Develop Demand Management Strategy
Demand management is the function of recognizing and managing all
organizational demand for products or services. Developing a demand
management strategy optimizes the organization's ability to make the supply
chain management (SCM) process more effective and efficient and is
intended to bring demand and supply into convergence. The level of strategy
and its complexity will vary depending on the purchase, but should reflect the
determination of whether existing assets within the Postal Service will meet
the identified need. Category Management Centers (CMCs) must continually
work with their clients to reduce both the types and quantities of goods and
services that they purchase to reduce costs on existing and future contracts.
Excess is the first source of supply.
When developing a demand management strategy, the preliminary focus
must be on cost reduction, revenue enhancement, and streamlining
operations. Once these issues are addressed, a demand management
strategy can be developed by examining the following topics:
• Independent and dependent demand analysis
• Internal and external factor analysis
• Usage and product trends
• Inventory management
Demand is independent if it is unrelated to demand for any other product or
service. Demand is dependent if it is derived from the demand for another
product or service. Independent demand needs to be forecast; however,
requirements for dependent demand are calculated from the independent
items. A given inventory item may have both dependent and independent
demand at any given time. For example, a part may simultaneously be the
component of an assembly and sold as a service part.
It is not possible to recognize all the demand drivers or their effect on
demand; below are some of the major factors:
• External factors:
- Market and economic conditions (e.g., strikes, recessions,
new advances in technology, or present and future
expectations of land value and interest rates)
- Competitor actions (e.g., new products or services)
- Regulations (e.g., EPA)
- Seasonality (e.g., weather and holidays)
- Trends (e.g., market and consumer)
• Internal factors:
- Maintenance concepts
- Pricing strategies
- Product change or innovation
- Changes in usage factors
- Promotions and advertising for products or services
The demand management strategy should be based on the continual
examination of usage and product trends. Market demand will determine the
price, quantity, and quality of the need. A better price can be negotiated with
suppliers through economies of scale (the increase in efficiency when the
number of goods or services being produced increases), if demand for the
need is comparatively high. The purchase price of the need will have to be
lower than the value it creates. The level of quality of the need will dictate the
specifications and requirements passed on to the supplier. The specifications
and requirements will affect the need's price and delivery time. Lastly,
projected product usage factors, reallocation of products between facilities,
and any changes in the maintenance concept(s) will impact the demand
A particular inventory type will be selected based on the particular need.
Examples of inventory types include:
• Insurance items - inventory stockpiled in anticipation of future
demand, such as internal and external factors like seasonality or
economic conditions; also covers end-of-life requirements when a
manufacturer or industry will no longer be producing the product.
• Safety stock - fluctuation inventory that covers unpredictable
fluctuations in demand or lead time.
• Economic order quantities - lot-size inventory created when
purchases are greater than needed; takes advantage of quantity
discounts, reduced shipping costs, and opportunities to make
purchases at the same rate as usage.
• Other examples - transportation; hedging; and maintenance,
repair, and overhaul inventories.
Operational availability requirements, maintenance concepts, demand
patterns (location, quantity, and frequency), and distribution options will
determine how inventory is positioned. Secondary considerations for
positioning include type of good stored, any special handling requirements,
and the cost of the product.
Forecasting is used to estimate the conditions that will exist over a future
period. There are long-, medium-, and short-term forecasts:
• The long-term, strategic business forecast focuses on the overall
market. The level of detail is not indepth, and it provides for
long-range planning, with an outlook that spans years.
• The medium-term, tactical forecast accounts for budgets, market
planning, long lead time, purchase items, and inventory levels.
The midrange outlook is for 12-26 months.
• The operational forecast is for the short term. The perspective is
of individual products and services, and the outlook is on a
monthly or quarterly basis.
Historical data are widely used to forecast, based on the assumption that
what has happened in the past will happen again in the future. Similarly,
demand from January can be used to forecast demand in February; if it is
assumed that demand varies little from month to month. This assumption is
realistic if demand is seasonal and trends vary nominally; however, such
forecasts do not take into account random fluctuation. Common forecasting
techniques that average historical demand, including moving averages,
exponential smoothing, and seasonal forecasts, diminish some effects of
random variation and, in combination with other techniques, are used to
establish replenishment and repair plans.