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Demand Chain Management: Enhancing Customer Value Proposition

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 Business Operation

Demand Chain Management: Enhancing Customer

Value Proposition
By Pankaj M. Madhani

the supply chain, but also on the demand chain. The demand
chain comprises all the demand processes necessary to under-
stand, create, and stimulate customer demand and is managed
within demand chain management (DCM). DCM is defined
as “The alignment of demand creation and demand fulfil-
ment processes across functional, organizational, and inter-
organizational boundaries”.2 Hence, DCM can leverage the
strengths of marketing and SCM and meet the challenges of
customer value creation in today’s marketplace.

The Need for Marketing and SCM Integration

As customers are increasingly becoming more demanding,
firms place more emphasis on customer service. Achieving
better levels of customer service requires working together
across different departments or functions of a firm. When
working relations between marketing and SCM are poor,
the coordination and communication that is crucial for
the provision of overall customer value proposition may
be lacking. The absence of cross-functional collaboration
may result in promises made by the firm’s sales and market-
ing department that have not been coordinated with SCM
DCM creates strategic assets for the firm in terms of the and logistics, and marketing promotions that are not syn-
overall value creation as it enables the firm to implement chronized with supply chain delivery schedules. Without
and integrate marketing and SCM strategies that improve marketing/SCM cross-functional collaboration, firms
its overall performance. cannot be expected to respond optimally and promptly to
customers’ requirements. Collaborative behavior is based

T
he supply chain comprises all the supply processes on cooperation (willingness), rather than on compliance
necessary to fulfil customer demand and is managed (requirement). The deleterious results of not integrating
within supply chain management (SCM). SCM the marketing and SCM efforts are becoming increasingly
focuses on the efficient matching of supply with demand evident. A firm cannot reach its full potential in terms of
but does not help the firm to find out what the customer per- developing, refining, supporting, or delivering products
ceives as valuable, and how this customer-perceived value can and services without using marketing insights to shape and
be translated into customer value propositions. Hence, SCM refine the SCM. In addition, functional departments may
efficiency by itself will not increase customer value and sat- divert considerable attention and effort from serving cus-
isfaction. Providing customer service in the value chain is tomers to internal issues like turf protection, and blame
largely the domain of two functional areas – marketing and game for errors and shortfalls. The inability of marketing
SCM. Supply chains capable of implementing and execut- and SCM to effectively integrate create significant barriers
ing an integrated and coordinated marketing strategy at the to identifying and responding to customer demand, opti-
supply chain level focused on the ultimate customers will gain mizing inventories, and servicing the customer base.
competitive advantage.1 Thus, it is essential to understand the
marketing perspective also instead of solely focusing on SCM Without marketing / SCM cross-function-
decisions. Marketing and SCM often operate as self-optimiz-
ing, independent entities. Marketing combined with dynamic al collaboration, firms cannot be expect-
SCM provides greater flexibility to satisfy customer demand ed to respond optimally and promptly to
based on the needs of individual customers and their value customers’ requirements.
to a firm. To be successful, firm not only needs to focus on

50 The European Business Review March-April 2013

Electronic copy available at: http://ssrn.com/abstract=2235973
 A demand chain strength that is not linked to a supply chain strength may result in a high-cost
base, as well as slow and inefficient product delivery; while a supply chain strength that is not
linked to a demand chain strength could result in sub-optimal outcome.

Demand Chain Management other, leads to sub-optimal solutions. In the DCM, the mar-
Functional managers often consider marketing and SCM as keting and SCM functions are not separate; rather, they are
separate and distinct entities from one another as they do intertwined as explained below in Figure 1.
not collaborate their activities. Despite strong arguments for The view of the consumer as an integral part of the chain
an integrated approach, in many firms, the supply side still is perhaps the most important issue in the shift from SCM to
seems to be disconnected from the demand side and supply DCM. The focus of DCM is on real-time flow of demand-
chain managers have only a faint idea of the drivers behind related information from point of inception (end-users) to the
customer demand.3 Marketing/logistics interdepartmental point of use (suppliers). The goal of DCM is to coordinate the
relations tend to be characterized by conflict and lack of demand creation and the demand fulfillment processes to gain
communication rather than by collaborative integration. competitive advantage by differentiating not only the products
Integrating marketing and logistics is a challenge in any but also the delivery process, as well as to exploit synergies
firm, since there is a natural tension between these two func- between marketing and SCM. The demand creation processes
tional areas. comprise all the activities necessary for creating demand and
A number of firms have focused their efforts on developing are closely linked to marketing, while the demand fulfillment
sophisticated supply chains such that their managerial focus processes comprise all the activities necessary for fulfilling
became myopic, and many lose sight of their markets and demand and are closely linked to SCM. This implies that a
their customers. Hence, along with supply chain, firms need framework of DCM may be constructed based on two inter-
to focus on demand chain. The demand chain is defined as related parts: marketing and SCM as shown in Figure 1.
“The complex web of business processes and activities that
DCM
help firms understand, manage, and ultimately create con- (Optimal)
sumer demand.4 An efficient supply chain alone provides only
half the solution, hence, complete solution is suggested to
be having an effective demand chain also that encourages a
strategic approach to market response. Demand chain design
is based on a thorough market understanding and has to be Sub - Sub -
managed in such a way as to effectively meet differing cus- optimal optimal
tomer needs. A demand chain strength that is not linked to a
supply chain strength may result in a high-cost base, as well
as slow and inefficient product delivery; while a supply chain
strength that is not linked to a demand chain strength could
result in sub-optimal outcome. DCM is a new business model Marketing SCM Efficiency
aimed at creating value in today’s marketplace by combining Effectiveness
the complementary strengths of marketing and supply chain
competencies. Figure 1: DCM: Marketing and SCM Integration for Optimal Outcome
(Source: Compiled by author)
DCM: Marketing and SCM Integration for
Optimal Outcome Examples of major demand creation processes are strate-
Marketing is focused on the demand chain and addresses gic marketing planning, market research, market segmenta-
the sell-side of the firm while SCM is focused on the supply tion, product development, and marketing and sales,5 while
chain and deals with the buy-side of the firm. The goal of examples of major demand fulfillment processes are strategic
DCM is to both reduce or if possible eliminate buffers of supply chain planning, supply chain design, and supply chain
inventory in the supply chain and at the same time deliver operations.6 DCM highlights the interplay between marketing
what the customer demand. Marketing and SCM must work and SCM as an enabler of customer value creation. The ulti-
together and formulate an effective DCM in order to achieve mate goal of DCM is to gain competitive advantages by differ-
organization goals. It is relatively common to find discrete entiating not only the products, but also the delivery process
functional excellence in marketing side by side with SCM. as well as to exploit the linkages between marketing and SCM.
They frequently operate as separate, self-optimizing – even Hence, DCM has been introduced as an approach to capture
adversarial – entities. Tackling one independently of the the synergies between marketing, and SCM.7

www.europeanbusinessreview.com 51
Electronic copy available at: http://ssrn.com/abstract=2235973
 Business Operation

To maximize value creation for cus- - Customer Value Proposition

tomers, it is necessary for the functional - Quick response to customer needs
- Processes are focused on efficiency and effectiveness
areas of the organization such as mar- - Best-in-class products and services at lowest price
keting, SCM to co-ordinate efforts with - Overall outcome: Optimal
each other. Collaboration has been DCM
called the driving force necessary for
effective marketing and SCM integration Demand Supply
and DCM development. The integration Chain Chain
(Demand (Demand
between the objectives of the marketing Creation) Fulfillment)
concept (to mobilize total organizational
effort to satisfy customers and generate a
profit) and the concept of SCM (to link Collaboration
Marketing SCM
organizational and inter-organizational
units to improve levels of service and - Effectiveness focus - Effficiency focus
reduce costs) is key concept of DCM - Respond quickly to customer needs - Low cost approach
- Processes are focused more on planning - Processes are focused on execution
as explained in Figure 2. It is through - Revenue is the key driver - Cost is the key driver:
DCM that customer value is achieved as - Deliver total solutions - Short term oriented,
- Overall outcome: - Overall outcome:
strong collaboration between marketing
Sub - Optimal Sub - Optimal
and SCM leads to an environment where
all are focusing on the customer value Figure 2: DCM: Enhancing Customer Value Proposition through Marketing and SCM Intregration
proposition as explained in Figure 2. (Source: Compiled by author)

Demand Chain Management reduce business transaction costs, and short-product lifecycles. To manage the
(DCM): Major Benefits reduce inventory. The DCM involves competition in fast fashion retail, Zara’s
As in DCM, marketing insight is com- integration between marketing (selling) business model is focused on high
bined with the SCM side of supply effi- and SCM (delivering) processes and availability of products, and speed of
ciency, and a number of benefits emerge. enables both parties to reduce cycle response. Zara uses the internet to gather
The benefits derived from DCM include: times, eliminate out-of-stocks and real-time information on the needs and
1. Reduced level of inventory from improve customer service in terms of changing tastes of consumers – changes
having precise information of inven- in-store product availability and respon- that are dictated by fashion shifts as well
tory availability. siveness. Effective marketing strategy as seasonal transitions. Zara stores use
2. Reduced lead times from better vis- demands sound SCM because it includes handheld devices i.e. personal digital
ibility of demand for products. the distribution part of a marketing strat- assistant (PDA) to send Inditex HQ all
3. Increased sales from being able to egy. In environments with increasing information regarding sales trends and
confirm availability and delivery of diversity in customer needs and require- insights on what customers would like
standard and enhanced products in ments, firms must rapidly adjust their to see, customer feedback and reac-
real time. supply to meet demand. The argument tions, 'buzz' around a new style as well
4. Increased responsiveness by working for integrating strengths of marketing as their ordering needs. Rather than
across various sales channels, while and SCM is strong and compelling. offering products at the lowest price by
holding costs down, Zara concentrates
on having the newest, unique, or most
In the collaborative system of DCM, marketing and SCM advanced products available at most
members will seek to reduce markdowns, increase sales, affordable price.
reduce business transaction costs, and reduce inventory. For Zara, strong market research
and the ability to bring products to
market quickly and efficiently through
taking into consideration production ZARA: Deployment of DCM effective DCM is the cornerstone of
constraints. Spanish ladies’ apparel maker Zara, a success. Zara's demand chain identi-
5. Improved customer service and unit of Spain’s Inditex SA and a global fies a demographic segment of 17 to
retention resulting from an improved player in fast fashion segment, has suc- 22 year olds that are fashion but budget
ability to meet delivery on time. cessfully developed DCM by integrating conscious. The essential features of
In the collaborative system of DCM, marketing and SCM initiatives. Zara Zara’s supply chain design are pro-
marketing and SCM members will seek operates in a rapidly changing market duction schedule and quality controls.
to reduce markdowns, increase sales, characterized by fast response and Zara brings new fashion design from

52 The European Business Review March-April 2013

 In addition to marketing and SCM capability of the organization, major resources contribut-
ing to marketing and SCM integration and hence successful development of DCM are: IT,
organization culture, and performance management/reward system.

sketch to store rack in as little as two utilization. Table 1, below represents due to DCM approach can have a pro-
weeks and represents strong market- an evaluation framework for a hypo- found effect on the bottom line, lift net
ing and SCM capability and collabora- thetical illustration of a firm (base case) income of a firm by approximately
tive efforts. Zara has made significant as well as after positive impact of DCM 16%, and increase ROA by 17%.
operating and financial improvements (new case). All figures are in millions
by better matching supply and demand of U.S. dollars. Demand Chain Management
through better integration of marketing With 1% improvement in sales (DCM): Key Requirements
and SCM and effective development revenue, new sales become $ 101 As DCM development is a complex phe-
of DCM. Zara increase profitability million. As COGS varies directly in nomenon, it is influenced by a variety of
through product availability, delivery proportion with sales, COGS has tangible and intangible resources of a
accuracy, responsiveness and flexibility increased to $ 65.65 million. After con- firm. In addition to marketing and SCM
by tightly linking customer and supply sidering the impact of 1% reduction capability of the organization, major
initiatives. in COGS, new COGS is reduced to $ resources contributing to marketing and
64.99 million. Similarly, decrease in SCM integration and hence successful
Illustration various line items framework, caused development of DCM are: IT, organiza-
In a following hypothetical illustra- by DCM approach with integration of tion culture, and performance manage-
tion of a firm, it is envisaged that the marketing and SCM and corresponding ment/reward system.
DCM capability on integration of the increase in operating profit, net income,
marketing and SCM generates a 1% and ROA is shown in Table 1. Taken Information Technology (IT)
positive impact across various income together, as calculated in Table 1, even DCM is an IT-led strategic concept
statement line items as well as asset a small cross-functional improvement that enables firms to rapidly respond to
rapidly changing customer needs that
Table 1: DCM in a Hypothetical Illustration of a Firm: Impact of 1% Improvement in Key affect market demand. DCM relies on
Functional Drivers
IT capabilities to enable linkages across
Serial Net Income Calculation Key Functional Base New Net departments resulting in tighter integra-
No. Drivers of DCM Case Case Impact
tion. DCM helps in reducing distortion
(1) Sales Revenue Marketing 100 101 1.00 of demand-related information (bull-
(2) COGS (Cost of Goods Sold) SCM 65 64.99 - 0.01 whip effects), knowledge-centric deci-
(3) Gross Profit = (1) - (2) 35 36.01 1.01 sion mechanism, web-based transparent
(4) Depreciation SCM 4 3.96 - 0.04 business transactions, sales processes
automation and matching of supply
(5) Selling Expense Marketing 7 6.93 - 0.07
with demand.8 Although IT enables
(6) G & A ( General & Administrative) Marketing 3 2.97 - 0.03
connectivity, it does not guarantee pro-
Expense
active information sharing among func-
(7) Logistics Expense SCM 8 7.92 - 0.08 tional area.
(8) Operating Profits = 13 14.23 1.23
(3) - (4) - (5) - (6) - (7) Organization Culture
(9) Interest Expense SCM 5 4.95 - 0.05 The extent to which the organization’s
(10) Net Income = (8) - (9) Marketing / SCM 8 9.28 1.28 culture creates a willingness to share
(11) Increase in Net Income (%) 15.87 information determines how much
information is shared,9 irrespective of
(12) Assets Marketing / SCM 130 128.7 - 1.3
the amount of investment in IT. To
(13) Decrease in Assets (%) 1.00
achieve high levels of cultural willing-
(14) Return on Asset (ROA) = Marketing / SCM 6.15 7.21 1.06 ness, firms require top management
(10) / (12) involvement and the formation of inter-
(15) Increase in Return on 17.24 organizational teams. This enhances the
Asset (ROA) (%) = level of information sharing. Developing
(Source: Calculated by author) an information-sharing culture as an

www.europeanbusinessreview.com 53
 Business Operation

Members of both functional areas are encouraged to clearly define mutual objectives and
associated performance measures and link their performance and reward systems with deci-
sion synchronization, information sharing, and incentive alignment.

organizational capability is not easy, as changing the culture capabilities as it is based on a customer-focused organization
within a firm is much more difficult to accomplish. Thus, the culture and making customized value offerings and hence
firm that can inculcate a culture in which willingness to share creates differential advantage. Through a DCM approach,
information among cross-functional areas are high, can take firms could enhance financial and operating performance by
advantage of a more sustainable, non-imitable competitive interlinking the marketing and SCM operations, and at the
advantage that should lead to relatively higher performance same time meet the long-term strategic goals and enhance cus-
levels. Proactive information sharing can improve relation- tomer value. The ideas presented in this article have the poten-
ship strength among marketing and SCM members, enhance tial to improve marketing and supply chain managers’ rela-
the ability to coordinate value-added activities of DCM and tional capability and accordingly formulate an effective DCM
exploit the collaboration opportunities, hence; organizations approach. However, it is important to note that the applica-
with a strong information-sharing culture outperform their tion of DCM is still in its infancy and needs to be researched
counterparts. further, both from marketing and SCM perspectives.

Performance Measurement and Reward System About the Author

In order to ensure successful DCM based on effective col- Pankaj M. Madhani received an MBA degree from Northern
laboration between marketing and SCM, members of both Illinois University, USA and an MS in computer science from
functional areas are encouraged to clearly define mutual Illinois Institute of Technology, Chicago, USA. He holds
objectives and associated performance measures and link bachelor’s degrees in chemical engineering and law, both from
their performance and reward systems with decision synchro- Gujarat University. He has more than 25 years of corporate
nization, information sharing, and incentive alignment. Clear and academic experience in India and the United States.
linkage will encourage the marketing and SCM members to He is currently working as an associate professor at ICFAI
improve shared processes that encourage DCM development. Business School (IBS). He has published seven books in the
Information sharing is required to signal the marketing and areas of business strategy and ERP and more than 100 book
SCM members that incentives for an effective DCM develop- chapters and research articles in several refereed journals. His
ment are available, timely, equitable, and performance-contin- research interests include technology in business and strategic
gent. On the marketing side, the size of the reward can be in management.
the form of increased sales, less price markdowns, increased
inventory turns, less stock-outs, reduced inventory, and lower
operating costs. On the SCM side, the size of the reward can References
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54 The European Business Review March-April 2013

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