Coordinating demand and supply processes: Towards demand-supply chain management Coordinating demand and supply processes: Towards demand- supply chain management Per Hilletofth1*, and Dag Ericsson2 1 School of Technology and Society 2 School of Engineering University of Skövde University of Borås 541 28 Skövde, Sweden 501 90 Borås, Sweden ABSTRACT This research explores and describes the demand-supply chain management (DSCM) concept from both a theoretical and practical perspective by determining what key principles that characterize the concept as well as to illustrate its application in practice. The concept is examined through a literature review combined with a qualitative single case study. The research reveals that DSCM is about coordinating demand and supply processes within a particular company and across the demand-supply chain. It can be defined as the alignment of demand and supply processes across intra and inter-organizational boundaries for the purpose of improving the ability of the particular company and the entire demand-supply chain to enhance overall customer value while utilizing resources cost-efficiently. Key principles that characterize the concept are value creation, value delivery, customer orientation, product and supply chain differentiation, lead-time reduction, information management, and responsiveness with respect to existing products as well as changing customer needs. 1. INTRODUCTION The customer value based theory of a company has become more prevalent than ever before [1]. It suggests that superior performance is a result of creating and delivering superior customer value [2]. This implies that companies only can outperform competitors if they can establish a difference (competitive advantage) that they can sustain [3]. This can be accomplished by providing superior value to customers or by providing comparable value at lower cost or both [4]. Hence, superior profitability is a result of creating superior customer value, which allows companies to charge higher average unit prices, and delivering customer value cost-efficiently, which results in lower average costs [5]. In view of this, companies should develop a customer-oriented business model by organizing themselves around understanding how customer needs are identified and customer value created (managing the demand chain), understanding how customer value can be delivered to customers cost-efficiently (managing the supply chain), and understanding how these processes and managements affect each other and can be coordinated. In most companies demand chain management (DCM) and supply chain management (SCM) are dealt with separately and one of them is usually prioritized (Hilletofth et al., 2009). Consequently, the customer-oriented business model is not very common in reality [6]. Instead a demand and supply-led business model can be distinguished in most industries [7-9]. Companies embracing the demand-led business model (demand chain masters) focus on DCM, and hence have strengths in managing and coordinating the demand processes [10]. In these companies the demand-side sets the business strategy (what to sell, where to sell and how to sell) while the supply-side simply executes it by building up appropriate supply chain capabilities and advantages [11]. These demand-led companies usually focus on activities such as identifying unique customer needs, developing innovative value propositions, managing customer relationships and/or in developing strong brands. In particular, the recent trend towards customer relationship management (CRM) has enabled many companies to capture market intelligence, to segment their customer base, to customize the value propositions and to coordinate demand chains [e.g., 12-13]. Moreover, these companies use their extensive customer knowledge to apply marketing instruments in a more cost-effective way. Still, as argued by Piercy [14], a superior demand chain strength that is not linked to supply chain strength leads to a high cost base and slow delivery; problems which only can be compensated by an incredibly strong brand. Companies that are unable to deliver according to promises made eventually will lose * Corresponding author: Tel.: +46 (0)500 44 85 88; Fax: +46 (0)500 44 87 99; E-mail: [email protected] Flexible Automation and Intelligent Manufacturing, FAIM2010, Hayward, CA credibility and customer satisfaction will decrease. Accordingly, it can be risky to focus solely, or too much, on the demand-side of the company [15], since supply chain efficiency is also essential in creating and delivering customer value and satisfaction. Typical problems faced by demand-led companies are under-delivering and over-delivering or lost share of customer opportunities, if the company cannot capitalize on the differentiated customer needs [7]. Companies embracing the supply-led business model (supply chain masters) focus on SCM, and hence have strength in managing and coordinating the supply processes [10]. This enables them to reduce time and costs in the supply chain, as well as to improve asset turnover. In these companies the supply-side sets the business strategy (competition based on price, availability and/or flexibility) while the demand-side simply support it by developing appropriate product and service offerings and promoting them accurately [11]. These supply-led companies usually focus on activities such as strategic sourcing, collaborative planning, forecasting and replenishment (CPFR) and inventory reduction [7]. Several studies report major cost savings which companies have accomplished through their supply chain excellence, for example, Rainbird [16] reports that an Australian supermarket chain has achieved major cost savings through its supply chain excellence, which could then be reinvested in lower selling prices. Still, as argued by Piercy [14], a supply chain strength that is not linked to demand chain strength usually limits the company to competing on price and availability. This implies that competition through supply chain excellence assumes that price is a major determinant of competitive advantage. Moreover, Lee [8] emphasizes the problems of SCM acting separately of DCM. Differentiated demand for products and services is a key input to SCM. If the demand and supply processes are separated, supply will view demand as exogenous and will fail to recognize that demand was influenced by the company’s customer facing functions. Also, if consistent and timely demand information does not flow, the company will not be able to respond to differentiated needs of individual customers and market segments. Accordingly, it can be risky to focus solely, or too much, on the supply-side of the company [17], as supply chain efficiency by itself will not increase customer value and satisfaction [16]. Typical problems faced by supply-led companies are suboptimal new product development (NPD), a lack of product and service differentiation and ineffective product delivery [7]. The differences between the demand and supply-led business models are differences of emphasis [18]. Depending on demand and supply characteristics, both these business models can be appropriate [19]. For example, the demand-led approach can be appropriate for manufactures of premium products, while a supply-led approach can be appropriate for manufactures of low-cost products. However, as discussed above these companies can experience major difficulties by exclusively focusing, or focusing too much on either the demand or supply-side of the company. Moreover, it can be argued that SCM should always be linked to DCM, even in markets where cost- efficiency is the basis for competitive advantage [7]. Management orientation does not take away the fact that the supply and demand logic must be balanced in one way or another. Thus, it has been recommended that companies should embrace the integrated and customer-oriented business model by coordinating the demand and supply processes [e.g., 20-23]. Developing such an integrated and customer-oriented business model is the main goal of the emerging demand-supply chain management (DSCM) concept [22]. Despite the strong arguments for an integrated DSCM approach, the supply-side still seems to be disconnected from the demand-side and supply chain managers have only a faint idea of the drivers behind demand. In a study of more than 400 companies, Mentzer [24] found that DCM, as well as the concept of demand itself, is not well understood by the supply chain community. He concludes that many companies have failed to realize that supply chain coordination is not possible without an adequate understanding of demand. In another global survey among 249 executives across 28 countries, Deloitte [6] found that only a minority (17%) of all companies have effectively linked their demand and supply processes. Moreover, they conclude that these integrated companies have outperformed their competitors on a range of performance criteria such as sales growth, market share, customer service and return on assets. The fact that still only a minority of companies appears to have effectively coordinated their demand and supply processes could be influenced by the complexity of the tasks involved [7], but also by the lack of research addressing its benefits and how it can be accomplished. It has been concluded that there is a lack of DSCM research examining how the different demand and supply processes affect each other, how they can be coordinated, what benefits that can be obtained by coordinating them, and what