Session 2 Demand Management

Demand Management
o Recognizing and managing all demands for products
Forecasting
Order processing
Making delivery promises (ATP)
Interface between manufacturing planning and control and the
market
Marketing Management
o Marketing Mix
Four Ps
A set of marketing tools to direct the business offering to
the customer
Product
Price
Promotion
Place
o Order winners/quantifiers
Order winners
APICS - Those competitive characteristics that cause a
firm's customers to choose that firm's goods and services
over those of its competitors.
Can be considered to be competitive advantages for the
firm, usually focusing on one (rarely more than two) of the
following strategic initiatives:
o Price/cost, quality
o Delivery speed
o Delivery reliability
o Product design
o Flexibility
o After-market service
o Image
Order quantifiers
APICS - Those competitive characteristics that a firm must
exhibit to be a viable competitor in the marketplace. For
example, a firm may seek to compete on characteristics
other than price, but in order to "qualify" to compete, its
costs and the related price must be within a certain range
to be considered by its customers. Syn: qualifiers. See:
order losers, order winners.
o Customer Relationship Management
APICS - A marketing philosophy based on putting the customer
first. The collection and analysis of information designed for
sales and marketing decision support (as contrasted to
enterprise resources planning information) to understand and

support existing and potential customer needs. It includes

account management, catalog and order entry, payment
processing, credits and adjustments, and other functions
CRM enables, accurate order entry/tracking
Providing and meeting delivery dates and quantities
Handling customer complaints
Accurate documentation
Demand Planning

The recognition of demand through forecasts and actual

customer orders
Characteristics of Demand
Independent vs. dependent demand
o Independent demand APICS - The demand for an
item that is unrelated to the demand for other
items. (is forecasted)
Demand for finished goods, parts required
for destructive testing, and service parts
requirements are examples of independent
demand
o Dependent demand APICS - Demand that is directly
related to or derived from the bill of material
structure for other items or end products.
Such demands are therefore calculated and
need not and should not be forecast. 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.
Sources of demand
o Forecast
o Customer orders
o Replenishment orders from distribution centers
o Interplant transfers
o Other
Demand patterns
o Trend
Increasing/decreasing demand changes at
a steady rate (linear or exponential) from
period to period
Level demand is also possible
o Seasonal
Seasonal demand patterns can occur
quarterly, monthly, weekly, daily etc.
o Random

Can exist within a trend or seasonal demand

pattern, but doesnt alter the general pattern
Cyclical
Characterized by wavelike fluctuations that
take place over long time spans (years) and
are tied to external influences like the
business cycle
Stable vs Dynamic demand
Stable
demand retains same general
shape over time
Dynamic demand
less predictable,
although in the long run they may have a
random pattern

Forecasting
Principles
o Rarely 100% accurate
o Should include an estimate of error
o More accurate for product groups/families
o More accurate for nearer periods of time
Data collection
o Forecasts are usually based off historical data
Record data in terms needed for the forecast

Record the circumstances relating to the data

Record demand separately for different customer
groups
o S&OP forecast at the product family/group level
o MPS forecast at the actual end item
Forecasting Techniques
Qualitative
o Based on intuition/informed opinion
o Used for medium/long range planning
Quantitative
o Extrinsic
Based on correlation and cause and effect of external
indicators
Economic housing starts, contract awards
Demographic population changes
Forecasts for total demand and product families
o Intrinsic time series data
Assumptions
Historical data correlates with future sales
Patterns exist in historical demand data
Forecast Types
Moving average
o For stable demands
No trends/seasonality
Demand variations are random
Characteristics
Moving average reacts slowly to
rising/falling demand
o The more months averaged, the
slower the reaction
Exponential Smoothing
o Logic
Uses old forecast and demand from
latest period
Assigns a weighting factor (alpha) to
the latest periods demand to skew
relative to the forecast
Formula
New forecast = ()*latest demand +
(1-)* previous forecast
Low alpha skews toward old forecast
o Seasonal Forecast
Process
Create seasonal index of demand for
each period
Develop deseasonalized demand

Seasonal quarterly forecast multiply

deseasonalized demand by each
quarters index
Formula
Seasonal Index = period avg demand /
avg demand for all periods
o deseasonalized demand = Total
forecast / number of periods
Tracking the Forecast
Why
o Study demand/forecast differences and adjust
forecast if necessary
o Forecast Error
Bias
Exists when total variation of demand
minus total variation of forecast
doesnt equal zero
Corrective action
o Investigate/define
cause
of
variation
o Adjust
demand
history
if
necessary
Random variation
Random variations in demand, but
generally cancel themselves out
o Measuring Forecast Error
Mean Absolute Deviation (MAD)
Sum of absolute errors / number of
periods
Normal distribution
60% of forecast errors falls within 1
standard deviation MAD
90% of forecast errors falls within 2
standard deviation MAD
98% of forecast errors falls within 3
standard deviation MAD
MAD uses
Indicates relative cost of different
levels of customer service
Use to convert MAD into safety stock
for desired customer service levels
Supply Chain implications
Mitigation of Forecast error
o Reduce reliance on long term forecasts

Collaborate with customers/suppliers on

demand management
Increase manufacturing flexibility internally
and operations integration externally with
customers/suppliers
React quicker to short term demand by becoming
more flexible/efficient