Demand Management: Basics of Supply Chain Management

Basics of Supply Chain Management
Demand Management
Session 2
APICS Certified in Production and Inventory Management (CPIM)

21 2009 APICS CONFIDENTIAL AND PROPRIETARY
Basics of Supply Chain Management

1.
Introduction to Supply Chain Management
2.
3.
4.
Material Requirements Planning
5.
Capacity Management and Production Activity Control
Demand Management
Master Planning
Aggregate Inventory Management
Item Inventory Management
Purchasing and Physical Distribution
Lean/JIT and Quality Systems
Theory of Constraints and Review Activity
6.
7.
8.
9.
10.
22
2009 APICS CONFIDENTIAL AND PROPRIETARY
Learning Objectives
Upon completion of this session, participants will be able to:
Demand Management Business Processes
Describe the significance of marketing management and customer relationship management Explain the role and objectives of demand planning (forecasting and customer order management)
Characteristics of Demand
Differentiate independent from dependent demand Identify at least five sources of independent demand
Recognize at least four demand patterns
23
Learning Objectives (cont.)

Basic Forecasting Concepts
Describe three planning levels that are supported by demand forecasts Explain four major principles of forecasting and three principles of data collection and preparation Differentiate quantitative from qualitative forecasting techniques
Estimate Demand
Calculate and explain the logic of an exponential smoothing forecast Explain the logic behind the calculation of a seasonal forecast Calculate and explain the use of the mean absolute deviation
24
Chapter 8 Page 216 in Intro to Materials Mgmt, sixth edition
Demand Management
Session 2
Demand Management
25
Demand Management Processes
Marketing Management
Demand Planning
Customer Relationship Management (CRM)
26
Marketing Management and Mix

Marketing Strategy
Product Positioning/ Differentiation, and Market Segmentation Decisions
Marketing Management
Potential Order Qualifying and Winning Products
Order Qualifying and Order Winning Products
Marketing Mix Decisions
Product Price Promotion Place

27 2009 APICS CONFIDENTIAL AND PROPRIETARY
Customer Relationship Management

Help customers achieve better business results through:
Design assistance: helping in the design of new products or improvement of existing ones
Customer needs: assessing the customers business and creating (expanding) product offerings Information and communications: collecting and analyzing customer data to support marketing, sales, and customer service
28
Order Management
Lilly Manufacturing Customer Service
CRM plays a major role in operations efficiency and customer service through: Fast and accurate order entry and tracking
Meet promised delivery dates and quantities Handle customer inquiries and service complaints, returns, and repair
Accurate and timely shipping documentation, invoicing, and recording of sales history
29
Demand Planning
Recognition of customer requirements through
Forecasts Management of orders from
Internal customers External customers - Lilly Shanghai
- Validation Lots - Patheon
2 10
Demand Management
Session 2
2 11
Independent vs. Dependent Demand

Only independent demand needs to be forecasted Dependent demand should never be forecasted; it should be calculated
MPS MRP
2 12
Sources of Demand
Forecasts Customer orders Replenishment orders from DCs Interplant transfers Other
Ex Lilly Orders from Singapore Demand in BPCS Transfer WA to WX Validation
2 13
Demand Patterns: Trend

Insulin
Increasing Decreasing Level
Demand
Quarters
2 14
Demand Patterns: Seasonal Demand

Ceclor
Demand
Quarters
2 15
Demand Patterns: Random

5
Demand
Quarters
2 16
Stable vs. Dynamic Demand

Stable demand retains same general shape over time Dynamic demand tends to be erratic
Dynamic Stable
Stable vs. Dynamic Demand
Average demand
2 17
Demand Management
Session 2
Forecasting
2 18
Introduction
Purposes and uses of the forecast Principles of forecasting Principles of data collection and preparation
2 19
How Forecasting Supports Planning

Planning Level Forecast Sales volume ($); new market and supply chain initiatives Physical units of production at the product family level Physical units of production at the end item level
Horizon (up to)
Business Planning
2 to 10 years
Sales and Operations
Planning
1 to 3 years
Master Scheduling
3 to 18 months
2 20
Principles of Forecasting
Forecasts
Are rarely 100% accurate over time Should include an estimate of error Are more accurate for product groups and families Are more accurate for nearer periods of time
Bad forecast = high safety stocks / inventory Good Forecast = low safety stocks / inventory
2 21
Data Collection and Preparation

Record data in terms needed for the forecast
No data no Fcst.
Record circumstances relating to the data
Promotions, ..
Record demand separately for different customer Hospitals / Wholesalers groups
2 22
Data Collection and Preparation Example

Month A B 1 2 3
6000
9
6000
10
11
12
500
500
500
500
500
500
500
500
500
500
500
500
Average Forecast
1500
1500
1500
1500
1500
1500
1500
1500
1500
1500
1500
1500
Customer As annual demand: Customer Bs annual demand: Total: Average over 12 months:
12,000 6,000 18,000 1,500 per month
!!!
2 23
Demand Management
Session 2
Forecasting Techniques
2 24
Qualitative
Quantitative
Judgment
Mathematics
Intrinsic (Time Series)
Extrinsic (Causal)
2 25
Qualitative Techniques
Are based on intuition and informed opinion Tend to be subjective Are used for business planning and forecasting for new products Are used for medium-term to long-term forecasting
Lilly Products?
2 26
Quantitative Techniques: Extrinsic

Furniture industry looks at home building industry index
Based on correlation and causality Rely on external indicators Useful in forecasting total company demand or demand for families of products Two types of leading indicators
Economic Demographic
- Construction awards, house prices, - Population, birth rate,
Lilly Products?
2 27
Quantitative Techniques: Intrinsic

Based on several assumptions
The past helps you understand the future Time series are available The past pattern of demand predicts the future pattern of demand
Examples
Moving Averages Exponential Smoothing
Average past sales
2 28
Moving Averages: Principles

Best used when demand is stable and there is little trend or seasonality, and demand variations are random When past demand shows random variation
Do not second-guess what the effect of random variation will be It is better to forecast based on average demand
2 29
Moving Average Forecast Example

Assume it is the end of December; forecast demand for the next month, January
Jan
Feb
Mar
Apr
May Jun
Jul
Aug Sep Oct

Mo.1
Nov Dec Jan

Mo.2 Mo.3
92
83
66
74
75
84
84
81
75
63
91
84
2 30
Moving Average Forecast Logic

Moving average forecast = average demand of past periods
Moving average forecast for month 4 Demand for months 1 - 3 288 = = = 96 units No. of months 3
Month Demand Three - Month Total Next Month Forecast
1 2 3
102 91 95 288
96
Key: = Sum
2 31
MONTH 4 FORECAST
Class Problem 2.1
Month Demand 1 2 3 4 5 6
2 32
Three-Month Total
Next Month Forecast
102 91 95 105 94 101

Class Problem 2.1 Solution
Month 1 2 3 4 5
Demand 102 91 95 105 94
Three-Month Total
Next Month Forecast
288 291 294 300

96 97 98 100
6
2 33
101
Class Problem 2.1 Solution (cont.)

Forecast variability will covered by safety stock
106 104 102
Actual Forecast
Month
3-Month Total
Forecast
288
96
Demand
100 98 96 94 92
4
5 6
291
294 300
97
98 100
90
0 2 4 6 8
Period
2 34 2009 APICS CONFIDENTIAL AND PROPRIETARY
Three-Month Moving Average Forecast

Faster reaction on forecast
Month
1 2 3 4 5 6 7 8
Demand
89 89 94 91 95 104 106 110
Three-Month Total
272 272 272 274 280 290 305 320
Next-Month Forecast
91 91 91 91 93 97 102 107
2 35
Six-Month Moving Average Forecast

Slower reaction on forecast
Month
1 2 3
Demand
89 89 94
Six-Month Total
545 544 549
Next-Month Forecast
91 91 92
4
5 6 7 8
91
95 104 106 110
546
552 562 579 600
91
92 94 97 100
2 36
Moving Averages: Lessons Learned

The moving average forecast will lag the development of a rising or falling trend The farther back the moving average forecast reaches for data, the greater the lag The three-month moving average forecast may have overreacted if the demand surge had abated The moving average forecast works best when demand is stable with random variation; it will filter out random variation
2 37
Exponential Smoothing Logic

Take the old forecast and the actual demand for the latest (most current) period Assign a weighting factor or smoothing constant (, alpha) to the latest period demand vs. the old forecast Calculate the weighted average of the old forecast and the latest demand
New forecast = () (latest demand) + (1 ) ( old forecast)
2 38
Smoothing Constant (, Alpha)

New forecast = () (latest demand) + (1 ) (previous forecast)
Low smoothing constant gives more weight to the old forecast: e.g.,
= .2 for latest demand (e.g. period X) 1 = .8 for old forecast (also period X)
20% 100% 80%
Appropriate if demand is stable, not rising or falling Run simulations with different values to see which one best fits the historical demand pattern
2 39
Class Problem 2.2

A. Prepare an exponential smoothing forecast for June.
May data: actual demand = 220; forecast = 200. Calculate the forecast for June using a smoothing constant () of .20
B. Prepare an exponential smoothing forecast for July.

June data: actual demand = 240
Calculate the forecast for July also using a smoothing constant () of .20
2 40
Class Problem 2.2 Solution

A. Prepare an exponential smoothing forecast for June.
= (.2) 220 + (.8) 200 = = 44 + 160 = 204
B. Prepare an exponential smoothing forecast for July.

= (.2) 240 + (.8) 204 = = 48 + 163 = 211
2 41
Seasonal Demand
Average demand for all periods
Demand (units)
Seasonal demand
Time (quarters)
2 42
Seasonal Forecast Process

New seasonal Fcst.
Develop a seasonal forecast for each period of the year being forecast
Develop a deseasonalized demand forecast spanning all periods
Avg. Fcst.
2
Calculate a seasonal index of demand for each period to establish seasonality
Season Impact
1
2 43
Seasonal Demand Indexes (Step 1)

Demand History Year 1 1 2 3 Average
122 130 132 128
Quarter 2
108 100 98 102
Total 3
81 73 71 75
4
90 96 99 95 401 399 400 400
Average demand for all quarters = 400 = 100 units 4

Quarter 1 2 3 4 Average Quarterly Demand/100 128/100 102/100 75/100 95/100 Total
2 44 2009 APICS CONFIDENTIAL AND PROPRIETARY
Seasonal Index = = = = = 1.28 1.02 0.75 0.95 4.00
Deseasonalized Forecast (Step 2)

Make the forecast for the next year
Assume 420
Deseasonalize the forecast distribute it evenly across the four quarters
Deseasonalized demand
(average demand/period)
Annual forecast No. of periods
420 4
= 105 units
2 45
Seasonal Forecast (Step 3)

Calculation
= Expected quarter demand Expected first quarter demand Expected second quarter demand Expected fourth quarter demand Total forecast demand = =
(seasonal index) (deseasonalized forecast demand) 1.28 X 105 = 134 units 1.02 X 105 = 107 units .75 X 105 = 79 units
Expected third quarter demand = = =
.95 X 105 = 100 units 420 units
2 46
Demand Management
Session 2
Tracking the Forecast
2 47
Tracking the Forecast

Forecasts are rarely 100% correct over time. Why track the forecast?
To understand why demand differs from the forecast - Trend? To plan around error in the future - One-time events To improve forecasting methods
- Tools
2 48
Bias vs. Random Variation

Check Forecast
Bias Cumulative demand may not be the same as forecast
Month Forecast Actual Variation
Forecast OK
Random Variation Demand will vary plus and minus about the average
Forecast Actual Variation
1
2 3 4 5 6 Cumulative Total
100 100 100 100 100 100 600
90 125 120 125 120 110 690
-10 +25 +20 +25 +20 +10 +90
100 100 100 100 100 100 600
105 94 98 104 103 96 600
+5 -6 -2 +4 +3 -4 0
Bias exists since cumulative variation is not zero.

2 49
There is no bias since cumulative variation is zero.
Forecast Error Data
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Total
Forecast
500
500
500
500
500
500
500
500
500
500
500
500
Actual
460
520
530
490
460
500
530
490
530
480
490
520
Absolute deviation
40
20
30
10
40
30
10
30
20
10
20
260
Forecast Sales variation
2 50
Mean Absolute Deviation (MAD)

MAD =
| - F| ||A n
Average variation
Absolute errors MAD = No. of periods =
260 12
= 22 units
Key: = Sum; I I = Absolute Value
2 51
MAD Analysis: Normal Distribution

Statistically 60% = 1 90% = 2 98% = 3 Important for safety stock
1%
4%
15%
30%
30%
15%
4%
1%
-3 -88
-2 -44
-1 -22
1 22
2 44
3 88
MAD Units
2 52
Uses of Forecast Measurement

Identify changes and trends in demand Identify and adjust for forecast error that results from random events
Adjust the period forecast so that it is close to the true forecast average demand to minimize bias
Making decisions on safety stock and service levels based on the degree of random variation (forecast error)
2 53
Supply Chain Management Implications

Deal with demand uncertainty through process improvements
Decrease reliance on long-term forecasts and increase ability to react quickly to demand Collaborate with customers and suppliers, especially in sharing demand information Increase manufacturing flexibility internally and operations integration externally with customers and suppliers
How can Suzhou handle Forecast variation
2 54
Demand Management
Session 2
Wrap-Up and Homework
2 55
Learning Objectives
Demand Management Business Processes
Describe the significance of marketing management and customer relationship management Explain the role and objectives of demand planning (forecasting and customer order management)
Differentiate independent from dependent demand Identify at least five sources of independent demand
Recognize at least four demand patterns
2 56
Learning Objectives (cont.)

Basic Forecasting Concepts
Describe three planning levels that are supported by demand forecasts Explain four major principles of forecasting and three principles of data collection and preparation Differentiate quantitative from qualitative forecasting techniques
Estimate Demand
Calculate and explain the logic of an exponential smoothing forecast Explain the logic behind the calculation of a seasonal forecast Calculate and explain the use of the mean absolute deviation
2 57
Vocabulary Check
Objective:
Reinforce terminology used in this session Complete the activity in class, individually or in pairs, or as homework
2 58
Vocabulary Check
1
O R D E R Q U A 5 I L N I D T 8 M E A N A 9 Q P T U E I A N V N D E 13 T R E N D I N T T 15 A F O T 16 I I N T R V 17 E X P O N E
2 59
U A L I F I E R S
3 4
M O V I N G A V
B S O L U T E D E V D E P E N D E X 12 T D 14 R S E A I M N A R E C A S T N I D I N S I C
10 11
O R D E R W I N N E R S
A N D O M R A G E B A T I O N A T S
7
O N A L
N T I A L S M O O T H I N G
Problem 2.4
Month 1 2 3 4 5 6
Demand 102 91 95 105 94 101
Next Month Forecast
7
8 9 10
2 60
108
91 101 99
Problem 2.4 (Solution)

Month Demand Next Month Forecast
1
2 3 4
102
91 95 105 96 97
5
6 7 8 9 10
2 61
94
101 108 91 101 99
98
100 101 100 100 97
Demand Management Summary

Various models to build forecast
Forecast is not the same as sales/demand

Important to watch forecast Close connection to the customer is important
2 62

Demand Management: Basics of Supply Chain Management

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Basics of Supply Chain Management

APICS Certified in Production and Inventory Management (CPIM)

Basics of Supply Chain Management

Aggregate Inventory Management

Item Inventory Management

Purchasing and Physical Distribution

Lean/JIT and Quality Systems

Theory of Constraints and Review Activity

2009 APICS CONFIDENTIAL AND PROPRIETARY

Recognize at least four demand patterns

2009 APICS CONFIDENTIAL AND PROPRIETARY

Learning Objectives (cont.)

2009 APICS CONFIDENTIAL AND PROPRIETARY

Chapter 8 Page 216 in Intro to Materials Mgmt, sixth edition

2009 APICS CONFIDENTIAL AND PROPRIETARY

Demand Management Processes

Customer Relationship Management (CRM)

2009 APICS CONFIDENTIAL AND PROPRIETARY

Marketing Management and Mix

Potential Order Qualifying and Winning Products

Order Qualifying and Order Winning Products

Marketing Mix Decisions

Product Price Promotion Place

Customer Relationship Management

2009 APICS CONFIDENTIAL AND PROPRIETARY

Lilly Manufacturing Customer Service

2009 APICS CONFIDENTIAL AND PROPRIETARY

- Validation Lots - Patheon

2009 APICS CONFIDENTIAL AND PROPRIETARY

2009 APICS CONFIDENTIAL AND PROPRIETARY

Independent vs. Dependent Demand

2009 APICS CONFIDENTIAL AND PROPRIETARY

2009 APICS CONFIDENTIAL AND PROPRIETARY

Demand Patterns: Trend

2009 APICS CONFIDENTIAL AND PROPRIETARY

Demand Patterns: Seasonal Demand

2009 APICS CONFIDENTIAL AND PROPRIETARY

Demand Patterns: Random

2009 APICS CONFIDENTIAL AND PROPRIETARY

Stable vs. Dynamic Demand

Stable vs. Dynamic Demand

2009 APICS CONFIDENTIAL AND PROPRIETARY

2009 APICS CONFIDENTIAL AND PROPRIETARY

2009 APICS CONFIDENTIAL AND PROPRIETARY

How Forecasting Supports Planning

Horizon (up to)

Sales and Operations

2009 APICS CONFIDENTIAL AND PROPRIETARY

Data Collection and Preparation

Record circumstances relating to the data

Record demand separately for different customer Hospitals / Wholesalers groups

2009 APICS CONFIDENTIAL AND PROPRIETARY

Data Collection and Preparation Example

12,000 6,000 18,000 1,500 per month

2009 APICS CONFIDENTIAL AND PROPRIETARY

2009 APICS CONFIDENTIAL AND PROPRIETARY

Intrinsic (Time Series)

2009 APICS CONFIDENTIAL AND PROPRIETARY

2009 APICS CONFIDENTIAL AND PROPRIETARY

Quantitative Techniques: Extrinsic

2009 APICS CONFIDENTIAL AND PROPRIETARY

Quantitative Techniques: Intrinsic

2009 APICS CONFIDENTIAL AND PROPRIETARY