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Demand Chain Management Explained: What It Is & Why It Matters
You’re in good company if you’ve never heard about demand chain management. Most online retailers aren’t DCM experts either.
But that doesn’t change the fact that your demand chain plays a fundamental role in your retail operations. Read on to learn the ins and outs of demand chain management.
Demand chain management (DCM) is an alternative approach to supply chain management (SCM) that centers on the customer’s needs and expectations first. Then, DCM works backward to connect those needs to the supply side of your business.
Unlike supply chain management, which is focused on supply (like finding retailers who can put goods in customers’ hands), demand chain management flips the script in the value chain by starting with the customer’s needs.
Because of this, demand chain management plays nicely with the direct-to-consumer model since it’s much more customer-centric and adaptive.
As you pay attention to real-time changes in consumer behavior, demand chain management helps you adapt to those changes.
For example, DCM allows you to pull specific levers to ensure your supply chain (and current inventory levels) can manage the shifting customer demand.
Did your marketing increase demand so much that you don’t have the supply to meet it right now? Try raising the price temporarily to decrease demand or selling on backorder to ensure limited supply doesn’t affect your revenue.
Demand chain management is like a counterweight to product lifecycle management, so you can adequately meet customer demand without running out of stock or holding too much product.
Think of DCM as less of a crystal-ball forecast and more like a spaceship control panel for your whole business where you’re sitting in your customer’s seat.
As a result, DCM builds an understanding of the greater demand chain by finding or removing any bottlenecks hindering your company’s profitability.
Demand chain management makes sure you always have the products your customers want. (You know — the entire goal of your retail business!)
By working backward from customer demand, you’ll look at your whole supply chain differently and have what you need to level up your retail operations. Here’s how.
Your customers want a memorable experience that keeps them coming back for more. And you need customers. No customers, no growth, no more business.
By improving demand chain management, your customer satisfaction will naturally improve too. This turns those folks into raving fans of your brand.
That’s because demand chain management delivers the best value to your customers by accounting for buyer behavior, preferences, and needs.
Eli Weiss, senior director of CX and retention at Jones Road Beauty, shared on The Checkout that retailers can use demand chain management to “put humanity back into the customer experience, and focus on relationships between your brand and your target consumers.”
For him, 2 brands do DCM better than just about anyone: Chewy and Zappos.
“Chewy and Zappos have hit this spark on feeling closeness to people and delivering more than just the product,” shared Eli. “Instead of ‘you bought the product, you got the product; you didn’t love it, but it doesn’t matter,’ they’re focused on delivering happiness.”
For Zappos, ‘delivering happiness’ means offering extraordinary customer service at every stage in the buyer journey.
For instance, Zappos’ support team doesn’t use scripts when taking customers’ calls. Instead, Zappos trusts its employees to listen well and personalize the conversation to each customer’s needs.
The result? Such happy customers that Zappos sees $600M in ARR (and is still growing).
Demand chain management allows your company to quickly pull levers that respond to changes in demand. That’s why it’s best suited for optimizing inventory management and replenishment.
And you can always use typical supply chain management practices to respond when things go wrong like you get stuck with excess inventory.
Imagine this: You’ve mis-forecasted demand during your slow season, and you’ve over-ordered a SKU that customers don’t want as much anymore. In this scenario, you can use a supply chain management lens to tweak your marketing efforts and drive an influx of orders.
But prioritizing demand chain management ensures you won’t make that mistake again. That’s because SCM calculates how much you need to sell to hit your revenue goal. So, it’ll see you sold through those excess units this year and order even more next year.
Meanwhile, DCM focuses on ordering what customers actually want to buy and unlocks new revenue growth by meeting existing demand.
So, the brand will already know that last year they were stuck with more supply than demand. And with this context, they can prevent costly stockouts or dead stock moving forward.
Similarly, DCM provides the context needed to artificially increase or decrease demand via pricing changes.
For instance, if that excess product only sells at a discount, the price might be too high. So, you can either order less or lower your cost.
Normally when retailers talk about price changes, we think about recent supply chain issues. Price increases for supply chain management are slightly different than those for demand chain management.
The supply chain responds to global factors like higher raw materials prices or longer lead times. But even if these prices eventually come down, most retailers won’t lower those prices.
In demand chain management, retailers increase prices to temporarily slow demand and avoid a stockout. That way, customers who want the product most can still purchase it.
But when supply can once again meets demand, that price comes back down. That is unless this temporary change reveals that you should be charging more (or less) all along.
Buffy, a DTC home goods company, announced in February of 2022 that they’re raising prices due to the “rising costs of materials, labor, transportation, and other supply chain factors.”
Buffy’s price increase wasn’t directly attributed to more demand than supply. However, they could still leverage demand chain management methods to determine how much their prices should go up.
Supply chain efficiency is best achieved by getting rid of operational silos. And that’s exactly why every business textbook will tell you the most successful DTC brands connect the supply side of their business with the demand side.
Demand chain management is ideal for omnichannel selling since it connects the dots between relevant sales and marketing channels within your business.
This includes your direct channels (like your Shopify and Amazon stores), indirect channels (like wholesale), and add context on how your customers interact with each channel.
By considering your demand on each channel, you can calculate the total demand for your products. Then, you can use that information to make smarter decisions about how much supply you need to meet that demand and set up supply chains to manage these inventory needs.
These demand-driven supply chains make it easier to adapt your supply chain processes to meet shifts in demand.
For instance, Cogsy can pull all your inventory and sales data (real-time and historical) into a single platform.
Then, the ops optimization tool uses that data to create an accurate 12-month demand plan. It even calculates how much working capital you’ll need budgeted to bring this plan to life.
By sharing this 12-month plan with your supply chain providers, you can ensure you have the necessary stock to meet this demand – regardless of what’s happening with the supply chain.
After all, if you know you’ll need 3,000 bottle caps 9 months before you need them, supply chain delays are no longer an excuse not to have those caps on time.
You can also use the shared demand plan to negotiate better vendor contract terms.
How? By guaranteeing that business to your distributors in exchange for a lower price, expedited purchase order processing, or whatever you want.
| 👉 No need to take our word for it. Try Cogsy for free and see for yourself. |
Improving your customer experiences through demand chain management can often cause a nice ripple effect for your brand’s long-term success.
At a high level:
In other words, a solid handle on your demand chain inherently leads to an incredible customer experience – which you already know.
But when you leave this positive impression on your customers, they’re more likely to return and become loyal supporters. Not to mention, they’ll probably recommend your brand to their family and friends, too.
Salesforce says that 89% of consumers are more likely to make another purchase after a positive customer service experience. And 72% will share a good experience with their family, coworkers, and neighbors.
Meaning, improving your demand chain management is the secret sauce to acquiring (and retaining) those lifelong customers you’ve been looking for.
The pandemic has been a crash course in supply chain disruptions. And retailers have all learned 1 big lesson: We need to be able to quickly respond to short-term changes in demand when they arise.
Easier said than done, right?
Thankfully, demand chain management can help you recognize the early warning signs of demand fluctuations or changing DTC trends. That way, you can get ahead of those changes and give your brand the competitive advantage.
Nike is an excellent example of this. In 2010, direct-to-consumer sales made up just 15% of Nike’s total revenue.
But a decade later, during the chaos of 2020 (where more customers opted to shop online), Nike grew that number to 35%.
How’d Nike do this? It stepped back from its wholesale partnerships and concentrated on sales through its owned stores and ecommerce channels.
By the end of the 2021 fiscal year, Nike had raked in a whopping $44.5B in revenue — 40% of which came via DTC channels.
Demand chain management empowers you to be more agile and shift focus quickly, even if you’re not a billion-dollar brand (yet).
Sure, you might not ditch your wholesale deals like Nike. But say you see that a growth initiative outperforms the rest (you’ll know because that’s what or where customers’ demand will be). Then, you can double down on that initiative.
Having data all over the place puts a damper on your team’s productivity.
Why? Because these siloed information systems prevent departments like marketing, operations, and customer experience (CX) from collaborating seamlessly.
Say you sell shelf-stable breakfast foods, for example. Your operations team is in charge of developing new products. But chances are good your CX team is who actually gets feedback about your current products.
So, your CX team might know that a huge portion of your customer base doesn’t like or is allergic to pineapple. B
ut unless they pass that information along, your operations team might think a piña colada granola is the next hot flavor. And you’ll end up experiencing a big mismatch between supply and demand.
Likewise, your marketing team might have a huge promotion planned. But unless marketing passes that information along to the ops team, that increased demand might not only come as a shock but leave you stocking out and unable to fulfill that demand.
Demand chain management requires these lines of communication open across your internal teams. That way, everyone can get aligned on:
This cross-departmental alignment translates to more operational control and a greater ability to meet customer requirements — even as they evolve and adapt over time.
Smart inventory management begins with controlling the demand chain — which, as I mentioned earlier, is both a customer-centric and adaptive model.
While supply chain management is rooted in the supplier’s ability to find retailers who can put goods in customers’ hands, demand chain management flips this concept.
Instead, the demand chain always begins by addressing customers’ needs and expectations. Retailers then work backward, connecting those needs to the inventory procurement side of their business (AKA, what products to create and how much to order). And as a result, these retailers have more inventory control.
Think about it: With a pulse on what customers actually want, it’s easier to know which products they’ll buy. With this information, you can make smarter, more accurate forecasting decisions.
As a result, you’re not stuck with all-too-common inventory troubles like stockouts and overstocking. And you can reduce holding costs by planning inventory around the demand your brand generates.
| 📝 Note |
| This is so naturally aligned with the direct-to-consumer model that this might even already feel intuitive to you. After all, DTC brands have been exploding in the past decade because they offer a more customer-centric approach to selling. And because they can continually evolve to align with changes in consumer behavior. |
Does the idea of planning your POs backward from demand send you into a cold sweat? Don’t worry — with Cogsy, adopting a demand chain management model has never been easier.
That’s because the ops optimization tool streamlines cross-department communication, automates demand forecasting, and empowers selling on backorder (for when supply just doesn’t meet demand).
You create demand by running marketing campaigns, like Black Friday promotions or seasonal sales.
With Cogsy’s marketing events feature, you can put upcoming events on your calendar. Then, leverage historical data and real-time sales trends to help you plan how much inventory you’ll need to meet that increased demand.
With this information, you can guarantee your purchase orders calculate in all the safety stock you’ll need to support these marketing initiatives while still running a lean operation.
The result? Your brand can avoid stockouts as you undertake your marketing initiatives and ensure your paid ad spend isn’t wasted. All while keeping working capital free and carrying costs down.
Production orders are a critical, ongoing part of running a DTC brand. And yet, the reality for most retailers is that their production planning isn’t supporting their business as well as it could.
Often, brands operate purchase order to purchase order. And they pay little attention to the sizing or timing of what they’ll need in a year or so.
But by hyper-focusing on what’s immediately ahead, you’re missing the opportunities happening further out and shrinking your long-term growth.
Luckily, Cogsy can help you map how much demand you’ll see in the next 12 months. And you can strategically prepare by stocking up on what you’ll need to unlock that growth.
Inside the actionable dashboard, you can even get quick-grab insights that ensure you’ll have the inventory you need to make this plan happen.
This includes replenishment suggestions, a heatmap view of your stock levels versus your generated demand, and an estimate of how much cash you’ll need to meet this forecasted demand.
Thanks to all the ongoing supply chain disruptions, even the most seasoned DTC brands stock out these days. And typically, those stockouts mean those brands aren’t making any money.
But with Cogsy, going out of stock doesn’t leave revenue on the table. With the backorder feature, you can temporarily sell sold-out products with the promise to fulfill that order as soon as inventory replenishment arrives. AKA, you can continue meeting demand.
Cogsy automatically switches sold-out product pages to a backorder model with your permission.
Then, it tracks your inventory backlog, so you can easily fulfill those orders when you’re back in stock. That way, there’s never a moment when you’re not selling.
As a result, brands generate 40% more revenue (and save 20+ hours a week) when they sell with Cogsy. Try it free for 14 days.
Demand chain management (DCM) is a customer-centric and adaptive model for retail management. With this model, brands quickly adjust to changes in consumer behavior, so they can adequately meet demand without running into an understock or overstock situation. As a result, brands that embrace DCM tend to be more profitable than those that don’t. Why? Because they’re not left stocking out or accumulating dead stock.
Supply chain management oversees the flow of consumer goods and encompasses all the business processes that turn raw materials into finished products. In contrast, demand chain management always begins by addressing the customer’s needs or expectations, then works backward to connect those needs to the supply side of the business.
Demand chain management bridges the gap between customer relationship management and supply chain management to improve a brand’s overall operational performance. With DCM, you gain greater visibility into your demand chain (what customers actually want). And you can remove bottlenecks that hinder your financial viability.
Demand chain management is all about delivering what your customers need. So, understanding what those needs are is the easiest way to improve your DCM efforts. If you’re new to demand chain management as a concept, start by reviewing any customer feedback and data you have available. This should help you gauge demand trends that will affect your inventory needs.
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