DEMAND MANAGEMENT

Learning Objectives Understand the critical importance of outbound-to-customer logistics systems. Appreciate the growing need for effective demand management as part of an organization’s overall logistics and supply chain expertise.

Learning Objectives, continued Know the types of forecasts that might be needed, and understand how collaboration among trading partners will help the overall forecasting and demand management processes. Understand the basic principles underlying the sales and operations planning process.

Learning Objectives, continued Identify the key steps in the order fulfillment process and appreciate the various channel structures that might be used in the fulfillment process.

Demand Management The efforts to estimate and manage customer’s demand, and using the information to form operating decisions. In essence, it is to further the ability of the firms on the supply chain, to collaborate on activities related to the flow of product, services, information, and capital.

Figure 7.1 Supply / Demand Misalignment Source: Acenture, Stanford and Northwestern Universities, Customer Driven Demand Networks: Unlocking the Hidden Value in the Personal Computer Supply Chain (Accenture, 1997) 15

Table 7.1 Demand Management Supports Strategy Source: Jim R. Langbeer II, “Aligning Demand Management with Human Strategy, Supply Chain Management Review (May/Jun 2000) 58

Balancing Supply and Demand External balancing methods Change demand by changing price Change lead time by increasing the lead time Internal balancing methods Production flexibility To quickly change the production line setup from one to another product. Inventory

Traditional Forecasting Factors Affecting Demand Independent demand Dependent demand Simple Moving Average Weighted Moving Average Exponential Smoothing Adjusted Exponential Smoothing for Trend Seasonal Influences on Forecasts

Table 7.2 Seasonal Moving Average Forecast Source: Robert A. Novak, Ph.D.

Table 7.3 Weighted Moving Average Forecast Source: Robert A. Novak, Ph.D.

Table 7.4 Exponential Smoothing Forecast Source: Robert A. Novak, Ph.D.

Table 7.5 Trend Adjusted Exponential Smoothing Forecast Source: Robert A. Novak, Ph.D.

Forecast Errors Cumulative sum of forecast errors (CFE) Mean squared error (MSE) Mean absolute deviation (MAD) Mean absolute percentage error (MAPE)

Table 7.9 Forecast Error Source: Robert A. Novak, Ph.D.

Sales and Operations Planning (SOP) Step 1: Run sales forecast reports Step 2: Demand planning phase Step 3: Supply planning phase Step 4: Pre-SOP meeting Step 5: Executive SOP meeting

Figure 7.2 Monthly S&OP Process Source: Thomas F. Wallace, Sales and Operations Planning: The How-to Book (2000) 43

Collaborative Planning, Forecasting, & Replenishment (CPFR) Retailers, distributors, and manufacturers collaborate on operational planning (using internet technologies) Transportation providers have now been included with the concept of collaborative transportation management. CPFR was first attempted by Walmart and Johnson & Johnson in 1995 for its Listerine product line. To rationalize inventory, reduce out of stock occurrences and increase their forecast accuracy.

Figure 7.3 CPFR Model Source: Larry Smith, “West Marine: A CPFR Success Story”, Supply Chain Management Review (March 2006) 31

CPFR Business Model Planning Phase Forecasting Phase Develop front-end agreement Create joint business plan Forecasting Phase Create sales forecast Identify exceptions for sales forecast Resolve/collaborate on exception items Create order forecast Identify exceptions for order forecast Replenishment Phase Order generation Delivery execution

Distribution Channels Channels of Distribution A logistics channel is the means by which products flow physically from where they are available to where thy are needed A distribution channel can be thought of as the physical structures and intermediaries (such as distributors, wholesalers, retailers, transportation providers, and brokers) through which goods, services, information, and finances flow.

Figure 7.5 Logistics and Marketing Channels Source: Robert A. Novak Ph.D.

Fulfillment Models Integrated fulfillment Dedicated fulfillment Outsourced fulfillment Drop-shipped fulfillment Store fulfillment Flow-through fulfillment

Figure 7.7 Direct to Consumer Fulfillment Source: Robert A. Novak Ph.D.

Integrated Fulfillment Fulfillment Models, continued 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

Figure 7.8 Integrated Fulfillment Source: Robert A. Novak Ph.D.

Dedicated Fulfillment Fulfillment Models, continued 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 Retailer maintains both a “bricks-and-mortar” and “clicks-and-mortar” presence.

Figure 7.9 Dedicated Fulfillment Source: Robert A. Novak Ph.D.

Outsourced Fulfillment Fulfillment Models, continued 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

Figure 7.10 Outsourced Fulfillment Source: Robert A. Novak Ph.D.

Drop Shipped Fulfillment Fulfillment Models, continued 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

Figure 7.11 Drop-Shipped Fulfillment Source: Robert A. Novak Ph.D.

Fulfillment Models, continued 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

Figure 7.12 Store Fulfillment Source: Robert A. Novak Ph.D.

Flow-Through Fulfillment Fulfillment Models, continued Flow-Through Fulfillment Product is picked and packed at a 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

Figure 7.13 Flow-Through Fulfillment Source: Robert A. Novak Ph.D.

Summary Outbound-to-customer logistics systems have received the most attention in many companies; but, even in today’s customer service environment, outbound and inbound logistics systems must be coordinated. Demand management may be thought of as “focused efforts to estimate and manage customers’ demand, with the intention of using this information to shape operating decisions.

Summary, continued Although many forecasts are made throughout the supply chain, the forecast of primary demand from the end user or consumer will be the most important. It is essential that this demand information be shared with trading partners throughout the supply chain and be the basis for collaborative decision making. Various approaches to forecasting are available, each serving different purposes. The S&OP process has gained much attention in industry today. It serves the purpose of allowing a firm to operate from a single forecast.

Summary, continued The S&OP process is a continual loop involving participation from sales, operations, and finance to arrive at an internal consensus forecast. CPFR is a method to allow trading partners in the supply chain to collaboratively develop and agree upon a forecast of sales. This allows for the elimination of inventories held because of uncertainty in the supply chain. A number of distribution channel alternatives might be considered by organizations today. Effective management of the various choices requires coordination and integration of marketing, logistics, and finance within the firm, as well as coordination of overall channel-wide activities across the organizations in the channel.