SCM20003 Global Logistics & Supply

Chain Management
Lecture 2: Demand Management

CRICOS 00111D
TOID 3059
 Demand Management
The Essence of Demand Management

To estimate and manage

customer demand and use this
information to make operating Greater
decisions. Desired value for
End the end
To further ability of firms Result user or
throughout the supply chain to consumer
collaborate on activities related to
the flow of products, services,
information, and capital.

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 Demand Management
Importance of Demand Management

Common Problems in Demand Management

 Lack of coordination between
departments
 Too much emphasis placed on
forecasts of demand, with less
attention on the collaborative
efforts and plans needed to be
developed from the forecasts
 Non-strategic uses of demand
information

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 Demand Management
Importance of Demand Management (continued)
Effective demand management unifies channel members with the
common goals of satisfying customers and solving customer problems.
1 Gather & analyze knowledge about consumers, their problems, and
their unmet needs.

2 Identify partners to perform functions needed in demand chain.

3 Move functions to the channel member that can perform them most
effectively and efficiently.

4 Share with other supply chain members knowledge about customers,

technology, and logistics challenges and opportunities.

5 Developing products and services that solve customers’ problems.

6 Develop & execute best methods to deliver products & services to

consumers in the desired format.

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 Demand Management
Importance of Demand Management (continued)
Effective demand management supports business strategy.

Source: Table 7.1

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Balancing Supply and Demand
 Balancing Supply and Demand
Problem of Supply-Demand Misalignment

Source: Figure 7.1

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 Balancing Supply and Demand
Supply-Demand Balancing Methods
Some combinations of supply-demand balancing methods are used,
depending on the nature of the product, the cost of stocking out, and
the organization’s ability to properly forecast customer demand.

External Balancing Methods Internal Balancing Methods

Change the manner in Manage gap using internal
which the customer orders: processes:
• Price • Inventory
• Lead time • Production flexibility

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 Demand Forecasting

Types of Forecast Common Forecasting

Error Measures Techniques
 Demand Forecasting
Demand forecasting is a major component of demand
management. Forecasts serve as a plan for both marketing and
operations to set goals and develop execution strategies.
Two Types of Demand
Most forecasting techniques focus on independent demand.

Independent Dependent
Demand Demand

The demand for the The demand directly

primary item, known as influenced by demand
base demand for independent item

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 Demand Forecasting
Factors Affecting Demand
All demand is subject to certain fluctuations.
A development that cannot be
Random fluctuation anticipated and is usually the
cause to hold safety stocks to
avoid stockouts.

Gradual increase or decrease in

demand over time for an Trend fluctuation
organization.

Seasonal patterns that will

normally repeat themselves
Seasonal fluctuation during a year for most
organizations.

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 Demand Forecasting
Common Forecasting Techniques
All statistical techniques used to generate forecasts require accurate data and
rely on the assumption that the future will repeat the past. The key to good
forecasting is to minimize forecast error by utilizing a forecasting technique
that best fits the nature of the data. Three common forecasting techniques are:

Simple moving Weighted moving Exponential

average average smoothing
 Makes forecasts based  Assigns a weight to each  Pros: simplicity and
on recent demand previous period with limited requirements
history and allows for higher weights usually for data, good for
the removal of random given to more recent relatively constant
effects. demand. demand
 Pros: quick and easy to  Pros: allows emphasis on  Cons: forecasts will lag
use more recent demand as a actual demand; Not
 Cons: old demand predictor of future appropriate for highly
dropped quickly; not demand. seasonal demand
accommodate seasonal,  Cons: not easily patterns or patterns
trend, or business cycle accommodate seasonal with trends
influences demand patterns.
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 Demand Forecasting
Types of Forecast Error Measures
t- 1

CFE CFE = å et
n
• Cumulative sum of forecast errors (CFE) calculates the total forecast error
for a set of data, taking into consideration both negative and positive errors.
å Et2
MSE MSE =
n
• Mean squared error (MSE) squares each period error so the negative and
positive errors do not cancel each other out.
å | Et |
MAD MAD =
n
• Mean absolute deviation (MAD) takes absolute value of each error, so the
negative and positive signs are removed.
å (| Et | / Dt )100
MAPE MAPE =
n

Track signal CFE/ MAD

• Tracking signal can be used to measure forecast error, especially good at
identifying if a “bias” exists in the forecast errors.

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 Demand Forecasting
Common Forecasting Techniques (continued)
Forecast Accuracy Summary

Source: Figure 7.6

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Sales and Operations
Planning (S&OP)
 Sales and Operations Planning (S&OP)
Arriving at Internal Consensus Forecast
It is necessary for an organization to arrive at a forecast internally
that all functional areas agree upon and can execute. A process that
can be used to arrive at this consensus forecast is called sales and
operations planning (S&OP).

Preliminary Marketing
demand forecast forecast

Internal
Financial Distribution S&OP Consensus
Forecast
forecast forecast

Manufacturing
forecast

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 Sales and Operations Planning (S&OP)
A Five-Step Process

Source: Figure 7.2

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Collaborative Planning,
Forecasting, and
Replenishment (CPFR)
 Collaborative Planning, Forecasting, and
Replenishment (CPFR)
Arriving at Inter-Organizational Consensus Forecast

 Trading partners
(retailers, distributors,
and manufacturers) use
available Internet-based
technologies to
collaborate on
operational planning,
allowing them to agree to
a single forecast for an
item where each partner
translates this forecast
into a single execution
Source: CPFR 2.0 GS1 (2014)
plan.
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Collaborative Planning, Forecasting and
Replenishment
Members of the supply chain need to agree upon a
consensus forecast
Internet-based technologies to collaborate on operational
planning through execution
Fulfillment Models
Demand management is implemented
through fulfilment models
Some Direct-to-Customer Fulfillment
models
– Integrated fulfilment
– Dedicated
– Outsourced
– Drop-shipped
– Store
– Flow-Through
Integrated Fulfillment
– Retailer maintains both a “bricks-and-mortar” and “clicks-and-
mortar” presence
– operates one distribution network to service both channels
– Advantage
• low start-up costs
• existing network can service both
– Disadvantages
• order profile will change with addition of Internet orders
• case lots versus “eaches”
• would require a “fast pick,” or broken case operation
• conflict might arise between a store order and an Internet order
Dedicated Fulfillment
– Both a store and an Internet presence with two separate distribution networks
– Advantage:
• separate distribution network for store delivery and consumer delivery eliminates most of the
disadvantages of integrated fulfillment
– Disadvantage:
• duplicate facilities and duplicate inventories
Outsourced Fulfillment
– assumes that another firm will perform the fulfillment

– Advantages:
• low start-up costs for the retailer to service the Internet channel
• possible transportation economies

– Disadvantage:
• loss of control over service levels
Drop-Shipped Fulfillment
– also called direct store delivery, vendor delivers
directly to retailer, bypassing retailer’s distribution
network.
– works best for products that have a short shelf life
– Advantages:
• reduction of inventory in the distribution network
• vendor has direct control of its inventories
– Disadvantage:
• possible reduction of inventory visibility
Store Fulfillment
The order is placed through the Internet site and sent to the nearest
store for customer pick up
– Advantages:
• short lead time to the customer
• low start-up costs for the retailer
• returns can be handled through the store
• product availability in consumer units
– Disadvantages:
• reduced control and consistency over order fill
• conflict may arise between inventories
• must have real-time visibility to in-store inventories
• stores lack sufficient space to store product
Flow-Through Fulfillment

Product is picked and packed at distribution center, then

sent to the store for pickup
– Advantages:
• eliminates the inventory conflict
• avoids the cost of the “last mile”
• returns can be handled through the existing store network
– Disadvantage:
• Storage space at the store for pickup items a problem