Demand Segmentation and

Profiling
 Demand Profiling : Defined
• Demand Profiling is simply the application of a
Time Series Plot to the Customer demand on a
process.

• Importance:
– Understanding demand is so important in any
Lean Sigma project
– Interpretation of the plot is the key to success
 Demand Profiling : Purpose
• The purpose of creating the profile was to
understand, from historical data, future
volume and variation in demand

• Rudimentary forecasting tool

Demand Profile : Plot
 Demand Profile :Process
• Demand data is captured over time at uniform
time intervals and plotted with an x-axis of
Time and a y-axis of Demand.

• The plot highlights the likely average demand

on the process and also the likely variation in
demand to which the process has to respond.
 Logistics of Demand Profiling
• Can be applied without the rest of the Team
• Data might have to come from multiple sources,
requires team involvement to collect it
• Analysis is done entirely in a spreadsheet or statistical
package
• Analysis can be done in a matter of a few minutes after
the data is in the correct format
• Initially, data is historical, but after the organization
understands the application of the tool, forecast data
can also be used
 Demand Profiling : Steps involved
• Step 1 : Identify which entity type or types are
to be examined
• Step 2 : Identify the time increments
• Step 3 : Collect from the downstream
Customer for the entity type for each time
increment
• Step 4 : Create the graph
 Roadmap : Step 1
• Identify which entity type or types are to be
examined
• Demand Profiling represents demand for either
one entity type or the sum across a few entity
types
• If the Team needs to understand the volume
and variation across many entity types then it is
probably best to look at a Demand
Segmentation instead of a Demand Profile
 Roadmap : Step 2
• Identify the time increments
• It is necessary to have at least 25 increments of
captured demand to have a useful graph
• The increments themselves should be
meaningful, and it is useful to take the typical
replenishment cycle as the driver
• For example, if Customers were replenished
weekly, then a week would be a reasonable time
increment
 Roadmap : Step 3
• Data is collected from the downstream Customer for the
entity type for each time increment
• Customer demand rates are typically much smoother
than we care to admit, and in fact, their usage rates are
even smoother
• Internally, we tend to batch entity processing into large
lots, which we make on an infrequent basis; so it shows
a much higher variation in demand than is actually there
• For Demand Profiling, we need to look at demand
patterns, not our own planned process patterns
 Roadmap : Step 4
• After the demand data for the entity type
across multiple time increments is collected,
create the graph similar to the one

• Take the time as the x-axis and the volume of

demand as the y-axis.
 Interpreting the Output
• Demand Profile is being used as a rudimentary
forecasting tool, but rather than using the data to
determine how much to generate on a short-term
basis, it is used to create a more responsive and
capable process
• Demand Profiles can exhibit one or combinations of a
multitude of patterns, the most common of which are
shown in Figure 7.15.2.
• Graph A represents a Zone 1 Demand Profile, whereas
Graph D represents a Zone 3 Demand Profile
Advantage over Demand Segmentation

• The value that Demand Profiling brings above

and beyond Demand Segmentation is that
cyclical patterns become visible
• Rather than just knowing that there is
variation, the Belt obtains an understanding of
how the demand is varying
• After this is understood, the process can be
laid out and resourced accordingly
 Example
If there are significant spikes in demand at the end
of each day:
– More staff could be used at that point (effectively
increasing capacity)
– Inventory could be built ahead of time to serve the
demand
– Later staff hours could be used to spread the demand
– Customers could be encouraged not to batch their
demand and perhaps spread it to earlier hours, and so
on
 Other options :
The interpolation techniques break down the time
series data into its component parts, namely:
– Current Level The mean value at the current time
– Trend The rate of systematic increase (or decrease) in
the mean value
– Seasonal Pattern A recurring periodic pattern
– Random Component The portion of behavior that
remains unaccounted for after the Current Level, the
Trend and the Seasonal Pattern have been identified
 Demand Segmentation

Products in the top left corner of the graph exhibit smooth high volume demand.
Products in the bottom right-hand corner exhibit variable, low volume demand.
Most production planning, forecasting, and process leveling approaches mistakenly
consider these in the same way, which misses opportunities to create more
predictable, responsive processes and reduce inventory all at the same time.
Demand Segmentation : Plot
 Considerations
• Altitude – this analysis typically starts with customer demand but can be
done by market, customer, finished goods, in-process, raw materials,
suppliers
• Time Bucket – depending on the ‘clock speed’ of the enterprise the demand
data can be aggregated by month, week, day, or hour.  When gathering data
start with the smallest time period possible. 
• Unit of Measure – the units of volume may be straight forward, for example
‘pieces’ or may be complicated due to different value streams or product
lines having a mix of units.
• Demand – sometimes not easy to get.  Shipments may not represent true
customer demand, especially if on-time delivery and order fill aren’t very
high. 
• Geography – like altitude, this analysis can be done by production cell, value
stream, plant or DC, business unit, or enterprise.
 Considerations Contd..
• Horizon – use forecast to determine volume, especially if product life cycles are
short
• Timeline – usually want at least 25 data points to calculate a meaningful standard
deviation of the demand history
• Scrub - other than filtering out abnormal orders consider weekend transactions,
huge one-time orders, and zeros.
• Plot – volume vs. Cv
• Interpret – Cv’s less than 1.0 lend themselves to flow and pull techniques.  Cv’s
less than 0.5 can often be handled with rate-based replenishment methods. 
Remember a Cv of 1.0 means the demand variation is a great as the demand
average.  Say a part has an average daily demand of 100 with a Cv of 1.0 the
demand one day could be zero and the next 200 or more – not very predictable. 
High Cv items are usually low volume, but not always.  Take a look at the three
data points in the top center of the graph above.  Must be a story here – why are
the highest volume parts so unpredictable?
Example 1
Example 2
Example 3
Example 4
Example 5
Example 6
Interpreting the Output
 Application : Replenishment
Demand Segmentation can be applied to materials management and specifically
replenishment as replenishment to a Customer or replenishment of materials internally
or from a Supplier for example, the delivery of product to a Customer, a materials
delivery to a line, or a medications delivery to a Care Unit. In this case, the zones would
be treated as follows:
• Zone 1
Deliver direct to line. High volume, low variation materials usage is so smooth that it
allows us to add service value to the Customer by managing their inventory for them.
Materials would be delivered on a rate-based system directly to the point of use (POU).
• Zone 2
Pull System from Customer. For the middle majority, simple pull triggers from the
Customer would allow replenishment when needed
• Zone 3
Make (or Deliver) to order. High variation, low volume gives such unpredictable demand
that it forces the Supplier to deliver only when there is an order.
 Application : Product Portfolio
Demand Segmentation can be applied to the Product Portfolio to identify
opportunities for rationalization and to validate the value in the portfolio. In this
case the Zones would be treated as follows:
• Zone 1
Dedicated Business Unit. Products in this Zone have high-volume, low variation
demand and could be managed independently, either by dedicating a small
internal group to manage them or to spin them off as a whole new Business Unit.
• Zone 2
Majority of portfolio. Products in this Zone are probably best left as they are.
There is always opportunity to rationalize in this majority, but they typically aren't
a primary focus.
• Zone 3
High-value niche products. Unless they are high-value products, the validity of
keeping low volume, highly variable products in the portfolio is questionable.
 Application : Production or Operations
Planning
Demand Segmentation when applied to Production or Operations Planning allows processing of
the entity types in the different Zones to be planned more effectively, as follows:
• Zone 1
Repetitive flow rate-based scheduling. Entity types that have a large, smooth demand do not
need to be scheduled individually, they can be rate-based, so that during each time-period a
consistent amount is processed with the knowledge that the Customer/Market uses that
amount. Slight variation in demand is catered for by using small buffers of inventory, preferably
at the POU.
• Zone 2
Hybrid control Pull System. For the middle majority of entity types in this Zone, Operations can
be successfully governed using internal Pull Systems, to minimize work in process (WIP)
inventory.
• Zone 3
• Discrete job order. For entity types in this Zone, the orders are few and far between and highly
variable, so it makes little sense to process them without an order or Customer request.
 References
• Forecasting: Methods and Applications (3rd
Edition) by S. Makridakis, S.C. Wheelwright,
and R.J. Hyndman
• Lean Sigma : A Practitioner’s Guide