COM J. Woods, A. White, K. Peterson, M. Jimenez

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1 J. Woods, A. White, K. Peterson, M. Jimenez Research Note 28 October 2002 Commentary Demand Chain Management Synchronizes CRM and SCM Pursued separately, supply chain management and customer relationship management can result in missed opportunities and poor performance. Enterprises must build bridges between them. This is demand chain management. Demand chain management (DCM) is a business strategy that involves the synchronization of demand and supply through customer and partner collaboration across multiple customer and supply chain channels or pathways. Enterprises have long struggled with supply chain management (SCM) and customer relationship management (CRM) applications that operate in silos independently of each other often competing for resources and attention in the enterprise. Enterprises that have been able to integrate their SCM and CRM strategies often used simple, one-way integration, with CRM throwing orders at SCM. SCM was forced to respond to these customer demands, regardless of the cost to the enterprise. Learning and business improvement took place using after-thefact reviews aimed at understanding what was profitable and "managing" the business. Such efforts resulted in the creation of new operating business rules intended to improve the profitability of the business by preventing the repetition of previous unprofitable business decisions. This process tends to break down when enterprises need to respond to customer requests faster and strive to become realtime enterprises (RTEs). A DCM strategy enables enterprises to create real-time feedback loops that incorporate "course correction knowledge" (see Figure 1) which is integrated into CRM systems. This drives decisions based on the ability of the supply chain to respond to customer demands to make decisions as to what is most profitable for the enterprise in real time. Gartner Entire contents 2002 Gartner, Inc. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 Figure 1 Integrating CRM and SCM Silos Traditional SCM/CRM Application Integration Demand Demand Is a Given Faster SCM Cycle Time to Efficiently Respond to Changes in Demand CRM SCM Drives Demand Chain Management Demand + Knowledge Demand is a Variable Simultaneous Consideration of Variable Demand and Supply in Enterprise Synchronization Decisions CRM SCM Drives Course Correction Knowledge Source: Gartner Research Enterprises have many individuals with SCM- or CRM-specific skill sets. Enterprises should begin to break down the silos between SCM and CRM so that the two can be managed more cohesively. They need to cultivate individuals who are CRM and SCM gurus to achieve better real-time responsiveness to unpredictable and increasingly dynamic demand patterns. How does a DCM strategy provide benefits? During the recent past, SCM has shown that no organization or department operates in isolation. Organizational behavior with respect to trading partners and internal constituencies has a great bearing on how the enterprise is perceived in the market and on how it performs in its market. CRM and SCM have developed, often independently, to optimize specific parts of the business in isolation from other parts of the business. In enterprises where CRM and SCM have been fully deployed, the integration between CRM and SCM has taken place, at best, at the database, transaction or enterprise resource planning (ERP) level and, at worst, with Microsoft Excel, which is the most popular integration tool for enterprise applications. When done correctly, this integration ensures consistency in core data, such as items, customers and products; however, it provides virtually no form or manner on which business processes within and between CRM and SCM can be synchronized or collaborated. CRM, the champion of processes that touch and influence customers, and SCM, the champion of processes that extend from customer satisfaction through raw material procurement, are almost two separate structures. The mismatch in many enterprises between sales forecasting and demand planning is an example of how data integration fails to meet enterprise requirements and how coordination between SCM and CRM 28 October

3 could enhance business performance. Before the advent of sales forecasting in CRM disciplines, best-inclass or "one number" demand-planning processes in SCM involved the sales and marketing teams in the development of the sales forecast, as this was one of the main drivers of the demand forecast. The issue is that enterprise before SCM treated these as different forecasts. With SCM and one-number planning (for example, sales and operations planning for a manufacturer), sales and marketing could easily maintain their own views in their preferred units of measure, but the forecast was one and the same with the demand plan. This process was never extended into pipeline management, because there was no sales force automation (SFA) or CRM, and demand forecasting is traditionally in the "SCM silo" of an enterprise. When SFA and CRM arrived on the scene, the sales organization was encouraged to pull away from the demand-planning process, as it now had its own tool to use, and the forecasts would be reconciled (according to the sales pitch) in the ERP database. In CRM, sales are typically forecast by account or customer in monetary terms (often revenue). Distribution and logistics organizations need to forecast product demand by units or equivalent units of measure. A holistic and coordinated view of demand forecasting across SCM and CRM is needed to prevent this mismatch. Three hierarchical layers make up DCM (see Figure 2). Figure 2 The Layers of DCM Strategic Business Value Synchronize Exchange Integrate Transactional Intensity Source: Gartner Research Integration is basic data integration CRM and SCM systems, usually in a one-way fashion. The exchange layer involves creating the process by which knowledge about customers and business processes is shared between trading partners in more of a two-way flow of information. Synchronization is the creation of business processes, not just data synchronization, that integrate knowledge about SCM efficiencies to shape demand in the extended value network. Pursued progressively, all three components are necessary for strategic DCM initiatives. Enterprises should begin to assess their enterprise architectures and their ability to support all three levels of DCM. 28 October

4 How will business processes and applications evolve to leverage DCM? Enterprises have already begun to leverage DCM in some projects by recognizing the need to synchronize CRM and SCM. Some of the business processes and business capabilities that benefit from an integrated CRM and SCM view are: Promotion management Integrated demand management Configuration and capable-to-promise (CTP) Order fulfillment Pricing optimization Service process management However, many of these applications are still immature and evolving. Through at least 2006, 80 percent of enterprises involved in DCM projects will be required to heavily modify off-the-shelf code or require industry-specific modifications to be introduced into DCM software before deployment for successful projects (0.8 probability). In addition, when vendors begin to offer applications in this space, they will offer products rooted in SCM or CRM expertise. Through 2005, emerging DCM applications will be SCMcentric or CRM-centric, leaving enterprises to integrate the two process areas themselves (0.8 probability). Three groups of vendors will compete for applications to enable DCM strategies, and, at this point, because of the immaturity of these applications, it's unclear who will lead. ERP II vendors bring a unified architecture to users. However, their inability to deliver new business functionality beyond data integration between modules has hindered their ability to take a "thought leadership" position with respect to this strategy. Through 2005, ERP II vendors will fail to enable DCM capabilities beyond CRM/SCM data integration (0.7 probability). Best-of-breed SCM and CRM vendors will also bring applications to market in this area, but they will be challenged most by their being rooted in SCM or CRM and not having a balanced view of both sides of the equation. Niche vendors will bring novel and agile solutions to the market, but, for the most part, they will be unable to offer comprehensive suites of functionality and lack the funds for rapid growth. One enterprise's supply chain is another's demand chain, and DCM principles are only one component of building and maintaining relationships with customers, partners and suppliers. Nonetheless, integration with partner systems will be a critical building block for successful DCM strategies, and these integrations need to consider capabilities that extend through the enterprise. Enterprises must be careful to take all the SCM capabilities with them when they integrate with customer systems. For example, demand forecasting systems need to be considered when extending sales channels through partner relationship management (PRM). Likewise, enterprises will need to concentrate on enabling supplier integrations with functionality that is coordinated all the way through to customer-facing systems. For example, enterprises need to ensure that they have a way to communicate order status to sales and service systems when integrating with an outsourcing vendor. Through 2006, enterprises that fail to master demand chain/supply chain collaboration and synchronization will experience 50 percent lower return on investment (ROI) on DCM projects (0.8 probability). 28 October

5 How should businesses begin to institute DCM competencies? DCM is just now entering Gartner's Hype Cycle, and DCM will be overhyped during the next two years. Although the strategic potential for DCM is significant, users should prepare for vendors that overpromise solutions. They need to be realistic about what they can achieve with DCM applications and strategies by applying extra rigor to ROI analyses of DCM projects. Through 2005, at least 50 percent of DCM projects will fail, 20 percent will suffer market share loss and 1 percent will result in a major business catastrophe (0.8 probability). Enterprises should begin executing on their DCM strategies by pursuing basic data integration of CRM and SCM systems (see Figure 3). Although this will not provide the strategic benefits of synchronizing SCM and CRM practices, it will form the foundation for future DCM projects. Figure 3 CRM/SCM Integration Points PRM/Promotion Management Value CRM Sales/ ATP SFA/Promotion Planning CRM Sales/SCE SFA/Promotion Management Configurator/CTP Call Center/SCE Source: Gartner Research CRM Sales/Basic Parcel Tracking Pricing Configuration/Optimization Difficulty Vendors will offer technology products that attempt to meet users' requirements during the next few years, and users will be challenged to understand where the process stops and the software begins. However, since DCM is so new, users should expect most of DCM to be process-centric, and only a small part of it will be technology-enabled. Through 2006, enterprises that focus on the deployment of DCM solutions to augment business processes will have a 50 percent lower ROI than those that first reengineer and rationalize processes (0.8 probability). Key Action Items Plan for new DCM strategies and business processes. Establish SCM/CRM application and process integration points. Establish a customer collaboration and integration infrastructure. Build SCM/CRM cross-functional expertise throughout the enterprise break down the silos. 28 October

6 Bottom Line: For the most part, supply chain management (SCM) and customer relationship management (CRM) strategies have been pursued in isolation inside the enterprise. To respond to dynamic business processes and create a real-time enterprise, enterprises will need strategies that synchronize CRM and SCM business processes. Gartner calls this demand chain management (DCM). Enterprises should begin their DCM strategies with data-level integration between SCM and CRM systems and begin to break down SCM and CRM silos. They should search out cross-functional SCM/CRM gurus capable of creating new business functionalities and processes, including real-time pricing optimization, integrated demand forecasting and comprehensive customer order fulfillment. 28 October