Demand Management Overview

Demand management processes include two types

of demand

Supply Supply Market

Plant Plant Affiliate

Dependent Demand Independent Demand

Demand that is directly related to or derived
from the bill of material structure for other
items or end products. It is dependent on
the demand for end products.
The demand for an item that is unrelated
to the demand for other items; it's
independent of other items. Demand for
finished goods is an example of
independent demand

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Forecasting and replenishment planning are key
demand management activities

How much does

How much are you manufacturing need to make Manufacturing plan
going to sell? and when? Actual orders to on what to make and
manufacturing. when.

Replenishment Production
Forecast Plan Plan

Marketplace Affiliate Lot size Raw

Safety stock Lead-time materials
brand
strategies
Work shifts
Product Capacity
Inventory
team
strategies

marketing and the replenishment coordinator are accountable

for providing a complete and accurate forecast and
replenishment plan.

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Why Forecast ?

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Why is forecasting required ?

 Almost all organizations use forecasting, as everyone must

plan to meet the conditions of the future for which they have
imperfect knowledge.

 Forecasting provides managers with data which enables

them to make informed decisions about the future.

 Forecasts directly determines what every factory and

supplier makes. The quality of the forecast determines if
company is making the right product at the right time

 An accurate Forecast gives company the Opportunity to

optimise sales and manufacturing

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Why forecast? Customer Service

 A forecast is required to ensure that you'll have product

available to meet your customers needs and your sales
goals

Avoid stock-outs!

 Accurate forecasts help to minimize stock-outs

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Why forecast? Resource Planning

 Manufacturing is investing capital, hiring people, and purchasing

raw materials based on affiliate forecasts

 Accurate forecasts help to minimize our investment risk

 Accurate forecasts help manufacturing utilize our assets more

effectively and reduce costs

Product A Product A Product A Product B

24 hours to change the

1 hour to clean
machine and clean

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An accurate Forecast gives organisation the opportunity
to optimise both its sales and manufacturing

2500
High Forecast Affiliate write offs and waste of plant site capacity

2000

1500
Accurate Forecast Affiliates and plant sites optimised

1000

Low Forecast Affiliate Risk missing sales

500

0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

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Why forecast? Effective Use of Capacity

 In an environment with constrained capacity:

 Capacity used to make the wrong product, is capacity lost to
manufacture needed products

 For new product launches, affiliate forecasts are used, in conjunction

with capacity plans, to:
 Determine when or if the capability exists to launch new
products in certain markets
 Determine affiliate marketing and pricing strategies
 Drive both short and longer term capital decisions

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Benefits of Good Demand Management

Affiliates
 Ensures product is available to meet customer
needs and sales goals
 Minimizes stock-outs
 which may harm the company's image
 Require time to manage
 Reduced inventory and inventory write-offs
 Enables early action on future issues

Plant Sites
 Enables more effective utilization of assets and
thus reduce costs
 Ensures adequate capacity is available
 Ensures better on time delivery to affiliates

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Planning Hierarchy Chart

 Financial Planning

◦ Aggregate Level

 Sales Planning

◦ Model Level

 Resource Planning

◦ SKU Level

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Use of Forecast at Major Categories
 Financial Planning
◦ Horizon is long
◦ Usually expressed in monetary units
◦ Moderate precision required
◦ Forecast made infrequently
◦ Interval is quarter, half-year, or year
 Sales Planning (product family)
◦ Usually expressed in units and monetary
◦ Moderate precision required
◦ Updated monthly
◦ Interval is usually month or quarter
 Sales Planning (item, feature, option)
◦ Usually expressed in units
◦ High precision required
◦ Updated weekly or monthly
◦ Interval is usually weeks or months
 Resource Planning
◦ Horizon must be long enough to
recognize the need and acquire or
delete the necessary resources
◦ Usually expressed in units or hours of
output
◦ Moderate precision required
◦ Updated quarterly or annually
◦ Interval is usually months
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What is a Forecast?

 Predicting future events for the purposes of

◦ planning,
◦ organizing, and
◦ controlling operations resources.

 Forecasts may involve

◦ The Economy,
◦ Technological development, or
◦ Demand
The Process of Forecasting

1 Determine the use of the forecast

2 Select the items to be forecast
3 Determine the time horizon
4 Select the forecasting model(s)
5 Gather the data
6 Validate the forecasting model
7 Make the forecast and Implement the results
8. Monitor the forecasting model
How are Forecasts used in Operations?

 Process Selection and Design

 Inventory Management and Control

 Capacity and Facilities Planning

 Workforce Planning and Management

 Production Scheduling and Control

Components Of Operations Forecasts

 Time Frame
◦ f(purpose of the forecast)

◦ short-range, medium-range, long-range

 Demand Behavior
◦ trends, cycles, seasonal patterns, random

 Product Life Cycles

◦ introduction, growth, maturity, decline
Demand Characteristics

Before a discussion of popular forecasting methods, it is important to be familiar with the

five major characteristics of demand:

 Average: Demand tends to cluster around a specific level.

 Trend: Demand consistently increases or decreases over time.

 Seasonality: Demand shows peaks and valleys at consistent intervals. These intervals can
be hours, days, weeks, months, years, or seasons.

 Cyclical: Demand gradually increases and decreases over an extended period of time,
such as years. Business cycles (recession and expansion) and product life cycles
influence this component of demand.

 Random Error: Variations that cannot be explained or predicted.

Patterns in Time Series Data

Seasonal
pattern

Demand
Trend
Demand

Random
movement
Time
Time

Cycle
Demand

Demand
Trend with
seasonal pattern
Time Time
Some Approaches to Forecasting

Qualitative Quantitative
(judgment-based) (data-based)
 Jury of Executive Opinion  Time series
 Sales force Composite ◦ moving averages
 Delphi method ◦ smoothing coefficients

 Consumer market survey  Regression

 Other
Forecasting System Design Considerations

 Which forecasting method should I use

◦ Dependant on the availability of data

 What forecast interval and horizon should I use ?

◦ Dictated by business decision being made
◦ E.g. FG replenishment is a weekly activity

 What level of forecast accuracy is required ?

◦ Dictated by business decision being made

 How often should the forecasting model be reevaluated for performance ?

◦ Periodically say every quarter

 Should input from key customers be part of the process

◦ Yes
Capturing Demand Data

 How much historical data is required ?

◦ Several periods possibly covering at least 2 seasons

 Should I capture sales or demand data ?

◦ Demand is desirable

 In what unit of measure should I capture ?

◦ Dictated by business decision being made

 In what forecast interval should the data be captured ?

◦ Dictated by business decision being made

 Should I capture exceptional data ?

◦ Yes but along with reasons