Demand chain

[2] Analysing the firm's activities as a linked chain is a tried and tested way of revealing value creation opportunities.

The business economist Michael Porter of Harvard Business School pioneered a value chain approach: "the value chain disaggregates the firm into its strategically relevant activities in order to understand the costs and existing potential sources of differentiation".

[clarification needed] Early applications in distribution, manufacturing and purchasing collectively gave rise to a subject known as supply chain management.

Without marketing / supply chain management (SCM) cross-functional collaboration, firms cannot be expected to respond optimally and promptly to customers' requirements.

"Make to stock" supply chains can also be "demand driven" if individual echelon replenishment quantities are determined by the need to simply replace stock that has been consumed by the immediate downstream activity (i.e.. sold to a customer, used by a manufacturing process or moved to another distribution location).

[6] By contrast, "demand driven" supply chains are protected from the need to be buffered from variability and bullwhip by the impact of "process decoupling' and are thus able to meet planned service levels with significantly lower inventory levels and capacity costs.

The accuracy and strategic value of S&OP is enhanced when supply chains are "demand driven" because they are less prone to unplanned capacity utilisation, "fire fighting" and focusing on resolving current performance issues (i.e. inventory and service).

Despite academics having, for many years, written a great deal about the benefits of driving supply chains with demand (e.g.. Forrester 1958, 1961 - "Industrial Dynamics"; Burbidge 1983 - "5 Golden Rules for Avoiding Bankruptcy"; Christopher & Towill 1995), only since 2002 have 'demand driven' concepts begun to be adopted by supply chain management software providers and industry.

[8] Demand driving activities and associated costs are still recorded inconsistently, mostly on spreadsheets and even then the quality of the information tends to be incomplete and inaccurate.

From a strategic finance perspective "segments are responsibility centers for which a separate measure of revenues and costs is obtained".

Whilst mathematical optimization theory has been in existence since the 1950s, its application to marketing only began in the 1970s,[18] and lack of data and computer power were limiting factors until the 1990s.

Return on marketing investment models can help demonstrate where financial impact of demand driving activities is positive and negative, and so help support fact-based budgeting.