Demand

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Demand is defined as 'a need for goods or services’ [Drabik and Sobol 2014]. In the book by Ziomek [2006], the term is described as „the amount of goods and services that a buyer wants to buy at a given price”. According to Philip Kotler [1999], the notion of demand must be seen in the context of a market which “consists of all potential customers having a particular need or desire, who are willing and able to exchange in order to meet that need or desire”. In such an approach, the market may therefore enter into the following conditions [Kotler and Levy Sidney 1971; Kotler 1973]:

  • negative demand – occurring when a large part of the market does not accept the product or service and is willing to pay a certain price in order to avoid it,
  • lack of demand – meaning no interest in or indifference to the product or service,
  • latent demand – occurring when consumers disclose a need that no existing product or service can meet,
  • decreasing demand – meaning a decrease in interest in a given product or service,
  • irregular demand – denoting seasonal or aperiodic fluctuations in demand for a given product or service,
  • full demand – indicating the state in which „organizations are satisfied with their sales”,
  • excessive demand – occurring when the demand for a given product or service exceeds the capabilities of the sellers offering it,
  • harmful demand – understood as the demand for products or services harmful to health.

From a logistic point of view, the attempt to illustrate the relationship between suppliers and buyers to satisfy the final buyer’s demand is described by the terms “supply chain” and “supply network” [Harrison and Van Hoek 2010]. Supply networks are understood as a more complex structure in which organizations can be interlinked in a crosswise way, allowing for two-way exchange of goods [Harland et al. 2001]. Therefore, in order to meet demand, goods flow from initial suppliers, through individual stocking points, to final customers. In parallel to the physical flow, an information flow takes place in logistics networks to inform individual participants in a given network about the current and future demand from buyers. In order to plan resources and prepare manufacturers to ensure the necessary supply in the future, it is essential to consider demand in terms of primary and secondary demand [Sarjusz-Wolski 2000].

Primary demand, also referred to as independent demand, is defined as the requirement that comes directly from the market and that is not linked to any other demand for any commodity of higher complexity. This demand arises outside the company and includes the final products manufactured by the company or, alternatively, the spare parts for those products. Primary demand is usually established through forecasting.

Secondary demand, also called dependent demand, is defined as the need resulting from the demand for goods of higher complexity. This demand represents material needs that derive from the demand for finished products and their spare parts to meet independent demand. Dependent demand is not forecast but calculated on the basis of forecasts of primary demand by using the MRP (Material Requirements Planning) algorithm [Willcox 2002a].

The place in the material flow where the main inventory in the system is accumulated (as a buffer stock to cover independent demand) is called the Decoupling Point [Fertsch 2003]. Upwards from this point the process is controlled by market demand, while downwards from it the process is controlled by MRP algorithm. In the decoupling point, therefore, stock necessary to cover independent demand is accumulated.

The location of the decoupling point in the logistics network is a strategic decision of the company, as it has a significant impact on the level of inventories and the time of delivery to the customer. The location of the decoupling point also depends on the type of good that is moved within the supply chain and the market in which it is sold. Typical positions of the decoupling point are shown in Figure 1.

introduction to the demand - Typical positions of the decoupling point
Figure 1. Typical positions of the decoupling point.

Locating the decoupling point in position 1 means locating stock close to consumers. The strategy of holding stock at this location is referred to as selling from local stock [Willcox 2002b]. Building up the main inventory so close to the customers enables them to respond quickly to their needs. Customers do not have to wait for the delivery because the goods are available directly from the stock held by the retailers. However, from the supplier’s point of view, maintaining the decoupling point in this place generally involves having their own distribution network. Suppliers must also take into account high inventory costs resulting from the need to hold stock of all products in all market locations. As a consequence, this approach makes the inventory management process much more difficult, as stock of a large number of products needs to be controlled separately at each location.

The location of the decoupling point in position 2 is connected with the location of the stock in the central warehouse of finished goods. Thus, finished goods are made to stock. Since instead of keeping inventories in multiple locations, this approach keeps them in one warehouse, it reduces inventory costs and simplifies the inventory management process compared to location 1. However, from the customer’s point of view, lead times are longer because the products have to arrive in the market from the warehouse.

The position of the third decupling point means the storage of parts and components prior to the assembly phase. The final assembly of the finished product takes place on request and it is named assemble to order. The consequence of this approach is a reduction of quantity and value of the inventory in relation to point 2. Instead of maintaining all configurations of finished goods, a much smaller stock of components from which these goods can be assembled is held. This gives suppliers high flexibility in responding to customer needs, as each time there is a possibility to adjust the finished products to individual customer needs. A negative consequence of such an approach is, however, a longer lead time than in the case of the previous positions of the decoupling point.

The location of the decoupling point in position 4 means the accumulation of stock in the form of raw materials, materials and subassemblies. The production and assembly of the finished product are made to order. This approach allows for further reduction of quantity and value in stock, as it does not yet have processing costs. At the same time, however, the order lead time for the customer increases.

The position of the fifth decoupling point means the concentration of stocks in the phase of raw materials, materials and subassemblies. In this case, the finished product is constructed according to the individual needs of a specific customer. The costs of inventories are usually transferred to their suppliers, as the manufacturer usually orders them once the design of the final product is agreed on with the customer. However, the lead time is significantly longer than in other cases.

The location of the decoupling point is a strategic decision of the company. On the one hand, it involves the costs of customer logistics. On the other hand, the result of this decision is to determine the level of customer service performance. It should be noted that different products of the same supplier may have different positions of decoupling points. It also happens that the same product may have different decoupling points for the different markets on which it is sold. In the consumer market, for instance, it may be sold from stock, whereas in an institutional market, it may be sold under specific orders. Competition in a given market often forces to move the decoupling point in the direction from position 5 to position 1.

The key factor determining the location of the decoupling point for a given product and the planning of its distribution network is the knowledge of the market for that product and, consequently, the demand for that product. The literature on the subject points to
a multitude of demand measures.

Kotler [1999] indicates, for example, that demand can be measured in different perspectives:

  • at six levels of the product:
    • total sales,
    • sales in the line,
    • the sale of the company,
    • product line,
    • the form of the product,
    • a particular product,
  • in five spatial dimensions of the:
    • world,
    • country,
    • region,
    • surroundings,
    • client,
  • in three time horizons:
    • in the short term,
    • in the medium term,
    • in the long term.

Overlapping all perspectives results in a total of 90 different demand measurement options.

From the perspective of inventory management, it is important to know demand characteristics at the level of individual products. Such an analysis is performed with the use of measures and methods described in the following section.

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Author of the article: Radosław Śliwka

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