Magazine Article | July 1, 2001

Demand Change In The Chain

Source: Innovative Retail Technologies

Retailers are constantly trying to predict customer demand. Little do most retailers know, demand chain management is simply a matter of taking sales data and turning it into actionable information.

Integrated Solutions For Retailers, July 2001

In today's multichannel retailing environment, the concept of supply and demand has become more complicated. Consumers expect more from retailers, and retailers are attempting to keep up with those expectations with the latest technology solutions combined with tried-and-true business practices. The oldest trick in the book is to predict customer demand by looking at historical sales data, but with so many more factors to consider, retailers need to incorporate more into their analyses. They need to predict demand from the customer's viewpoint and on a very granular level to get the most out of their information resources. Troy Richards, president and CEO of DCM Solutions, highlights the basics of the demand chain management concept and why retailers should look beyond simply the supply chain to determine which products are in demand one store at a time.

Define the concept of demand chain management.

Troy Richards (TR):Demand chain management (DCM) is a strategic concept that enables retailers to rapidly respond to ever-changing customer wants and the conditions that affect customer demand. The essence of DCM is the capability to understand historical and future customer demand and rapidly respond to changes. DCM identifies which products customers want (a fresh assortment); who wants them (customer purchasing behavior analysis); when they want them (changing conditions ranging from weather to time of day); where they want them (store and shelf location); and how many they want (inventory on the shelf). Stores should approach demand store by store, product by product to determine the appropriate store inventory to fulfill demand. In retail, it is the commitment of an organization to adopt processes and technology to permit a clear understanding of their customers' demands at a local or store level.

How does DCM relate to supply chain management (SCM)?

(TR):Conventional theory says DCM is the last 10 yards of the supply chain - getting products to the retail store and in the hands of customers. Actually, DCM represents the first 10 yards of the supply chain. Supply chain optimization is essential to control costs and to maximize collaborative opportunities. The demand-side view is the view of the customer. Retailers can't truly optimize the supply chain without precisely understanding the demand chain. DCM and SCM complement one another in that DCM provides the granular level of detail necessary to properly manage the movement of goods and services at the local level, and SCM deals with the big picture (managing product). DCM deals with the necessary minute details that represent the local movement of those goods and services.

What makes consumer demand so difficult to predict?

(TR):The random nature of human behavior and preferences makes it difficult, especially when combined with local fluctuations in neighborhood conditions, such as weather, local campaigns and events, and traffic issues. The complex interaction of these factors creates widely varying demand cycles in very short time frames. Consequently, high order algorithms such as those used in supply chain planning can't properly account for the fluctuations seen at the local level. Furthermore, all but the most sophisticated businesses are attempting to predict demand based upon outdated historical sales data analyzed by central decision support systems or by outside agencies. Consumer demand is much more complex than that. It takes into account future factors that are not considered by conventional means.

What results can retailers expect to see from DCM?

(TR):Managing demand chain issues can result in a double-digit increase in profitability, driven by increased sales. Other benefits from improved understanding of customer demand include:

  • reduced cost of inventory
  • reduced lost opportunity from out of stocks
  • faster introduction of new items
  • reduction of dead items and slow sellers
  • appropriate inventory turns based on product type
  • improved alignment and communications between headquarters and stores
  • ability to measure store, employee, vendor, and product performance.

These all contribute to a better overall understanding of customers' needs, and hence, more customer satisfaction.

How have changes in the market increased the need for this type of management?

(TR):Customer expectations for fresh, new products are growing and competition is responding. Streamlining the supply side has been the focus of the past. Retailers must now take the customer standpoint and respond rapidly in order to compete. Retailers cannot disappoint customers with out of stocks and expect to keep customers loyal. In addition, retailers need to reduce the cost of inventory and shrink. Because the manufacturers have had more money to invest in technology, retailers have often looked to the supply side for innovations. Now they are concentrating on the important last leg - the individual stores where goods are sold. DCM assists in customer satisfaction with their operations while improving actual return at the same time.

What additional information is gathered when looking at demand on such a detailed level?

(TR):From the perspective of the retailer's front end, POS (point of sale), delivery, and inventory adjustment information can help to maintain accurate item inventories. Also, retailers can gather individual store reports when needed. Weather, event, and product information, as well as trend information will determine how well an item will sell. This can determine which products to order each day based upon a system order/delivery schedule. Retailers can turn this information into meaningful out of stock information. They can determine the critical selling window to indicate the criticality of the out of stock, and quantify opportunity lost to determine what the sales would have been if the out of stock had not occurred.

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