DPF_KSRAO_ppt_2

7/27/2019 DPF_KSRAO_ppt_2

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Dem and Planning andForecasting

Session 2

Demand Management and Planning-the business perspective

By

K . Sashi RaoManagement Teacher and Trainer


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W hat is Dem and

M anagem ent? Demand Management is one that takes a

complete view of a business

It means discovering markets, planning

products and services for those markets andthen fulfilling these customer demands

It is an integrative set of business processes,across, not just the enterprise, but across allits trading partner network ( both customersand suppliers)


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W hat does Dem and M anagem ent

involve? Discovering and understanding your market

Establishing your customers needs and expectationsand what draws them to your business

Challenge of managing what, when, and how aproduct/service is designed, made, distributed,displayed , promoted and serviced

Doing the pricing and inventory optimization at

various levels of market and channels segmentation Satisfying customers on product, price, delivery and

post-sales services


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M anaging Dem and and Supply

In any operating organization, it isimportant to manage both demand andsupply singly or together by:

Managing Demand thro various options

Managing Supply thro various options

All chosen options have their ownimplications on customer service levelsand different costs incurred


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M anaging Dem and

Thro capacity reservation by shifting excess demand toa future period without losing it by doing advancebooking or appointments for future times

Thro differential pricing to reduce peak

demands( higher prices e.g. movie tickets) or builddemand in off-season by lowering prices/specialdiscounts)

Thro advertising and sales promotions to even outdemand patterns at different times( lower telecom rates

for night use) Thro complementary products to even out seasonal

demand products e.g. woolen and cotton garments;winter creams and suntan lotions; lawn mowers andsnow ploughs


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M anaging Supply

Thro inventory based alternatives by building excessinventory during periods of lean demand andconsuming them during peak demand times; or byshifting production to a future period beyond demandperiod; or deliberately inducing stock-outs leaving

customers to wait longer; final choice depends onrequired customer service levels

Thro capacity adjustment alternatives by hiring/layingof workers; working extra hours and shifts; use of parttime workers

Thro capacity augmentation means by outsourcingand/or subcontracting, rescheduling maintenanceprograms and by debottlenecking projects


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M anaging Dem and and Supply

Managing demand and/or supply involves choice amongstmany options with varying implications

Some basic strategies to help make a choice are:

Level strategy not to disturb existing production system at

all; maintain a steady rate of regular time output whilemeeting demand variations largely thro inventories

Chase strategy by matching capacity to demand and dontcarry inventories; planned output for a period is set atexpected demand for that period( with lead-times built ine.g. Jan production for Feb needs); capacity relatedalternatives ( discussed earlier) used flexibly

Mixed strategy use a combination of level and chaseapproaches


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M anaging Dem and and Supply-cost im plications

Alternative Cost Implication

Managing demand Capacity reservation Planning & schedulingcosts

Influencing demand Marketing oriented

costs

Managing supply Build inventory Inventory holding costs

Backlog/backorder/

stock-out

Shortage/loss ofgoodwill

Overtime/under-time Overtime costs, Loss of

productivityVarying shifts Shift change costs

Hiring/layoff workers Training/hiring costs,employee morale

Subcontract/outsource Transaction costs

Debottlenecking/addingnew capacity

Investment,debottlenecking costs


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W hat is Dem and Planning?(1)

This is a subset of Demand Management

It is a business planning process that enables sales teams(andcustomers) to develop demand forecasts and inputs to feedvarious planning processes, production, inventory planning,

procurement planning and revenue planning Based on estimated product demand, a firm can plan for

deployment of its resources to meet this demand

It is a bottom-up process as different from any top-downmanagement process


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It is also seen as a multistep operational SCMprocess to create reliable demand forecasts

Effective demand planning helps to improve

accuracy of revenue forecasts, align inventorylevels in line with demand changes and enhanceproduct-wise/channel-wise profitability

Its purpose can be seen as to drive the supply

chain to meet customer demands thro effectivemanagement of company resources


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For FMCG/retailing sectors, demand planningtakes a special meaning requiring integration ofpoint-of-sale information to flow back to the

manufacturer Besides getting such customer level demand

data thro distribution channel partners, key isto leverage it by maximizing success in

forecasting efforts and accuracy( withoutnormal distortions like the bull-whip effect)


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Benefits of Dem and Planning

Higher service levels and more responsive toactual demand

Reduced stock levels and inventory costs

Improved purchase planning and subsequentreduction in supply input costs

Enhanced capacity utilization of production

facilities and logistics assets Focused promotion and product

planning/assortment/stocking levels at retaillevel for FMCG products


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Forecasting Factors

Time required in future

Availability of historical data

Relevance of historical data into future Demand and sales variability patterns

Required forecasting accuracy and likelyerrors

Planning horizon/lead time for operationalmoves


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Types of Forecasts

Economic Forecasts- projections of economic growth, inflation rates,money supply based on economic and fiscal data trends along withpolicy interventions

Demographic Forecasts- projections of population in aggregate anddisaggregate form forecasts using birth and death rates in each case

Technological Forecasts- predicting technological change e.g. in cloudcomputing or electronics sectors et al

Other Forecasts- weather, earthquakes, tsunami et al

Business Forecasts- involving demand and sales forecasts our primary interest in this DPF course


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W hat is Dem and Forecasting?(1)

Demand Forecasting is predicting thefuture demand for products/services ofan organization

To forecast is to estimate or calculate inadvance

Since forecasts are estimates and

involve consideration of so many priceand non-price factors, no estimate isnecessarily 100% accurate


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W hat is Dem and Forecasting/(2)

Demand forecasting involves estimating future overallmarket demand for the proposed products/range

This involves extensive market and marketing researchinto existing and new markets, end applications,current market size and future demand potential,market segmentation, customerprofiling/attitudes/preferences et al

Purpose is to finally help business decisions on how tocater to the overall market and plan its marketing mixand product-market positioning et al

Demand forecasting is essentially an outward/externallooking process

Important as forms basis for sales forecasting operational planning and actions


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W hy Dem and Forecasting?

To help decide on facility capacity planning andcapital budgeting

To help evaluate market opportunities worthy of

future investments To help assess its market share amongst other

competitors

To serve as input to aggregate production

planning and materials requirement planning

To plan for other organizational inputs ( likemanpower, funds and financing) and settingpolicies and procedures


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Key Functions of Forecasting

Its use as an estimation tool

Way to address the complex and

uncertain business environmentissues

A tool to predicting events related to

operations planning and control A vital prerequisite for the overall

business planning process


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Forecasting Characteristics

By its very nature, forecasting always has errors; forecastsrarely match actual demand/sales; forecast accuracy anderrors are real issues

Their chosen time horizon also determines accuracywithshorter periods having higher accuracy; the constant need toreduce lead times also puts focus on shorter planning horizons(as in lean manufacturing/JIT environments)

Aggregate demand forecasts are more accuratethanmarket segmental forecasts( e.g. all Maruti 800 cars versus redMaruti 800s; all paints versus blue color paints; all toothpastesversus herbal toothpastes); these have implications at different

levels/stages of the supply chain


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Forecasting Horizon-focus

Short term forecasts say for next 1-2 months for current productionplanning and scheduling; for specific products, machine capacitiesand deployment, labor skills and usage, cash inventories ; operationalfocus

Medium term forecasts say for next 3-12 months for plant level

planning for product/volume changes requiring redeployment ofresources; for product groups, departmental capacities, work forcemanagement, purchased materials and inventories; tactical focus

Long term forecasts 1 year to 3 years for planning a new plant orfacility requiring major investments and other resources for both newand old product lines; strategic focus


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Forecasting Horizon- methodology

Short-term forecasting( 1 day to 3 months) forproduction planning needing disaggregatedproduct forecasts with high accuracy levels;primarily uses time series data methods

Medium-term forecasting( 3 months to 12-24months) useful for aggregate sales andoperational planning; also for seasonal businessoperations; uses both time series and causalforecasting models

Long term forecasting( beyond 24 months)useful for aggregate business planning forcapacity and site/location decisions; uses

judgment and causal models


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W hy Aggregate ProductionPlanning?

Demand fluctuations - seasonal factors,uncertain environment et al

Capacity fluctuations number of workingdays in month( 28-31; weekends/holidays;plant availability/maintenance schedules)

Production level changes plant loadingfactors, materials and resources availability

Production planning has to be done to matchdemand and supply on a period-to-periodbasis in a cost effective manner


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Forecasting for Business

Demand forecasting to establish the current total size forany product/service market and its future growth potentialand trends over time

Sales forecasting- required for a firm to plan its overallbusiness operations within the overall market size andpotential for its range of products

Product-life cycle forecasting- to assess the likelydemand development and trends as they move fromintroduction -> growth-> maturity -> decline phases

All above forecasting types are to be looked at


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Sales Forecasting

Within overall demand, firm needs to establish itssales forecast to help operations

Basis of sales forecasting is assessment of marketshare that firm can carve out of the total market

given its past sales as also current marketingstrategies

Firming up of sales forecasts is a function ofavailable capacity, plant performance, plantresources and stocks

Sales forecasting is essentially an inward/internalprocess

Forecasting from now is seen from operationalcontext


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Dem and Forecast and Sales

Forecast(1) Demand forecasts relate to the total demand for a

product/service offered

Demand forecasts consider various factors influencing theoverall demand for a product/service including economic anddemographic factors, customer needs and expectations,market segmentation, disposable incomes et al

Sales forecasts are reflection of actual sales expected andconsequent share of the total market demand

Sales forecasts also consider various supply-related specificcompany factors like capability, product range and capacity


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Dem and Forecast and Sales

Forecast(2) It is important to understand separately the need fordemand and sales forecasts linked to their purpose

Demand forecasts are called for while doing market entryexercises and planning long term investments in new

/added capacities Sales forecasts are needed to provide the input basis for all

production planning and supply chain operations

During this DPF course, demand and sales forecasts termsmay be used interchangeably, but the clear distinctionshould be understood


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Dem and Forecasting Issues(1)

Forecasting is the deliberate attempt to predict thefuture- in all its dimensions !

Crystal ball gazing or making astrologicalpredictions are also exercises in forecasting thefuture

Is both an art and science as based on significantbehavioral and unstructured issues and ananalytical exercise using scientific principles

Despite its limitations, essential for plannedbusiness operations


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Dem and Forecasting Issues(2)

All decisions need information about futurecircumstances

Best we can do is to forecast these

circumstances

Since business decisions are driven by whatthe market needs, it is necessary to forecastmarket demand

Since operational decisions are driven by whattheir customers need, it is necessary toforecast expected sales


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Demand Forecasting Issues(3)

All factors influencing demand for a product or service have to

be first identified

These factors could be both price and non-price determinants of

demand( including consideration of substitutes and

complementary products)

Evolve a suitable methodology to assess these demand factors

and do quantitative and qualitative data analysis to arrive at

short term and long term demand estimates with identifiable

trends

Prepare such forecasts to assist both long term and short term

decision-making needs of an organization


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Forecasting Role in a Supply Chain

Forms basis for all strategic and planning decisions in asupply chain

Used for both push and pull processes

Examples: Production: scheduling, inventory, aggregate planning

Marketing: sales force allocation, promotions, new productionintroduction

Finance: plant/equipment investment, budgetary planning

Personnel: workforce planning, hiring, layoffs

All of these decisions are interrelated and part ofaggregate production planning(APP)


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Need for Collaborative Supply Chains

SCM integrates and optimizes the processes,but does not eliminate inherent conflict

SCM mostly remains an in-corporate initiative

SCM does not address the total businessenvironment (different components of externalvalue chain face different environments)

Hence, need for collaborative supply chains

Thus, born concept of Collaborative Planningand Forecast Replenishment( CPFR)


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Forecasting Problems

Lack of understanding of integrated market andsupply realities by key decision makers within anorganization

Lack of trust and transparency amongst supplychain elements and partner organizations

Lack of proper communication, coordination andcollaboration amongst supply chain partners

Lack of metrics for measuring total supply chainperformance

Lack of IT tools, processes, professionalcompetencies to achieve accurate forecasts


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Forecasting Role in Decision-m aking

External andInternal Data

ObjectivesAnd

Constraints

ManagersForecasts

UpdatedForecasts

ActualPerformance

PlannedPerformance

Operations

Resources

Forecasting in BusinessPlanning


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Forecasting in Business PlanningInputsMarket ConditionsCompetitor ActionConsumer Tastes

Products Life CycleSeasonCustomers plans

Economic OutlookBusiness Cycle Status

Leading Indicators-StockPrices, Bond Yields,MaterialPrices, Business Failures,

moneySupply, Unemployment

Other FactorsLegal, Political,Sociological,Cultural

ForecastingMethod(s)Or

Model(s)

OutputsEstimated Demandfor each Productin each Time Perio

Other Outputs

Sales ForecastForecast andDemand

for Each ProductIn Each Time

Processor

ProductionCapacityAvailableResourcesRisk AversionExperiencePersonal ValuesandMotives

Social andCultural

Management Team

ForecastErrors

Feedback


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Sales ForecastForecast and Demandfor Each Product

In Each Time Period

Procedure forTranslating SalesForecast intoProductionResource Forecast

Business StrategyMarketing Plan-AdvertisingSales Effort, Price,Past SalesProduction Plans-Quality

Levels, CustomerService,Capacity Costs

Finance PlanCredit Policies, BillingPolicies

Production Resource Forecasts

Long RangeFactory capacitiesCapital FundsFacility NeedsOther

Medium RangeWork ForceDepartment CapacitiesPurchased MaterialInventoriesOthers

Short RangeLabor by Skill ClasMachine CapacitieCashInventoriesOther

Processor

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