subject: Evolution of Management Concepts in the Demand Chain Management (DCM) from POME by Gautam KOppala [print this page] Evolution of Management Concepts in the Demand Chain Management (DCM)
Management concepts come and go. Some rise, explode and fall back like fireworks. Some remain like the North Star brightly shining and serving as guidelines for navigation on the stormy seas of management. The first major issue, then, is to learn how to distinguish between fads and lasting, innovative concepts. The next issue is to find out how to implement concepts; what kind of methods and tools we need; how to educate to change mindsets; and what the best way is to design the transformation process.
One way to distinguish between concepts and the rest is to use a holistic approach and see how the bits fit together to create a new pattern. When Taylor wrote about scientific management, he observed and summarized things that were happening in research and practice. He established a theory or a frame of reference for the emerging industrial society. One reason for the success of scientific management was the obvious need for a new paradigm to guide the transition from handicraft to industrial manufacturing.
Today there is a need for a new paradigm for the shift from the industrial to the digital society. It is obvious that 'something is trying to happen'. There are islands of rethinking and new frames of reference popping up in the ocean of business strategy and management. What is needed is a holistic frame of reference that can help bridge the troubled waters separating those islands.
Demand chain management (DCM) is an important new business model to help with this. Electrolux, one of the world's leading appliance projects, has created its own version of DCM, called demand flow leadership and these words are carefully chosen. Demand means consumer-centric, with all activities based on consumer insight. Flow suggests an even, steady, uninterrupted and quality-assured value stream as opposed to a chain of sequential, connected links. Leadership refers to the fact that the demand flows are not Projectal units that have to be managed. Demand flows are processes where leaders can emerge anywhere in the value network. Their efforts have to be supported by executives with a vision of what can be achieved.
Man is limited not so much by his tools as by his visions.
(Christopher Columbus)
The evolution of management concepts is influenced by several things. One of the most important is executive vision, which is important for identification and application of relevant methods and tools. Another is new tools, which create new possibilities. Information and communication technology (ICT) is a major trigger for renewal and also a major enabler in the transition from the old industrial to the new digital world. The availability of new ICT tools is increasing rapidly, and the trick is to know which ones to use and for what purpose with implementation driven by business needs and not by technology availability.
External developments also have to be analysed and classified in order of importance. External opportunities and threats should be transformed into action and internal adaptation triggering internal rethinking and restructuring. Increasing global competition puts heavy stress on proaction rather than reaction and it is important to identify trends early and benefit from them. For example, identification of emerging consumer needs, and efforts to turn market volatility from a threat to an opportunity are two of the major goals of DCM.
A lot of today's thinking has its roots far back in history, but visions that earlier could not be reached because of lack of efficient tools can now be realized. The next issue, then, asks how new concepts should be implemented to create lasting change. To get a better understanding of this it is worth looking back in history, to learn from experience and see how lasting management concepts have developed over time.
In order to look forward we have to look back.
The diffusion of a concept like DCM follows the usual S-shaped curve, with early adopters and laggards. It is also clear that there will never be complete implementation in any sample of projects, as the concept simply does not fit all conditions. We can see this in the development of other management concepts. In 1981, it described the development of production, sales and marketing orientation to provide a background to the evolving materials flow concepts (Ericsson, 1981) I wanted to show how concepts build on each other and develop partly in response to problems created by an old concept. The best parts of the old concept remain and are refined, while the flaws are removed. There is a considerable overlap in time, with laggards still introducing a new concept while early adopters are leaving for an even newer concept. Intense, global competition makes it more and more dangerous to lag behind, as concept life cycles like product life cycles get shorter over time.
Production orientation
In the early 1900s, production orientation developed as a natural response to increasing demand for industrial goods. Scientific management focused on the production process and the possibility of increasing productivity through rationalization. Taylor 's frame of reference and the availability of new methods and tools hastened development and accelerating growth. Keith (1959) summarized the management philosophy of Pillsbury for the years 1891 to 1930, saying, 'Our task is to grind flour of high quality and to sell it. However, it is important that the business idea is built on the availability of wheat and water-power not the availability and closeness of growing markets or the demand for better and cheaper flour.' Such a narrow view causes problems when productivity increases and getting rid of the product becomes a problem. Early writers observed this and pointed to the demand market as the major problem. In 1915 Shaw wrote, 'Even if we are still on the threshold to all the possibilities offered by increasing productivity, the development has already surpassed existing distribution systems. We have to find markets for the products we can manufacture. The most important issue today is to systematically study distribution in the same way as we have been studying manufacturing.' Despite this, laggards still stuck to production orientation until the 1950s and 1960s.
Sales orientation
In the 1920s, the view of sales orientation evolved, with Borsodi (1929) summarizing the change of focus by saying, 'The days are gone when the recipe for big profit simply was manufacturing, more manufacturing and even more manufacturing! The distribution age is here.' Then Pillsbury's philosophy changed to: 'As a flour producing company with many different products for the consumer market, we need a first class sales force to get rid of all the products we can produce at a good price' (Keith, 1959).
The sales orientation was sufficient in a seller's market, when demand is higher than supply. However, when the situation was reversed, a change of mindset was needed. The sales orientation was successively replaced by a marketing orientation.
Marketing orientation
A 'new marketing concept' was launched in the early 1950s with authors making a distinction between the old production and sales concepts and the new marketing concept. It was stressed that marketing is consumer-centric and focuses on analysis, planning, product development and profitability and not only sales volume.
Pillsbury's philosophy changed again to: 'Today marketing in our company is seen as the function that plans and executes sales the whole way from idea generation, through development and sales to the customer. Marketing starts and ends with the consumer the marketing department leads all company resources in the transformation of the idea to a product and the product to a sales agreement' (Keith, 1959). This statement could have been written today, with the major difference that we now have the tools to carry it through. The focus had shifted from production to marketing, from the products we can manufacture to the products the consumer really wants and from the company to the market.
But the new marketing concept started to create its own problems, most of which came from too far-reaching customer orientation with focus on service and delivery without any deeper analysis of the concepts and the consequences. Scattered remedies were popping up, but most of these were fads rather than cures. They generally demanded more flexibility and smaller batch sizes in manufacturing, while focusing on delivery lead times and gave higher inventory, transportation and handling costs. The lack of a theoretical framework and a common language resulted in tension and conflicts between marketing and manufacturing and increasing struggles for power. These problems initiated the development of the materials flow orientation, when it became clear that the problems could only be solved with a more holistic approach.
Materials flow orientation
In the early 1960s the materials flow approach started to spread in Sweden. It grew rather slowly to the end of the 1960s, and then took off when the concept of materials administration was developed through close collaboration between universities and major industrial projects such as Volvo, SKF, Atlas Copco, Sandvik and Astra. The approach was called materials administration because it was a much broader and more strategic concept than logistics at that time (see Ericsson, 2003). In particular, materials administration (MA) was defined as 'Planning, development, coordination, Project, control and review of the materials flow from raw materials supplier to the ultimate user' (Ericsson, 1969b).
The concept focused the need for integrated management of the inflow, throughput and outflow. From the start, MA stressed coordination and the strategic aspects of effective materials flows, but it also emphasized that implementation had to start internally with synchronization of purchasing, production and physical distribution on an operational and tactical level The internal structuring of the company must increase cooperation and synchronization of activities in different departments.
The focus on internal processes was the starting point for the implementation, but it was clear that internal efficiency was not enough, and links with suppliers and customers also had to be improved and coordinated. The first step was to improve cooperation on the supply side. Supplier development and evaluation, stockless buying, systems contracting and co-makership became key words in this development (Ericsson, 1969c).
The next step was to increase cooperation with first-tier customers. Early writers on marketing focused on consumer markets, but now the interest in industrial marketing and hence in industrial buying increased (Ericsson, 1969a). the term 'control' in the definition of MA refers to the use of developing computer tools for managing materials flows. Initial steps focused on operational and tactical levels in the company, but soon the strategic aspects of MA came into focus not only for directly flow-related functions such as purchasing, production and physical distribution, but also with marketing and R&D and engineering.
Phases in the development of the materials administration/ logistics concept
The early development of the concept shows a typical growth curve: a rather slow start with acceleration in the early 1970s, as shown inbelow (Ericsson 1981, 2003; Green, 1989).
The first generation of logistics the total-cost-oriented one came as a response to increasing need for a holistic view on costs. The functional and silo-oriented approach that had evolved as a consequence of the division of labour had gone too far. By the 1950s this approach had started to show major weaknesses trade-offs between functions and departments were hard to achieve and sub-optimization was a major threat. Luckily, some new methods and tools were appearing to solve the problem, such as operational research models and emerging computer technology. So the first generation of materials administration/logistics was born in 1969 as a response to problems and needs and the increasing availability of effective tools.
The vision is 'to create an even, steady, uninterrupted and quality assured flow from raw materials supplier to the ultimate user' (Ericsson, 1969b). This was a guiding statement of the ideal situation when all members of the flow think and act as one. This vision is very close to Towill's (1997) concept of the 'seamless supply chain'.
External conditions changed again with rapid growth in the 1960s replaced by zero growth of the 1970s. The problem was then to gain a bigger share of a non-growing cake. The solution was the second generation of logistics the revenue-oriented one based on logistics as a means of competition. One of the ways of increasing sales was to increase the local presence with sales outlets and warehouses close to the customer. The number of warehouses and number of items exploded with the capital tied up in inventory creating new challenges. This triggered the third generation of logistics the profitability-oriented one that was born in the 1980s.
During the late 1980s and the early 1990s the need for more and better integration both internally and externally increased but communication and integration tools were developing fast. Business process re-engineering and time-based management caught on and, if properly applied, could serve as a basis for effective and efficient use of new ICT tools.
The fourth and fifth generations of logistics respectively the time and process one and the IT-based one were born. They served as the launching pad for increased and improved integration in supply chains. They also pointed to the need to focus on inter-Projectal processes, rather than on institutions in the chain. Different definitions of SCM illustrate this change of focus (Cooper, Lambert and Pagh, 1998). The implementation of SCM was enabled and facilitated by two important toolboxes that were developed in the 1990s business resource management and e-logistics.
Business resource management
In the 1980s, the need for deeper integration and synchronization of processes across functional areas became urgent. In order not to get stuck in traditional functional or departmental silos, the focus was on interdepartmental resources and processes. This holistic view was called business resource management (BRM) (Ericsson, 1990). It had its roots in classical management literature, where the four main resources were 'men, materials, machines and money' with information as a major new resource. The aim was to create a framework for integration of resources, flows and processes.
BRM is a broad, holistic management approach, and soon it became evident that it also could be used as a basis for inter-Projectal process management. The focus on resources, flows and processes was an excellent starting point for process-oriented SCM and DCM.
E-logistics
BRM is a forerunner of the broadening of the logistics concept into e-logistics which is a toolbox for improving inter-Projectal relations. It was a response to the increasing interdependence between logistics and ICT.
The evolution of the logistics concept illustrates the interplay between visions and tools. In the early history of logistics development, tools were lagging behind visions and we were asking for more tools in the mid-1990s, however, the tools surpassed the visions and the next issue was to renew the vision and create ways of using the new tools (Ericsson, 1996, 2003). E-logistics was launched to provide a framework for using the new tools of logistics, process management and ICT and the opportunities created by the interplay between them. E-logistics is the enabler of increased collaboration in the supply chain and it also creates opportunities for true consumer orientation.
New tools are continuously developing, while old ones change focus and use. For example, the concept of quick response is not new, but it has a new and deeper meaning when used to give customer orientation in fast-moving industries. New ICT tools especially customer databases improve relations with customers and enable point-of-sale and point-of-demand techniques. New tools for linking enterprise databases, applications and business systems are also developing fast.
Supply chain management
The concept of supply chain management evolved as a response to the necessity of improving and extending cooperation. The relationships in supply chains moved from arm's length, often adversarial, transactions to different levels of integration ranging from coordination, through cooperation to collaboration. Then e-logistics, with its focus on process management, is a major enabler of both SCM and DCM.
There are several ways of defining processes in business (Cooper, Lambert and Pagh, 1998). I have chosen to distinguish between three core business processes:
time-to-cash,
time-to-market, and
customer creation and retention.
The time-to-cash process includes the total materials, information and payment flows.
Time-to-market is the total process for creation, development and improvement of products and services.
The customer creation and retention process creates and retains customer relations all the way from the first contact, via after-sales, follow-up and continuous improvement (Ericsson, 2003).
The difference between logistics and SCM becomes clear if we take these processes as the starting point. Both concepts focus on the flow from raw materials to ultimate user. MA/logistics has its main focus on the materials flow and its connected information flows. In other words, it is focused on the time-to-cash process.
The SCM concept also considers the other two core processes
time-to-market and
customer creation and retention.
Hence, the SCM concept is broader than the MA/logistics concept. It focuses on the integration and synchronization of inter-Projectal relations and processes. This explicitly changes the focus from the individual company to the supply chain as a whole. SCM developed as a remedy for reoccurring problems at the interfaces between entities in the chain. It was important to 'get the entities to act as one', which was apparent when the fact that competition takes place more between supply chains than between individual projects started to be recognized and accepted (Christopher, 1992).
However, in practice, it still was very much 'us' against 'them' both inside supply chains and in relation to outside customers. Everyone talked about consumer-centric approaches, but they were not being implemented. This creates increasingly severe problems when the locus of power shifts down the supply chain to the final customer. Global competition, increased volatility and decreasing product life cycles accentuated the problems. It became clear that there was a need for a new business model.
The evolution of a new business model
We need a completely new way of thinking in order to solve the problems we have created by using the old way of thinking.
The evolution of the DCM concept is, maybe, the first step towards a major rethinking. The transition from yesterday's business model into tomorrow's is shown which illustrates that we are moving from a push to a pull approach from an SCM to a DCM. We are moving from yesterday's model based on independent, inventory-based entities aiming for low-cost production to tomorrow's model with information-based virtual networks aiming for creation of perceived consumer value. Supplier-driven mass production and mass marketing are replaced by market-driven mass customization and one-to-one marketing.
If we believe in this description it is quite clear where we are and where we are heading. The question is how to get there. The first step is to make some internal as well as external adaptations and alignments.
Internal alignments
There is clearly a need for closer integration of logistics/SCM and relationship marketing (Ericsson, 2003). The concept of relationship marketing has evolved into customer relationship management (CRM), which allows a business to target customers more closely and implement one-to-one marketing strategies where appropriate, and which makes the alignment with SCM even more important. The key is to knit together the knowledge and expertise from SCM with the knowledge of marketing/sales and buyer behaviour. Internally, this is a question of getting a common demand chain strategy that is based on both the marketing/sales and logistics/SCM strategies. Demand creation has to be synchronized with demand fulfilment. In theory, this is obvious, but there still is a long way to go before this is implemented in practice.
External alignments
Externally, processes and systems must also be aligned and synchronized:
Perceived customer values and the market segments have to be defined to answer the question, 'What are the explicit and implicit demands and requirements of the customer?'
Value chain processes are defined to answer the question, 'What processes should be synchronized in order to fulfil the needs and demands in the value segments?'
The network structure of the customized supply chain (the value chain) must be defined, answering the question, 'Who are the key value chain members with whom to link processes?'
Value chain management components are defined based on the question, 'What level of integration and management should be applied for each process link?' (Cooper, Lambert and Pagh, 1998).
Most contemporary DCM research focuses on interfaces in the commercial channel, ie on B2B relations, but the interface between the commercial channel and the consumer is the most important one. Because of the direct demand, the consumer's wants, desires and needs are of a different nature. The focus on consumer insight and deep knowledge of consumer needs and wishes is the major difference between demand-driven SCM and DCM.
Demand chain management
In recent years, there has been intense discussion of SCM and DCM. Is there a choice of either one or the other? Should DCM replace SCM? Is DCM just another name for demand-driven supply chain or is it completely new? My conclusion is that DCM is a natural next step in the evolution of the SCM concept based on the necessity for adaptation to changing external and internal conditions and the availability of new tools. It is a matter of adapting to changing circumstances and creating and using the right tools.
Responsiveness is the key to the new global economy and also to the DCM approach. 'Customer ecstasy at a profit' is the battle-cry of the new global economy (Ericsson, 2003). The key is to create value to the consumer, but in a cost-effective and efficient way. This is, in a nutshell, the mission of the DCM approach.
From a theoretical point of view, DCM is a logical way of refocusing and creating a new business model for the digital and global society. Intensified competition and the availability of new tools push for a change of focus. The question is can we see any sign of a new model in practical applications or is the concept just another academic fad?
Practical applications
There is some evidence of DCM emerging in business. Over the years, power in the distribution channel has moved from the manufacturer to the wholesaler and retailer. Today, the power rests with the consumer. This makes direct contact between the manufacturer and the consumer a vital ingredient in creating competitive strength. Dell has solved this problem with close collaboration with suppliers and customers. However, most projects cannot bypass intermediaries, so relationships with retailers are crucial, as they form the main interface with consumers.
The car industry has been trying to handle this problem for some time and has used all types of electronic tools. However, in 2001, an industry analyst stated that 'The business model for the car industry is broken' (USA Today, 2001). GM had already started to create a new model for the car industry, and they launched a project for 'Building a digital loyalty network through demand and supply chain integration' with the purpose of benefiting from closer integration of purchasing/SCM, marketing and ICT.
On the retail side, Wal-Mart is often cited for its intelligent use of information and for running the entire Project on the basis of consumer demand. This allows it automatically to delist products from a group of stores after only two days of performing badly. IKEA's ability to move goods quickly from its suppliers, through warehouses and on to stores is impressive. Products are packaged and sold to consumers in a way that facilitates speed through the chain. IKEA measures total logistics costs for products in terms of transportation, storage and investment in inventory. The capital cost is especially important, and the company often works with double sourcing one regional supplier and a low-cost supplier in Asia with the control system making it possible to switch source quickly depending on sales.
Today, the fashion industry is an archetype of the new business model, and the Spanish company Zara is maybe the best example. In the volatile world of fashion, where trends go in and out of style very quickly, Zara is efficient at minimizing obsolescent stock and bringing new products to shops very quickly.
Concluded Note
What, then, can we learn about the development of management concepts? We can certainly see that history repeats itself as concepts come and go and reappear in a slightly modified and refined shape. For example, consumer orientation was stressed in the 1950s as the key to success in 'the new marketing concept'. Today, it is the key to success in the DCM approach with consumer insight going deeper and having more tools available than the old customer orientation. However, it is evident that implementation will be just as bothersome as it was with the marketing concept, and it still takes time.
Unlearning is more difficult than learning so a change of tools is easier and swifter than a transition of mindsets. The change process has to be based on a vision and a consistent frame of reference, which is based on earlier experience. Implementation has to be well planned and systematic, and a common language must be established within the change network. Training and education are the key!
Gautam Koppala,
POME Author
Evolution of Management Concepts in the Demand Chain Management (DCM) from POME by Gautam KOppala
