets. It is debated, for both markets, whether this is caused by manufacturers behaviour or whether manufacturers behaviour is a logical response to it.

A second approach to demand management is by deep understanding of the systems used to order products by retailers and other sellers from manufacturers. Even where this supply chain is very simple, customer-retailer-manufacturer, it is usually the case that orders are based on some form of Economic Order Quantity (EOQ) calculation that aggregates actual customer demand over a certain period. This aggregation, and the other clever calculations that may be involved, often obscure the fact that actual demand for a product is close to flat, and for high volume products very close to flat. The demand pulsing effect is created by the ordering process and the more complex it is the greater this effect. The use of EPOS actual sales data can reveal this effect very clearly.

A third approach to demand management is the keeping of Finished Goods (FG) or nearly Finished Goods stock to acts to isolate the production facility from actual demand. This approach is widely used today but its weakness is becoming more and more evident as a growing variety of products is demanded. The cost of making, storing, managing and protecting FG stock can grow to be prohibitive depending upon product range and demand variability levels. This usually means that actually whilst stocks are kept they are insufficient to meet the stated aims and so customer dissatisfaction ensues along with distressed sales (reduced price) to eliminate stock levels seen as too high

Implementation

If it is accepted that a large part of demand variability in high volume products can be substantially caused by sales and ordering process artifacts then analysis and leveling can be attempted.

The use of long delay supply chains in order to reduce manufacturing costs often means that production orders are placed long before customer demand can be realistically estimated. The much later arrival of forecast product demand volumes makes demand leveling irrelevant since the issue has now switched to disposal at best price possible products that are already created and possibly paid for. Demand leveling has only proven possible where build times have been made relatively low and production has been made relatively reliable and flexible. Examples of these are fast airborne supply chains (e.g. Apple iPod) or direct to customer selling through web sites allowing late customisation (e.g. [http://www.nikeid.com NIKEiD] custom shoes) or local manufacture (e.g. [http://www.timbuk2.com/tb2/products/bagbuilder Timbuk2] custom courier bags).

Where actual build-delivery times can be brought within the same scale as customer time horizons then effort to modify impulse buying and make it somewhat planned can be successful. Reliable, flexible manufacturing will then mean that low stock levels (if any) do not interfere with customer satisfaction and that incentives to sell what has been produced eliminated.

Where demand follows a predictable pattern, e.g. flat, then regular deliveries of constant amounts can be agreed with variances in actual demand ignored unless it exceeds some agreed trigger level. Where this cannot be agreed then it can be simulated and the benefits gained through Frequent deliveries and a market location.

The predictable pattern does not have to be flat and may, for example, be an annual pattern with higher volumes at particular periods. Here again the deliveries can be agreed to follow a simplified but similar pattern, perhaps one delivery volume for six months of the year and another for the other six months.

References