Unit III. Planning Demand and Supply in A Supply Chain

2020
Unit III: Planning Demand and Supply in a

Supply Chain
MA. MAE GABALES-VILLANUEVA,MBA

FACULTY-JBLFMU-MOLO
7/22/2020
JOHN B. LACSON FOUNDATION MARITIME UNIVERSITY-MOLO, INC.
BACHELOR OF SCIENCE IN CRUISE SHIP MANAGEMENT (BSCSM)
Table of Contents
Unit III: Planning Demand and Supply in a Supply Chain ........................... 2

3.1. Planning in supply chain Management ............................................ 2
3.2. Demand forecasting ..................................................................... 8
3.3. Aggregate planning.................................................................... 14
3.4. Bullwhip effect .......................................................................... 23
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Unit III: Planning Demand and Supply in a Supply

Chain
3.1. Planning in supply chain Management
Learning Objectives: At the end of the topic, students should be able

to:
1. Describe the Supply Chain Planning Process
2. Know the steps to achieve connected supply
chain planning.
3. Appreciate the importance of technology in
Supply Chain Planning
References: Readings:
https://www.anaplan.com/blog/5-steps-to-smart-
supply-chain-planning/
https://www.gartner.com/en/information-
technology/glossary/scp-supply-chain-planning
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https://www.jabil.com/blog/supply-chain-
planning-steps.html
https://explorescm.com/planning-in-supply-chain-
management/
Videos:
https://www.youtube.com/watch?v=A-
4V5vQ8dw8
https://www.scmdojo.com/create-supply-chain-
strategic-plan/
What is the supply chain planning process?
Supply chain planning is the process of planning a product from raw

material to the consumer. It includes the following:
1. Supply planning determines how best to fulfil the requirements

created from the demand plan. The objective is to balance supply and
demand in a manner that achieves the financial and service objectives
of the enterprise.
2. Production planning addresses the production and manufacturing
modules within a company. It considers the resource allocation of
employees, materials, and of production capacity.
3. Demand planning is the process of forecasting demand to make sure
products can be reliably delivered. Effective demand planning can
improve the accuracy of revenue forecasts, align inventory levels with
peaks and troughs in demand, and enhance profitability for a particular
channel or product.
4. Sales and operations planning (S&OP) is a monthly integrated
business management process that empowers leadership to focus on
key supply chain drivers, including sales, marketing, demand
management, production, inventory management, and new product
introduction.
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The digital supply chain revolution is already here
At the Gartner Supply Chain Executive Conference in London, Marc Engel

Global, Chief Supply Chain Officer at Unilever, shared this reminder:
“Innovation is not about machines; it‟s about asking „what do people want?‟”
For supply chain professionals, those people are consumers. To effectively
serve their needs, supply chain innovation must focus on the needs of the
consumer.
A key challenge in the supply chain digital revolution is “people

transformation.” It‟s key to unlearn the old rules and define the new rules.
It means saying “we‟ll only do things that will have customer impact, not
just for efficiency‟s sake.” Mike Burkett presented Gartner‟s point of view,
which emphasizes that digital transformation is more than just digital
optimization. Digital supply chain transformation focuses on building new
business models.
How to achieve connected supply chain planning
To succeed in a growing global market, one must adapt effectively to the

digital revolution and seek out practical ways to connect its supply chain
planning from start to finish. Here are five steps to achieve connected supply
chain planning:
1. Make the move to real-time supply chain planning

When using ERP systems and spreadsheets for planning, companies
typically rely only on historical data, resulting in little wiggle room for
changes should any disruptions occur in demand or supply. For
example, based on the previous year‟s numbers, a company can
estimate the number of products it will sell in the next quarter. But
what if a massive hurricane destroyed a key distribution center,
leading to too little supply on the shelves? With Anaplan‟s real-time
connected supply chain management solution, you can create “what-if”
scenarios and plan more effectively so you‟re ready when disruptions
occur.
2. Unify supply chain planning with enterprise planning
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A vital second step is connecting traditionally siloed supply chain

planning to sales and operations planning and financial planning.
Companies can benefit from synchronizing their short-term operational
planning with their wider business planning processes to make real-
time updates to inventory forecasts and supply. Deploying real-time
S&OP solutions that enable enterprise-wide collaboration means key
stakeholders across the business can create new scenarios and quickly
assess how to use their resources wisely to optimize profitability when
an unforeseen event happens.
3. Anticipate the demand of the end customer

For consumer-packaged goods companies, anticipating what
customers want and when they want it is an ongoing challenge. A
solution like Anaplan allows end-to-end visibility across the supply
chain, and beyond their existing network of wholesalers and retailers
to sense demand signals from customers. When you can rapidly
identify changing consumer sentiments and assess how that changes
demand for your product, it benefits your company, partners, and
customers by improving profitability, margins, and lead time.
4. Leverage real-time data across all points of the supply chain

Because supply chain planning typically involves a myriad of suppliers,
channels, customers, and pricing schemes, models soon become large
and potentially unwieldy—especially when spread sheets are your
primary planning tools. Incorporating a solution that uses real-time
data allows you to plan with more accuracy and reduces the risk of
stock-outs or having too much inventory.
5. Ensure you have the flexibility to cope with change

When you have technology that lets you plan efficiently and react
quickly, disruptions aren‟t disruptive because re-planning and re-
forecasting is easy—resulting in time and money saved and increased
profitability.
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Disruptive technology is the new normal
Emerging technologies like blockchain, artificial intelligence, and

machine learning are generating massive amounts of hype and attention
in the supply chain management world. It can be difficult to find your way
through the hype, but as they‟re becoming ubiquitous, supply chain planners
need to understand how to harness them for maximum benefit.
For example, blockchain can be used in supply chain management for smart
contracts, for maintaining ethics and sustainability, and for better security,
traceability, and efficiency. If you can effectively integrate this emerging
technology into your supply chain, the sky‟s the limit.
A new supply chain planner for a new supply chain
Along with new technologies and practices comes the need for a supply
chain leader with a new set of skills. To lead the way into a transformative
future, they need to combine technical and business knowledge with
collaboration and communication skills. The ability to influence department
leaders that partner with supply chain is key, as well as the skills to interact
intelligently with leaders across the organization is essential, because supply
chain initiatives often reach across business units. And strong business
acumen is a must-have—you‟ll be more effective working with your
counterparts in finance, sales, and marketing if you can speak their lingo.
The effective supply chain leader of tomorrow is tech-savvy and

comfortable working alongside the world of “machines.” Some have
said that artificial intelligence won‟t replace managers, but managers who
work with AI will replace managers who don‟t. This highlights the
transformation taking place in supply chain: humanity is essential, but so is
technology. And this leader is a storyteller—digging into the countless layers
of the supply chain to find the issues and weaving the right story together to
help solve them.
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Congratulations for making it to the Midterm!

I bet you have improved your time and task
management skills, especially on using JeL. Unlike
Instructor’s Note
prelim, we will now embark on Semi-automation mode.
Most of your activities will be done in JeL. We will only
utilize Google Drive as necessary.
So study your lessons carefully and take a short quiz on
Unit 3, Topic 1 when you are ready 
” Some said that artificial intelligence won‟t replace managers, but

managers who work with AI will replace managers who don‟t. Do
you agree?
If you do, then let‟s continue improving our knowledge by studying
well.
That‟s a #Lacsonian! PERSEVERING!
Galatians 6:9
And let us not grow weary of doing good, for in
due season we will reap, if we do not give up.
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3.2. Demand forecasting
Learning Objectives: At the end of the topic, students should be able to:
1. Describe the Characteristics of Demand
Forecasting
2. Know the importance of Advance Planning and
Scheduling Software in Demand Forecasting.
3. Identify the steps in demand forecasting .
https://businessjargons.com/demand-
forecasting.html
https://www.planettogether.com/blog/characteristics-
of-demand-forecasting-in-supply-chain-management
https://www.planettogether.com/blog/why-
forecasting-is-important-in-supply-chain-
management
Videos:
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https://www.youtube.com/watch?v=tCnFx6VfPUA
https://www.youtube.com/watch?v=pyKmgFw3U0I
https://www.youtube.com/watch?v=ASX68ShGkyc
https://www.youtube.com/watch?v=MD34jyjNRhI
https://www.slimstock.com/en/demand-forecasting-
sop/
The business world is characterized by risk and uncertainty, and most of the
business decisions are taken under this scenario. An organization come
across several risks, both internal or external to the business operations
such as technology, attrition, unrest, employee grievances, recession,
inflation, modifications in the government laws, etc.
Demand Forecasting refers to the process of predicting the future demand
for the firm‟s product. It is comprised of a series of steps that involves the
anticipation of demand for a product in future under both controllable and
non-controllable factors.
Strategic Forecast- medium and long-term forecasts used for decisions
related to strategy and estimating aggregate demand.
Tactical Forecast- short-term forecasts used as input for making day-to-
day decisions related to meeting demand.
Predicting the future demand for a product helps the organization in

making decisions in one of the following areas:
1. Planning and scheduling the production and acquiring the inputs

accordingly.
2. Making the provisions for finances.
3. Formulating a pricing strategy.
4. Planning advertisement and implementing it.
Demand forecasting holds significance in the businesses where large-scale
production is involved. Since the large-scale production requires a long
gestation period, a good deal of forward planning should be done. Also, the
potential future demand should be estimated to avoid the conditions of
overproduction and underproduction. Most often, the firms face a question of
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what would be the future demand for their product as they have to acquire
the input (labor and raw material) accordingly.
Characteristics of Demand Forecasting in Supply Chain Management
The characteristics of demand forecasting in supply chain management

pertain to the following:
1. Demand Forecasting is Always Wrong - It is important to

understand that demand forecasts are always wrong. Even if the
demand forecast are generated from demand forecasting software,
you should expected to see some level of error within the forecasts.
This is because year-to-year there will always be a variation in
demand forecasts, no matter what company that you are. You have to
take into account seasonality, macroeconomic factors, if you are
running marketing campaigns, etc. All of these factors and more will
greatly affect your demand and therefore leave you unable to
accurately forecast what your demand will be.
2. Long-Term Demand Forecast are Less Accurate - In correlation

with demand forecasting being always wrong, long-term demand
forecast are even less accurate than short-term forecast. This is
because as you stretch your demand forecast further and further, the
harder it is to accurately predict what it could be. Once again this is
because of all of the factors associated with demand forecasting and
any unforeseen events that may occur. Therefore, it is a must to
attempt to only utilize short-term demand forecast and develop an
idea of what demand may be.
3. Aggregate Demand Forecast are More Accurate - Aggregate

demand forecast take the cake when it pertains to accuracy. This is
because aggregate demand planning tends to have a smaller standard
deviation of error relative to the mean. Many large manufacturing
facilities utilize aggregate demand forecasting and have seen a
tremendous amount of efficiency improvement within their
manufacturing operation. This form of software may be a bit more
expensive than the others but is well worth the cost.
Advanced Planning and Scheduling Software
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Advanced Planning and Scheduling (APS) software has become a must for
modern-day manufacturing operations due to customer demand for
increased product mix and fast delivery combined with downward cost
pressures. APS can be quickly integrated with a ERP/MRP software to fill
gaps where these system lack planning and scheduling flexibility and
accuracy. Advanced Planning and Scheduling (APS) helps planners save time
while providing greater agility in updating ever-changing priorities,
production schedules, and inventory plans.
Here are the benefits of APS:
 Create optimized schedules balancing production efficiency and

delivery performance
 Maximize output on bottleneck resources to increase revenue
 Synchronize supply with demand to reduce inventories
 Provide company-wide visibility to capacity
 Enable scenario data-driven decision making
Implementation of Advanced Planning and Scheduling (APS) software will

take your manufacturing operations to the next level of production
efficiency, taking advantage of the operational data you already have in your
ERP.
Why Forecasting Is Important In Supply Chain Management
With many businesses and manufacturing operations, forecasting is

necessity in the regard that it pertains to accurate sales and demand
fulfilment. While forecasting is extremely important, forecasting is an
imperfect science that is challenging to get “spot on” - especially within
manufacturing and supply chain management.
Adequate forecasting within operations ensure that you always have enough
supply on hand to properly fulfil orders and satisfy demand. Business
analysts will use supply chain management systems and other tools needed
in order to forecast demand as far as months in advance. Utilizing a supply
chain management system and the tools provided will aid in providing
further insight into your operation and attempt to move your forecasting
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closer to the accurate range. Before implementing various forecasting

methods into your operation, it is essential to understand the importance of
forecasting in supply chain management. Therefore, here are four aspects
pertaining to the importance of forecasting in supply chain management.
Importance of Forecasting in Supply Chain Management
 Forecasting Demand and Coordinating Activities - Forecasting

demand and coordinating activities to meet demand are incredibly
time consuming tasks. While global companies use complex software
and systems to forecast demand, your small business may be unable
to afford this. Fortunately, small businesses can forecast supply chain
needs using simple techniques. These methods of moving average and
exponential smoothing try to smooth out demand to allow for
seasonality in the results.
 Shortage of Inventory - Inventory shortage is a substantial problem

that needs to be addressed immediately. Being unable to fulfill orders
is detrimental to a manufacturing operation, which is why using
adequate forecasting methods is a must. If your company finds itself
being unable to fulfill orders, you may find out that your customers are
taking their business elsewhere. Attempt to use adequate forecasting
methods in order to fulfill orders and ensure that you maintain your
customers.
 Insight in the Supply and Demand Cycle - Utilizing supply chain

management (SCM) software can aid with the facilitation of forecasting
and measuring the supply chain synchronization of supply and demand
through the use of real-time information. A result of this will be that
inventory is less likely to sit unused.
 Higher Inventory Due to Demand Overestimation - If a business

or manufacturing operation overestimates demand, you may found out
that you end up with more inventory than needed. While this is not as
hurtful as having less inventory than needed, there are still inventory
holding cost associated with it - which cuts into your profit. This may
also increase your labor and storage costs if workers have to move this
inventory to another storage facility to make way for new inventory. In
order to aid with this, forecasting is a must. If you find yourself during
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a time of volatile demand, then you may need to sell inventory at a

discount using a promotional strategy in order to sustain your
company‟s profit margins and income.
As a College student, what type of Forecasting have

Instructor’s you done so far? Is it classified as Strategic or Tactical
Note
Forecasting?
Whatever type it is, it is important that we prepare for
our future by practising #EXCELLENCE in every little
thing that we do.
Wow! You have finished studying our 2nd Topic!

If you have observations, activities and suggestions to
help you enjoy our lessons, write it down on your
yellow notebook and feel free to discuss it during our
next zoom meeting 
I would be excited to hear from you.
Philippians 4:8
Finally, brothers, whatever is true, whatever
is honorable, whatever is just, whatever is
pure, whatever is lovely, whatever is
commendable, if there is any excellence, if
there is anything worthy of praise, think
about these things.
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3.3. Aggregate planning
Learning At the end of the topic, students should be able to:

Objectives: 1. Define Aggregate Planning.
2. Identify the inputs of Aggregate Planning.
3. Name the various Aggregate Plan Strategies.
4. Identify the techniques and new trends in
Aggregate Planning.
https://en.wikipedia.org/wiki/Aggregate_planning
https://www.referenceforbusiness.com/management/A-
Bud/Aggregate-Planning.html
Videos:
https://www.youtube.com/watch?v=rZxqdHhZMBw
https://www.youtube.com/watch?v=i8Hb9nqoBGk
https://www.youtube.com/watch?v=HOtai_3EdNY
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https://www.youtube.com/watch?v=4O9qdjOaJzU
https://www.youtube.com/watch?v=qDo6Y1_i3uU
https://www.youtube.com/watch?v=x2yd4zdkxoI
https://www.planettogether.com/blog/aggregate-
planning-in-supply-chain-management
Aggregate planning is the process of developing, analysing, and

maintaining a preliminary, approximate schedule of the overall operations of
an organization.
The aggregate plan generally contains targeted sales forecasts, production

levels, inventory levels, and customer backlogs. This schedule is intended to
satisfy the demand forecast at a minimum cost. Properly done, aggregate
planning should minimize the effects of short-sighted, day-to-day
scheduling, in which small amounts of material may be ordered one week,
with an accompanying layoff of workers, followed by ordering larger
amounts and rehiring workers the next week. This longer-term perspective
on resource use can help minimize short-term requirements changes with a
resulting cost savings.
In simple terms, aggregate planning is an attempt to balance capacity

and demand in such a way that costs are minimized. The term
"aggregate" is used because planning at this level includes all resources "in
the aggregate;" for example, as a product line or family. Aggregate
resources could be total number of workers, hours of machine time, or tons
of raw materials. Aggregate units of output could include gallons, feet,
pounds of output, as well as aggregate units appearing in service industries
such as hours of service delivered, number of patients seen, etc.
Aggregate planning does not distinguish among sizes, colors, features, and
so forth. For example, with automobile manufacturing, aggregate planning
would consider the total number of cars planned for not the individual
models, colors, or options. When units of aggregation are difficult to
determine (for example, when the variation in output is extreme) equivalent
units are usually determined. These equivalent units could be based on
value, cost, worker hours, or some similar measure.
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Aggregate planning is considered to be intermediate-term (as opposed to

long- or short-term) in nature. Hence, most aggregate plans cover a period
of 3 to 18 months. Aggregate plans serve as a foundation for future short-
range type planning, such as production scheduling, sequencing, and
loading. The master production schedule (MPS) used in material
requirements planning (MRP) has been described as the aggregate plan
"disaggregated."
Steps taken to produce an aggregate plan begin with the determination of

demand and the determination of current capacity.
Capacity is expressed as total number of units per time period that can be
produced (this requires that an average number of units be computed since
the total may include a product mix utilizing distinctly different production
times).
Demand is expressed as total number of units needed. If the two are not in
balance (equal), the firm must decide whether to increase or decrease
capacity to meet demand or increase or decrease demand to meet capacity.
In order to accomplish this, a number of options are available.
Options for situations in which demand needs to be increased in order to

match capacity include:
1. Pricing. Varying pricing to increase demand in periods when demand

is less than peak. For example, matinee prices for movie theatres, off-
season rates for hotels, weekend rates for telephone service, and
pricing for items that experience seasonal demand.
2. Promotion. Advertising, direct marketing, and other forms of
promotion are used to shift demand.
3. Back ordering. By postponing delivery on current orders demand is
shifted to period when capacity is not fully utilized. This is really just a
form of smoothing demand. Service industries are able to smooth
demand by taking reservations or by making appointments in an
attempt to avoid walk-in customers. Some refer to this as
"partitioning" demand.
4. New demand creation. A new, but complementary demand is
created for a product or service. When restaurant customers have to
wait, they are frequently diverted into a complementary (but not
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complimentary) service, the bar. Other examples include the addition

of video arcades within movie theaters, and the expansion of services
at convenience stores.
Options which can be used to increase or decrease capacity to match current

demand include:
1. Hire/lay off. By hiring additional workers as needed or by laying off

workers not currently required to meet demand, firms can maintain a
balance between capacity and demand.
2. Overtime. By asking or requiring workers to work extra hours a day
or an extra day per week, firms can create a temporary increase in
capacity without the added expense of hiring additional workers.
3. Part-time or casual labor. By utilizing temporary workers or casual
labor (workers who are considered permanent but only work when
needed, on an on-call basis, and typically without the benefits given to
full-time workers).
4. Inventory. Finished-goods inventory can be built up in periods of
slack demand and then used to fill demand during periods of high
demand. In this way no new workers have to be hired, no temporary
or casual labor is needed, and no overtime is incurred.
5. Subcontracting. Frequently firms choose to allow another
manufacturer or service provider to provide the product or service to
the subcontracting firm's customers. By subcontracting work to an
alternative source, additional capacity is temporarily obtained.
6. Cross-training. Cross-trained employees may be able to perform
tasks in several operations, creating some flexibility when scheduling
capacity.
7. Other methods. While varying workforce size and utilization,
inventory build-up /backlogging, and subcontracting are well-known
alternatives, there are other, more novel ways that find use in
industry. Among these options are sharing employees with counter-
cyclical companies and attempting to find interesting and meaningful
projects for employees to do during slack times.
Aggregate Planning Strategies
There are two pure planning strategies available to the aggregate planner: a
level strategy and a chase strategy. Firms may choose to utilize one of the
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pure strategies in isolation, or they may opt for a strategy that combines the
two.
1. Level Strategy
A level strategy seeks to produce an aggregate plan that maintains a steady

production rate and/or a steady employment level. In order to satisfy
changes in customer demand, the firm must raise or lower inventory levels
in anticipation of increased or decreased levels of forecast demand. The firm
maintains a level workforce and a steady rate of output when demand is
somewhat low. This allows the firm to establish higher inventory levels than
are currently needed. As demand increases, the firm is able to continue a
steady production rate/steady employment level, while allowing the
inventory surplus to absorb the increased demand.
A second alternative would be to use a backlog or backorder. A backorder is

simply a promise to deliver the product at a later date when it is more
readily available, usually when capacity begins to catch up with diminishing
demand. In essence, the backorder is a device for moving demand from one
period to another, preferably one in which demand is lower, thereby
smoothing demand requirements over time.
A level strategy allows a firm to maintain a constant level of output and still
meet demand. This is desirable from an employee relations standpoint.
Negative results of the level strategy would include the cost of excess
inventory, subcontracting or overtime costs, and backorder costs, which
typically are the cost of expediting orders and the loss of customer goodwill.
2. Chase Strategy
A chase strategy implies matching demand and capacity period by period.

This could result in a considerable amount of hiring, firing or laying off of
employees; insecure and unhappy employees; increased inventory carrying
costs; problems with labor unions; and erratic utilization of plant and
equipment. It also implies a great deal of flexibility on the firm's part. The
major advantage of a chase strategy is that it allows inventory to be held to
the lowest level possible, and for some firms this is a considerable savings.
Most firms embracing the just-in-time production concept utilize a chase
strategy approach to aggregate planning.
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Most firms find it advantageous to utilize a combination of the level and

chase strategy. A combination strategy (sometimes called a hybrid or mixed
strategy) can be found to better meet organizational goals and policies and
achieve lower costs than either of the pure strategies used independently.
Techniques for Aggregate Planning
Techniques for aggregate planning range from informal trial-and-error

approaches, which usually utilize simple tables or graphs, to more formalized
and advanced mathematical techniques. William Stevenson's
textbook Production/Operations Management contains an informal but useful
trial-and-error process for aggregate planning presented in outline form.
This general procedure consists of the following steps:
1. Determine demand for each period.

2. Determine capacity for each period. This capacity should match
demand, which means it may require the inclusion of overtime or
subcontracting.
3. Identify company, departmental, or union policies that are pertinent.
For example, maintaining a certain safety stock level, maintaining a
reasonably stable workforce, backorder policies, overtime policies,
inventory level policies, and other less explicit rules such as the nature
of employment with the individual industry, the possibility of a bad
image, and the loss of goodwill.
4. Determine unit costs for units produced. These costs typically include
the basic production costs (fixed and variable costs as well as direct
and indirect labor costs). Also included are the costs associated with
making changes in capacity. Inventory holding costs must also be
considered, as should storage, insurance, taxes, spoilage, and
obsolescence costs. Finally, backorder costs must be computed. While
difficult to measure, this generally includes expediting costs, loss of
customer goodwill, and revenue loss from cancelled orders.
5. Develop alternative plans and compute the cost for each.
6. If satisfactory plans emerge, select the one that best satisfies
objectives. Frequently, this is the plan with the least cost. Otherwise,
return to step 5.
Mathematical Approaches to Aggregate Planning
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The following are some of the better known mathematical techniques that
can be used in more complex aggregate planning applications.
Linear Programming
Linear programming is an optimization technique that allows the user to find

a maximum profit or revenue or a minimum cost based on the availability of
limited resources and certain limitations known as constraints. A special type
of linear programming known as the Transportation Model can be used to
obtain aggregate plans that would allow balanced capacity and demand and
the minimization of costs. However, few real-world aggregate planning
decisions are compatible with the linear assumptions of linear
programming. Supply Chain Management: Strategy, Planning and
Operation, by Sunil Chopra and Peter Meindl, provides an excellent example
of the use of linear programming in aggregate planning.
Mixed-Integer Programming
For aggregate plans that are prepared on a product family basis, where the
plan is essentially the summation of the plans for individual product lines,
mixed-integer programming may prove to be useful. Mixed-integer
programming can provide a method for determining the number of units to
be produced in each product family.
Linear Decision Rule
Linear decision rule is another optimizing technique. It seeks to minimize

total production costs (labor, overtime, hiring/lay off, inventory carrying
cost) using a set of cost-approximating functions (three of which are
quadratic) to obtain a single quadratic equation. Then, by using calculus, two
linear equations can be derived from the quadratic equation, one to be used
to plan the output for each period and the other for planning the workforce
for each period.
Aggregate Planning In Services
For manufacturing firms the luxury of building up inventories during periods

of slack demand allows coverage of an anticipated time when demand will
exceed capacity. Services cannot be stockpiled or inventoried so they do not
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have this option. Also, since services are considered "perishable," any
capacity that goes unused is essentially wasted. An empty hotel room or an
empty seat on a flight cannot be held and sold later, as can a manufactured
item held in inventory.
Service capacity can also be very difficult to measure. When capacity is

dictated somewhat by machine capability, reasonably accurate measures of
capacity are not extremely difficult to develop. However, services generally
have variable processing requirements that make it difficult to establish a
suitable measure of capacity.
Historically, services are much more labor intensive than manufacturing,

where labor averages 10 percent (or less) of total cost. This labor intensity
can actually be an advantage because of the variety of service requirements
an individual can handle. This can provide quite a degree of flexibility that
can make aggregate planning easier for services than manufacturing.
What's New In Aggregate Planning?
Rudy Hung, in his Production and Inventory Management Journal article

entitled "Annualized Hours and Aggregate Planning," presents a new, useful
idea for aggregate planning called Annualized Hours (AH). Under AH,
employees are contracted to work for a certain number of hours (say 1,800
hours) per year, for a certain sum of money. Employees can be asked to put
in more hours during busy periods and fewer hours in slow periods.
Typically, employees receive equal monthly or weekly payments so that
hourly workers in effect have gained salaried status. Overtime is paid only
when employees have worked beyond their annual hours.
AH is also known as flexiyear, as it can be seen as an extension of flextime,

in which employees can vary their work hours within limits. This concept is
used almost exclusively in Europe, particularly in the United Kingdom. The
Scandinavian pulp and paper industries pioneered AH in the mid-1970s.
Around that time, some West German firms, particularly those in the retail
industry, also used AH.
AH gives employers much flexibility. AH serves to cut labor costs by offering

employees an annual sum less than their previous annual earnings with
overtime. Even though their total earnings may fall, their average earnings
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per hour would remain the same or even rise. Effective earnings could rise
even more so if the employer is unable to consume all contracted hours.
Employees have greater income security with no worries about layoffs. There
is also increased morale because blue-collar workers are now salaried.
Another development affecting aggregate planning is postponement. This

refers to delaying the "finish" of a product until the moment of sale. Firms
that rely on the postponement strategy, such as PC-maker Dell Inc. or
clothing franchise Benetton Group Sp.A., depend upon the availability of
aggregate inventories of components that can be assembled to order shortly
after, or even immediately, as an order is taken.
Kudos! You have completed our 3rd topic in Unit 3!

Instructor’s If you have recommendations to make our sessions a
Note lot more engaging, write it down on your yellow
notebook and feel free to discuss it during our next
zoom meeting 
I would be excited to hear from you.
Isn‟t it interesting to know more about aggregate

planning? Someday, when you become Managers
and Business Owners, this will become part of
your daily routine.
For now, I want you to focus on one very
important trait of a Leader, #INTEGRITY. If you
practice integrity in all aspects of your life, you
will reap its fruits in the future.
1 Chronicles 29:17-19
I know, my God, that you test the heart and are pleased with
integrity. All these things I have given willingly and with
honest intent. And now I have seen with joy how willingly
your people who are here have given to you
22 | P a g e
3.4. Bullwhip effect
Learning Objectives: At the end of the topic, students should be able to:
1. Define Bullwhip Effect
2. Identify the causes of Bullwhip Effect
3. Identify the effects of Bullwhip Effect to Supply
23 | P a g e
Chain Management
4. Identify steps to minimize Bullwhip Effect
https://www.adaptalift.com.au/blog/2012-04-02-
what-is-the-bullwhip-effect-understanding-the-
concept-definition
https://en.wikipedia.org/wiki/Bullwhip_effect#:~:text
=The%20bullwhip%20effect%20is%20a,further%20u
p%20the%20supply%20chain.
https://blog.arkieva.com/what-is-bullwhip-effect/
https://www.tradegecko.com/supply-chain-
management/the-bullwhip-effect
Videos:
https://www.youtube.com/watch?v=3O0NfyXz91M
https://www.youtube.com/watch?v=fNUmEw2EJPs
https://www.youtube.com/watch?v=2nlmkTYZG5s&t
=13s
https://www.youtube.com/watch?v=v3WK1Sgmu50
https://www.youtube.com/watch?v=iALiS4FBB6E
https://www.youtube.com/watch?v=Cr8lhk2zGDg
https://www.youtube.com/watch?v=2DfWP-XJ4ro
https://www.youtube.com/watch?v=d1K6i9sMcbo
https://www.youtube.com/watch?v=ad7l4bDlWU0
https://www.youtube.com/watch?v=vIiJ6xknV3c
Assessment 1. Define Bullwhip Effect and identify at least three

(3) Hospitality Establishments which may be
affected by it.
2. Name the causes of Bullwhip Effect and describe
each.
3. Identify the effects of Bullwhip Effect to Supply
24 | P a g e
Chain Management
4. If you are a Hotel Purchasing Department Head,
identify counter measures that your company
would take to minimize Bullwhip Effect
What is the bullwhip effect?
The bullwhip effect is a distribution channel phenomenon in which

forecasts yield supply chain inefficiencies. It refers to increasing swings in
inventory in response to shifts in customer demand as one move further up
the supply chain. The concept first appeared in Jay Forrester's Industrial
Dynamics (1961) and thus it is also known as the Forrester effect. It has
been described as “the observed propensity for material orders to be more
variable than demand signals and for this variability to increase the further
upstream a company is in a supply chain”. The bullwhip effect was named
for the way the amplitude of a whip increases down its length. The further
from the originating signal, the greater the distortion of the wave pattern. In
a similar manner, forecast accuracy decreases as one moves upstream along
the supply chain. For example, many consumer goods have fairly consistent
consumption at retail but this signal becomes more chaotic and
unpredictable as the focus moves away from consumer purchasing
behaviour.
In the 1990s, Hau Lee, a Professor of Engineering and Management Science

at Stanford University, helped incorporate the concept into supply chain
vernacular using a story about Volvo. Suffering a glut in green cars, sales
and marketing developed a program to move the excess inventory. While
successful in generating the desired market pull, manufacturing did not
know about the promotional plans. Instead, they read the increase in sales
as an indication of growing demand for green cars and ramped up
production.
25 | P a g e
The Causes of Bullwhip effect
Because customer demand is rarely perfectly stable, businesses must

forecast demand to properly position inventory and other resources.
Forecasts are based on statistics, and they are rarely perfectly accurate.
Because forecast errors are given, companies often carry an inventory buffer
called "safety stock".
Moving up the supply chain from end-consumer to raw materials supplier,

each supply chain participant has greater observed variation in demand and
thus greater need for safety stock. In periods of rising demand, down-
stream participants increase orders. In periods of falling demand, orders fall
or stop, thereby not reducing inventory. The effect is that variations are
amplified as one moves upstream in the supply chain (further from the
customer). This sequence of events is well simulated by the beer distribution
game which was developed by MIT Sloan School of Management in the
1960s.
 Disorganisation
 Lack of communication
 Free return policies
 Order batching
 Price variations
 Demand information
The causes can further be divided into behavioural and operational causes.
1. Behavioral causes. Previous control-theoretic models have identified as

causes the trade-off between stationary and dynamic performance as well as
the use of independent controllers. In accordance with Dellaert, Udenio and
Vatamidou (2017) one of the main behavioural causes that contribute to the
bullwhip effect is the under-estimation of the pipeline. In addition, the
complementary bias, over-estimation of the pipeline, also has a negative
effect under such conditions. Nevertheless, it has been shown that when the
demand stream is stationary, the system is relatively robust to this bias. In
such situations, it has been found that biased policies (both under-
estimating and over-estimating the pipeline) perform just as well as
unbiased policies.
26 | P a g e
Other behavioural causes include:
 Misuse of base-stock policies

 Mis-perceptions of feedback and time delays
 Panic ordering reactions after unmet demand
 Perceived risk of other players' bounded rationality
Human factors influencing the behaviour in supply chains are largely

unexplored. However, studies suggest that people with increased need for
safety and security seem to perform worse than risk-takers in a simulated
supply chain environment. People with high self-efficacy experience less
trouble handling the bullwhip-effect in the supply chain.
2. Operational causes
2.1. Demand forecast updating is accomplished individually by all

members of a supply chain. Each member updates its own demand forecast
based on the orders collected from its “downstream” customer. The more
members in the chain, the less these forecast updates reflect actual demand
from end customers.
2.2. Order batching takes place when each member collect order
quantities from their downstream customer and rounds up or down to meet
production constrains such as equipment setup times or truckload quantities.
The more members who conduct such rounding of order quantities, the more
likely a distortion occurs of the original quantities that were demanded.
2.3. Price fluctuations as a result of inflationary factors, quantity

discounts, or sales tend to stimulate customers to buy larger quantities than
they require. This behaviour appears to add variability to quantities ordered
and uncertainty to forecast.
2.4. Rationing and gaming is when a retailer tries to limit order quantities
by providing only a percentage of the order placed by the buyer. As the
buyer knows that the retailer is delivering only a fraction of the order placed,
he attempts to “game” the system by making an upward adjustment to the
order quantity. Rationing and gaming generate inconsistencies in the
ordering information that is being received.
27 | P a g e
Other operational causes include:
 Dependent demand processing

o Forecast errors
o Adjustment of inventory control parameters with each demand
observation
 Lead time variability (forecast error during replenishment lead time)
 Lot-sizing/order synchronization
o Consolidation of demands
o Transaction motive
o Quantity discounts
 Trade promotion and forward buying
 Anticipation of shortages
o Allocation rule of suppliers
o Shortage gaming
o Lean and JIT style management of inventories and a chase production
strategy
Consequences
In addition to greater safety stocks, the described effect can lead to either
inefficient production or excessive inventory, as each producer needs to
fulfill the demand of its customers in the supply chain. This also leads to a
low utilization of the distribution channel.
In spite of having safety stocks there is still the hazard of stock-outs which
result in poor customer service and lost sales. In addition to the (financially)
hard measurable consequences of poor customer services and the damage
to public image and loyalty, an organization has to cope with the
ramifications of failed fulfillment which may include contractual penalties.
Moreover, repeated hiring and dismissal of employees to manage the
demand variability induces further costs due to training and possible lay-
offs.
Countermeasures
1. Kanban
2. Smoothing
28 | P a g e
3. Cumulative Quantities
In manufacturing, this concept is called kanban. This model has been

successfully implemented in Wal-Mart's distribution system. Individual Wal-
Mart stores transmit point-of-sale (POS) data from the cash register back to
corporate headquarters several times a day. This demand information is
used to queue shipments from the Wal-Mart distribution center to the store
and from the supplier to the Wal-Mart distribution center. The result is near-
perfect visibility of customer demand and inventory movement throughout
the supply chain. Better information leads to better inventory positioning
and lower costs throughout the supply chain.
Another recommended strategy to limit the bullwhip effect is order

smoothing. Previous research has demonstrated that order smoothing and
the bullwhip effect are concurrent in industry. It has been proved that order
smoothing is beneficial for the system‟s performance when the demand is
stationary. However, its impact is limited to the worst-case order
amplification when the demand is unpredictable. Having said that, dynamic
analysis reveals that order smoothing can degrade performance in the
presence of demand shocks. The opposite bias (i.e., over-reaction to
mismatches), on the other hand, degrades the stationary performance but
can increase dynamic performance; controlled over-reaction can aid the
system reach its new goals quickly. The system, nevertheless, is
considerably sensitive to that behaviour; extreme over-reaction significantly
reduces performance. Overall, unbiased policies offer in general good results
under a large range of demand types. Although these policies do not result
in the best performance under certain criteria. It is always possible to find a
biased policy that outperforms an unbiased policy for any one performance
metric.
The concept of "cumulative quantities" is a method that can tackle and

even avoid the bull-whip-effect. This method is developed and practised
mainly in the German automotive industry, with its expanded supply
chains] and is established in several EDI-formats between OEMs and their
suppliers.
Methods intended to reduce uncertainty, variability, and lead time:
 Vendor-managed inventory (VMI)
29 | P a g e
 Just in time replenishment (JIT)

 Demand-driven MRP
 Strategic partnership
 Information sharing
 Smooth the flow of products
o Coordinate with retailers to spread deliveries evenly
o Reduce minimum batch sizes
o Smaller and more frequent replenishments
 Eliminate pathological incentives
o Every day low price policy
o Restrict returns and order cancellations
o Order allocation based on past sales instead of current size in case of
shortage
Example of the bullwhip effect
The actual demand for a product and its materials start at the customer,
however often the actual demand for a product gets distorted going down
the supply chain. Let‟s say that an actual demand from a customer is 8
units, the retailer may then order 10 units from the distributor; an extra 2
units are to ensure they don‟t run out of floor stock.
The supplier then orders 20 units from the manufacturer; allowing them to
buy in bulk so they have enough stock to guarantee timely shipment of
goods to the retailer. The manufacturer then receives the order and then
orders from their supplier in bulk; ordering 40 units to ensure economy of
scale in production to meet demand. Now 40 units have been produced for a
demand of only 8 units; meaning the retailer will have to increase demand
by dropping prices or finding more customers by marketing and advertising.
Although the bullwhip effect is a common problem for supply chain

management understanding the causes of the bullwhip effect can help
managers find strategies to alleviate the effect. Hopefully this blog post has
given you a simple understanding of the term.
30 | P a g e
So, can you recall the countermeasures of Bullwhip Effect?

Instructor’s Great! You see, in every problem, there is always a
Note solution. Just as an every Calamity, there is an
opportunity. This Pandemic gave us a lot of opportunity.
To heal and re-set. Amazing right? So why don‟t we say
“thank you” to our Creator. #Godliness, a true-blooded
Lacsonian‟s Trait.
Matthew 6: 33
But seek first the kingdom of God and his righteousness,
and all these things will be added to you.
AWESOME!
You have finished Unit 3 
How was it?
I bet you are ready for a short Quiz. Open your Quiz
activity using JeL and enjoy reaping the fruits of your
reading through a good score.
-End of Unit 3-
31 | P a g e

Unit III. Planning Demand and Supply in A Supply Chain

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2020

Unit III: Planning Demand and Supply in a

MA. MAE GABALES-VILLANUEVA,MBA

Unit III: Planning Demand and Supply in a Supply Chain ........................... 2

Unit III: Planning Demand and Supply in a Supply

3.1. Planning in supply chain Management

Learning Objectives: At the end of the topic, students should be able

What is the supply chain planning process?

Supply chain planning is the process of planning a product from raw

1. Supply planning determines how best to fulfil the requirements

The digital supply chain revolution is already here

At the Gartner Supply Chain Executive Conference in London, Marc Engel

A key challenge in the supply chain digital revolution is “people

How to achieve connected supply chain planning

To succeed in a growing global market, one must adapt effectively to the

1. Make the move to real-time supply chain planning

2. Unify supply chain planning with enterprise planning

A vital second step is connecting traditionally siloed supply chain

3. Anticipate the demand of the end customer

4. Leverage real-time data across all points of the supply chain

5. Ensure you have the flexibility to cope with change

Disruptive technology is the new normal

Emerging technologies like blockchain, artificial intelligence, and

A new supply chain planner for a new supply chain

The effective supply chain leader of tomorrow is tech-savvy and

Congratulations for making it to the Midterm!

” Some said that artificial intelligence won‟t replace managers, but

3.2. Demand forecasting

Predicting the future demand for a product helps the organization in

1. Planning and scheduling the production and acquiring the inputs

Characteristics of Demand Forecasting in Supply Chain Management

The characteristics of demand forecasting in supply chain management

1. Demand Forecasting is Always Wrong - It is important to

2. Long-Term Demand Forecast are Less Accurate - In correlation

3. Aggregate Demand Forecast are More Accurate - Aggregate

Advanced Planning and Scheduling Software

Here are the benefits of APS:

 Create optimized schedules balancing production efficiency and

 Maximize output on bottleneck resources to increase revenue

 Synchronize supply with demand to reduce inventories

 Provide company-wide visibility to capacity

 Enable scenario data-driven decision making

Implementation of Advanced Planning and Scheduling (APS) software will

Why Forecasting Is Important In Supply Chain Management

With many businesses and manufacturing operations, forecasting is

closer to the accurate range. Before implementing various forecasting

Importance of Forecasting in Supply Chain Management

 Forecasting Demand and Coordinating Activities - Forecasting

 Shortage of Inventory - Inventory shortage is a substantial problem

 Insight in the Supply and Demand Cycle - Utilizing supply chain

 Higher Inventory Due to Demand Overestimation - If a business

a time of volatile demand, then you may need to sell inventory at a

As a College student, what type of Forecasting have

Wow! You have finished studying our 2nd Topic!

3.3. Aggregate planning

Learning At the end of the topic, students should be able to:

Aggregate planning is the process of developing, analysing, and

The aggregate plan generally contains targeted sales forecasts, production

In simple terms, aggregate planning is an attempt to balance capacity

Aggregate planning is considered to be intermediate-term (as opposed to

Steps taken to produce an aggregate plan begin with the determination of

Options for situations in which demand needs to be increased in order to

1. Pricing. Varying pricing to increase demand in periods when demand