Supplying Principles and Practices > USPS Supplying Practices Process Step 1: Identify Needs > Develop Demand Management Strategy

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

• Forecasting

Independent and Dependent Demand

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.

Internal and External Factors

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

Usage and Product Trends

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 patterns.

Inventory Management

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

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.