June 1996 € Volume 6 € Number 6

Managing Customer Demand

By Tom Wallace



The following is a verbatim replay of a conversation I had several years ago.

Tom Wallace: "You guys need to do a better job of managing customer demand."

Marketing vice president: "Get serious. It's not possible to manage customer demand."

TW: "Oh no? Didn't you ever announce a price increase early to bring in lots of orders before the end of the fiscal year?"

VP: "Oh."

Yes, it is possible to affect customer demand. And it can be done for the benefit of both customer and supplier, not merely for one or the other.

Effective demand management is a potential gold mine for most companies, and I'm talking about a lot more than just timing price changes. Few companies manage their total customer demand effectively.

I'll go a step further: Many companies engage in counter-productive demand management. Because of they way they price, promote, promise orders, and invoice, they shoot themselves in the foot: 1. Their sales promotion policies create unstable, non-linear demand. The resulting surges of orders force the plants and distribution system into uneconomical, reactionary operations. This raises costs, which squeezes margins, which can lead to premature and often inappropriate price increases. Complex discounts and allowances make it difficult to generate accurate invoices. The customers become unhappy.

2. Their order promising is decoupled from plant capacities and schedules; thus on-time and complete shipment performance is the exception rather than the rule. In this environment, the customers become unhappy.


3. They lack effective processes to deal with abnormal demand. Abnormally large orders are filled for a new or infrequent customer whose demand has not been anticipated in the forecasting process. By allocating large quantities of product to orders like this, the company ensures that it won't be able to service its regular customers, the ones who've been with the company for the long run. These regular customers become unhappy. When they become unhappy enough, they leave.
Doing it right
Customer demand should drive the company's operations, and demand management is the set of processes companies use to ensure that this happens the right way. Effective demand management enables people to closely monitor demands for products, thus ensuring that these demands and the resources to meet them are in sync. It's a key element in being able to ship on time virtually all the time.

Here are some of the major pieces of demand management:

1. "Linear" promotions and pricing. The issue here is simple: Do your pricing and sales promotion policies induce variability in your incoming demand streams? This is potentially wasteful and thus bad. Or do they encourage linearity of demand? This is cost-effective and thus good.

Do you offer price breaks for large quantity orders (potentially bad) or do you give incentives to your customers to give you frequent, smaller orders to closely match their needs (good)? Do you lurch from promotion to promotion and from deal to deal (potentially bad)? Or do you-like trend-setter Procter & Gamble-minimize deals and focus on everyday low pricing?

Dr. Genichi Taguchi, the brilliant quality control expert, pointed out that variability is bad; linearity is good. This applies to incoming customer demand every bit as much as to the quality attributes of a product.


2. "Linear" sales force incentives. How do you motivate your sales people? Do you pay a bonus on reaching a quarterly sales goal? This may be OK if you're selling insurance policies or big ticket software. But if you're in the manufacturing business, then I suggest you may be creating substantial surges in demand as your sales people struggle to hit their end-of-quarter-or even worse-end-of-year sales goal. The orders get dumped on the plants, and they have to scramble to meet them. Scrambling usually costs money-in overtime, in premium freight, and sometimes in warranty costs for products that were produced during the end-of-the-quarter crunch.


3. Effective sales forecasting is necessary in virtually all companies for resource acquisition and for financial planning. Effective sales forecasting will typically involve forecasts in both units and dollars, generated primarily by the people in sales and marketing. (See this column for March 1996: "Forecasting 101.")


4. Proactive sales planning. This refers to the details of what the sales and marketing folks have committed to sell and how they plan to do it. This can include specific plans by individual sales person, by territory, by product line, and by market channel. The difference between the sales forecast and the sales plan is well described by George Palmatier and Joe Shull in their excellent book, The Marketing Edge. They point out that the forecast represents customer orders we haven't yet got; the sales plan is how we're going to get those orders. Sales planning is proactive. It's "sic 'em."


5. Integrated customer order promising, linked tightly to manufacturing's master schedule. The key here is linkage. Order entry is not a stand-alone function; rather it needs to be an integral part of the company's overall set of processes for procurement, production and shipment. Best practices here mean customer order promises are based on two elements: not only the current finished goods inventory but also the future inventory, derived from information contained within the master production schedule. This contrasts sharply with a worse practice: "Tell 'em whatever they want to hear; get the order; and we'll sort it out later." Please see this column for April 1995: "A Promise Made Is A Debt Unpaid."


6. Abnormal demand control. Here's a quiz: We just received a customer order for 800 units, right away. We have 850 in inventory. The forecast is 1,000 per month. Should we promise and ship 800 to the customer or should we not?

Well, there's really no way you can answer that question without getting more information. Here are some of the questions to be asked: To control abnormal demand well requires several capabilities. Since more and more companies are receiving orders electronically, logic in the order entry system is needed to identify and kick out abnormally large orders. These orders go to a human being-typically in sales and marketing-for a decision about what to do. The second capability is for those people to know what questions to ask, such as the above, so they can make informed decisions. A third need is for them to be empowered to make these calls and not be second-guessed.


Capture all demands
Please note: Demand management needs to address all demands, not only those from "the real customers," i.e., the external ones. Other important demands can come from sister plants within the same division, other divisions within the corporation, on and on. Winning companies look upon these as customers also, even though they're a part of the same organization.

Demand management is a set of business processes to help the customers help their suppliers. Good customers can help their suppliers provide better service and better products at a lower cost. Effective demand management makes it easier for the customers to do just that.

A final word to all you customers and suppliers: Remember Taguchi; think linear.


Tom Wallace is an independent consultant based in Cincinnati. He is the author of Customer Driven Strategy: Winning Through Operational Excellence (1992) and editor/author of The Instant Access Guide to World Class Manufacturing (1994). Tom is co-director and a Distinguished Fellow of the Ohio State University's Center for Excellence in Manufacturing Management.

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Commentary


I don't understand why Ron Brown had to die. I'm referring to our former secretary of commerce who, along with dozens of other hard-working, high-achieving Americans, slammed into a mountain on an approach to Dubrovnik airport.

They died in a military version of a Boeing 737. Many of us are frequent flyers in 737s (also called "guppies" because they're not very sleek). These commercial aircraft are chock full of exotic navigation instruments. They tell the pilots where they are, which heading to follow to the airport or the next checkpoint, how far away it is, how long it'll take to get there, how much fuel they'll burn, and so forth. There is redundancy, so that if one instrument fails, another is there to take its place. The aviation arm of the federal government requires the airlines to use this equipment because it increases our safety-yours and mine. I thank the FAA for that.

The Department of Defense apparently doesn't share the same concern for its passengers' well being. According to press reports, the plane carrying Secretary Brown and his colleagues was woefully underequipped with navigation hardware, and not only by today's standards. It was underequipped based on technology in place more than 30 years ago, when I was in the aviation business with the U.S. Navy. What in the world is going on here?
I still can't understand why Ron Brown and his colleagues had to die. I doubt that I ever will.
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