An organization’s ability to align supply and demand is one of the most important measures on profitability. In a perfect world, demand would always meet the supply and supply would always meet the demand. Unfortunately, there are constant fluctuations in the demand and supply dynamics.
Traditionally, when it becomes known that demand and supply are no longer in alignment, the response is demand shaping through demand manipulation. An organization will begin changing prices, substituting goods or services, and offering promotions in an effort to change the demand.
This post is the first in a two-part series intended to move organizations from demand manipulation to a more holistic approach of demand shaping. Here, we’ll discuss leveraging what-if analysis for demand shaping to gain a strong market advantage.
The Extended Blu-Ray Version of Demand Shaping
A better and more complete definition of demand shaping is the process that makes the most profitable demand and supply decisions by using all of the available demand and supply data. Most organizations now have the ability to gather and process all of this information, especially if the organization follows a traditional sales and operations planning (S&OP) process.
Organizations that practice an extended version of demand shaping — where both the demand and supply dynamics are accounted for — have a more complete view on the issue of supply and demand alignment. The end result of this increased insight is that companies are able to gain a significant competitive advantage.
In this more modern view of demand shaping, when demand and supply are no longer aligned, both demand and supply dynamics will be analyzed. The analysis of demand dynamics answers questions such as “Can demand be increased for product X?”, “Can we substitute product Y to decrease demand for X?”, and “What mechanisms can we use to increase the demand?”
The analysis of supply dynamics looks into an organization’s ability to support the demand — it’s a resource allocation problem. It will answer questions like “Can we fill this demand?” or “What distribution channels will allow us to fulfill the increased demand?”
One method an organization can use to execute a more complete approach to demand shaping is what-if analysis.
How What-If Analyses Shift Organizations to True Demand Shaping
The interaction between increasing and decreasing demand and the ability to allocate resources to fill that demand must be looked at from a total profitability view. What-if analyses allow users to evaluate alternative strategies, policies, and tactics to maximize their revenue, profit, and working capital performance while delivering on service level commitments and properly considering risk and supply chain constraints.
To perform a what-if analysis, events and conditions are presented and the outcomes are determined by a mathematical or logical model. The outcomes are then compared to a baseline scenario for context.
Demand shaping, under a what-if analysis, evaluates and analyzes demand options such as pricing, promotions and specific customer deals. The objective is to develop a set of demand options, then identify the impact the different demand strategies have on the business, profits, revenues and volume.
What-if analysis helps organizations shift from demand manipulation to shaping by evaluating the demand options in light of resource allocation, financial objectives, and base lines.
- Resource Allocation: Once demand options are evaluated and optimization strategies are run, a what-if analysis will inform an organization on how to properly allocate resources to align demand and supply.
- Financial Optimization: Running a what-if analysis allows an organization to understand financial constraints as they affect demand and inventory. This allows organization to optimize not only P&L, but also the Balance sheets.
- Baselines: The baselines established allow an organization to assess performance and improve future accuracy. They give a comparison and show organization which methods may be worth pursuing and which are not.
For example, an organization can run a scenario where a promotional program increases the demand for their products. The market response models would give the expected uplift in demand and pricing. That data, along with associated costs or any other variables, would then be entered into a what-if analysis system. The scenario would be simulated and the results would be compared to a baseline.
Based on the complexity of an organization’s situations, they may require the use of different models to receive the best results. Either way, an organization can expect a competitive advantage when using a what-if analysis to shape demand. Sophisticated what-if analyses may allow decision makers to improve the quality and timeliness of their decisions. In the next article, I will discuss how using a pricing/revenue optimization method can help organizations shift from demand manipulation to demand shaping.
Editor's Note: This post was originally published February 8th, 2016 and revised September 30th, 2018.