Demand Planning in Supply Chain Management
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Demand Planning
Introduction to Demand Planning
Learning Block 1
•
After completing this learning block, you will be able to:
▫
Outline demand planning and why it is important to company success
▫
Discuss the factors that affect demand
▫
Explain the main approaches to planning and managing demand
▫
Identify the key roles and skills required in demand planning
▫
Discuss the key responsibilities and metrics used in planning demand
Learning Block 1 Objectives
•
Demand planning includes the steps and process taken to accurately
estimate anticipated demand.
•
Demand estimates
include:
▫
anticipated orders
▫
orders received
▫
adjustments resulting from changes in inventory policies and actions
Learning Block 1 - Unit 1: Supply and Demand Planning
▫
Demand estimates are relied upon by other departments and are used to
create:
manufacturing schedules
procurement plans
inventory stocking policies.
▫
Essentially, you are working backwards from an end goal of selling your
product (i.e. demand), using the ‘goal’ to create enough product to fulfill
the demand.
Learning Block 1 - Unit 1: Supply and Demand Planning
•
Demand Planning vs Supply Planning
– What’s the difference?
Supply Planning
supports Demand
Planning and
seeks to ensure
enough resources
to fulfill the
demand
Learning Block 1 - Unit 1:
Supply and Demand
Planning
Figure 1
. Supply and Demand balance. Acquired from CanStockPhoto.com
▫
Demand planning involves anticipating demand, aligning entire
organizations with expected demand for various products and services, and
optimizing supply chain activity around expected levels of demand.
Aim to:
Correct inventory level sizes
increase profit
maximizing revenue
▫
Demand planning is not marketing and sales, but must understand sales
and marketing plans to forecast demand.
Learning Block 1 - Unit 1: Supply and Demand Planning
▫
Supply planning involves ensuring that materials, components,
consumables, and services are available to
support the demand plan
.
Supply planning may take place in one or more departments. For example,
some firms conduct supply planning in the manufacturing department,
others supply plan in procurement, and even others have a defined formal
planning department.
▫
There must be effective communication between Demand planners and
supply planners
YouTube Video
: https://www.youtube.com/watch?v=RfZjikQ2nYs
Learning Block 1 - Unit 1: Supply and Demand Planning
•
Several factors affect demand
▫
the market size
▫
complimentary products and services
▫
substitute products and services
▫
customer preferences
▫
future expectations
▫
income levels
▫
market forces
▫
risk events
Learning Block 1 - Unit 2: Factors Affecting Demand
•
Market Size
▫
Larger markets naturally have a larger demand. The size of the market will
fluctuate based on the product and consumers taste.
▫
E.g. if gas prices increase, the market for fuel efficient cars increases
Learning Block 1 - Unit 2: Factors Affecting Demand
•
Complementary Products and Services
▫
Complementary products or services are typically associated with, or are
natural components of, companies’ products or services.
▫
Change in price of a complementary product can change demand for a
companies product.
e.g. an increase in price of peanut butter may effect the demand of jelly.
Learning Block 1 - Unit 2: Factors Affecting Demand
•
Substitute Products and Services
▫
Substitute products and services are similar to the product or
service offered and satisfy the same need. Therefore they can be
used in place of one another.
Butter/Margarine
Coke/Pepsi
Tylenol/store brand
Learning Block 1 - Unit 2: Factors Affecting Demand
•
Customer Preference
▫
Customers’ personal preferences for products can change from time
to time and can be influenced by advertisements, promotions, and
customer perceptions of the value of products or services.
Running an extended sale on a product can negatively influence demand
for competitor’s products
Uber and Lyft are impacting the demand for taxis by offering the same
service, a ride, with a different experience that younger people prefer
Demographic changes can shift demand for certain products
As Baby Boomers age, products that appeal to or are necessary for the elderly
will see a demand increase.
Learning Block 1 - Unit 2: Factors Affecting Demand
•
Customer Future Expectations
▫
If consumers expect the cost of a product or service to increase in the
near future, or if they expect it to become scarce for a period of time,
they may buy more before the expected price increase or scarcity.
These advance purchases would cause demand, and possibly prices,
to increase.
For example, an environmental event that negatively effects coffee crops
leading to scarcity may cause people to stockpile coffee at a cheaper price.
Learning Block 1 - Unit 2: Factors Affecting Demand
•
Incom
e
▫
Consumers’ salaries and their relative increases or decreases
over time impact demand for products and services. As
consumers’ incomes increase, they may have more
disposable income
, and demand for certain products and
services they purchase may increase.
Learning Block 1 - Unit 2: Factors Affecting Demand
•
Shifting Commodity Markets
▫
Commodity markets, such as rubber, corn, gold, copper, and oil, are a
real source of concern for many organizations because a primary
characteristic of most commodity markets is that no single industrial
buyer affects or controls prices within these markets. However, cartels of
producers might attempt to manipulate world markets.
▫
Many commodities operate in markets that economists call
pure
competition
. This means that prices are dictated by the market forces of
supply and demand. For example, an increase in copper demand in
China can result in higher prices for copper worldwide and for products
that contain copper because of the resulting shortage of copper supply.
Learning Block 1 - Unit 2: Factors Affecting Demand
•
Operational Risk
▫
Equipment failure, supply disruptions
(company or supplier e.g. running out),
labor issues, quality issues
•
Natural disasters
▫
Earthquakes, tornados, storms
•
Terrorism and political instability
▫
Commercial ship hijacking, supply route
disruptions
•
Commercial or market risk
▫
Supply/demand shifts, unexpected price
changes
Types of Risk Events
•
Global supply chains are
vulnerable to many forms of
risk, including natural
disasters, terrorism, and
currency fluctuations. These
disasters can completely
disrupt a supply chain and
completely close an operation.
Risk Events
Learning Block 1 - Unit 2: Factors Affecting Demand
•
The demand planning and
management process involves
balancing customers’
requirements with the
capabilities of the supply chain.
This includes forecasting demand
and synchronizing it with
production, procurement, and
distribution capabilities.
Learning Block 1 - Unit 3: The Demand Planning and
Management Process
•
Demand planning data
considerations include
•
anticipated orders
•
orders received
•
adjustments resulting from
changes in inventory policies
and actions
•
The plan should span a horizon
of 12-18 months
•
Planning Demand
▫
The demand planning process is
typically initiated by marketing
and sales, with input form other
departments, to develop a
strategic, company-wide forecast
with more detailed steps and
processes to arrive at an estimate
of anticipated demand.
Learning Block 1 - Unit 3: The Demand Planning and
Management Process
•
Sensing Demand
▫
Demand sensing involves collecting information about demand based
on real-time changes in demand. Demand sensing uses a broader
range of demand signals, including current data from the supply chain
and different mathematics to create a more accurate forecast that
responds to real-world events
Companies can use point-of-sale data and monitor social media to
gather information about their products.
Learning Block 1 - Unit 3: The Demand Planning and
Management Process
Communicating Demand
in a timely and
structured manner is
vital for an organization’s
success. Other plans are
dependent on the
Demand Plan
Learning Block 1 - Unit 3:
The Demand Planning and
Management Process
•
Shaping Demand
▫
Using price changes to influence demand
a company can provide a discount on its products over a specified period of
time to increase, or shape, demand. That company could also increase prices to
decrease demand, if needed, when demand is greater than supply.
Demand shaping involves influencing customer orders while also reducing the
uncertainty of when those orders will occur. Though forecasts project the
future, most shaping techniques rely on history as the basis of that projection.
Learning Block 1 - Unit 3: The Demand Planning and
Management Process
•
Shaping Demand
▫
Using price changes to influence demand
a company can provide a discount on its products over a specified period of
time to increase, or shape, demand. That company could also increase prices to
decrease demand, if needed, when demand is greater than supply.
Demand shaping involves influencing customer orders while also reducing the
uncertainty of when those orders will occur. Though forecasts project the
future, most shaping techniques rely on history as the basis of that projection.
Learning Block 1 - Unit 3: The Demand Planning and
Management Process
•
Managing Demand
▫
Demand management involves adjusting internal operations and plans to
match demand or to shape demand as necessary.
Respond to changes in volume, timing and mix of demand
Supply demand increase (consider cost, capacity and capabilities)
Stimulate demand when declining
Learning Block 1 - Unit 3: The Demand Planning and
Management Process
•
Demand planners must have :
▫
Skills to communicate with cross-functional teams and communicate demand
plans.
Understanding of company reporting structures
▫
Skills to analyze data and adjust demand plans
Raw material and commodity prices
Restocking lead-times
▫
Knowledge of the business and industry
Effect of marketing activities on demand
Understand customer buying patterns
International business experience (if working in international company)
▫
Skills to review demand plans to actual results and adjust accrodingly
Learning Block 1 - Unit 4: Demand Planning Roles and
Responsibilities, Typical Reporting Structure, and Key Metrics
•
Key Metrics
▫
Demand plan accuracy: This is the measure of accuracy of the demand plan over time. This measure is used to
determine how closely the plan matches actual demand overall by key customers as well as the degree of
variation of actual demand from the plan.
▫
Customer satisfaction: This measure includes on-time delivery and number of customer complaints. It is also used
to determine the number of deliveries that were accomplished on time versus those that were not, as well as the
amount and nature of customer complaints.
▫
Inventory performance:
Days of inventory on hand
# of days worth of inventory in stock to over normal usage
Inventory turns (inventory velocity)
Rate at which inventory moves through the distribution facility. Inventory costs money to hold, the quicker it turns, the less costly
Dollar investment in inventory
indicates the amount of investment that a company has occupied in inventory; this is a useful measure because inventory
represents an investment of companies’ cash. The cash occupied in inventory cannot be used for other purposes.
Learning Block 1 - Unit 4: Demand Planning Roles and
Responsibilities, Typical Reporting Structure, and Key Metrics
•
1. Demand planning ____________________.
▫
a) Includes the steps and the process to arrive at estimates of anticipated
demand
▫
b) Includes the steps and the process to arrive at estimates of anticipated
supply
▫
c) Is very seldom practiced by companies
▫
d) Only involves demand planners
Learning Block 1 Practice Questions
•
2. The number of potential buyers in a specific market for a given
product or service will influence demand. If the market size
____________________.
▫
a) Increases, this can mean a lower number of potential buyers available to
purchase a company’s products or services
▫
b) Decreases, this can mean a lower number of potential buyers available
to purchase a company’s products or services
▫
c) Decreases, this can mean a higher number of potential buyers available
to purchase a company’s products or services
▫
d) Decreases, this can mean no potential buyers are available to purchase a
company’s products or services
Learning Block 1 Practice Questions
•
3. Complementary products or services are those products and services
which ____________________.
▫
a) Are substitute products and services, which may exist for what a
company offers
▫
b) Are given to customers to complement other products they purchase
▫
c) Are typically associated with, or are natural components of, the product
or service the company provides
▫
d) Cannot have an impact on demand
Learning Block 1 Practice Questions
•
4. Consumers’ salaries, and relative increases or decreases in these
salaries over time, ____________________.
▫
a) Do not impact demand for products and services
▫
b) Have no impact on the company
▫
c) Impact demand for products and services
▫
d) Do not matter to the demand planner
Learning Block 1 Practice Questions
•
5. A good demand planning and management process enables a
company to be ____________________.
▫
a) Slow to react to changes in demand
▫
b) More agile in reacting to unanticipated demand
▫
c) More proactive to anticipated demand
▫
d) Both b and c
Learning Block 1 Practice Questions
•
6. Demand shaping is ____________________.
▫
a) The steps required to arrive at estimates of anticipated demand
▫
b) Measuring the rate at which inventory moves through a distribution
facility
▫
c) The process used to influence demand
▫
d) A next generation forecasting method
Learning Block 1 Practice Questions
•
7. Demand management involves ____________________.
▫
a) Selling products to customers
▫
b) Placing orders for products
▫
c) Managing and prioritizing demand
▫
d) Providing discounts to customers
Learning Block 1 Practice Questions
•
8. A demand planner must have thorough knowledge of
____________________.
▫
a) Customer purchase patterns
▫
b) Purchasing tools and techniques
▫
c) Events that could affect demand patterns
▫
d) Both a and c
Learning Block 1 Practice Questions
•
9. A demand planner ____________________.
▫
a) Must be able to communicate effectively with colleagues in other groups
affected by demand within the company
▫
b) Does not need to communicate with colleagues in other groups affected
by demand within the company
▫
c) Only needs to communicate effectively with colleagues in the marketing
and sales groups within the company
▫
d) Must be able to communicate with colleagues in the procurement group
and seldom with the marketing and sales groups
Learning Block 1 Practice Questions
•
10. Demand plan accuracy is ____________________.
▫
a) A measure of the number and nature of customer complaints
▫
b) A measure of department performance
▫
c) A measure of inventory performance
▫
d) A measure of how accurately the demand plan matches actual demand
Learning Block 1 Practice Questions
Demand Planning
The Interaction Between Demand Management
&
Order Management
Learning Block 2
•
After completing this learning block, you will be able to:
▫
Outline the key aspects of the order management function
▫
Discuss the key steps in the customer order and replenishment cycle
▫
Explain the key links between demand management and order
management
▫
List the key technologies that enable e-Commerce
▫
Discuss the role of e-Commerce technologies in enabling effective demand
management
Learning Block 2 Objectives
•
The customer order management function primarily involves handling customer
orders and managing the customer order cycle. The order management process
starts with customer requests, which can be general to specific requests about
products or services.
▫
Customers can call, email, write or submit through the web, requests for:
Product specifications
Price
Availability
Potential discounts
▫
Inquiries may then be turned into orders and put into the order management
system manually or through web input by the customer
Learning Block 2 – Unit 1: Overview of the Order Management
Function
Customer Order Fulfillment
•
The steps in ensuring that customers
receive the correct products, in the
correct quantity, at the correct time,
and at the appropriate level of quality
•
The ultimate objective of order
fulfillment is fulfilling customers’
orders while satisfying promised
delivery dates at the
right quantities
and conditions and while
managing
total costs
.
Learning Block 2 – Unit 1:
Overview of the Order
Management Function
•
Customer Order Fulfillment
•
Similar to supplier selection and new product development, customer order fulfillment, if
performed quickly and responsively, can lead to companies’ competitiveness. For
example, a maker of beverage and ice dispensers might forecast and build a base product,
anticipating customer orders. Final product configuration occurs only after actual orders
are received, and this process might take only 3 days, compared to 4 to 6 weeks for their
competitors; this extra time provides an advantage to the company against its
competitors. Restaurants and other customers would purchase beverage dispensers
because they plan to make a profit with them.
Learning Block 2 – Unit 1: Overview of the Order Management
Function
The customer order and
replenishment cycle occurs when
customers interact with suppliers
(e.g., wholesalers, retailers, or
material suppliers) and includes work
directly involved in receiving and
fulfilling customers’ orders and in
replenishing inventories.
Learning Block 2 – Unit 2:
The Customer Order and
Replenishment Cycle
•
Custome
r Request/Arrival
▫
The beginning of the order management cycle is when a customer requests
product information
Customer arrives at store
Sales representative visits or calls
Customer goes to website/showroom
Learning Block 2 – Unit 2: The Customer Order and
Replenishment Cycle
•
Customer Order Entry
▫
In
customer order entries, customers inform retailers and suppliers of goods
about the products they wish to purchase. At a clothing store, customers might
place items they wish to buy into shopping carts and bring them to the counter
to check out and complete their purchases. Order entries can also include
customers informing suppliers of the products and quantities they want to
purchase online; orders are then transmitted to suppliers through the Internet.
▫
Orders must be accurate, timely and communicated throughout the supply chain.
Learning Block 2 – Unit 2: The Customer Order and
Replenishment Cycle
•
Customer Order Fulfillment
▫
Customer order fulfillment includes the steps in ensuring that customers receive correct
products, in the
correct quantity
, at the
correct time
, and at the
appropriate level of
quality
.
filling orders
invoicing customers
shipping orders
tracking orders
handling returns
having after-sale services
Learning Block 2 – Unit 2: The Customer Order and
Replenishment Cycle
•
Customer Order Receipt
▫
Customers receive and
accept (or reject)
their orders
check for quantity and quality of delivered products
incomplete or damaged orders are recorded by the customer
in strong buyer/supplier relationships this is may be done through a
computerized system to log orders that were received incomplete or damaged,
and suppliers are then notified.
customers typically withhold payment until deficiencies are corrected.
Learning Block 2 – Unit 2: The Customer Order and
Replenishment Cycle
•
Customer Invoicing
▫
When customers place orders they receive invoices.
at check-out counters, invoices are often presented as receipts or
electronic invoices on check-out screens
when orders are shipped to customers, invoices normally accompany the
goods.
▫
Invoices state amounts owed and payment terms.
▫
Invoices are received by customers, checked against agreed terms and
conditions between customers and suppliers, and paid accordingly
(hopefully).
Learning Block 2 – Unit 2: The Customer Order and
Replenishment Cycle
Inventory Replenishment
•
the process of determining when to
make or buy more inventories and
how many to order while also
considering various cost and
customer service trade-offs
•
When do I need to refill my
inventory?
Learning Block 2 – Unit 2:
The Customer Order and
Replenishment Cycle
•
Stocking Policies
▫
Companies often base their inventory stocking and replenishment policies on their desired service
levels.
For instance, if a company wants a 98% service level, they must have enough inventory on hand to
ensure that customers get the product they want in 98 out of 100 visits to a store or website.
Marketing or sales personnel as well as inventory management personnel should work together to
determine the correct service level for particular companies and products. Most marketing and sales
personnel would like to have a 100% service level so that the company never stocks out of a product.
However, this perfect service level is not typically feasible because it requires holding too much
inventory at an expensive cost.
Learning Block 2 – Unit 2: The Customer Order and
Replenishment Cycle
•
The Relationship Between Demand Management and Order Management
▫
It is critical for demand planners to have open communication with sales staff.
Sales staff understand the timing of customer orders. If this information isn’t
communicated to the demand planners there may not be enough product to fulfill the
orders
See examples beginning on page 19 of the manual
Learning Block 2 – Unit 3: Demand Management and Order
Management
•
Electronic commerce, or e-Commerce, is used to describe the wide range
of tools and techniques used to conduct business without using paper.
This form of commerce involves selling and buying goods and services
using the Internet to transmit information and transfer funds.
▫
Automates the ordering process and efficiently processes orders accurately
Learning Block 2 – Unit 4: e-Commerce Order Fulfillment
Strategies
•
Various technologies can be used to support the order management process within
organizations:
▫
phone, fax, mail,
▫
Internet
▫
electronic data interchange (EDI)
▫
bar coding
▫
POS technology
▫
radio frequency identification (RFID)
▫
OMS technologies
Learning Block 2 – Unit 4: e-Commerce Order Fulfillment
Strategies
•
Phone, Fax, and Mail
▫
Phone, fax, and mail are traditional means of taking, confirming, querying, and
tracking orders and have been commonly used in companies for communication and
business purposes. Today, phones are still used heavily; however, faxing and mailing
are being largely superseded by companies’ use of the phone and the Internet.
Learning Block 2 – Unit 4: e-Commerce Order Fulfillment
Strategies
•
Internet
▫
The Internet is a worldwide system of networks linked by various
technologies and provides a wealth of resources for businesses. It is often
used for placing and tracking orders. Additionally, e-Commerce is used to
facilitate business to business or business to customer sales, purchases, and
other information transfers via the Internet.
Learning Block 2 – Unit 4: e-Commerce Order Fulfillment
Strategies
•
Electronic Data Interchange (EDI)
▫
EDI involves the direct exchange of information between computers. In many
companies, EDI has been used to replace the faxing and mailing of paper documents
and, in a variety of industries, to improve efficiencies. Many companies require their
suppliers to also use EDIs. Some examples of EDI transactions include the following:
A buying company transmits order specifications (e.g., product numbers, quantities, and
desired receipt dates) to a selling company.
A selling company transmits order invoice information (e.g., cost and payment terms) to a
buying company.
•
YouTube Video: https://www.youtube.com/watch?v=OVFI3I8LlRI
Learning Block 2 – Unit 4: e-Commerce Order Fulfillment
Strategies
•
Bar Coding
▫
Bar codes present information in visual patterns that machines can read.
Bar code scanners read a pattern of black and white bars that represent a
set of characters. This pattern is then turned into lines of text that
computers can understand. Many companies use bar codes in stores, at
check-out counters, and throughout their supply chains. Bar codes are used
in many areas throughout the supply chain, including vehicle
manufacturing, document tracking, time control, and security access.
Learning Block 2 – Unit 4: e-Commerce Order Fulfillment
Strategies
•
Point of Sale (POS) Technology
▫
POS technology, or check-out counters, is where sale transactions are completed and
where customers make payments and accept receipts. Retailers use weighing scales,
scanners, and electronic and manual cash registers in conjunction with this
technology. For example, grocery stores use scales at POSs to weigh produce.
▫
Information provided at the POS stage is translated into prices for products, is shown
on a screen at the register, and is printed out on receipts. For example, modern POS
technologies are often used to update inventory usage as goods are purchased, and
they relay this information to other parts of organizations (e.g., warehouses and
suppliers).
Learning Block 2 – Unit 4: e-Commerce Order Fulfillment
Strategies
•
Radio Frequency Identification (RFID)
▫
RFID describes the type of technology that uses radio waves to automatically identify
objects. The most common means for doing this is to have a serial number for specific
objects on microchips that are attached to antennas (commonly called RFID tags). The
antenna transmits information, such as unique product codes and storage location, from
chips to readers, and then to warehouse computers.
▫
RFID tags are used in many industries. For example, they can be attached to cars during
production to track their progress through the assembly line. Pharmaceuticals can be
tracked, and animals can have microchip implants to be tracked and to be positively
identified.
Learning Block 2 – Unit 4: e-Commerce Order Fulfillment
Strategies
•
Order Management Systems (OMS)
▫
OMSs typically provide information about orders, including
inventory available, listing of suppliers, listing of customers,
information about invoicing and payments, customer returns and
refunds, and others.
YouTube video: https://www.youtube.com/watch?v=atbZiCbecrA
Learning Block 2 – Unit 4: e-Commerce Order Fulfillment
Strategies
•
How can demand planners use this information?
▫
Gather demand signals such as
Inventory consumption data from distribution center
POS activity from a retail store
▫
This information can be used to quickly and accurately resupply products and
provide historical data to use in forecasts
Learning Block 2 – Unit 4: e-Commerce Order Fulfillment
Strategies
•
1. The customer order management function is primarily concerned
with ____________________.
▫
a) Managing internal customers only
▫
b) Developing production plans
▫
c) Managing the customer order cycle
▫
d) Managing suppliers
Learning Block 2 Practice Questions
•
2. Which of the following defines successful customer order fulfillment?
▫
a) Orders are filled and sent to suppliers on time, in the correct quantities, with
no damages, and within the specified delivery date
▫
b) Orders are filled and sent to the distribution center on time, in the correct
quantities, with no damages, and within the specified delivery date
▫
c) Orders are filled and sent to transportation on time, in the correct quantities,
with no damages, and within the specified delivery date
▫
d) Orders are filled and sent to customers on time, in the correct quantities, with
no damages, and within the specified delivery date
Learning Block 2 Practice Questions
•
3. Which of the following is the key starting point of the customer order
management cycle?
▫
a) Customer order entry
▫
b) Customer request/arrival
▫
c) Customer invoicing
▫
d) Customers receiving orders
Learning Block 2 Practice Questions
•
4. Customer order entry involves customers ____________________.
▫
a) Receiving an invoice for products and services
▫
b) Receiving and accepting orders
▫
c) Complaining about customer service
▫
d) Informing retailers and suppliers about the products they wish to
purchase
Learning Block 2 Practice Questions
•
5. The replacement of an item that was held in inventory but was sold is
known as ____________________.
▫
a) Demand planning
▫
b) Selling
▫
c) An order receipt
▫
d) Replenishment
Learning Block 2 Practice Questions
•
6. Demand management attempts to ____________________.
▫
a) Influence customer orders while trying to reduce the uncertainty of when those orders
will occur
▫
b) Reduce customer orders while trying to increase the certainty of when those orders
will occur
▫
c) Influence customer orders while trying to increase the uncertainty of when those
orders will occur
▫
d) Influence customer orders while trying to reduce the certainty of when those orders
will occur
Learning Block 2 Practice Questions
•
7. Demand management and order management working together can
be ____________________.
▫
a) Detrimental to the company’s success
▫
b) A way to promote a balanced flow of goods across a supply chain
▫
c) Stressful
▫
d) A way to promote a limited flow of goods across a supply chain
Learning Block 2 Practice Questions
•
8. e-Commerce is a term used to describe ____________________.
▫
a) A wide range of techniques used to conduct business without paper
▫
b) Only using EDI
▫
c) Events that could affect demand patterns
▫
d) Commerce that uses electricity
Learning Block 2 Practice Questions
•
9. Which technology features the direct exchange of information
between computers?
▫
a) Internet
▫
b) EDI
▫
c) Fax machines
▫
d) Telephone
Learning Block 2 Practice Questions
•
10. Which of the following is an accurate statement?
▫
a) e-Commerce systems can be used to support and enable demand planning
▫
b) e-Commerce systems cannot be used to support and enable demand planning
▫
c) e-Commerce systems can rarely be used to support and enable demand
planning
▫
d) e-Commerce systems are too costly to support and enable demand planning
Learning Block 2 Practice Questions
Demand Planning
Demand Planning Principles
Learning Block 3
•
After completing this learning block, you will be able to:
▫
Discuss the definitions of forecasting and inventory control
▫
Recognize the difference between independent and dependent demand
▫
Explain the key components of a demand plan
Learning Block 3 Objectives
•
A
forecast
means to make a calculation or prediction about a future event or
condition, usually as a result of studies and analyses available from pertinent
data. This is precisely what companies do in forecasting demand: calculate
what they think will be needed in advance of the need itself.
▫
More accurate forecasts allow for potentially higher company revenue and,
hopefully, lower costs. Increases in revenue result from products being in stock
when customers request them, and decreases in cost result from not holding too
much inventory to make up for inaccurate forecasts.
Learning Block 3 – Unit 1: Forecasting Demand
•
Demand forecasting includes companies’ estimates of future needs for
finished goods in order to meet projected customer demands over a defined
period of time. Developing accurate forecasts for finished goods also enable
companies to develop support forecasts for raw materials, consumables,
packaging supplies, and other required goods and services.
▫
Oversupplying = inventory holding costs
▫
Undersupplying = lost sales; unhappy customers
Learning Block 3 – Unit 1: Forecasting Demand
•
Lead Time Forecast
▫
Amount of time it takes to replenish a product
Includes delivery times that can have variations due to weather event or other
unforeseen circumstances
Learning Block 3 – Unit 1: Forecasting Demand
•
Forecast Error
▫
Accurate forecasts result in lower inventory holding costs
Goal of 100% accuracy is difficult to achieve
▫
Accuracy of forecasts generally go down the longer the timeframe
A forecast for next week is more accurate than one for next year
Learning Block 3 – Unit 1: Forecasting Demand
•
demand of demand of these items depends on
the sales of other items
•
Raw materials and component inventories
depend on the demand for finished goods and
have dependent demand
•
Car manufacturers need 4 tires on every car.
The tire supplier for a car manufacturer is
dependent on the manufacturers demand for
finished cars
Dependent Demand
•
demand for these items is not dependent
upon the demand for other items
•
Finished goods held for stock and current and
projected customer orders have independent
demand
•
Tires sold to tire retailers are a finished goods
and are independent
Independent Demand
Learning Block 3 – Unit 2: Independent and Dependent Demand
Same product – Different demand based on its place in the supply chain
•
Bill of Materials (BOM)
•
A Bill of Materials (BOM) is closely tied to the concept of dependent
demand and is, essentially, a structure for finished products.
▫
In manufacturing environments, design engineers draw the finished
product, and the drawing is accompanied by a BOM. The BOM shows, in
line item format, the items (detailed by part number, quantity, item
description, and more) needed to assemble the finished product.
Learning Block 3 – Unit 2: Independent and Dependent Demand
Overview of Planning Levels
•
The highest level of forecast, as an example, is
used to determine overall levels of supply of
raw materials required over specified time
periods. However, the lowest levels of
forecasts, for example, are used to drive daily
and weekly production manufacturing
schedules. Most companies generate forecasts
at various levels for planning and customer
support.
•
Similar to forecasting at different levels,
companies must also plan inventory requirements
at these varying levels.
Learning Block 3 – Unit 2:
Independent and
Dependent Demand
•
Demand plans are generated, based on the forecasted demand, by
determining how much of each product will be sold across the entire
company in all geographies by time frame (e.g., year, month, week, or
day) as well as how much inventory will be needed to meet the
demand. The demand plan should balance projected needs with the
accompanying desired inventory level down to the SKU level (e.g., sizes
and colors)
Learning Block 3 – Unit 3: The Demand Plan
•
A bottom-up plan, however, does just the
opposite. A forecast would be created for the
smallest breakdown of demand: a particular
SKU, in a particular location, for a particular
time period. Then, more detailed forecasts
would be added up across the company to get
totals.
Bottom-Up Demand Plan
•
They start at a totaled number to be broken
down into particular products and regions or
geographies, as shown in the Overview of
Planning Levels section.
•
For example, if there was a forecast to sell
100,000 units across the entire company for a
year, this would get broken down into how much
of each product family will be sold, and would
get broken down even further into the amount of
each SKU that will be sold across the entire
company. Additional breakdowns would reflect
the items sold in particular areas or locations.
Top-Down Demand Plan
Learning Block 3 – Unit 3: The Demand Plan
•
Time frame or time horizon:
the time period
used to determine product need
•
Time fence:
the time period during which
minimal or no changes to the demand plan
can be made
•
Time buckets:
the time increment used in
planning, scheduling, and reporting
•
Roles of personnel:
people who generate,
monitor, and adjust the forecast
•
Demand forecast
: the amount of demand
companies must satisfy
•
Locations
: places where sales occur
•
Stock keeping unit (SKU):
individual products
or items
•
Cycle stock:
amount of product needed to
cover sales during the lead time
•
Safety stock:
amount of product needed to
cover for variations in forecast and lead time
Key Components of the Demand Plan
Learning Block 3 – Unit 3: The Demand Plan
•
1. The two main types of demand are
▫
a) Independent and dependent
▫
b) Constant and fluctuating
▫
c) Known and unknown
▫
d) Short term and long term
Learning Block 3 Practice Questions
•
2. Which of the following are components of a demand plan?
▫
a) Demand forecast
▫
b) Locations
▫
c) Time frame or horizon
▫
d) All of the above
Learning Block 3 Practice Questions
•
3. The BOM, which shows which materials or parts needed for a
finished product, is like a ____________________.
▫
a) Schedule
▫
b) Recipe
▫
c) Sales history
▫
d) Time horizon
Learning Block 3 Practice Questions
•
4. If a company is producing cars and they have to predict how many
spark plugs are needed, the demand for cars would be
____________________ demand and the demand for spark plugs
would be ____________________ demand.
▫
a) Dependent; independent
▫
b) Stable; unstable
▫
c) Independent; dependent
▫
d) None of the above
Learning Block 3 Practice Questions
•
5. What is one way to make forecasts more accurate?
▫
a) Analyze what was sold last year
▫
b) Let marketing create their own forecast
▫
c) Reduce the time between creating a forecast and the event that is being
predicted
▫
d) Hold more inventory
Learning Block 3 Practice Questions
•
6. Which of the following is the most detailed forecast?
▫
a) Total company demand across all products and regions
▫
b) Total demand by specific region
▫
c) Total demand for a SKU by region
▫
d) Total demand for a product category
Learning Block 3 Practice Questions
•
7. A top-down plan starts at ____________________.
▫
a) The smallest breakdown of demand
▫
b) Manufacturing
▫
c) Suppliers
▫
d) A more aggregate number
Learning Block 3 Practice Questions
•
8. The demand plan should ____________________.
▫
a) Balance current needs with the desired inventory down to the SKU level
▫
b) Balance projected needs with the desired inventory down to the SKU
level
▫
c) Balance current needs with the desired inventory level at the aggregate
level
▫
d) Balance projected needs with the desired inventory level at the
aggregate level
Learning Block 3 Practice Questions
•
9. What is a common method for creating corporate forecasts?
▫
a) Department-department
▫
b) Top-down
▫
c) Company-company
▫
d) Supplier-customer
Learning Block 3 Practice Questions
•
10. Which of the following is an accurate statement?
▫
a) The more accurate the forecast is, the higher inventory will be
▫
b) The more accurate the forecast is, the lower inventory will be
▫
c) The less accurate the forecast is, the lower inventory will be
▫
d) The less accurate the forecast is, the higher inventory will be
Learning Block 3 Practice Questions
Demand Planning
Demand Planning Tools and Techniques
Learning Block 4
•
After completing this learning block, you will be able to:
▫
Define the various types of uncertainty related to demand planning in
terms of demand, supply, and lead times
▫
Explain the causes and impacts of variability or uncertainty
▫
Discuss the basic types of forecasting techniques, such as reorder points,
economic order quantity (EOQ), lead times, and technology uses
Learning Block 4 Objectives
•
Uncertainty
is the quality or state of being uncertain, or it is something
that is doubtful or unknown (Uncertainty, n.d.). In the case of demand
planning, uncertainty occurs in demand, supply, and lead time. In terms
of demand, this can be forecasted, but it is not known exactly what will
be needed to meet customer requirements.
Learning Block 4 – Unit 1: Uncertainty in Demand Planning
•
Uncertainty in Demand
▫
Uncertainty in demand is not knowing the exact amount of need.
▫
In retail stores, an uncertainty is not knowing for sure how many of a
particular item will be bought by customers on a particular day. Stores
likely have the histories of daily sales for most items, but this does not
mean the same number of sales will occur every day. Forecasts are never
100% correct, and not knowing how incorrect these forecasts are creates
uncertainty within companies.
Learning Block 4 – Unit 1: Uncertainty in Demand Planning
•
Uncertainty in Supply
▫
Sometimes, there is also uncertainty in companies’ supply. A source of supply can
be uncertain due to the stability of suppliers, potential shortages in raw materials,
or reliability of transportation.
Suppliers might not have enough supply to fill orders that companies place, or there
might be a shortage of particular materials to create the supply.
Labor forces could strike
Companies may not be able to obtain raw materials or parts from their suppliers
Uncertainty might occur in the transit time or the inability to secure trucks for
shipments
▫
When you choose a supplier you are only as good as they are. Choose carefully.
Learning Block 4 – Unit 1: Uncertainty in Demand Planning
•
Uncertainty in Lead Time
▫
Lead time, or order cycle time, is the time between when orders are placed
and when orders are received.
▫
This uncertainty can be due to different processing times, pick times, and
shipping or transportation times.
▫
Manufacturers might experience breakdowns, so the manufacture of goods
might be delayed, and warehouses might have labor shortages and not be
able to pick the goods on time for orders.
▫
Transportation carriers could also be delayed in delivering products to
customers from suppliers because of bad weather.
Learning Block 4 – Unit 1: Uncertainty in Demand Planning
•
Uncertainty leads to variability in the supply chain. If companies understand the causes of
variability and address these causes, they can work on reducing variability. For instance,
companies can improve the forecasting process by using better forecasting techniques, which are
described in this learning block. Another way to reduce variability is to better collaborate with
suppliers and customers with collaborative planning, forecasting, and replenishment (CPFR).
•
CPFR includes sharing sales data and forecasts, as well as other known issues that might affect
the supply chain (outlined in Learning Block 6). If companies can more quickly get actual demand
from customers for their products, they can better prepare to meet future demand. For example,
this can occur by electronically sharing demand data.
Learning Block 4 – Unit 2: Addressing Causes of Uncertainty and
Variability
•
Impacts of Variability
▫
Variability in supply chains increases costs. When companies are not certain about how
much product they need, they must carry more in order to cover for any variability.
▫
To address variability and uncertainty, companies generally hold more inventory for raw
materials or packaging materials to make finished goods. If they are uncertain of their
suppliers’ reliability to deliver on time, or if suppliers might not ship all products ordered,
then the company might have to carry additional raw material inventory to ensure that it
can keep production lines running. Similarly, companies must stock the appropriate
amount of packaging supplies to make finished products (e.g., boxes and stretch wrap).
Learning Block 4 – Unit 2: Addressing Causes of Uncertainty and
Variability
•
Safety Stock (Buffer Stock)
▫
The extra inventory needed to cover for variability or uncertainty.
▫
For instance, if the forecast is to sell 100 units of an item in a week, and
actual sales are 150, then 50 units of safety stock would be needed to cover
the variability in the forecast.
▫
If we could predict demand, supply and lead times all with 100% accuracy,
then safety stock is unnecessary. Unfortunately, this is impossible.
Learning Block 4 – Unit 2: Addressing Causes of Uncertainty and
Variability
•
Companies can use many types of techniques to reduce uncertainty in the supply
chain.
▫
Statistical forecasting techniques
▫
Point logic in replenishment
▫
Economic order quantity (EOQ)
▫
Lead time analysis
▫
Role of technology
Learning Block 4 – Unit 3: Tools or Techniques to Reduce
Uncertainty
•
Statistical forecasting techniques
▫
In the
simple moving average
, historical data are used to predict a future demand
need by taking the average of all of the data point used.
▫
For Example
January sales: 200 units
February sales: 300 units
March sales: 400 units
(200+300+400)/3
(900)/3
300 Units
Learning Block 4 – Unit 3: Tools or Techniques to Reduce
Uncertainty
•
Statistical forecasting techniques
▫
Weighted moving averages
place more weight on particular time periods than on others. Usually, more weight would be
placed on the more recent demand, and less weight would be placed on the older demand.
▫
For this technique, weights are placed on each month of previous history. Continuing with the January–March historical
data from above, the weights have to add up to 100%.
▫
Therefore, 60% of the weight might be placed on the most recent month of March, 30% might be placed on February, and
the remaining 10% might be placed on January.
▫
In this case, the forecast for April would be (0.5 × 400) + (0.3 × 300) + (0.2 × 200); or (200 + 90 + 40); or 330 units.
Learning Block 4 – Unit 3: Tools or Techniques to Reduce
Uncertainty
•
Statistical forecasting techniques
▫
Note that the result of the two methods resulted in different forecasts for April:
Simple: 300
Weighted: 330
▫
The weighted average places higher importance on more recent demand, and thus the trending
increase in sales caused the forecast to be higher than a simple average.
▫
These forecasts can use any time frame a company chooses. Our example uses 3 previous months
to forecast the next month. When April is over and the company has actual demand figures ,they
will use February, March and April for their forecast.
Learning Block 4 – Unit 3: Tools or Techniques to Reduce
Uncertainty
•
Statistical forecasting techniques
▫
Two other types of forecast methods can also be used:
causal forecasts
try to use specific factors to determine future demand (e.g., if
price is lowered, the amount of product that will be sold). Linear regression, a
statistical method, is an example of causal forecasting.
expert forecasting
uses inputs from experts to generate forecasts. The Delphi
method is an example of an expert forecast, and it uses the opinions of several
experts to agree on a future demand.
http://www.investopedia.com/terms/d/delphi-method.asp
Learning Block 4 – Unit 3: Tools or Techniques to Reduce
Uncertainty
•
Reorder Points
▫
The reorder point occurs once the amount of inventory reached to satisfy
demand until the next order is received. Reorder points determine when
another order needs to be placed to replenish product.
Two types
Fixed order quantity
Fixed order interval
Learning Block 4 – Unit 3: Tools or Techniques to Reduce
Uncertainty
•
Fixed order interval reordering
occurs when the
amount ordered varies
, but the
time between
orders remains the same
.
•
For particular products, the inventory level
would be observed for that item when the
reorder time comes. These items’ on-hand
inventories would not be continuously reviewed;
instead, they would be reviewed to place an
order that would make the inventory reach the
desired level.
Fixed order interval reordering
•
Fixed order quantity reordering
occurs when the
same amount of product
is reordered each time,
but the
timing varies
.
•
Inventory for items is monitored regularly, and
when the amount on hand reaches the reorder
point, the same quantity is ordered each time for
replenishment. The reorder point quantity is the
amount of inventory needed to cover daily
demand over the lead time.
Fixed order quantity reordering
Learning Block 4 – Unit 3: Tools or Techniques to Reduce
Uncertainty
Learning Block 4 – Unit 3: Tools or Techniques to Reduce
Uncertainty
Learning Block 4 – Unit 3: Tools or Techniques to Reduce
Uncertainty
•
Reorder Points
▫
It is important to decide which reorder point technique will be best to use
with particular products and inventories.
▫
ABC classification labels A items as the most critical and highest-selling
items, B items as the next level of importance down from A items, and C
items as the least important items in inventories.
fixed order quantity approach for critical items
fixed order interval approach for less critical items
Learning Block 4 – Unit 3: Tools or Techniques to Reduce
Uncertainty
•
Economic Order Quantity (EOQ)
▫
The EOQ helps companies determine how much to reorder for the fixed quantity model. It
determines the best quantity to order for replenishment that balances costs of ordering (i.e., in a
buying environment) or set-up costs (i.e., for production in a manufacturing environment) with
inventory carrying costs.
▫
Inventory carrying costs are separate from the value of the goods that is necessary to maintain or
hold inventory. Because holding inventory comes with a cost, every dollar that companies have in
inventory cannot be used elsewhere. Other inventory costs include the cost of the space to store
the inventory, the cost of personnel to manage the inventory, the cost of obsolescence, and the
cost of any damages to the inventory.
Learning Block 4 – Unit 3: Tools or Techniques to Reduce
Uncertainty
•
Economic Order Quantity (EOQ)
▫
key assumptions about the simple EOQ model:
Demand rates that are continuous, constant, and known (e.g., 100 units every month, and always for the same
amount)
Replenishment lead times that are constant and known (e.g., lead time to replenish raw materials is always 3
days)
All demand will be satisfied by the quantity ordered (e.g., 100 units will cover demand until the next order)
Costs per unit purchased and transportation costs remain the same, no matter what quantity is purchased
YouTube Video https://www.youtube.com/watch?v=AYpjPWmlyHM
Economic Order Quantity Formula
•
R = annual demand
•
A =
cost per order or cost
per machine setup
•
V = value of the item
•
W = inventory carrying
cost percentage
Learning Block 4 – Unit 3:
Tools or Techniques to
Reduce Uncertainty
Learning Block 4 – Unit 3: Tools or Techniques to Reduce
Uncertainty
•
Economic Order Quantity (EOQ)
▫
In an example of a gym equipment salesman, annual demand for gym mats is 3,600 per year, and each gym mat
costs $100. The annual holding cost per unit is 25%, and the cost to place an order from the gym mat supplier is
$200. Using the information in this example, the various values used in the formula would be as follows:
V = $100 per unit
W = 25% (or 0.25 in the formula)
A = $200 per order
R = 3,600 units per year
•
The EOQ in this case would be the square root of (1,440,000/25), or 240 gym mats.
Economic Order Quantity Formula
•
R = 3,600 units per year
•
A = $200 per order
•
V = $100 per unit
•
W = 25% (or 0.25 in the formula)
•
The EOQ in this case would be the
square root of (1,440,000/25), or
240 gym mats
Learning Block 4 – Unit 3:
Tools or Techniques to
Reduce Uncertainty
Learning Block 4 – Unit 3: Tools or Techniques to Reduce
Uncertainty
•
Lead Time Analysis
▫
Another way to reduce uncertainty is through lead time analysis and
corrective action based on this analysis. Lead time analysis involves
analyzing the various components of lead time to see if the time required
can be reduced or if each component can be made more consistent in
order to minimize uncertainty.
Learning Block 4 – Unit 3: Tools or Techniques to Reduce
Uncertainty
•
Lead Time Analysis
▫
Components of lead time could include the following:
time taken to receive an order
time to transmit an order to a supplier or to a warehouse
time to prepare or pick an order in a warehouse
time taken to pack an order
time taken to transport an order to a customer.
▫
Longer lead times result in larger inventories needed to cover demand during the lead time.
Therefore, if the lead time can be shortened, inventory can be reduced.
Learning Block 4 – Unit 3: Tools or Techniques to Reduce
Uncertainty
•
Role of Technology
▫
All the techniques and calculations discussed in this unit can be done by hand or in spreadsheets, but several software
applications can automate these calculations. Some software applications can also create various types of forecasts to
see which would be the most accurate. These applications will also set target inventory levels and replenishment
quantities. The main purpose of this type of software is to automate and streamline the process of forecasting.
▫
Advancements in software and computer technology have revolutionized business, providing demand planners with
desktop access to powerful computing capability. The forecasting software available has built-in capability, which has
made complex algorithms accessible by incorporating numerous automatic features (Tashman & Leach, 1991).
Forecasting software for demand planning uses built-in statistical models to forecast sales and demand, based on the
use of extensive data about past sales, and this helps to provide an idea of what to expect in the future.
Learning Block 4 Practice Questions
•
1. Which of the following are components of lead time?
▫
a) Order transmittal
▫
b) Order preparation
▫
c) Order receipt
▫
d) All of the above
Learning Block 4 Practice Questions
•
2. Which replenishment method results in the same amount of product
being ordered each time?
▫
a) Safety stock
▫
b) Fixed order interval
▫
c) Fixed order quantity
▫
d) Moving average
Learning Block 4 Practice Questions
•
3. What type of forecasting technique applies emphasis to certain time
periods?
▫
a) Linear regression
▫
b) Simple moving average
▫
c) Weighted moving average
▫
d) Expert forecast
Learning Block 4 Practice Questions
•
4. Which of the following is NOT an assumption to calculate EOQ?
▫
a) A changing rate of demand over time
▫
b) A constant and known replenishment
▫
c) The satisfaction of all demand
▫
d) A constant cost that is independent of the order quantity or time
Learning Block 4 Practice Questions
•
5. Which of the following types of forecast methods uses historical data
to predict future demand?
▫
a) Expert forecasts
▫
b) Causal forecasts
▫
c) Time series forecasts
▫
d) Lead time forecasts
Learning Block 4 Practice Questions
•
7. Which of the following inventory review approaches would be best
for fast moving items?
▫
a) Lead time analysis
▫
b) Fixed order interval
▫
c) Fixed order quantity
▫
d) Safety stock analysis
Learning Block 4 Practice Questions
•
8. Businesses have to carry ____________________ because there are
variations in demand, supply, and lead time.
▫
a) Safety stock
▫
b) Order quantities
▫
c) Sawtooth inventory
▫
d) Raw materials
Learning Block 4 Practice Questions
•
9. What can be calculated by multiplying daily demand by the length of
the lead time?
▫
a) Reorder point quantity
▫
b) EOQ
▫
c) Order processing time
▫
d) Picking time
Learning Block 4 Practice Questions
•
10. If there was a problem with a supplier, what would businesses have
to carry more of?
▫
a) Finished goods
▫
b) Raw materials
▫
c) Work in process inventory
▫
d) None of the above
Demand Planning
Communicating and Managing Demand
Learning Block 5
•
After completing this learning block, you will be able to:
▫
List the key aspects of demand sensing and communication
▫
Discuss the key aspects of gaining demand consensus in organizations
▫
Identify the key metrics used in demand management
▫
Explain the key aspects of managing and prioritizing demand
Learning Block 5 Objectives
•
Demand sensing is a way to obtain information on demand while focusing on real-time changes in
demand. Traditionally, forecasting accuracy is based on using historical data to determine potential
future demand. However, demand sensing does not use historical data to determine demand;
instead, it uses a broader range of real-time demand signals, including current data from the
supply chain and different mathematics to create more accurate forecasts.
•
Accurately and effectively communicating demand in a timely fashion is vital in companies and
requires structured and integrated processes. Once the demand plan has been developed, it
should be communicated to other groups within companies. This unit also explores demand
communication in more detail.
Learning Block 5 – Unit 1: Demand Sensing and Communicating Demand
•
Demand Sensing
▫
For demand management to be truly effective, it is important to sense demand and
changes to demand as close to real time as possible.
▫
True Demand – demand for products and services that a customer truly wants
If a retailer has a stockout, then true demand is unknown. All of the product sold, but how much
more could have been sold?
Did customer buy substitute products?
True demand becomes even harder to estimate for wholesalers that supply retailers and for
manufacturing plants that supply wholesalers because they must estimate demand based on
previous orders received from retailers or wholesalers, respectively.
Learning Block 5 – Unit 1: Demand Sensing and Communicating Demand
•
Demand Sensing
▫
Customer demand is constantly changing and real-time data is critical to achieving accurate demand forecasts and responding to
changes
▫
Point-of Sale (POS) is the time and place in which retail transactions are completed, and POS data include data about
transactions: time of transaction and quantity purchased.
▫
Other types of information that could impact customer demand include:
information related to weather events (e.g., hurricanes or floods)
economic indicators, which show an improvement or decline in the economy
sales of products from competitors
social media activities and trends.
Learning Block 5 – Unit 1: Demand Sensing and Communicating Demand
•
Demand Sensing
▫
Demand sensing is a way to structurally sort out large amounts of data to recognize patterns and separate
indicators that can affect demand or trends in demand.
▫
Demand sensing technology has already been adopted by companies that are recognized as having
effective supply chain management. For example, a company in the U.S. might sell products in Europe and
use demand sensing technology to capture and track data about the state of the economy in Europe.
▫
This data would be captured and analyzed to see if the economy is improving or declining; then, the
company could use this to indicate potential demand for its products in Europe.
Learning Block 5 – Unit 1: Demand Sensing and Communicating Demand
•
Demand Sensing
▫
Demand sensing is a way to structurally sort out large amounts of data to recognize patterns and separate indicators
that can affect demand or trends in demand.
▫
Demand sensing technology has already been adopted by companies that are recognized as having effective supply
chain management. For example, a company in the U.S. might sell products in Europe and use demand sensing
technology to capture and track data about the state of the economy in Europe.
▫
This data would be captured and analyzed to see if the economy is improving or declining; then, the company could
use this to indicate potential demand for its products in Europe.
Learning Block 5 – Unit 1: Demand Sensing and Communicating Demand
•
Delivering products or services to customers at the desired time in the desired quantities requires constant monitoring, feedback, and
analysis to improve decision-making based on customers’ requests: when it is needed, what can be delivered, and when can it be delivered.
•
Matching supply and demand can be achieved through a demand management process based on interdepartmental collaboration, effective
communication, and the use of techniques in demand-sensing and demand-shaping.
•
This also means using all available relevant information to support decisions regarding the extent of the actual and anticipated demand and,
from this, to determine how much to make of a product, when to have this product available to be shipped, when this product should be
available to customers, and for how long it should be available. This is at the heart of demand-sensing and shaping activities.
•
When organizations clearly understand demand in through demand sensing, they must communicate this demand throughout the
organization, as described in the next section.
YouTube Video: https://www.youtube.com/watch?v=vRqKS16wuow
Learning Block 5 – Unit 1: Demand Sensing and Communicating Demand
•
Communicating Demand
▫
Demand management cannot be accomplished effectively without clear, continuous, and timely
communication between the demand manager and key groups at all levels within a company,
including marketing, sales, manufacturing, and procurement groups.
▫
The demand communication process should focus on communicating the true state of demand,
the actions that need to be carried out to accomplish the demand objectives, and the actions
needed to keep supply and demand coordinated. If demand and demand changes are not
communicated quickly after they are noted, then companies’ responses can be too late.
Learning Block 5 – Unit 1: Demand Sensing and Communicating
Demand
•
Communicating Demand
•
Feedback and communication must take place continuously because demand changes with time and can be affected
by the various factors. This feedback and performance monitoring occurs in various groups within companies:
▫
Feedback to the sales group:
The purpose of this feedback is to alert the sales force of expected sales and products that will be
available to sell.
▫
Feedback to the marketing group:
The purpose of this feedback is to communicate any changes that are required in the company
to meet demand objectives and any expectations for marketing in stimulating or slowing demand.
▫
Feedback to the procurement group:
The purpose of this feedback is to communicate the demand plan to procurement so they
can input necessary products (e.g., raw materials and components are available when needed).
Learning Block 5 – Unit 1: Demand Sensing and Communicating Demand
•
Communicating Demand
▫
Feedback from the procurement group:
The purpose of this feedback is to alert demand managers of changes or anticipated changes to the timing
or quantities of procured goods; then, any necessary changes can be made to factor in material availability and to prioritize accordingly.
▫
Feedback to the master production scheduler:
The purpose of this feedback is to quickly alert master production schedulers of changes in demand
mix and/or volumes so that any necessary changes can be made to the master production schedule (e.g., priorities or volumes in manufacturing
products).
▫
Feedback from the master production scheduler:
The purpose of this feedback is to alert demand managers of production capacity constraints so
that necessary actions can be taken to prioritize products (e.g., highest demand products).
▫
Feedback from the sales group:
The purpose of this feedback is to alert demand managers to changes or anticipated changes to demand and timing
so that necessary actions can be carried out to prioritize accordingly.
Learning Block 5 – Unit 1: Demand Sensing and Communicating Demand
•
Effective demand management involves quickly communicating changes in demand to various
groups in companies to allow them to respond effectively to these changes. Collaborative
efforts are required here, and various scenarios can exist when changes in demand occur:
▫
Supply should be managed to meet demand if the demand decreases or increases and does not match
supply and if the materials have not yet been purchased or if manufacturing has not added value to
the product. Examples of changing demand include increasing or decreasing order sizes, expediting
orders, changing production schedules, and others.
▫
Demand should be managed and prioritized to meet supply if the demand decreases or increases and
does not match supply and if the materials have already been purchased or if the value has been
added to products through production or other means. Demand management techniques can include
carrying out marketing promotions to increase demand (e.g., increasing prices to decrease demand).
Learning Block 5 – Unit 1: Demand Sensing and Communicating Demand
•
Effective communication is essential to effective demand planning. If different departments are using different
demand plans there will be a constant struggle to meet demand. There must be consensus on the demand plan.
•
This happens in regular demand consensus review meetings, which are normally carried out monthly. At this
meeting, the various groups (sales, marketing, procurement, , finance, etc.)come together to agree on one demand
plan.
•
Consensus is reached by reviewing the overall demand plan as well as the individual products that make up this
plan. Demand planners then complete the demand plan using the agreed upon figures. The demand plan is
reviewed for volumes of anticipated product demand and the revenue that will be generated over time.
•
Results from demand consensus meetings are used for deploying the right product, at the right place, at the right
time, and for the right customer
Learning Block 5 – Unit 2: Demand Planning and Gaining Consensus
•
Market share
: The percentage of an industry or market’s total sales that is earned by a particular
company over a specified time period (Market share, n.d.). Market share is calculated by taking a
company’s sales from the time period specified and dividing it by the total sales of the industry
over the same period. This metric is used to provide a general idea of a company’s size to its
market and its competitors.
•
Customer retention:
The ability of a company to retain its customers over time (e.g., the amount
of repeat business received from customers over an extended period of time).
•
Cost and profit per customer
: This involves the amount of costs required to service a given
customer and the profit from a given customer. The costs include attracting, selling, and servicing
each customer. The profits, however, include any profit the firm makes from serving a customer
over a specified period of time.
Learning Block 5 – Unit 3: Demand Metrics
•
Customer satisfaction
: Measures how products and services supplied by a company meet or surpass
customer expectations. It can be based on the number of customers that express satisfaction with a
company’s products and services according to specified satisfaction goals; it can also be indicated by,
and based on, the amount of repeat business a company receives from customers.
•
Inventory metrics
: Measures used to determine whether a company is effectively and efficiently
managing inventory. Many key inventory metrics have been developed and are commonly used by
companies to measure inventory management effectiveness and efficiency.
•
Overall or gross profit margin
: This is a financial metric used to assess a firm's financial health by
determining the proportion of money left over from revenues after accounting for the cost of goods
sold.
Learning Block 5 – Unit 3: Demand Metrics
•
Measuring the Accuracy of the Demand Plan
▫
Companies should understand how closely their demand plan agrees with
actual demand over time, as well as the degree of difference. From this,
companies should be able to determine if the demand plan is reliable and if
the accuracy improves or worsens; then, corrective action could be taken.
For the accuracy of this measure, the demand plan must be broken down
into individual item levels so that the projected demand is being measured
for individual products.
Learning Block 5 – Unit 3: Demand Metrics
•
Measuring the Accuracy of the Demand Plan
▫
For example, a pack of 12 hand lotions would be broken down into individual bottles of hand
lotion. Then, it becomes possible to pinpoint which items’ demands are being more accurately
predicted and the degree of difference. This would be measured by products in which demand
has fallen short of the projections and by products in which demand has exceeded the
projections.
▫
Based on this measurement, demand management can work with marketing and sales groups to
determine possible reasons for this and to take corrective action. This corrective action could
include adjusting future demand plans based on the degree of accuracy or inaccuracy of past and
current demand plans.
Learning Block 5 – Unit 3: Demand Metrics
•
Measuring the Accuracy of the Demand Plan
▫
The frequencies of measurements should ideally be in sufficient time to
understand the reasons for demand variation from the plan and to allow
meaningful actions to adjust and meet any changes in demand, monthly is
typical.
Learning Block 5 – Unit 3: Demand Metrics
•
Measuring the Accuracy of the Demand Plan
•
The typical goals for overall demand plan accuracy are 95% at the product family level. A product family is a group of related goods
that are manufactured by a single company. For example, a company might manufacture and sell suntan lotion.
•
Accuracy goals should also be set by level of sales volume, according to ABC classification, as follows:
▫
A items are the ~20% of items that account for ~80% of the sales volume.
▫
B items are the ~30% of items that account for ~15% of the sales volume.
▫
C items are the balance items: ~50% of items that account for ~5% of the sales volume.
•
Different demand plan accuracy levels and objectives should be developed and set for each of these categories. The most time and
management attention should be spent on evaluating demand plan accuracy for A items, a little less should be spent on B items, and
even less should be spent on C items
Learning Block 5 – Unit 3: Demand Metrics
•
A key aspect of the demand management function is prioritizing
demand. This essentially requires deciding which products need the
most focus in demand prioritization. Focusing on certain products can
mean allocating more or fewer resources as demand increases or
decreases, or is projected to increase or decrease.
Learning Block 5 – Unit 4: Prioritizing Demand
•
When is it Necessary to Prioritize Demand?
▫
If production or supply constraints impact the demand plan and make it
necessary to shift priorities between products.
▫
If demand increases or decreases, and changes have to be made to prioritize the
production and supply of goods, such as allocating necessary resources (e.g.,
additional machine capacity or reduced production, additional funding for supply
or reduced spending on supply, etc.).
Learning Block 5 – Unit 4: Prioritizing Demand
•
Best Practices
▫
Managing and prioritizing, or reprioritizing, should occur when it becomes evident that the
volume, mix, and timing of actual demand is different from the demand plan or the company’s
ability to meet the required demand.
▫
▫
Demand planners and managers work closely alongside sales, marketing, manufacturing, and
supply groups. Then, they can begin to understand all the ramifications of changing the demand
plan and the use of resources.
▫
Communicate demand changes throughout the organization quickly.
▫
A process must also be in place within companies to continuously prioritize demand and to
communicate this throughout the organization.
Learning Block 5 – Unit 4: Prioritizing Demand
Learning Block 5 Practice Questions
•
1. Demand sensing ____________________.
▫
a) Involves basing demand on historical sales data
▫
b) Is impossible to carry out
▫
c) Is very seldom practiced by companies
▫
d) Involves sorting massive amounts of data into recognizable patterns
Learning Block 5 Practice Questions
•
2. The demand communication process should be aimed at
____________________.
▫
a) Decreasing costs
▫
b) Communicating the true state of demand
▫
c) Communicating the actions needed to accomplish demand objectives
▫
d) Both b and c
Learning Block 5 Practice Questions
•
3. The purpose of feedback for the marketing group ____________________.
▫
a) Is to alert the master production scheduler to changes in demand mix and/or
volumes
▫
b) Is to alert them to the sales that occurred over the last year in a company
▫
c) Is to communicate what is expected from them with regard to stimulating or
slowing demand
▫
d) Does not have an impact on demand
Learning Block 5 Practice Questions
•
4. Gaining consensus on the demand plan is vital. This happens through
____________________.
▫
a) Infrequent communication between the groups concerned
▫
b) Zero communication
▫
c) Regular demand consensus review meetings
▫
d) Review meetings without the demand planner
Learning Block 5 Practice Questions
•
5. As the demand plan accuracy improves there should be a related
____________________.
▫
a) Increase in costs
▫
b) Increase in meetings to discuss the demand plan
▫
c) Improvement in inventory turns
▫
d) Improvement in salaries
Learning Block 5 Practice Questions
•
6. Businesses are interested in knowing ____________________.
▫
a) Who developed the demand plan
▫
b) The rate with which inventory moves through a distribution facility
▫
c) How closely the demand plan tracks with actual demand over time and
the degree of difference between them
▫
d) The historical sales within a company
Learning Block 5 Practice Questions
•
7. Demand plan accuracy evaluation and adjustment should typically
take place ____________________.
▫
a) Every hour
▫
b) Once a year
▫
c) From time to time
▫
d) Once a month
Learning Block 5 Practice Questions
•
8. Demand planning can be a powerful way to ____________________.
▫
a) Get suppliers to reduce costs
▫
b) Increase sales
▫
c) Increase inventory
▫
d) Promote a balanced flow of goods across a supply chain
Learning Block 5 Practice Questions
•
9. A key aspect of successful demand management is
____________________.
▫
a) Trying to influence patterns by managing demand
▫
b) Trying to influence patterns by managing supply
▫
c) Trying to reduce demand
▫
d) Trying to increase demand
Learning Block 5 Practice Questions
•
10. There are a number of typical situations where it becomes
necessary to manage and prioritize demand, such as
▫
a) When production or supply constraints impact the demand plan
▫
b) When there are no production or supply constraints
▫
c) When there is a change in management and a new demand plan is
required
▫
d) When no demand plan exists
Demand Planning
Contemporary Approaches to Demand Planning
and Management
Learning Block 6
•
After completing this learning block, you will be able to:
▫
Describe CPFR, how it works, and its benefits
▫
Discuss pull systems versus push systems
▫
Explain the concept of demand shaping
▫
List some key best practices in demand planning
Learning Block 6 Objectives
•
CPFR is a method of cooperation between suppliers and customers to better align forecasts, production,
and orders to reduce amount of inventory. This method follows a defined framework that combines the
intelligence of multiple trading partners with the planning and fulfillment of customer demand.
•
CPFR has the objective of increasing product availability to customers while reducing inventory,
transportation, and logistics costs.
•
CPFR involves collaborative forecasting, which entails collecting and reconciling information inside and
outside organizations and working together with other supply chain partners in order to come up with
single projections of demand.
•
A key reason that CPFR is being used more by companies is that it helps reduce the bullwhip effect.
Learning Block 6 – Unit 1: Collaborative Planning, Forecasting, and
Replenishment (CPFR)
•
The Bullwhip Effect
▫
The bullwhip effect is an observed phenomenon in forecast-driven
distribution channels. It refers to a trend of increasingly larger swings in
inventory that respond to changes in customer demand, especially when
observing companies further back in the supply chain for products
YouTube Video: https://www.youtube.com/watch?v=2nlmkTYZG5s
Learning Block 6 – Unit 1: Collaborative Planning, Forecasting, and
Replenishment (CPFR)
•
The Bullwhip Effect
▫
Bullwhip effect can be a result of supply chain factors (e.g., the timing of when orders are placed and
when these orders are supplied), demand and supply variations, lack of communication, and
disorganization.
The bullwhip effect impacts inventory holding throughout the supply chain. Variations of orders in the
lower parts of the supply chain (i.e., end customers, such as retailers) develop and are more pronounced
in the higher parts of the supply chain (i.e., suppliers, such as raw materials or component suppliers).
This occurs because each entity in the supply chain over estimates or under estimates demand, resulting
in exaggerated fluctuations and lead, as well as over stocking or under stocking inventory.
Learning Block 6 – Unit 1: Collaborative Planning, Forecasting, and
Replenishment (CPFR)
•
The Bullwhip Effect
▫
As an example of variations of orders, a manufacturer of skin care products might experience a series of erratic
shifts of ordering up and down the supply chain for a popular brand of skin care cream.
▫
This supply chain includes the manufacturer that supplies a wholesaler, which, in turn, supplies a retailer. In this
example, by looking up and down the supply chain, the wholesaler’s orders have more variability than does the
actual level of demand happening at the retail stores. This would result from the wholesaler basing its forecast on
projected demand from the retailer, which never completely reflects actual demand.
▫
This means that the wholesaler either over estimated or under estimated demand and either over ordered or
under ordered from the manufacturer, based on projected demand. This leads to erratic ordering.
Learning Block 6 – Unit 1: Collaborative Planning, Forecasting, and
Replenishment (CPFR)
•
The Bullwhip Effect
The bullwhip effect usually increases the amount of inventory held in the supply chain; even a moderate
amount of demand uncertainty and variability is increased at each link in the supply chain. If all links in the
supply chain make ordering and inventory decisions on their own and for their own perceived needs, this
would lead to, in some cases, very high levels of inventory.
This would occur because ordering inventory and determining safety stock requirements often occurs
simultaneously at many places across the supply chain. However, if all links in the supply chain order too
little product, then they may possibly run out of stock and not be able to supply customers’ orders, which
can result in lost sales.
Learning Block 6 – Unit 1: Collaborative Planning, Forecasting, and
Replenishment (CPFR)
•
The Bullwhip Effect
A lack of trust complicates demand planning between partners in the supply chain, which can also
contribute to the bullwhip effect. Sometimes, companies might hold extra inventory in case their suppliers
do not deliver on time or in the correct quantity. Similarly, suppliers might hold extra inventory in case their
customers increase their orders at the last minute.
This lack of trust causes the entire supply chain to hold too much inventory. Additionally, an estimated 40%–
60% of costs that companies have to bear are caused externally, so coordination with supply chain partners
is key. These supply chain partners include suppliers and customers throughout the supply chain.
Learning Block 6 – Unit 1: Collaborative Planning, Forecasting, and
Replenishment (CPFR)
•
How CPFR Works and Results from Using CPFR
▫
Companies cooperate using CPFR to manage inventory, provide inventory visibility, and order and
replenish product throughout the supply chain. Information is often shared among partners in the
supply chain during regular meetings and via secure intranet links. Information-sharing helps supply
chain partners plan for and meet customer demand, including variability due to anticipated and actual
customer demand, lead times, forecasts, and production levels.
▫
Sharing information also allows supply chain partners to receive real-time updates about inventory
and demand, which reduces uncertainty and helps reduce the need for large amounts of inventory.
Learning Block 6 – Unit 1: Collaborative Planning, Forecasting, and
Replenishment (CPFR)
•
How CPFR Works and Results from Using CPFR
▫
For example, a major retailer might discover that one of its suppliers, a pharmaceutical company, is not able to meet the
buyer’s requirements for holding enough stock to satisfy demand on a regular basis. The two companies meet to see how the
problem can be resolved and to develop a process to link customer demand with replenishment needs through the entire
supply chain. They develop a test run, or pilot, in which they look at the forecast demand for toothpaste at the retail firm that
was continuously running out of stock.
▫
They first test the collaborative concept on paper and then demonstrate in a computer lab that the Internet can be used for the
information exchange. The retailer and supplier then set up a joint planning group to forecast demand as well as a real-time
system for sharing demand through a secure Internet link. The supplier is then able to see demand in real time and adjust its
planning and delivery schedules accordingly. This information results in a substantial increase of toothpaste stock at the
retailer’s stores, reduced supply lead times, and increased sales overall for both companies.
Learning Block 6 – Unit 1: Collaborative Planning, Forecasting, and
Replenishment (CPFR)
•
How CPFR Works and Results from Using CPFR
▫
According to the Voluntary Inter-industry Commerce Standards (VICS), some of the benefits
that implementing CPFR has produced across several programs include the following:
Increased sales by 10% to 30% by being in stock more
▫
Increased margin rate by 2% to 6% by reducing inventory costs
▫
Increased in-stock percentages by 2% to 7% from better stock planning
▫
Decreased inventory by 10% to 30% from reduced safety stock
▫
Improved forecast accuracy by 20% to 30% from sharing data
▫
Decreased logistics and operating costs by 10% to 28% from all of the above
Learning Block 6 – Unit 1: Collaborative Planning, Forecasting, and
Replenishment (CPFR)
•
Inventory management approaches generally distinguish between pull
and push systems. Sometimes called a reactive system, the pull
approach relies on customer demand to pull product through a logistics
system. In contrast, the push, or proactive, approach uses inventory
replenishment to anticipate future demand.
Learning Block 6 – Unit 2: Pull and Push Systems
•
The trigger to initiate an act in a pull
environment is a customer order.
•
Responds quickly to abrupt changes in
demand
•
One way communication between point of
need and supply
Pull System
•
The trigger to initiate an act in a push
environment originates upstream (with
customers) with downstream entities
(suppliers) managing the consequences. The
trigger is often a forecast of anticipated
demand that sets the supply chain in motion.
•
Meets system wide inventory needs in an
orderly and disciplined way according to a
master production plan
•
Two way communication between point of
need and supply
Push System
Learning Block 6 – Unit 2: Pull and Push Systems
•
For example, fast food restaurants operate on pull systems, and bakery
services operate on push systems. Fast food restaurants make
hamburgers and sandwiches in response to current demand because
individual purchases trigger more food item production. In contrast,
bakeries attempt to anticipate what customers will need and pushes
food items to where customers need them ahead of time.
Learning Block 6 – Unit 2: Pull and Push Systems
In traditional push operations, most manufacturing operations are concerned with
equipment utilization. Most companies that invest capital in equipment want to see
the equipment being used as much as possible and as efficiently as possible.
Performance measures within these centers focus on efficiency, pieces produced per
hour, and equipment utilization.
However, idle equipment is better than producing unneeded components,
assemblies, and finished products. This means that many manufacturing operations,
or work centers, will produce items to anticipate demand, sometimes just to ensure
high equipment utilization, which essentially equates to pushing items into the supply
chain.
Learning Block 6 – Unit 2: Pull and Push Systems
•
An example of a push mentality involves the U.S. operations of Hyundai. Hyundai has a
history of building factories that produce vehicles with no orders being placed for these
specific vehicles in anticipation of future demand. At one point, Hyundai had about 32,000
unsold Sonata sedans located at its Alabama assembly plant.
•
The company establishes it sales targets on what it can produce rather than what it can sell.
Pushing production without any immediate demand, and often in excess of eventual
demand, can result in high inventory carrying costs with products waiting to be sold and can
result in potentially decreased profits if products are sold below normal prices.
Learning Block 6 – Unit 2: Pull and Push Systems
•
Visible Signals
▫
Central to a pull system are visible signals that indicate that particular items are
needed by work centers. These signals are also known as kanbans; this term
originates from Japanese manufacturing systems . Kanbans are a signaling device
that authorize and instruct from downstream centers for production or
withdrawal of items to upstream centers. These signals are ideally non-verbal and
can consist of cards, lights, spaces in a rack, or squares on a floor.
YouTube Video: https://www.youtube.com/watch?v=zkQxvkXSiuA
Learning Block 6 – Unit 2: Pull and Push Systems
•
Demand Shaping occurs when companies try to influence what customers
will buy. Demand shaping is what marketing and sales groups in organizations
do as part of the natural business process: They attempt to continuously
influence demand.
•
Demand shaping involves the demand signals discussed in the previous unit
during demand sensing. This should decide how best to shape or influence
demand. It also requires continuously listening to and obtaining feedback
from customers as input to demand shaping activities.
Learning Block 6 – Unit 3: Demand Shaping
•
Tactics for Demand Shaping
▫
encouraging customers to buy alternative products
▫
increasing product purchases
▫
delaying product purchases
•
When companies have fixed capacity and supply is less than demand, they may
attempt to shape demand by increasing prices and reducing marketing spend. Also,
companies can redirect customer spending by encouraging them to buy alternative
products that may have a greater supply available by offering these products at
discounted prices.
Learning Block 6 – Unit 3: Demand Shaping
•
A sporting goods retail store that sells tennis equipment might shape demand in various situations.
For example, it might shape demand when there is a warning from suppliers that a particular brand
of tennis rackets will not be shipped on time to meet current levels of demand for this tennis racket.
The tennis shop, which processes orders via its website and a toll-free order line, realizes that at the
current rate of purchase, they will run out of this brand of racket before the next shipment of these
rackets arrives from the supplier.
•
To avoid this, the company uses demand shaping by altering the website and updating the screens.
Now, the tennis retailer does not display this tennis racket front and center on its website landing
page; instead, the retailer displays a more expensive model of the same make of tennis racket and at
a price premium of only a few dollars more. This new price is significantly less than the normal
premium price for the upgraded tennis racket, but it is still sufficient for the tennis retailer to make a
profit. By adjusting the upgrade price, the company can help shape demand so that they potentially
do not run out of the lower grade tennis racket until a new delivery has been received.
Learning Block 6 – Unit 3: Demand Shaping
•
A sporting goods retail store that sells tennis equipment might shape demand in various
situations. For example, it might shape demand when there is a warning from suppliers that
a particular brand of tennis rackets will not be shipped on time to meet current levels of
demand for this tennis racket. The tennis shop, which processes orders via its website and a
toll-free order line, realizes that at the current rate of purchase, they will run out of this
brand of racket before the next shipment of these rackets arrives from the supplier.
•
To avoid this, the company uses demand shaping by altering the website and updating the
screens. Now, the tennis retailer does not display this tennis racket front and center on its
website landing page; instead, the retailer displays a more expensive model of the same
make of tennis racket and at a price premium of only a few dollars more. This new price is
significantly less than the normal premium price for the upgraded tennis racket, but it is still
sufficient for the tennis retailer to make a profit. By adjusting the upgrade price, the
company can help shape demand so that they potentially do not run out of the lower grade
tennis racket until a new delivery has been received.
Learning Block 6 – Unit 3: Demand Shaping
•
There are several benefits in shaping demand.
▫
The customer is potentially happy with purchasing the original tennis racket
or the relatively inexpensive upgrade tennis racket, and potentially does
not go to a different retailer.
▫
There is also no back order involved with the purchase because it can be
completed and billed immediately if the upgraded tennis racket is selected,
which keeps the cash-to-cash time short.
Learning Block 6 – Unit 3: Demand Shaping
•
There are several benefits in shaping demand.
▫
The customer is potentially happy with purchasing the original tennis racket
or the relatively inexpensive upgrade tennis racket, and potentially does
not go to a different retailer.
▫
There is also no back order involved with the purchase because it can be
completed and billed immediately if the upgraded tennis racket is selected,
which keeps the cash-to-cash time short.
Learning Block 6 – Unit 3: Demand Shaping
•
Another often used tactic to attempt increasing demand is offering
price discounts. This is often done to stimulate sales at certain times of
year and to help increase demand for items that companies wish to sell
at increased rates.
•
A typical example of this is discounts offered by car companies on year-
end sales of current year models. In this case, the car company has a
stock of cars that it wishes to sell prior to the new year’s model so that
it is not left with excess stock.
Learning Block 6 – Unit 3: Demand Shaping
•
Another often used tactic to attempt increasing demand is offering
price discounts. This is often done to stimulate sales at certain times of
year and to help increase demand for items that companies wish to sell
at increased rates.
•
A typical example of this is discounts offered by car companies on year-
end sales of current year models. In this case, the car company has a
stock of cars that it wishes to sell prior to the new year’s model so that
it is not left with excess stock.
Learning Block 6 – Unit 3: Demand Shaping
•
However, if these tactics are used on a regular basis, customers’ buying
behaviors may change.
•
For example, where there are patterns of discounted offers for goods,
customers may delay purchasing these goods until the discounts are offered
because they may start to expect those discounted prices at these times.
•
This can negatively impact companies’ long-term financial health because
customers might not purchase products throughout the year at initial prices
but might wait until discounts are provided. This could then result in lost
revenue and lost profits.
Learning Block 6 – Unit 3: Demand Shaping
•
Demand Shaping and the Demand Plan
▫
Attempts to shape demand must also be communicated with demand
planners and the other affected groups within companies. Communication
allows demand planners to update the demand plan, work with affected
groups in companies, ensures that the demand plan is met, and confirms
that tasks are taken by the various groups in line with the demand plan.
Learning Block 6 – Unit 3: Demand Shaping
Learning Block 6 Practice Questions
•
1. CPFR is ____________________.
▫
a) Also known as demand shaping
▫
b) A way of supplying products as they are needed
▫
c) A proactive method of information-sharing among key supply chain
partners
▫
d) A formula used to calculate safety stock
Learning Block 6 Practice Questions
•
2. CPFR involves ____________________.
▫
a) Collaborative forecasting, which involves collecting and reconciling information inside and
outside of the organization to come up with a single projection of demand
▫
b) Non collaborative forecasting, which involves collecting and reconciling information
within the organization to come up with a single projection of demand
▫
c) Collaborative forecasting, which involves collecting and reconciling information inside and
outside of the organization to come up with multiple projections of demand
▫
d) Collaborative forecasting, which involves collecting and reconciling funds inside and
outside of the organization to come up with a single projection of demand
Learning Block 6 Practice Questions
•
3. With CPFR, supply chain partners coordinate plans in order to
____________________.
▫
a) Increase variance between supply and demand and share the benefits of a
more efficient and effective supply chain
▫
b) Reduce variance between supply and demand and share the benefits of a more
efficient and effective supply chain
▫
c) Increase variance between supply and demand and share the costs of a less
efficient and effective supply chain
▫
d) Reduce variance between supply and demand and share the benefits of a less
efficient and effective supply chain
Learning Block 6 Practice Questions
•
4. Several factors are critical to the success of CPFR, including
▫
a) Sharing sales information
▫
b) Addressing variability
▫
c) Aligning incentives
▫
d) All of the above
Learning Block 6 Practice Questions
•
5. A key principle of demand shaping is ____________________.
▫
a) Encouraging customers to buy alternative products or delay purchasing
▫
b) Encouraging customers to buy a competitors products or to delay
purchasing
▫
c) Discouraging customers from buying alternative products or to delay
purchasing
▫
d) Encouraging suppliers to buy alternative products or to delay purchasing
Learning Block 6 Practice Questions
•
6. When a company has a fixed capacity and supply is less than demand,
then the company may ____________________.
▫
a) Encourage customers to buy alternative products, for which there may
be a greater supply available
▫
b) Do nothing to change demand
▫
c) Increase prices and reduce marketing spending
▫
d) Both a and c
Learning Block 6 Practice Questions
•
7. Another tactic used to increase demand is ____________________.
▫
a) Offering price discounts
▫
b) Increasing prices
▫
c) Reducing the number of suppliers
▫
d) Doing nothing
Learning Block 6 Practice Questions
•
8. An issue with the type of demand shaping described in Question 7 is
that, if used on a regular basis, ____________________.
▫
a) Sales will plummet
▫
b) Buying behaviors may change
▫
c) Customers may delay purchasing goods until a time when the discounts
are offered
▫
d) Both b and c
Learning Block 6 Practice Questions
•
9. Sometimes called a reactive system, the pull approach relies on
____________________.
▫
a) Customer demand to pull a product through the logistics system
▫
b) Supplier demand to pull a product through the logistics system
▫
c) Top management demands to pull a product through the logistics system
▫
d) Customer demands for reduced prices
Learning Block 6 Practice Questions
•
10. Management and prioritization, or reprioritization, of demand
should occur when it becomes evident that ____________________.
▫
a) All other actions have failed
▫
b) The company has become insolvent
▫
c) Demand is steady
▫
d) The volume, mix, and timing of actual demand is different from the
demand plan
Demand planning is crucial for company success, involving estimating anticipated demand, factors affecting demand, key roles and skills, and responsibilities. This process aligns organizations with expected demand, optimizes supply chain activities, and ensures sufficient resources to meet customer needs efficiently.
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Demand Planning Introduction to Demand Planning Learning Block 1 SCPro Fundamentals Training Program SCPro Fundamentals Training Program This material was funded in whole by a $24.5M TAACCCT grant awarded by the U.S. Department of Labor s Employment and Training Administration to the LINCS Consortium. Unless otherwise noted, this work is licensed under the Creative Commons Attribution 4.0 International License. To view a copy of this license, go to http://creativecommons.org/licenses/by/4.0/ on your web browser
Learning Block 1 Objectives After completing this learning block, you will be able to: Outline demand planning and why it is important to company success Discuss the factors that affect demand Explain the main approaches to planning and managing demand Identify the key roles and skills required in demand planning Discuss the key responsibilities and metrics used in planning demand
Learning Block 1 - Unit 1: Supply and Demand Planning Demand planning includes the steps and process taken to accurately estimate anticipated demand. Demand estimates include: anticipated orders orders received adjustments resulting from changes in inventory policies and actions
Learning Block 1 - Unit 1: Supply and Demand Planning Demand estimates are relied upon by other departments and are used to create: manufacturing schedules procurement plans inventory stocking policies. Essentially, you are working backwards from an end goal of selling your product (i.e. demand), using the goal to create enough product to fulfill the demand.
Demand Planning vs Supply Planning What s the difference? Learning Block 1 - Unit 1: Supply and Demand Planning Supply Planning supports Demand Planning and seeks to ensure enough resources to fulfill the demand Figure 1. Supply and Demand balance. Acquired from CanStockPhoto.com
Learning Block 1 - Unit 1: Supply and Demand Planning Demand planning involves anticipating demand, aligning entire organizations with expected demand for various products and services, and optimizing supply chain activity around expected levels of demand. Aim to: Correct inventory level sizes increase profit maximizing revenue Demand planning is not marketing and sales, but must understand sales and marketing plans to forecast demand.
Learning Block 1 - Unit 1: Supply and Demand Planning Supply planning involves ensuring that materials, components, consumables, and services are available to support the demand plan. Supply planning may take place in one or more departments. For example, some firms conduct supply planning in the manufacturing department, others supply plan in procurement, and even others have a defined formal planning department. There must be effective communication between Demand planners and supply planners YouTube Video: https://www.youtube.com/watch?v=RfZjikQ2nYs
Learning Block 1 - Unit 2: Factors Affecting Demand Several factors affect demand the market size complimentary products and services substitute products and services customer preferences future expectations income levels market forces risk events
Learning Block 1 - Unit 2: Factors Affecting Demand Market Size Larger markets naturally have a larger demand. The size of the market will fluctuate based on the product and consumers taste. E.g. if gas prices increase, the market for fuel efficient cars increases
Learning Block 1 - Unit 2: Factors Affecting Demand Complementary Products and Services Complementary products or services are typically associated with, or are natural components of, companies products or services. Change in price of a complementary product can change demand for a companies product. e.g. an increase in price of peanut butter may effect the demand of jelly.
Learning Block 1 - Unit 2: Factors Affecting Demand Substitute Products and Services Substitute products and services are similar to the product or service offered and satisfy the same need. Therefore they can be used in place of one another. Butter/Margarine Coke/Pepsi Tylenol/store brand
Learning Block 1 - Unit 2: Factors Affecting Demand Customer Preference Customers personal preferences for products can change from time to time and can be influenced by advertisements, promotions, and customer perceptions of the value of products or services. Running an extended sale on a product can negatively influence demand for competitor s products Uber and Lyft are impacting the demand for taxis by offering the same service, a ride, with a different experience that younger people prefer Demographic changes can shift demand for certain products As Baby Boomers age, products that appeal to or are necessary for the elderly will see a demand increase.
Learning Block 1 - Unit 2: Factors Affecting Demand Customer Future Expectations If consumers expect the cost of a product or service to increase in the near future, or if they expect it to become scarce for a period of time, they may buy more before the expected price increase or scarcity. These advance purchases would cause demand, and possibly prices, to increase. For example, an environmental event that negatively effects coffee crops leading to scarcity may cause people to stockpile coffee at a cheaper price.
Learning Block 1 - Unit 2: Factors Affecting Demand Income Consumers salaries and their relative increases or decreases over time impact demand for products and services. As consumers incomes increase, they may have more disposable income, and demand for certain products and services they purchase may increase.
Learning Block 1 - Unit 2: Factors Affecting Demand Shifting Commodity Markets Commodity markets, such as rubber, corn, gold, copper, and oil, are a real source of concern for many organizations because a primary characteristic of most commodity markets is that no single industrial buyer affects or controls prices within these markets. However, cartels of producers might attempt to manipulate world markets. Many commodities operate in markets that economists call pure competition. This means that prices are dictated by the market forces of supply and demand. For example, an increase in copper demand in China can result in higher prices for copper worldwide and for products that contain copper because of the resulting shortage of copper supply.
Learning Block 1 - Unit 2: Factors Affecting Demand Risk Events Types of Risk Events Global supply chains are vulnerable to many forms of risk, including natural disasters, terrorism, and currency fluctuations. These disasters can completely disrupt a supply chain and completely close an operation. Operational Risk Equipment failure, supply disruptions (company or supplier e.g. running out), labor issues, quality issues Natural disasters Earthquakes, tornados, storms Terrorism and political instability Commercial ship hijacking, supply route disruptions Commercial or market risk Supply/demand shifts, unexpected price changes
Learning Block 1 - Unit 3: The Demand Planning and Management Process The demand planning and management process involves balancing customers requirements with the capabilities of the supply chain. This includes forecasting demand and synchronizing it with production, procurement, and distribution capabilities.
Learning Block 1 - Unit 3: The Demand Planning and Management Process Planning Demand The demand planning process is typically initiated by marketing and sales, with input form other departments, to develop a strategic, company-wide forecast with more detailed steps and processes to arrive at an estimate of anticipated demand. Demand planning data considerations include anticipated orders orders received adjustments resulting from changes in inventory policies and actions The plan should span a horizon of 12-18 months
Learning Block 1 - Unit 3: The Demand Planning and Management Process Sensing Demand Demand sensing involves collecting information about demand based on real-time changes in demand. Demand sensing uses a broader range of demand signals, including current data from the supply chain and different mathematics to create a more accurate forecast that responds to real-world events Companies can use point-of-sale data and monitor social media to gather information about their products.
Learning Block 1 - Unit 3: The Demand Planning and Management Process Financial Plan Communicating Demand in a timely and structured manner is vital for an organization s success. Other plans are dependent on the Demand Plan Manufacturing Plan Demand Plan Supply Plan Production Schedule Sales Plan
Learning Block 1 - Unit 3: The Demand Planning and Management Process Shaping Demand Using price changes to influence demand a company can provide a discount on its products over a specified period of time to increase, or shape, demand. That company could also increase prices to decrease demand, if needed, when demand is greater than supply. Demand shaping involves influencing customer orders while also reducing the uncertainty of when those orders will occur. Though forecasts project the future, most shaping techniques rely on history as the basis of that projection.
Learning Block 1 - Unit 3: The Demand Planning and Management Process Shaping Demand Using price changes to influence demand a company can provide a discount on its products over a specified period of time to increase, or shape, demand. That company could also increase prices to decrease demand, if needed, when demand is greater than supply. Demand shaping involves influencing customer orders while also reducing the uncertainty of when those orders will occur. Though forecasts project the future, most shaping techniques rely on history as the basis of that projection.
Learning Block 1 - Unit 3: The Demand Planning and Management Process Managing Demand Demand management involves adjusting internal operations and plans to match demand or to shape demand as necessary. Respond to changes in volume, timing and mix of demand Supply demand increase (consider cost, capacity and capabilities) Stimulate demand when declining
Learning Block 1 - Unit 4: Demand Planning Roles and Responsibilities, Typical Reporting Structure, and Key Metrics Demand planners must have : Skills to communicate with cross-functional teams and communicate demand plans. Understanding of company reporting structures Skills to analyze data and adjust demand plans Raw material and commodity prices Restocking lead-times Knowledge of the business and industry Effect of marketing activities on demand Understand customer buying patterns International business experience (if working in international company) Skills to review demand plans to actual results and adjust accrodingly
Learning Block 1 - Unit 4: Demand Planning Roles and Responsibilities, Typical Reporting Structure, and Key Metrics Key Metrics Demand plan accuracy: This is the measure of accuracy of the demand plan over time. This measure is used to determine how closely the plan matches actual demand overall by key customers as well as the degree of variation of actual demand from the plan. Customer satisfaction: This measure includes on-time delivery and number of customer complaints. It is also used to determine the number of deliveries that were accomplished on time versus those that were not, as well as the amount and nature of customer complaints. Inventory performance: Days of inventory on hand # of days worth of inventory in stock to over normal usage Inventory turns (inventory velocity) Rate at which inventory moves through the distribution facility. Inventory costs money to hold, the quicker it turns, the less costly Dollar investment in inventory indicates the amount of investment that a company has occupied in inventory; this is a useful measure because inventory represents an investment of companies cash. The cash occupied in inventory cannot be used for other purposes.
Learning Block 1 Practice Questions 1. Demand planning ____________________. a) Includes the steps and the process to arrive at estimates of anticipated demand b) Includes the steps and the process to arrive at estimates of anticipated supply c) Is very seldom practiced by companies d) Only involves demand planners
Learning Block 1 Practice Questions 2. The number of potential buyers in a specific market for a given product or service will influence demand. If the market size ____________________. a) Increases, this can mean a lower number of potential buyers available to purchase a company s products or services b) Decreases, this can mean a lower number of potential buyers available to purchase a company s products or services c) Decreases, this can mean a higher number of potential buyers available to purchase a company s products or services d) Decreases, this can mean no potential buyers are available to purchase a company s products or services
Learning Block 1 Practice Questions 3. Complementary products or services are those products and services which ____________________. a) Are substitute products and services, which may exist for what a company offers b) Are given to customers to complement other products they purchase c) Are typically associated with, or are natural components of, the product or service the company provides d) Cannot have an impact on demand
Learning Block 1 Practice Questions 4. Consumers salaries, and relative increases or decreases in these salaries over time, ____________________. a) Do not impact demand for products and services b) Have no impact on the company c) Impact demand for products and services d) Do not matter to the demand planner
Learning Block 1 Practice Questions 5. A good demand planning and management process enables a company to be ____________________. a) Slow to react to changes in demand b) More agile in reacting to unanticipated demand c) More proactive to anticipated demand d) Both b and c
Learning Block 1 Practice Questions 6. Demand shaping is ____________________. a) The steps required to arrive at estimates of anticipated demand b) Measuring the rate at which inventory moves through a distribution facility c) The process used to influence demand d) A next generation forecasting method
Learning Block 1 Practice Questions 7. Demand management involves ____________________. a) Selling products to customers b) Placing orders for products c) Managing and prioritizing demand d) Providing discounts to customers
Learning Block 1 Practice Questions 8. A demand planner must have thorough knowledge of ____________________. a) Customer purchase patterns b) Purchasing tools and techniques c) Events that could affect demand patterns d) Both a and c
Learning Block 1 Practice Questions 9. A demand planner ____________________. a) Must be able to communicate effectively with colleagues in other groups affected by demand within the company b) Does not need to communicate with colleagues in other groups affected by demand within the company c) Only needs to communicate effectively with colleagues in the marketing and sales groups within the company d) Must be able to communicate with colleagues in the procurement group and seldom with the marketing and sales groups
Learning Block 1 Practice Questions 10. Demand plan accuracy is ____________________. a) A measure of the number and nature of customer complaints b) A measure of department performance c) A measure of inventory performance d) A measure of how accurately the demand plan matches actual demand
Demand Planning The Interaction Between Demand Management & Order Management Learning Block 2
Learning Block 2 Objectives After completing this learning block, you will be able to: Outline the key aspects of the order management function Discuss the key steps in the customer order and replenishment cycle Explain the key links between demand management and order management List the key technologies that enable e-Commerce Discuss the role of e-Commerce technologies in enabling effective demand management
Learning Block 2 Unit 1: Overview of the Order Management Function The customer order management function primarily involves handling customer orders and managing the customer order cycle. The order management process starts with customer requests, which can be general to specific requests about products or services. Customers can call, email, write or submit through the web, requests for: Product specifications Price Availability Potential discounts Inquiries may then be turned into orders and put into the order management system manually or through web input by the customer
Learning Block 2 Unit 1: Overview of the Order Management Function entering orders filling orders invoicing customers Customer Order Fulfillment The steps in ensuring that customers receive the correct products, in the correct quantity, at the correct time, and at the appropriate level of quality The ultimate objective of order fulfillment is fulfilling customers orders while satisfying promised delivery dates at the right quantities and conditions and while managing total costs. shipping orders tracking orders handling returns after-sale services
Learning Block 2 Unit 1: Overview of the Order Management Function Customer Order Fulfillment Similar to supplier selection and new product development, customer order fulfillment, if performed quickly and responsively, can lead to companies competitiveness. For example, a maker of beverage and ice dispensers might forecast and build a base product, anticipating customer orders. Final product configuration occurs only after actual orders are received, and this process might take only 3 days, compared to 4 to 6 weeks for their competitors; this extra time provides an advantage to the company against its competitors. Restaurants and other customers would purchase beverage dispensers because they plan to make a profit with them.
Learning Block 2 Unit 2: The Customer Order and Replenishment Cycle Customer request Customer order entry The customer order and replenishment cycle occurs when customers interact with suppliers (e.g., wholesalers, retailers, or material suppliers) and includes work directly involved in receiving and fulfilling customers orders and in replenishing inventories. Customer order fulfillment Customer order receipt Inventory replenishment Customer invoicing Stocking policies
Learning Block 2 Unit 2: The Customer Order and Replenishment Cycle Customer Request/Arrival The beginning of the order management cycle is when a customer requests product information Customer arrives at store Sales representative visits or calls Customer goes to website/showroom
Learning Block 2 Unit 2: The Customer Order and Replenishment Cycle Customer Order Entry In customer order entries, customers inform retailers and suppliers of goods about the products they wish to purchase. At a clothing store, customers might place items they wish to buy into shopping carts and bring them to the counter to check out and complete their purchases. Order entries can also include customers informing suppliers of the products and quantities they want to purchase online; orders are then transmitted to suppliers through the Internet. Orders must be accurate, timely and communicated throughout the supply chain.
Learning Block 2 Unit 2: The Customer Order and Replenishment Cycle Customer Order Fulfillment Customer order fulfillment includes the steps in ensuring that customers receive correct products, in the correct quantity, at the correct time, and at the appropriate level of quality. filling orders invoicing customers shipping orders tracking orders handling returns having after-sale services
Learning Block 2 Unit 2: The Customer Order and Replenishment Cycle Customer Order Receipt Customers receive and accept (or reject) their orders check for quantity and quality of delivered products incomplete or damaged orders are recorded by the customer in strong buyer/supplier relationships this is may be done through a computerized system to log orders that were received incomplete or damaged, and suppliers are then notified. customers typically withhold payment until deficiencies are corrected.
Learning Block 2 Unit 2: The Customer Order and Replenishment Cycle Customer Invoicing When customers place orders they receive invoices. at check-out counters, invoices are often presented as receipts or electronic invoices on check-out screens when orders are shipped to customers, invoices normally accompany the goods. Invoices state amounts owed and payment terms. Invoices are received by customers, checked against agreed terms and conditions between customers and suppliers, and paid accordingly (hopefully).
Constant replenishment Learning Block 2 Unit 2: The Customer Order and Replenishment Cycle Replace every item as it is sold Impossible to implement/costly to hold inventory Inventory Replenishment the process of determining when to make or buy more inventories and how many to order while also considering various cost and customer service trade-offs When do I need to refill my inventory? Stockout Run out of product Lost business
Learning Block 2 Unit 2: The Customer Order and Replenishment Cycle Stocking Policies Companies often base their inventory stocking and replenishment policies on their desired service levels. For instance, if a company wants a 98% service level, they must have enough inventory on hand to ensure that customers get the product they want in 98 out of 100 visits to a store or website. Marketing or sales personnel as well as inventory management personnel should work together to determine the correct service level for particular companies and products. Most marketing and sales personnel would like to have a 100% service level so that the company never stocks out of a product. However, this perfect service level is not typically feasible because it requires holding too much inventory at an expensive cost.
Learning Block 2 Unit 3: Demand Management and Order Management The Relationship Between Demand Management and Order Management It is critical for demand planners to have open communication with sales staff. Sales staff understand the timing of customer orders. If this information isn t communicated to the demand planners there may not be enough product to fulfill the orders See examples beginning on page 19 of the manual
Learning Block 2 Unit 4: e-Commerce Order Fulfillment Strategies Electronic commerce, or e-Commerce, is used to describe the wide range of tools and techniques used to conduct business without using paper. This form of commerce involves selling and buying goods and services using the Internet to transmit information and transfer funds. Automates the ordering process and efficiently processes orders accurately
