Management of

Business Logistics
Dr. NGUYEN TIEN DUNG
Dr. LE THI DIEM CHAU
Dr. TRAN QUYNH LE
Industrial Systems Engineering Department
Mechanical Engineering Faculty
Ho Chi Minh City University of Technology (HCMUT)–
VNUHCM
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CHAPTER 3:
Demand Management and Customer Service
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Contents
Matching supply and demand

• The lead-time gap

• Improving visibility of demand

• The supply chain fulcrum

• Forecast for capacity, execute against demand

• Demand management and planning

• Collaborative planning, forecasting and replenishment

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Contents
Going to market

• Distribution channels are value delivery system

• Innovation in the distribution channel

• The omni-channel revolution

• Omni-channel retailing

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Introduction

The goal of supply chain management

• Match supply and demand

• What makes this seemingly simple task so

difficult in reality is the presence of uncertainty.

• This uncertainty brings with it a serious

challenge to the classic practice of running a
business on the basis of a forecast.

• Uncertainty increases so too will forecast

accuracy reduce.
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The lead-time gap

The basis of the lead-time gap

• The time it takes to procure, make and deliver the finished product to a
customer is longer than the time the customer is prepared to wait for it

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The lead-time gap

• Logistic lead time: the time taken to complete the process from procurement to
delivered product

• The customer’s order cycle: the period they are prepared to wait for delivery

• Bridge gap (old way):

✓ seeking to forecast the market’s requirements and then to build inventory

ahead of demand

✓ no matter how sophisticated the forecast, its accuracy is always less than
perfect

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 The lead-time gap Chapter 3

• Other solution:

✓ not in investing ever greater sums of money and energy in improving forecasting
techniques

✓ reducing the lead-time gap: match between the logistics lead-time and the
customer’s required order cycle

✓ shortening the logistics lead-time (end-to-end pipeline time)

✓ move the customer’s order cycle closer by gaining earlier warning of requirements

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 Improving visibility of demand Chapter 3

• Inadequate ‘visibility’ of real demand

✓ ‘real’
demand we mean the demand in the final market place, not the ‘derived’
demand that is filtered upstream

• The challenge is to find a way to receive earlier warning of the customers’ requirements

✓ The demand penetration point is too far down the pipeline and that secondly
✓ Real demand is hidden from view and all we tend to see are orders.

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 Improving visibility of demand Chapter 3

• The demand penetration point (the de-coupling point)

✓ Point in the logistics chain where real demand meets the plan
✓ Upstream from this point everything is driven by a forecast and/or a plan
✓ Downstream of that point we can respond to actual customer demand.
• What to do with DPP:

✓ seek to identify ways in which the demand penetration point can be

pushed as far as possible upstream.

✓ achieved by the use of information so that manufacturing and purchasing

get to hear of what is happening in the market place faster than they
currently do.

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Improving visibility of demand Chapter 3

Strategic inventory

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 Improving visibility of demand Chapter 3

• Extending the customer’s order cycle is by

gaining earlier notice of their requirements

• Receives no indication of the customer’s actual

usage until an order arrives.

✓ The order cycle time (i.e. the required

response time from order to delivery) may
only be the visible tip of the ‘information
iceberg’

✓ Below the surface of the iceberg

represents the ongoing consumption,
demand or usage of the product which is
hidden from the view of the supplier.

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• Mutual advantage if information on requirements can be shared on a

continuing basis.

• If the supplier can see right to the end of the pipeline then the logistics
system can become much more responsive to actual demand

• If an ongoing feed-forward of information on demand or usage can be

established there is a greater chance that the service to the customer will
be enhanced and the supplier’s costs reduced

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 The supply chain fulcrum Chapter 3

• Supply chain: to balance supply and demand

✓Achieved through forecasting ahead of demand and creating

inventory against that forecast.

✓Capacity’ refers to the ability to access supply not currently held as

inventory.

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 The supply chain fulcrum Chapter 3

• How in reality do we move the fulcrum closer to demand?

✓Improve visibility of demand

✓Enhancing the velocity of the supply chain

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The supply chain fulcrum Chapter 3

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Forecast for capacity, execute against demand

• Much harder to achieve high levels of forecast accuracy for individual items.

• The focus has to be on how the company can move from a forecast-driven to a
demand-driven mentality.

• Forecasting is at the individual item level but rather forecast for aggregate
volume.

• The importance of the ‘de-coupling point’:

✓ ‘Generic’ inventory at that point

✓ Facilitate the late configuration or even manufacture of the product
against a customer’s specific requirements

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Demand management and planning

• Demand management: the various tools and procedures that enable a more
effective balancing of supply and demand to be achieved through a deeper
understanding of the causes of demand volatility

• Demand planning:

✓ The translation of our understanding of what the real requirement of the

market is into a fulfilment program

✓ making sure that products can be made available at the right times and
places

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Demand management and planning

Generate Modify forecast
aggregate with demand
• Sales and operations planning (S&OP). demand forecast intelligence

✓ a formalized approach to demand

management and planning

✓ Aim ensure the highest level of Create ‘rough

Create a
consensus
customer satisfaction through OTIF cut’ capacity plan
forecast
deliveries with minimum inventory

✓ The sales and operations planning

process:
Execute at
individual item Measure
(SKU) level performance
against demand

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 Generate
Chapter 3
aggregate

Demand management and planning demand forecast

• Generate aggregate demand forecast

Modify forecast
with demand
intelligence

✓ The impossible to forecast at the individual item Create a

consensus
level (SKU) too far ahead forecast

✓ Made on the basis of high-level aggregate volume Create ‘rough cut’

capacity plan

forecasts at the product family level.

Execute at

✓ Get closer to the point of demand fulfilment => start individual item
(SKU) level
against demand

to think about product mix requirements

Measure
performance

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 Generate
Chapter 3
aggregate

Demand management and planning demand forecast

• Modify forecast with demand intelligence

Modify forecast
with demand
intelligence

✓ Modify it utilizing specific intelligence on current Create a

consensus
market conditions and events forecast

✓ Involve key customers or accounts Create ‘rough cut’

capacity plan

Execute at
individual item
(SKU) level
against demand

Measure
performance

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 Generate
Chapter 3
aggregate

Demand management and planning demand forecast

• Create a consensus forecast Modify forecast

with demand

✓ A cross-functional approach to achieving a balance between supply intelligence

and demand
✓ A seamless alignment between the demand creation side of the Create a
consensus
business (i.E. Sales and marketing) with the demand fulfilment forecast

activity (i.E. Logistics and operations)

Create ‘rough cut’
capacity plan

Execute at
individual item
(SKU) level
against demand

Measure
performance

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 Generate
Chapter 3
aggregate

Demand management and planning demand forecast

• Create ‘rough cut’ capacity plan Modify forecast

with demand
intelligence

✓ Look at the aggregate product family forecast for

the planning period and to translate that into the
Create a
capacity and resources needed consensus
forecast

✓ How much machine time, how much time in an

assembly process, how much transport capacity
Create ‘rough cut’
and so on. capacity plan

• No enough the capacity:

Execute at

✓ Managing
individual item
demand, e.g delivery lead times re- (SKU) level
against demand

negotiated, prices adjusted to reduce demand, etc

✓ Finding additional capacity using external providers. Measure

performance

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 Generate
Chapter 3
aggregate

Demand management and planning demand forecast

• Execute at individual item (SKU) level against demand

Modify forecast
with demand
intelligence

✓ Ideally nothing is finally assembled, configured or packaged until we

Create a
know what the customer’s order specifies. consensus
forecast

✓ To achieve this ideal state clearly requires a high level of agility

Create ‘rough cut’
capacity plan

• Forecast and inventory

Execute at

✓ Make inventory ahead of time, at least the forecast will be more individual item
(SKU) level
against demand

accurate since the forecast horizon is closer

✓ A further enabler of more accurate forecasts is visibility of real demand

Measure
performance

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 Generate
Chapter 3
aggregate

Demand management and planning demand forecast

• Measure performance Modify forecast

with demand
intelligence

✓ How high the percentage of perfect order achievement is compared

to the number of days of inventory and the amount of capacity Create a
consensus
forecast
needed to achieve that level.

✓ The goal of the S&OP system: Create ‘rough cut’

capacity plan

▪ Reduce the dependency on the forecast

▪ Measure the lead-time gap at the individual item level. Execute at

individual item
(SKU) level
against demand

▪ Reduce this gap by a concerted focus on time compression and improved

visibility.
Measure
performance

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Collaborative planning, forecasting and

replenishment
• Logic of all these collaborative initiatives

✓ through sharing information and by working together to create joint plans and forecasts,
both the supply side and the demand side of the supply chain can benefit

• Collaborative planning, forecasting and replenishment (CPFR)

✓ The name given to a partnership-based approach to managing the buyer/supplier

interfaces across the supply chain

✓ The idea is a development of vendor managed inventory (VMI)

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Collaborative planning, forecasting and

replenishment
• Vendor managed inventory (VMI):

✓ A process through which the supplier rather than the customer manages the flow
of product into the customer’s operations

✓ Driven by frequent exchanges of information about the actual off-take or usage of

the product by the customer

✓ The supplier is in effect managing the customer’s inventory on the customer’s

behalf.

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Collaborative planning, forecasting and

replenishment
• VWI and CFFR:

✓ CPFR is in effect an extension of VMI in that it takes the idea of collaboration

amongst supply chain partners a step further

✓ the creation of an agreed framework for how information will be shared between
partners and how decisions on replenishment will be taken

✓ A key element of CPFR is the generation of a joint forecast, which is agreed and
signed off by both the supplier and the customer.

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Going to market: Introduction

• The routes use to take products to market are commonly called distribution channels:

• Traditionally, distribution channels were viewed purely as a means to enable the physical
fulfilment of demand

• In recent year, eliminate the ‘middleman’ in a distribution channel, sold product direct to end
users

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Distribution channels are value delivery systems

• Distribution channels:

✓ Physical conduits through which products flow

✓ Connect with customers
✓ Provide a means of delivering the value that customers seek
✓ Work in both directions: serving the customer and providing a means of
capturing customer insight , enabling market understanding

✓ Seamless connections between all of the entities in the channel

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Distribution channels are value delivery systems

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Distribution channels are value delivery systems

• Choose the value:

✓ All businesses must choose where they want to compete, i.e. the target market

✓ Clear understanding of the segmentation of the market and strong insight into the value
preferences of each segment.

✓ The decision based on a rigorous and objective analysis of the capabilities that the
organization can access

✓ The value proposition is an articulation of the compelling reason(s) why customers should do
business with us.

✓ This is the starting point for the development of a ‘go-to-market’ strategy – the development
of the product/service offer and the value delivery system to support that offer.

Choose the Value Provide the Value Communicate the Value Capture the Value

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Distribution channels are value delivery systems

• Provide the Value

✓ Focused on developing solutions to buying problems

✓ Develop supply chains and distribution channels that are flexible and that can adapt
to customers changing needs

✓ Use value-adding partners:

▪ Seamlessly integrated into the total value delivery system

▪ Share the same strategic objectives and be committed to the overall value
proposition

Choose the Value Provide the Value Communicate the Value Capture the Value

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Distribution channels are value delivery systems

• Communicate the Value

✓ Proclaim the value proposition

▪ Ensure that the value proposition is enunciated and proclaimed in the end
market, the business and channel partners

✓ Develop a shared vision

▪ The communication process should be two-way

▪ Enable customer feedback and sales data to flow swiftly up the supply chain

Choose the Value Provide the Value Communicate the Value Capture the Value

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Distribution channels are value delivery systems

• Capture the Value

✓ Understand the cost-to-serve

▪ Multiple channels to go to market => portfolio of customers grows => not easy to
understand the real cost of serving specific customers through a particular
channel

▪ A lot of the potential financial value that could be captured by the channel is
being eroded because of the failure to understand the true costs involved.

Choose the Value Provide the Value Communicate the Value Capture the Value

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Distribution channels are value delivery systems

• Capture the Value

✓ What is the channel margin and who receives it?

▪ The financial value generated through that channel be shared amongst its
members

▪ The channel margin is defined as the difference between the price paid by the
end user in the final market (the ‘street’ price) and the price that the supplier
achieves when they sell it (the ‘factory gate’ price).

▪ The channel margin reflects the value that is going to intermediaries rather than
to the supplier
Choose the Value Provide the Value Communicate the Value Capture the Value

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Innovation in the distribution channel

• Until recently, channels of distribution changed very little.

• Combination of competitive pressure and technology development => dramatic

changes in distribution channels.

• The biggest drivers of these changes has been the rapid rise in the use of the
Internet both for on-line shopping and for business-to-business transactions.

• In many cases, intermediaries has been removed.

• In other cases, it has created new opportunities for intermediaries by acting as

‘info-mediaries’ i.e. using information and knowledge to create new value for
their customers.

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Innovation in the distribution channel

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The omni-channel revolution

• Major retailers around the globe are having to re-evaluate their strategies: temporarily
halt expansion

• The rise of convenience stores

• The biggest change is on-line shopping through the Internet

✓ The Internet is revolutionizing both marketing and supply chain management

✓ The volume and value of transactions conducted via the Internet continues to
grow

✓ Placing the customer or consumer at the centre of the network

✓ Growth of ‘mobile commerce’, i.e. the use of mobile phones to enable a two-
way communication channel

✓ Increase in home delivery

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Omni-channel retailing
• Multi-channel retailing:

✓ Is essentially a logistics and distribution

arrangement whereby each channel is more or
less independent of the other.

✓ Separate channels for brick-and-mortar

outlets, for its catalog business, and for its
online business.

✓ The logistics and distribution arrangements

could be quite separate.

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Omni-channel retailing
• Omni-channel retailing:

✓ All routes to market are served through the same

supply chain wherever possible

✓ Create high levels of customer satisfaction

✓ Bring down costs.
✓ Ensure that each channel complements the other to
provide a consistent customer experience and enable
a seamless transition from one channel to another
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