Academic journal article The Journal of Business Forecasting

Supply's Demand-Shaping Roles

Academic journal article The Journal of Business Forecasting

Supply's Demand-Shaping Roles

Article excerpt

EXECUTIVE SUMMARY |

This column deals with demand-shaping activities, the primary responsibility of marketing and sales managers. However, while not responsible for demand-shaping perse, supply chain managers should play two important roles. The first of these is ensuring that supply is in place to meet all anticipated future demand. The second, often overlooked by these managers, is advocating that demand-shaping be done with supply in mind.The second role involves a better alignment of demand with potential available supply, and is aimed at maximizing profitability, in contrast to just maximizing revenues.

Almost 25 years ago (during my tenure) in the Marketing Department of the Field Service Division of Data General-a Fortune 500 mini-computer manufacturer- our Finance organization decided to conduct an analysis into the "real" profitability of our service customers. Finance routinely did profitability analyses based on what accountants term "Standard Cost Analyses." However these, especially prior to the advent of today's sophisticated financial systems such as Enterprise Resource Planning (ERP) systems, were difficult to do and had serious shortcomings when it came to estimating customer and product-level costs. In those days, the shortcomings included heavy and expensive bookkeeping, delays in the reporting of costs, and little to notracking of costs at the customer and product level. Because of these shortcomings, Finance knew that it would be a long and arduous process to analyze customer profitability. Unfortunately for the Finance Department, it decided to pilot the concept by analyzing our largest customer.

This customer provided what is termed "first-call and remote-support" for its hundreds of computer users, and then relied upon our division to followup with the dispatching of field service technicians to conduct remedial and preventative maintenance services. Of course, revenues generated by the customer were easily gotten from accounts payable records. Estimating costs was the hardest part of the profitability analysis. The customer's billings were heavily discounted to compensate it for doing the first-call and remote-support before calling our technical staff. So the key issues that needed to be addressed were how much to discount for the activities the customer performed and how much discounting was volume-related.

Our Finance Department took an untold number of months of hard work to come up with a profitability estimate that eventually (and unfortunately) showed a loss on the customer. The results were presented to the executive management team with much fanfare, yet the presentation went"over like a lead balloon." Rather than trying to address whether or not there was any merit to the pilot analysis and how it might be improved, the executives dismissed it as a worthless exercise because they could never believe we were losing money on our biggest account. Finance immediately shut down any further analysis of customer profitability.

Personally, I suspect the analysis was reasonable, probably correct in its assessment, and could have been revised to make it more credible. However, the fact that the initial estimate showed a loss, no one wanted to face up to the fact that our aggressive selling and marketing efforts might lead to losing money on any customers. (I surmise there are quite a few suppliers that are losing money in their business with Walmart, but would never want to have to come to grips with doing anything about it.) In fact, I believe we were losing money on other customers as well, because rarely did anyone have to cost-justify negotiated discounts. For the most part, discounts were justified essentially on maintaining and enhancing revenues, in contrast to profits.

Maximizing revenue was the primary goal of the commercial (i.e., marketing and sales) departments of the division, while service operations (i.e., the supply side) were goaled on minimizing costs and service part inventories, as well as maximizing customer satisfaction. …

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