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Demand Planning and
Forecasting
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What is Demand Management?
Demand Management is one that takes acomplete 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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What does Demand Management involve?
Discovering and understanding your market
Establishing your customers needs and expectations and 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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Managing Demand and Supply
In any operating organization, it is important to
manage both demand and supply singly or together
by:
Managing Demand thro various options Managing Supply thro various options
All chosen options have their own implications on
customer service levels and different costs incurred
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Managing Demand
Thro capacity reservation by shifting excess demand to afuture period without losing it by doing advance booking orappointments for future times
Thro differential pricing to reduce peak demands( higher
prices e.g. movie tickets) or build demand in off-season bylowering prices/special discounts)
Thro advertising and sales promotions to even out demandpatterns at different times( lower telecom rates for night use)
Thro complementary products to even out seasonal demandproducts e.g. woolen and cotton garments; winter creamsand suntan lotions; lawn mowers and snow ploughs
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Managing Supply
Thro inventory based alternatives by building excessinventory during periods of lean demand and consumingthem during peak demand times; or by shifting production toa future period beyond demand period; or deliberatelyinducing stock-outs leaving customers to wait longer; final
choice depends on required customer service levels Thro capacity adjustment alternatives by hiring/laying of
workers; working extra hours and shifts; use of part timeworkers
Thro capacity augmentation means by outsourcing and/or
subcontracting, rescheduling maintenance programs and bydebottlenecking projects
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Managing Demand 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 strategyby matching capacity to demand and dontcarry inventories; planned output for a period is set atexpected demand for that period( with lead-times built in e.g.Jan production for Feb needs); capacity related alternatives (discussed earlier) used flexibly
Mixed strategy use a combination of level and chaseapproaches
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Managing Demand and Supply
-cost implications
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
productivity
Varying 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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What is Demand Planning?(1)
This is a subset of Demand Management
It is a business planning process that enablessales teams(and customers) to develop demandforecasts and inputs to feed various planningprocesses, production, inventory planning,procurement planning and revenue planning
Based on estimated product demand, a firm canplan for deployment of its resources to meet this
demand It is a bottom-up process as different from any
top-down management process
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What is Demand Planning?(2)
It is also seen as a multistep operational SCM process
to create reliable demand forecasts
Effective demand planning helps to improve accuracy
of revenue forecasts, align inventory levels in linewith demand changes and enhance product-
wise/channel-wise profitability
Its purpose can be seen as to drive the supply chain
to meet customer demands thro effective
management of company resources
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What is Demand Planning?(3)
For FMCG/retailing sectors, demand planningtakes a special meaning requiring integrationof point-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 inforecasting efforts and accuracy( withoutnormal distortions like the bull-whip effect)
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Benefits of Demand Planning
Higher service levels and more responsive to actual
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 retail level 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 likely errors
Planning horizon/lead time for operational moves
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Types of Forecasts
Economic Forecasts- projections of economic growth,inflation rates, money supply based on economic andfiscal data trends along with policy interventions
Demographic Forecasts- projections of population in
aggregate and disaggregate form forecasts using birthand death rates in each case
Technological Forecasts- predicting technologicalchange e.g. in cloud computing or electronics sectorset al
Other Forecasts- weather, earthquakes, tsunami et al
Business Forecasts- involving demand and salesforecasts our primary interest in this DPF course
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What is Demand Forecasting?(1)
Demand Forecasting is predicting the future demand
for products/services of an organization
To forecast is to estimate or calculate in advance
Since forecasts are estimates and involveconsideration of so many price and non-price factors,
no estimate is necessarily 100% accurate
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What is Demand Forecasting/(2)
Demand forecasting involves estimating future overall market demand forthe proposed products/range
This involves extensive market and marketing research into existing andnew markets, end applications, current market size and future demandpotential, market segmentation, customer profiling/attitudes/preferenceset al
Purpose is to finally help business decisions on how to cater to the overallmarket and plan its marketing mix and product-market positioning et al
Demand forecasting is essentially an outward/external looking process
Important as forms basis for sales forecasting operational planning andactions
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Why Demand Forecasting?
To help decide on facility capacity planning and capital
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 ( like manpower, funds
and financing) and setting policies and procedures
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Key Functions of Forecasting
Its use as an estimation tool
Way to address the complex and uncertain
business environment issues
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 and
errors are real issues
Their chosen time horizon also determines accuracywith
shorter periods having higher accuracy; the constant needto reduce lead times also puts focus on shorter planning
horizons( as in lean manufacturing/JIT environments)
Aggregate demand forecasts are more accuratethan
market segmental forecasts( e.g. all Maruti 800 cars versus
red Maruti 800s; all paints versus blue color paints; all
toothpastes versus 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 currentproduction planning and scheduling; for specific products,machine capacities and deployment, labor skills and usage,cash inventories ; operational focus
Medium term forecasts say for next 3-12 months for plantlevel planning for product/volume changes requiringredeployment of resources; for product groups, departmentalcapacities, work force management, purchased materials andinventories; tactical focus
Long term forecasts 1 year to 3 years for planning a newplant or facility requiring major investments and otherresources for both new and old product lines; strategic focus
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Forecasting Horizon- methodology
Short-term forecasting( 1 day to 3 months) for productionplanning needing disaggregated product forecasts with highaccuracy levels; primarily uses time series data methods
Medium-term forecasting( 3 months to 12-24 months) useful
for aggregate sales and operational planning; also for seasonalbusiness operations; uses both time series and causalforecasting models
Longterm forecasting( beyond 24 months) useful foraggregate business planning for capacity and site/location
decisions; uses judgment and causal models
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Why Aggregate Production Planning?
Demand fluctuations - seasonal factors, uncertainenvironment et al
Capacity fluctuations number of working days in month(
28-31; weekends/holidays; plant availability/maintenanceschedules)
Production level changes plant loading factors, materialsand resources availability
Production planning has to be done to match demand andsupply on a period-to-period basis in a cost effectivemanner
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Forecasting for Business
Demand forecasting to establish the current total size forany product/service market and its future growth potential
and 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 likely
demand 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 its salesforecast to help operations
Basis of sales forecasting is assessment of market share thatfirm can carve out of the total market given its past sales as
also current marketing strategies Firming up of sales forecasts is a function of available capacity,
plant performance, plant resources and stocks
Sales forecasting is essentially an inward/internal process
Forecasting from now is seen from operational context
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Demand Forecast and Sales Forecast(1)
Demand forecasts relate to the total demand for aproduct/service offered
Demand forecasts consider various factors
influencing the overall demand for aproduct/service including economic anddemographic factors, customer needs andexpectations, market segmentation, disposableincomes et al
Sales forecasts are reflection of actual salesexpected and consequent share of the total marketdemand
Sales forecasts also consider various supply-related
specific company factors like capability, productran e and ca acit
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Demand Forecast and Sales Forecast(2)
It is important to understand separately the needfor demand and sales forecasts linked to theirpurpose
Demand forecasts are called for while doingmarket entry exercises and planning long terminvestments in new /added capacities
Sales forecasts are needed to provide the inputbasis for all production planning and supply chain
operations During this DPF course, demand and sales
forecasts terms may be used interchangeably,but the clear distinction should be understood
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Demand Forecasting Issues(1)
Forecasting is the deliberate attempt to predict the future- in
all its dimensions !
Crystal ball gazing or making astrological predictions are also
exercises in forecasting the future
Is both an art and science as based on significant behavioral
and unstructured issues and an analytical exercise using
scientific principles
Despite its limitations, essential for planned business
operations
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Demand Forecasting Issues(2)
All decisions need information about future circumstances
Best we can do is to forecast these circumstances
Since business decisions are driven by what the market needs,
it is necessary to forecast market demand
Since operational decisions are driven by what their
customers need, it is necessary to forecast 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 decisionsin a supply chain
Used for both push and pull processes
Examples: Production: scheduling, inventory, aggregate planning
Marketing: sales force allocation, promotions, newproduction introduction
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 business environment(different components of external value chain facedifferent environments)
Hence, need for collaborative supply chains
Thus, born concept of Collaborative Planning and ForecastReplenishment( CPFR)
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Forecasting Problems
Lack of understanding of integrated market and supplyrealities by key decision makers within an organization
Lack of trust and transparency amongst supply chain
elements and partner organizations Lack of proper communication, coordination and
collaboration amongst supply chain partners
Lack of metrics for measuring total supply chainperformance
Lack of IT tools, processes, professional competencies toachieve accurate forecasts
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Forecasting Role in Decision-making
External and
Internal Data
Objectives
And
Constraints
ManagersForecasts
Updated
ForecastsActual
Performance
Planned
Performance
Operations
Resources
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Inputs
Market Conditions
Competitor Action
Consumer Tastes
Products Life CycleSeason
Customers plans
Economic Outlook
Business Cycle Status
Leading Indicators-StockPrices, Bond Yields, Material
Prices, Business Failures, money
Supply, Unemployment
Other Factors
Legal, Political, Sociological,
Cultural
Forecasting
Method(s)
Or Model(s)
Outputs
Estimated Demands
for each Product
in each Time Period
Other Outputs
Sales Forecast
Forecast and Demand
for Each Product
In Each Time Period
Processor
Production Capacity
Available Resources
Risk Aversion
Experience
Personal Values and
Motives
Social and Cultural
Values
Other Factors
Management Team
Forecast
Errors
Feedback
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Sales Forecast
Forecast and Demand
for Each Product
In Each Time Period
Procedure for
Translating Sales
Forecast into
Production
Resource Forecast
Business Strategy
Marketing Plan- Advertising
Sales Effort, Price, Past
Sales
Production Plans- Quality
Levels, Customer Service,
Capacity Costs
Finance PlanCredit Policies, Billing
Policies
Production Resource Forecasts
Long RangeFactory capacities
Capital Funds
Facility Needs
Other
Medium RangeWork Force
Department Capacities
Purchased Material
Inventories
Others
Short RangeLabor by Skill Class
Machine Capacities
Cash
Inventories
Other
Processor