for Entry- to Mid-Level Professionals in Supply Chain Management

for Entry- to Mid-Level Professionals in Supply Chain Management
DEMAND PLANNING CERTIFICATION TRACK for Entry- to Mid-Level Professionals in Supply Chain Management Note: This PowerPoint is based on LINCS.DP.v pdf (08/19/2016)

LINCS: Leveraging, Integrating, Networking, Coordinating Supplies
Developed by the LINCS in Supply Chain Management Consortium, comprised of educational institutions: Broward College (Lead Institution) Long Beach City College Columbus State Community College Northwestern University Essex County College Rutgers, the State University of New Jersey Florida State College at Jacksonville San Jacinto College Georgia Institute of Technology St. Petersburg College Harper College Union County College In partnership with the Council of Supply Chain Management Professionals (CSCMP)

LINCS in Supply Chain Management Consortium
Broward College, Lead Institution 1930 S.W. 145th Avenue, Suite 224 Miramar, FL 33027 (954) Author: LINCS in Supply Chain Management Consortium Title: Transportation Operations Certification Track Release Date: 01/13/2017, Version: v2.36 To learn more about LINCS, visit Content was developed and produced by LINCS in Supply Chain Management Consortium and is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit Use of this document as a bibliographic reference should employ the following citation: Demand Planning Certification Track. LINCS in Supply Chain Management Consortium. August Version: v Disclaimer: The photos used within this document may only be used with this content. The license does not include copying photos for use with any other content.

Program Overview Course Dates: No Class: Instructor:
Program Coordinator: Student Expectations: Students must contribute to a respectful learning atmosphere that enables all students to participate at a high level. Students are required to arrive to class on time in order to not disrupt the learning environment Students should come to class prepared to discuss topical events in the news that affect the supply chain. Instructor should fill this in as appropriate.

Course Structure Learning Block 1: Introduction to Demand Planning
Learning Block 1 Description Learning Block 1 Learning Objectives Unit 1: Supply and Demand Planning Unit 2: Factors Affecting Demand Unit 3: The Demand Planning Process Unit 4: Demand Planner Skills and Typical Reporting Learning Block 2: Interaction between Demand Management and Order Management Learning Block 2 Description Learning Block 2 Learning Objectives Unit 1: Overview of Order Management Unit 2: The Customer Order and Replenishment Cycle Unit 3: Demand Management and Order Management Unit 4: Ecommerce Order Fulfillment Strategies Learning Block 3: Demand Planning Principles Learning Block 3 Description Learning Block 3 Learning Objectives Unit 1: Forecasting Demand Unit 2: Independent and Dependent Demand Unit 3: The Demand Plan Learning Block 4: Demand Planning Tools and Techniques Learning Block 4 Description Learning Block 4 Learning Objectives Unit 1: Uncertainty in Demand Planning Unit 2: Addressing Causes of Uncertainty and Variability Unit 3: Tools and Techniques to Reduce Uncertainty Learning Block 5: Communicating and Managing Demand Learning Block 5 Description Learning Block 5 Learning Objectives Unit 1: Communicating Demand Unit 2: Demand Planning and Gaining Consensus Unit 3: Demand Metrics Unit 4: Prioritizing Demand Learning Block 6: Contemporary Approaches to Demand Planning and Management Learning Block 6 Description Learning Block 6 Learning Objectives Unit 1: Collaborative Planning, Forecasting, and Replenishment (CPFR) Unit 2: Pull Systems and Push Systems Unit 3: Sensing Demand and Shaping Demand

Abstract The effective anticipation, planning, and management of customer demand are key factors in the success of any organization. Companies strive to provide improved customer service levels at reduced costs, with planning and managing demand being two key components. This certification track is intended to train students in the basics of demand planning so they can quickly familiarize themselves with and become effective contributors to the demand planning processes that are part of SCM. Key elements of this certification track include aspects of demand planning, interaction between demand and order management, demand planning principles, demand planning tools and techniques, communication and management of demand, and contemporary approaches to demand planning.

Introduction to Demand Planning
Learning Block 1 Introduction to Demand Planning

Learning Block 1: Introduction to Demand Planning
Learning Block 1, Overview Learning Block 1: Introduction to Demand Planning Description Customers purchase desirable and affordable goods and services to meet their needs and wants. Purchasing power creates demand for particular products and services Demand planning is a critical process which incorporates various inputs to predict or approximate future customer demand. Without an understanding of customer demand, companies cannot plan accurately for staffing, inventory, finished products, and other support services. The effective estimation and management of customer demand is a key factor in the success of any organization. Meeting customer demand can be the difference between company success and failure. Customers have the ability to buy goods and services quickly from companies that can accurately predict demand and utilize logistical channels for single-item fulfillment and same-day shipping. Several core topics are discussed in this learning block, including the various factors that affect demand, the overall demand planning and management process, the roles and responsibilities in demand planning, and the key metrics of demand planning.

Learning Block 1 Learning Objectives
Learning Block 1, Overview Learning Block 1 Learning Objectives Upon completing this learning block, the learner will be able to: Define demand planning and why it is important to company success Understand the factors that affect demand Explain the primary approaches to planning demand Apply the key roles and skills required in demand planning Analyze the metrics used in demand planning processes

Demand Planning Overview
Learning Block 1 Demand Planning Overview Demand Planning - process used to create reliable supply chain forecasts. Effective demand planning can help to improve the accuracy of revenue forecasts, align inventory levels with peaks and troughs in demand, and enhance profitability for a given channel or product.

Unit 1: Supply and Demand Planning
Learning Block 1, Unit 1 Unit 1: Supply and Demand Planning Demand Planning - Incorporates supply chain information Demand forecast inputs from sales, marketing, and customers. Supply capacity inputs from manufacturing, inventory management, and suppliers Demand estimates include anticipated orders, orders received, and adjustments resulting from changes in inventory policies and actions. Demand estimates are used as a primary data input for manufacturing schedules, procurement plans, and inventory stocking levels Demand planning may be a company’s most important business process.

Balancing Supply with Demand
Learning Block 1, Unit 1 Balancing Supply with Demand Matching supply with demand involves: Sales & Operations Planning (S&OP) Forecasting Planning Internal and external collaboration Collaborative Planning, Forecasting & Replenishment (CPFR) It is easier to balance supply and demand when the forecast is accurate. However, accurate forecasting is very difficult. Supply Chain Management is about cost-effectively balancing supply with demand and meeting customer expectations.

Matching Supply and Demand
Learning Block 1, Unit 1 Matching Supply and Demand Estimates of product and service demand are critical Accurate estimates help companies achieve their business goals Inaccurate demand plans can lead to business failure Current and anticipated future demand is compared to current and future capacity to develop plans that will meet actual customer demand. Demand Current Anticipated Capacity Anticipated demand and capacity should be considered for the same time periods. Best Practice - Seamless linkage between demand forecasting and supply planning through close coordination and effective communication.

Matching Supply and Demand
Learning Block 1, Unit 1 Matching Supply and Demand Current and anticipated future demand is compared to current and future capacity to develop plans that will meet actual customer demand. Demand planning must understand sales projections and marketing efforts in terms of their potential impact on manufacturing and material supply plans. Supply planning ensures that materials, components, consumables, manufacturing capabilities/capacity, etc. are available to support the demand plan. Best Practice - Seamless linkage between demand forecasting and supply planning through close coordination and effective communication. Material Information Information Money

Information Drives the Process
Learning Block 1, Unit 1 Information Drives the Process Shared information is critical for efficiency and accuracy. Adapted from -

Customer Satisfaction!
Learning Block 1, Unit 1 Demand Planning Sales Advertising Estimating future demand Aligning the entire organization to satisfy the expected demand Optimizing all supply chain activities to support demand Customer Satisfaction! Marketing Promotions Purchasing Supply Planning Inventory Manufacturing Accurate demand plans allow an organization to manage inventory levels, increasing profits, and maximizing revenue.

Unit 2: Factors Affecting Demand
Learning Block 1, Unit 2 Unit 2: Factors Affecting Demand Factors that affect demand: Price of the good or service itself Prices of related goods or services Complementary products and services Substitute products and services, including competitors Demographic characteristics, such as Market size / Geography Customer preferences Income levels Future expectations regarding pricing or product scarcity Market forces, such as advertising / marketing of the primary product or service as well as its competitors and complements Risk events, including weather and changes in regulation These factors are often interrelated and may occur simultaneously

Example - Factors Affecting Pizza Demand
Learning Block 1, Unit 2 Example - Factors Affecting Pizza Demand The number of pizzas people will purchase depends on: Whether they like pizza Price of the pizza Prices for alternatives such as hamburgers or pasta Local competition – other pizza parlors Complementary offerings, such as delivery Market size - Population and age distribution of the local area The quantity demanded of a good or service is the quantity buyers are willing and able to buy at a particular price during a particular period, all other things unchanged. Given all the other variables that affect demand, a higher price tends to reduce the quantity people demand, and a lower price tends to increase it. Instructor – For discussion - A medium pizza typically sells for $5 to $10. Suppose the price were $30. How would demand change? Suppose pizzas typically sold for $2 each. At that price, would people be more likely to buy more pizzas than they do now? Might be helpful to draw a demand curve on the board.

Learning Block 1, Unit 2 Market Size Market Size – Number of potential buyers for a given product or service If the market size decreases, there will be fewer potential buyers If the market size increases, there may be greater demand Based solely on market size, would the following businesses be better off locating in San Francisco or NYC McDonald’s Eddie’s Expensive Car Detailing Shop Teeny’s Tiny Tattoo Shop San Francisco New York City Population 864,816 8.6 million Median Property Value $941,400 $538,300 Median Household Income $92,094 $55,752 Car Ownership 69% 46% Instructor – the car manufacturer example in the book isn’t a good example for market size as it is comparing apples and oranges – two different products. McDonald’s would be better off in NYC – due to the lower household income and greater population. Eddie’s would be better off in San Francisco due to the higher income and higher rate of car ownership. We don’t really have enough information about Teeny’s customer base to tell which city would be better. Instructor should lead a discussion with other potential companies/businesses and where they would fit based on the markets.

Complementary Products
Learning Block 1, Unit 2 Complementary Products Complementary Products and Services Products or services typically associated with, or natural components of, other products or services. Changes in demand for complementary products or services may impact demand for the primary product or service For example, the demand for ice cream cones is related to the demand for ice cream. If demand for ice cream drops, it is possible that demand for the cones would drop as well. Complementary goods are goods used in conjunction with one another. Tennis rackets and tennis balls Eggs and bacon Sneakers and laces As price decreases, demand quantity increases Price Instructor – It may be helpful to draw and talk through some additional examples Quantity Reducing the price of a complementary good tends to increase demand for both the primary and the complementary good.

Substitute Products Substitute Products and Services
Learning Block 1, Unit 2 Substitute Products Substitute Products and Services Alternative products or services which can replace the primary product or service Substitute products and services compete for the same market as the primary product For example, smart phones cameras are substitutes for standalone cameras. Although the camera function isn’t the primary function of the smart phone, demand for standalone cameras has decreased as smart phones have become more popular. Substitute goods are goods used instead of one another. iPODs vs. CD players Cereal vs. eggs Honda vs. Toyota As primary product price increases, demand for substitute increases Price of Primary Product Substitute Demand Reducing the price of a substitute good tends to increase demand for the substitute and decrease demand for the primary good.

Customer Preferences Customer Preferences
Learning Block 1, Unit 2 Customer Preferences Customer Preferences Preferences may change over time and may be influenced by Advertisements Promotions Perceptions of value and quality Social media, friends, news stories, etc. Customer tastes Customer age, income, employment level, family status, etc. Previous experience with product / service Product / service demand is affected by changes in customer preferences For example, a customer with 4 young children may prefer a minivan. However, as the children age and leave home, that customer’s preference may be for a smaller car or sedan.

Customer Future Expectations
Learning Block 1, Unit 2 Customer Future Expectations Future Expectations Anticipated scarcity or price increases often increase demand People “stock up” prior to the anticipated event or change For example, grocery stores may sell out of water, bread and other staples prior to a storm as people stock up. Source -

Learning Block 1, Unit 2 Income Income Changes in consumer incomes impacts demand for products and services. As incomes increase and consumers have more disposable income, their demand for certain products and services may increase. If consumer incomes decrease, then demand may decrease. For example, a downturn in the economy that results in high levels of unemployment will decrease demand for certain products / services. As unemployment rises, auto sales and new housing permits decline.

Shifting Commodity Markets
Learning Block 1, Unit 2 Shifting Commodity Markets Shifting Commodity Markets Commodity markets like rubber, corn, gold, copper, and oil are generally independent and not controlled by any single industrial buyer However, cartels of producers may attempt to manipulate world markets. Many commodities operate in markets that economists call pure competition, meaning that prices are entirely dictated by the market forces of supply and demand. For example, an increase in copper demand in China can result in higher prices for copper worldwide and for products that contain copper because of the resulting pressure on the copper supply.

Risk Events Risk Events
Learning Block 1, Unit 2 Risk Events Risk Events Global supply chains are vulnerable to many forms of risk, including natural disasters, terrorism, and currency fluctuations. These risks can disrupt the supply chain, reducing the quantity available for purchase. Reduced availability may result in lower sales, cost increases and reduced profits Source – AMR Research,

Risk Events Risk Examples Operational Issues
Learning Block 1, Unit 2 Risk Events Risk Examples Operational Issues Equipment failure, supply disruptions, labor issues, quality issues Samsung’s “exploding” phones West Coast Port strikes Natural Disaster Earthquakes, hurricanes, and tornadoes Terrorism & Political Instability Commercial ship hijacking, the threat of bombs hidden within cargo, embargoes Commercial or Market Shifting demand and supply patterns, unexpected price increases, economic or financial instability Operational example, a company in the U.S. that has a key supplier in France might experience disruption if strikes impact the French supplier.

Unit 3: The Demand Planning Process
Learning Block 1, Unit 3 Unit 3: The Demand Planning Process Demand planning is the process of integrating the demand forecast with the capabilities of the supply chain: Analyze the demand forecast Collaborate with manufacturing, procurement and logistics to assess their capacity and capabilities Together, develop a comprehensive plan that considers both the forecast demand and the ability to meet that demand Demand shaping may be required Implement the plan Purchase raw materials, components, supplies Manufacture, as planned Shape demand through pricing, marketing and advertising Track actual sales vs. forecast demand Revise plans, as necessary

Customer Demand Drives the Supply Chain
Learning Block 1, Unit 3 Customer Demand Drives the Supply Chain Demand Management includes both the recognition of customer demand and the shaping of that demand through marketing and sales strategies. Anticipated Customer Demand Some organizations have ERP Systems which integrate the individual forecasts and plans. Instructor should discuss how customer demand information flows through the diagram to inform each step in the planning process.

Manufacturing Operations
Learning Block 1, Unit 3 Forecasting Demand Estimating demand is part of a sales and operations planning (S&OP) process that involves the development of a prediction or estimate of the amount of resources required for a product or service. Demand estimates are often limited to a particular period of time, such as a month, quarter, or year. Demand forecasts include: Anticipated orders Orders received Sales & Marketing Supply Chain Manufacturing Operations S&OP Adjustments resulting from returns, quality issues, product alterations and/or changes in inventory policies Customer feedback, when available Demand planning requires collaboration and communication across an organization.

Demand Planning Requires Collaboration
Learning Block 1, Unit 3 Demand Planning Requires Collaboration Collaborative planning involves sales and marketing as well as manufacturing and operations. Source -

Demand Estimation & Capacity Planning
Learning Block 1, Unit 3 Demand Estimation & Capacity Planning Demand estimate - Sum of the total claims on a firm’s production output for a given period. When estimating demand, consider: Forecasts of anticipated finished good customer demand in future time periods Actual orders - customer commitments that must be fulfilled in a given time period Service and spare part requirements for aftermarket, service and repair Inventory level adjustments due to changes in policies, processes, capacity, etc. Increase or decreases the requirement for production in a given time period. Safety stock, shrinkage/loss/damage, quality, etc. Promotional items or samples for sales and marketing Product recalls – Recalled product may need to be replaced, consuming manufacturing capacity

Demand Estimation & Capacity Planning
Learning Block 1, Unit 3 Demand Estimation & Capacity Planning After the initial demand estimate for an item/service is developed for a given time period, capacity is reviewed in terms of the firm’s ability to meet the estimated demand Demand Estimate Capacity Plan Capacity - Plant and equipment requirements. Capacity is only fixed in the short term. Over time, capacity can change as new equipment or labor is added or subtracted from the process. Change the size of the workforce Pay overtime to increase labor hours Send people home early Hire/Fire Temps Subcontract or outsource part or all of the production process Speed up or slow the production line

Collaboration & Communication
Learning Block 1, Unit 3 Collaboration & Communication Once the forecast is integrated with supply capability and capacity data, senior management, financial management, and other key individuals Coordinate and fine-tune the demand plan based on Experience and knowledge Product and market insight Company-wide goals and objectives Demand planning is quantitative and based on actual numbers or statistics In dissecting the data, it is important to look for trends or patterns that explain the numbers What caused the sales increases or decreases for specific points in time? How did factors such as sales promotions and weather impact the data? Has seasonality been incorporated into the plan? Are there plans to introduce new products, which might cannibalize sales of existing products?

Balancing Supply and Demand
Learning Block 1, Review Balancing Supply and Demand Supply and demand can be managed either internally or externally. Internally, via changes in operations Increase / decrease production Increase / decrease inventory Improve manufacturing flexibility through postponement and reduced changeover times Externally, via demand shaping Increase / decrease pricing Increase / decrease order fulfillment times Advertising more / less Marketing incentives Supply DEMAND Instructor should give examples of the various ways that demand can be shaped. The SCMP.v2.16 gives an example of Dell changing fulfillment times in order to persuade customers to purchase the laptop that is overstocked. Dell could also change their pricing, increase advertising on the overstocked item or provide increased warranties or other incentives for customers to purchase the overstocked item. Supply > Demand = Excess Inventory Demand > Supply = Lost Business

Managing Supply to Meet Demand
Learning Block 1, Unit 3 Managing Supply to Meet Demand Demand Management - Adjusting internal operations and plans to match actual customer demand. Timely analysis of sales data and close communication with customers facilitates quick and accurate responses to changes in demand If demand unexpectedly increases, management must decide whether to meet this new, unplanned demand. Are there risks to meeting the demand and how can those risks be mitigated? From the perspectives of customer service, costs, profits, and impact on personnel, what is the most effective way to meet this demand? If demand is declining, then responses may include: Stimulating demand through sales promotions, advertising, or price changes Adjusting supply operations in response to projected decreases Slowing production or working fewer shifts Cancelling planned purchases Or a combination of both

Learning Block 1, Unit 1 Demand Shaping Demand shaping - Influencing demand to match planned supply. External methods of balancing supply and demand Adapt price and lead time to encourage behavior If supply is low, encourage people to buy substitutes via promotions, pricing, etc. Change lead time, shipping cost, etc. Variable pricing can reduce peak demand or build demand in off-season (e.g. movie tickets, electricity rates) Plan new product introductions Identify cross-selling opportunities and complementary products Internal methods Shift excess demand to a future period (e.g. advance bookings or future appointments) Flexible manufacturing / buying Build excess inventory during periods of lean demand and consuming them during peak demand times Planned stock-outs to drive demand (depending on Customer Service goals) Labor adjustments Outsourcing

Planning Processes Four Key Processes:
Learning Block 1, Unit 3 Planning Processes Four Key Processes: Analyze / predict sales of new products through market and competitive analysis Analyze the demand by collaborating with supply chain partners Compare the financial targets by taking the supply and demand plan and translating it into similar values Review management strategies by translating strategic goals into planned production and other core business functions

Anticipated Customer Demand
Learning Block 1, Unit 3 Demand Planning Demand Planning requires input and feedback from multiple functions within the organization. Anticipated Customer Demand Some organizations have ERP Systems which integrate the individual forecasts and plans. Instructor should discuss how customer demand information flows through the diagram to inform each step in the planning process.

Unit 4: Demand Planner Skills & Typical Reporting Structures
Learning Block 1, Unit 4 Unit 4: Demand Planner Skills & Typical Reporting Structures Demand planners require analytical and other specialized skills. They must: Understand the business for which they are planning, including its products and customers Be able to work with a broad range of individuals both inside and outside their own organizations Have the ability to reach agreement and understand compromise If the company conducts business internationally, the planner must understand the kinds of events that influence global demand. Pay good attention to accuracy and details Organization Products Customers

Learning Block 1, Unit 4 Business Knowledge Demand planners need business acumen and knowledge about their specific industry. Understand how marketing activities like promotions or price increases will affect demand Know what new products are being planned; when these products are being introduced and the timetable for discontinuing products Understand how the lead times and pricing issues of raw materials and components might affect the demand for a given set of products Work closely with their colleagues in sales and marketing, business development, engineering, and procurement For international businesses, demand planners must be aware of regional events that could affect demand patterns Bank and other public and religious holidays International events, from political unrest or instability to extreme weather conditions and labor disruptions

Customer Knowledge Demand planners must also understand customers:
Learning Block 1, Unit 4 Customer Knowledge Demand planners must also understand customers: Buying patterns Typical product combinations, including complementary products Sales cycle (the period of time over which they buy products) Seasonality and any other shifts or changes in buying patterns that could affect demand Key customers that need particular attention, as well as those customers that will share their buying plans / forecasts

Learning Block 1, Unit 4 Demand Planner Skills Accurately track the forecast and demand plan against actual sales demand Analyze deviations and incorporate that knowledge into future plans Utilize the wide range of data that are typically found in enterprise resource planning (ERP) systems Effectively manage demand priorities by balancing Goods which have long production lead times Products which have high potential variance against the demand forecast Products which will be difficult to restock if the forecasts are too low New products with no demand history Products which are expensive to produce Goods with high contribution to overall profitability

Observational Knowledge
Learning Block 1, Unit 4 Observational Knowledge Demand planners must be careful observers. They must: Compare actual demand to the demand plan and make and communicate any necessary adjustments. At least monthly Monitor demand changes to alert key customers and colleagues when demand increases or decreases Recognize when a change of plan is needed, make and communicate changes, as necessary Time Units Sold Planned Actual

Effective Communication
Learning Block 1, Unit 4 Effective Communication Demand planners must be able to communicate effectively with colleagues in other groups that are affected by demand Marketing Sales Manufacturing Procurement Customer Service Customers Demand planners need good interpersonal skills to be able to influence and persuade their colleagues when it is necessary. Alert and communicate demand issues as they arise Withstand difficult conversations if demand is significantly different than forecast Escalate issues or challenge other functions, as necessary For example, if sales are below forecast yet the sales department insists that sales will meet the target, demand planners must provide data to show the level of error between projected and actual sales.

Typical Reporting Structures
Learning Block 1, Unit 4 Typical Reporting Structures Influence and Feedback affecting Demand Planning Figure 4. Influence and feedback affecting demand planning. Developed by LINCS in Supply Chain Management Consortium

Experience in Recognizing Change
Learning Block 1, Unit 4 Experience in Recognizing Change What occurs at the macro level, or internationally, affects supply conditions at the micro level, or individual companies and local markets. Events that impact supply and demand include: Fluctuating exchange rates Surges in demand in emerging countries New trade agreements or restrictions Geopolitical conflicts and terrorist activities Nationalization of companies or entire sectors Government leadership and finances Global demands for commodities and services Demand planners must use their experience and knowledge to be proactive in developing and adjusting demand plans. Businesses that are slow to react to growth may be left behind by more agile competitors Alternatively, if they are slow to reduce forecasts/plans, they can be left holding excess inventory

Organizational Reporting Structures
Learning Block 1, Unit 4 Organizational Reporting Structures Organizational structures make clear to whom individuals report within a company. For example, a Vice President of SCM might be responsible for Worldwide supply planning and replenishment Demand and finished goods forecasting Inventory planning Primary customer order fulfillment Logistics Integration of supply chain activities with operational positions In many cases, demand planners report to marketing or sales managers, while in other companies, demand planners report to forecasting and inventory control managers. Book says “In an ideal situation, demand planning management would involve a single executive responsible for demand and supply planning activities rather than having responsibility distributed across several managers.” BUT this really depends on the organization. In a company with many products/plans/etc. it would be next to impossible for a single person to manage the data and relationships required to be an effective demand planner.

Communication & Information Flow
Learning Block 1, Unit 4 Communication & Information Flow Demand planners and managers are responsible for Gathering information about Demand timing Demand volume Changes or anticipated changes to demand Communicating this information to other key groups within the company Ensure that the demand plan is accurate Updating the demand plan, as necessary

Learning Block 1 - Summary
The most important information that flows across a supply chain includes customer estimates of product and service demand. Demand planning involves all steps and processes needed to arrive at estimates of anticipated demand. Several factors affect demand: Market size Complementary products and services Substitute products and services Customer preferences Income levels Future expectations Market forces Risk events

Learning Block 1 – Summary (Continued)
The demand planning process involves: Balancing customer requirements with the capabilities of the supply chain Forecasting demand and synchronizing it with production, procurement, and distribution capabilities The demand planning process consists of these key steps: Planning demand Sensing demand Communicating demand Shaping demand Managing demand

Demand planners require a broad set of skills. Analytical foundation Detailed understanding of the business for which they develop demand plans Ability to monitor actual demand against planned demand Willingness to adjust plans accordingly, and recognize and act on changes that can impact demand Interpersonal and communication skills, including the ability to interact effectively with customers as well as people in various functions throughout the organization To understand whether demand planning is effective, companies use key metrics, including Demand plan accuracy Customer satisfaction Inventory performance On-time, as promised, order fill rates

Interaction between Demand Management and Order Management
Learning Block 2 Interaction between Demand Management and Order Management

Learning Block 2, Overview
Learning Block 1: Interaction between Demand Management and Order Management Description The demand planning process is designed to create a plan that reduces uncertainty about when customer orders will occur. Customer order management is concerned with managing customer orders and involves managing the order cycle from the time an order is placed until that order is received by the customer. Demand management and customer order management must work well together to ensure the effectiveness of both processes. This learning block provides an overview of the order management function and process, the customer order and replenishment cycle, order enabling technologies, and the relationship between order management and demand management.

Learning Block 2, Overview Learning Block 2 Learning Objectives Upon completing this learning block, the learner will be able to: Recognize the key aspects of the order management function Explain the key steps in the customer order and replenishment cycle Compare the key links between demand management and order management Implement the key technologies that enable ecommerce Evaluate the role of ecommerce technologies in enabling effective demand management

Unit 1: Overview of Order Management
Learning Block 2, Unit 1 Unit 1: Overview of Order Management Customer order management - Handling / Managing the customer order cycle. The order management process begins with customer requests or inquiries Common inquiries include questions about: Product specifications Price Availability Potential discounts Orders may be manually entered into a computerized order entry system, or placed electronically via the internet or EDI and automatically entered into the system.

Learning Block 2, Unit 1 Customer Order Cycle Order Management may include multiple touchpoints during the Customer Order Cycle

The Order Process Receiving and fulfilling customer orders
Learning Block 1, Unit 1 The Order Process Receiving and fulfilling customer orders Managing the flow of information, products/services and customer relationships Information Flows in Both Directions Customer Inquiry Order Received Process Order Prepare Shipment Order Delivered After-sales Support The customer order cycle occurs when customers interact with suppliers. This process requires teamwork and is often the first experience with a customer. Normally, customers begin this cycle, which is then focused on fulfilling their demands. Suppliers are wholesalers, retailers, or suppliers of material. When orders are placed, companies must ensure they are filled on time, completely, and without quality defects. The process starts with a customer request and may be followed by requests for follow-up information at any point prior to or during the order process. Information flows in both directions – from the customer throughout the supply chain.

Customer Order Fulfillment
Learning Block 2, Unit 1 Customer Order Fulfillment Order fulfillment includes the steps that ensure that customers receive the correct products, in the correct quantity, at the correct time, and at the appropriate level of quality. The process includes: Entering orders Filling orders Invoicing customers Shipping orders Tracking orders Handling returns Providing after-sale services Source:

Learning Block 2, Unit 1 Customer Order Fulfillment Order fulfillment includes the steps that ensure that customers receive the correct products, in the correct quantity, at the correct time, and at the appropriate level of quality. The process includes: Entering orders Filling orders Invoicing customers Shipping orders Tracking orders Handling returns Providing after-sale services Figure 4. Influence and feedback affecting demand planning. Developed by LINCS in Supply Chain Management Consortium

The Objective of Order Fulfillment
Learning Block 2, Unit 1 The Objective of Order Fulfillment Order Fulfillment Objective - Complete customer orders by the promised delivery dates at the right quantities and conditions, all while managing total costs. Demand and supply planning effectiveness enables more effective customer order fulfillment. Quick and responsive order fulfilment improves competitiveness Amazon’s ability to fill Prime orders in 2 days, has enabled it to compete effectively against brick and mortar stores like Walmart. Consumer Intelligence Research Partners (CIRP) estimates that there are currently roughly 54 million Amazon Prime members in the U.S. The average Prime member spent $1,500 annually at Amazon, versus $625 for nonmembers

Unit 2: Customer Order & Replenishment Cycle
Learning Block 2, Unit 2 Unit 2: Customer Order & Replenishment Cycle The Customer Order and Replenishment Cycle Begins when a customers interacts with suppliers such as wholesalers, retailers, or material suppliers Initial interaction may be an actual order, a request for information or a visit to the business’ location Sales representatives may call or visit customers to discuss their needs. Customers may require guidance in product selection, customization or technical specifications Customers may access suppliers’ websites or catalogs to learn about their products. B2B organizations may tailor their websites and create portals with information customized for specific key customers Customers may visit showrooms or distribution centers to place orders Includes the work directly involved in receiving and fulfilling customers’ orders Continues with inventory replenishment Book makes a distinction between B2B and B2C order beginnings, but, in reality both relationships begin with the first contact – which may be initiated by the supplier or the customer. Goal - Fulfill customer demands in the shortest possible timeframe.

Learning Block 2, Unit 2 Customer Order Entry Customers inform retailers and suppliers about the products that they wish to purchase. At a clothing store, customers place the items that they wish to purchase into shopping carts and take them to the check-out counter to complete their purchases. Order entries can also include customers’ informing suppliers of the products and quantities they want to purchase online; orders are then transmitted to suppliers through the Internet. Objective - Ensure that order entries are accurate, carried out in a timely fashion, and communicated throughout the supply chain.

Learning Block 2, Unit 2 Customer Order Fulfillment Order fulfillment includes the steps that ensure that customers receive the correct products, in the correct quantity, at the correct time, and at the appropriate level of quality. The process includes: Entering orders Filling orders Invoicing customers Shipping orders Tracking orders Handling returns Providing after-sale services Goal - Ensure that orders are provided to customers on time and at the lowest cost, while also maintaining product quality. Source:

The Perfect Order The Perfect Order
Learning Block 2, Unit 2 The Perfect Order The Perfect Order The Right Product To the Right Customer At the Right Time At the Right Place In the Right Condition In the Right Quantity At the Right Cost Customers and their suppliers may define their perfect order requirements differently. Graphic illustrates that all of the elements must be balanced in order to achieve a perfect order. 100% accuracy according to every customer service requirement

Order Receipt by the Customer
Learning Block 2, Unit 2 Order Receipt by the Customer Customer Activities Order Receipt - Receiving and accepting products and/or services that were ordered Almost every organization is both a customer and a supplier so there are always two sides to the receiving process. Customers need to check the quantity and quality of delivered products Incomplete or damaged orders - details will be recorded and suppliers notified. Customers may withhold payment until deficiencies are corrected. Customers may also require a corrective action report from the supplier to indicate the deficiencies that occurred and the corrective actions taken. Customers then record that they received their correct orders in the correct quantities. Order Product Monitor Fulfillment Schedule carrier Unload vehicle Identify product Inspect for damage Compare to PO File claims (if necessary) Update records Customers may also require a corrective action report from the supplier to indicate the deficiencies that occurred and the corrective actions taken. Customers then record that they received their correct orders in the correct quantities.

Customer Order Receipt
Learning Block 2, Unit 2 Customer Order Receipt Customer Order Receipt - Occurs when customers actually receive and accept their orders. Customers check the quantity and quality of delivered products, and any incomplete or damaged orders are recorded and reported Suppliers may be notified electronically or by telephone Shipments damaged in-transit may be refused and require replacement Customers may withhold payment until deficiencies / shortages are corrected. B2B customers may also require a corrective action report from the supplier to indicate the deficiencies that occurred and the corrective actions taken and preventive actions planned to avoid a recurrence of the issue(s).

Customer Order Invoices
Learning Block 2, Unit 2 Customer Order Invoices Invoice format and delivery method varies. When invoices are received, they are checked against the terms and conditions agreed between customers and suppliers, and paid accordingly. At checkout counters, for example, invoices are often presented as paper or electronic invoices at checkout. When orders are shipped to customers, paper invoices normally accompany the goods. EDI can be used to transmit invoices electronically. Invoices state the amount owed and payment terms, such as the number of days customers have to pay the invoice, any agreed-upon reductions in costs for paying early, penalties for late payment, and form of payment required by writing a check or transferring into a corporate banking account. When invoices are received by customers, they are checked against the stipulated terms and conditions and paid or queried accordingly. Invoices normally accompany the goods, regardless of whether they are shipped to customers or purchased in person.

Customer Order Invoices
Learning Block 2, Unit 2 Customer Order Invoices When orders are shipped to customers, paper invoices normally accompany the goods. Invoices state Amount owed Payment terms Number of days customers have to pay the invoice Any reductions for paying early Penalties for late payment Form of payment required When invoices are received by customers, they are checked against the stipulated terms and conditions and paid or queried accordingly. Amount Owed Payment Terms

Inventory Replenishment
Learning Block 2, Unit 2 Inventory Replenishment Inventory replenishment - Process of determining how much of a material or product to make or buy and when to procure it so it is available in the right location when a customer wants it. Whenever an item is sold to a customer, an item should replace it so that the next customer will also be able to purchase the item. Although it is not possible to sell one item and instantly create an item to replace it, companies strive to ensure they have neither too much nor too little inventory on hand If a particular item is not available at the right place and time, it is known as an out-of-stock situation, or more commonly as a stockout. Goal – Constant availability of product for both new and repeat customers.

Inventory Replenishment
Learning Block 2, Unit 2 Inventory Replenishment Inventory is expensive to hold, so companies do not want to have too much inventory. By determining the need and timing for additional inventory, management strives to balance not having excess quantities of product on hand against the risk of a stock-out condition. Fundamentally, the inventory replenishment process is used to decide how much inventory to ship to refill inventory requirements and when it should be shipped. Acquisition Costs Carrying Costs Stockout Costs Customer Service

Learning Block 2, Unit 2 Stocking Policies Companies often base their inventory stocking and replenishment policies on their desired service levels. 98% service level - Inventory on hand sufficient to ensure that customers receive the product they want in 98 of every 100 visits to a store or website. Marketing, sales, and inventory personnel should work together to determine the correct service levels for particular products. Goal - Optimize inventory levels so there is the right amount of inventory in place to meet customer needs, while ensuring the company is not overinvesting in inventory.

Unit 3: Demand Management & Order Management
Learning Block 2, Unit 3 Unit 3: Demand Management & Order Management Demand Planning - Processes required to estimate anticipated demand. Demand Management Proactively influencing demand patterns rather than simply reacting to changes. Includes both the recognition of customer demand and the shaping of that demand through marketing and sales strategies. Understanding demand levels as they occur Adjusting demand plans accordingly Transmitting this information throughout the organization so that appropriate changes can be made Objective - Influence customer orders while reducing the uncertainty of when those orders will occur.

Demand Management & Order Management
Learning Block 2, Unit 3 Demand Management & Order Management Order Management Responding to customer requests Taking and entering orders Tracking and fulfilling orders Ensuring that the correct products are shipped in the correct quantities without any damage

Demand Management & Order Management
Learning Block 2, Unit 3 Demand Management & Order Management The Relationship between Demand Management & Order Management Successful demand planning requires close communication between sales and demand planning personnel Whenever possible, sales should share details about expected orders When they expect to receive the order Products and quantities expected on the order Customer due date for delivery Likelihood that order will actually occur Changes to their expected orders, as they occur It is important to track actual vs. expected orders so that demand planners can factor that information into their demand plan.

Demand Management and Order Management
Learning Block 2, Unit 3 Demand Management and Order Management Demand management, in conjunction with sales, marketing and order management can promote a balanced flow of goods across the supply chain. Power Example – During a heat wave, power companies change pricing so that usage costs more at times of peak power consumption (day time). This pricing differential is an incentive for customers to schedule consumption at lower priced times (night). Aftermarket Auto parts Example – Another example, the aftermarket (i.e., spare parts) division of an automotive company. The distribution centers for this company processes orders every evening for replacement parts ordered through the company’s vast dealer network. However, the demand for replacement parts processed during a given week is not consistent. Monday evening’s orders are usually heavy because they include dealer orders from Saturday, Sunday, and Monday, as these facilities do not ship over the weekend. Conversely, orders received at the end of the week are usually lower. These short-term demand fluctuations are addressed by creating different types of orders and pricing structures. Daily orders, which are the main type of order processed by these facilities, are picked, packed, and shipped the day they are received. Dealers use this type of order when they have an immediate need and cannot satisfy that demand from their internal inventory. Stock orders are less urgent, priced at a 15% discount, and submitted once a week by dealers to replenish their own inventories.

Demand Management and Order Management
Learning Block 2, Unit 3 Demand Management and Order Management Demand management, in conjunction with sales, marketing and order management can promote a balanced flow of goods across the supply chain. Aftermarket Auto Parts DC can’t process all of the orders received on Monday and spends the week catching up. By Friday, they are caught up and have excess capacity. By separating urgent orders from stock replenishment orders and discounting orders that are less urgent, demand management can spread the workload throughout the week while increasing customer satisfaction as orders are processed according to their priority. Orders Received Mon Tue Wed Thu Fri Orders processed in another example, the aftermarket (i.e., spare parts) division of an automotive company. The distribution centers for this company processes orders every evening for replacement parts ordered through the company’s vast dealer network. However, the demand for replacement parts processed during a given week is not consistent. Monday evening’s orders are usually heavy because they include dealer orders from Saturday, Sunday, and Monday, as these facilities do not ship over the weekend. Conversely, orders received at the end of the week are usually lower. These short-term demand fluctuations are addressed by creating different types of orders and pricing structures. Daily orders, which are the main type of order processed by these facilities, are picked, packed, and shipped the day they are received. Dealers use this type of order when they have an immediate need and cannot satisfy that demand from their internal inventory. Stock orders are less urgent, priced at a 15% discount, and submitted once a week by dealers to replenish their own inventories. These orders help the automotive company’s distribution centers balance their daily workload from two perspectives. First, dealers are assigned specific weekdays on which to submit their stock orders. Historical demand data also help these facilities determine when best to schedule each dealer’s stock order day. Second, each center has up to two days to ship a stock order from the submission date. On nights with lower daily demand, a facility can pick any outstanding stock orders on their first day. On other nights, the automotive facility might defer a few orders until the second day, if it helps balance the overall workload. Segmenting orders does not completely level out day-to-day demand, but it does help make volume fluctuations more consistent, which supports easier workforce management and logistical concerns like the scheduling of warehouse workers and the assignment of delivery vehicles. Before Prioritization

Unit 4: E-commerce Order Fulfillment Strategies
Learning Block 2, Unit 4 Unit 4: E-commerce Order Fulfillment Strategies E-commerce - Tools and techniques used to conduct business electronically Selling and buying goods and services by using the Internet to transmit information and transfer funds. E-commerce systems help companies Improve order processing Track inventory Sell products online Automate document exchange between suppliers and customers Speed up receiving, tracking, and fulfilling orders

E-commerce Order Management
Learning Block 2, Unit 4 E-commerce Order Management E-commerce - Selling and buying goods and services by using the Internet to transmit information and transfer funds. E-commerce and retail OMS help companies improve order processing, track inventory, sell online, and provide many other services. Most online retail businesses have some kind of OMS. Source -

Order Management Technology
Learning Block 2, Unit 4 Order Management Technology Technology can not only support the entire order process from beginning to end but also ensure effective and efficient return processes for customers. Technology helps support the order management process: Telephone, fax, and mail Internet Electronic data interchange (EDI) Bar-coding Point of sale (POS) technology Order Management Systems (OMS) Source - Source -

Telephone, Fax, Mail and Internet
Learning Block 2, Unit 4 Telephone, Fax, Mail and Internet Telephone, fax, and mail Telephone is heavily used for communication and business purposes Fax and mail (for order management) are less common and have been superseded by the Internet and other technologies Internet Worldwide system of networks linked by different technologies Often used for placing and tracking orders Internet interactions between sellers and buyers can vary widely, depending on industries, products, and services. B2C - businesses sell to end consumers B2B - businesses sell to other businesses Many organizations sell to consumers, businesses and other organizations Telephone, fax, and mail - traditional means of taking, confirming, querying, and tracking orders B2C - businesses sell to end consumers (e.g., Apple sells an electronic device to an individual for personal use).

Electronic Data Interchange (EDI)
Learning Block 2, Unit 4 Electronic Data Interchange (EDI) Electronic Data Interchange (EDI) – the computer-to-computer interchange of strictly formatted messages that represent documents, such as Purchase Orders, Manifests, etc. Direct exchange of information between computers EDI documents are not normally intended for human interpretation Messages follow strict formats designed to be independent of the method of communication . In many companies, EDI has replaced faxing and mailing of paper documents; it has been employed to improve efficiencies in every imaginable industry. Many companies also require their suppliers to use EDIs. Examples of EDI transactions include: A buying company transmits order specifications (e.g., product numbers, quantities, and desired receipt dates) to a selling company A selling company transmits order invoice information (e.g., cost and payment terms) to a buying company Trading Partners include: Customers Stores Shipping Companies Manufacturer’s Freight Forwarders

Learning Block 2, Unit 4 Bar-coding Barcodes present information in visual patterns machines can read. Bar codes are attached to products or product packages to identify that particular item. Radio Frequency Identification Device (RFID) Tags identify and track products, wirelessly using electromagnetic fields to transfer data. Used both in warehouses and stores. Barcode scanners read a pattern of black and white bars that represent a set of characters. This pattern is then turned into lines of text computers can understand. Many companies use barcodes in stores, at checkout counters, and throughout their supply chains. Barcodes are used in virtually all areas throughout the supply chain, such as vehicle manufacturing, document tracking, time control, and security access. Many companies use barcodes in stores, at checkout counters, and throughout their supply chains. Barcodes are used in virtually all areas throughout the supply chain, such as vehicle manufacturing, document tracking, time control, and security access.

Point of Sale (POS) Technology
Learning Block 2, Unit 4 Point of Sale (POS) Technology Point of Sale (POS) technology streamlines the checkout process Checkout - where sales transactions are completed and where customers make payments and take receipt of purchases. Scales, scanners, and electronic and manual cash registers may be used in conjunction with POS technology The POS system translates scanned or manually entered information into product prices and descriptions. Depending on the system, the information may appear on a screen at the register and may be printed out on receipts. POS systems are often used to update financial and inventory records as goods are sold; this information is relayed to other parts of organizations, including warehouses and supplier contacts. POS systems integrate with other types of technology. For example, grocery stores use scales at the POS to weigh produce. POS information may also be shared with partners, such as in Vendor Managed Inventory relationships. POS systems are changing rapidly, ApplePay and other types of new technology bring new concerns (security, new interfaces, training, etc.)

Technology Summary Telephone, Fax, & Mail
Learning Block 2, Unit 4 Technology Summary Telephone, Fax, & Mail Traditional means of taking, confirming, querying, tracking, and fulfilling orders Telephones are still used heavily Fax and mail are being replaced by , web orders, EDI and other technologies Internet Global networks linked by a number of technologies Used for placing and tracking orders, facilitating sales / purchases, and many types of information transfers, all of which form part of ecommerce. Electronic Data Interchange (EDI) Direct exchange of information between computers Replaces faxing and mailing paper documents Improves efficiency, accuracy and rate of information transfer Actual EDI exchange may take place via the Internet or via dedicated gateways

Technology Summary Barcoding
Learning Block 2, Unit 4 Technology Summary Barcoding Barcode scanners read a pattern which is converted into lines of text that computers can understand. Quicker and more accurate than manual data entry Point of Sale (POS) Technology Looks up product prices, processes sales transactions and payments; issues receipts May be tied to scales, scanners, and cash registers Updates inventory levels and relays this information so that inventory can be replenished Radio Frequency Identification (RFID) Uses radio waves and RFID tags (antenna's) to identify objects (pallets, cartons, individual products) The antenna transmits information (SKUs, storage locations) from the tag to readers connected to the warehouse computers

Technology Summary Order Management Systems (OMS)
Learning Block 2, Unit 4 Technology Summary Order Management Systems (OMS) Provides information about Orders Inventory available Lists of suppliers Lists of customers Invoicing and payments Customer returns and refunds

How Ecommerce Can Support Demand Management
Learning Block 2, Unit 4 How Ecommerce Can Support Demand Management Much of the technology used to support e-commerce order fulfilment can also be used to support demand management. Demand-driven companies want to sense market changes as they occur and respond to demand quickly by aligning their operations and resources to demand. POS data can provide inventory consumption signals which facilitate quick reaction to customer demand Example – Cash register data at a grocery store Supplier managed inventory and Kanban programs provide similar inventory consumption information Example - Daily delivery of surgical kits to nurses’ work stations

The customer order management function is concerned with managing customer orders and includes all steps in ensuring that customers receive the correct products, in the correct quantity, at the correct time, and at the appropriate level of quality. The key steps involved in the customer order and replenishment cycle include Customer request or arrival Customer order entry Customer order fulfillment Customer order receipt Customer invoicing Inventory replenishment

Demand management seeks to influence customer orders while trying to reduce the uncertainty about when those orders will occur. Leading demand planning companies do not simply react to changes in demand patterns; they try to influence these patterns by managing demand. Demand management working together with order management can promote a balanced flow of goods across the supply chain. Ecommerce describes the wide range of tools and techniques used to conduct business without the use of paper Ecommerce systems can be used to support and enable demand management in a number of different ways.

Demand Planning Principles
Learning Block 3 Demand Planning Principles

Learning Block 3: Demand Planning Principles
Learning Block 3, Overview Learning Block 3: Demand Planning Principles Description When companies forecast accurately, they will be more likely to meet the needs of their customers without having to absorb the cost of holding excessive inventory, thus promoting maximum profits through higher sales and cost reductions. This learning block provides an overview and definitions of key terms in forecasting, including types of demand and techniques to improve demand planning.

Learning Block 3, Overview Learning Block 3 Learning Objectives Upon completing this learning block, the learner will be able to: Discuss the definitions of forecasting and inventory control Recognize the difference between independent and dependent demand Explain the key components of a demand plan

Unit 1: Forecasting Demand
Learning Block 3, Unit 1 Unit 1: Forecasting Demand Demand Forecast - Estimate of a company’s future needs for finished goods to support anticipated sales, raw materials, semi-finished goods, and other necessities like packaging supplies. Sales department creates a forecast and then supply chain personnel create the inventory or demand plan to support the forecasted sales. How will they sell of a particular product over a given period of time. More accurate forecasts allow for potentially higher company revenue and, hopefully, lower costs. Increases in revenue result from having products in stock when customers request them Decreases in costs result from not holding excessive inventory to compensate for inaccurate forecasts. Source:

Supplier Order Received
Learning Block 3, Unit 1 Lead Time Forecast Lead time is a key input into the demand forecast. Lead-time forecast – Estimated time from order to delivery Lead time forecasts show the length of the time it takes to obtain and replenish products that are consumed and sold. May vary significantly depending on the availability of raw materials, manufacturing resources, supplier location and transportation method For example, it might take four days to deliver from a domestic supplier, but much longer from an overseas supplier. Days 7 14 21 28 Lower arrow illustrates shorter time due to EDI order processing and local transport rather than overseas. Supplier Order Placed Order Processing Production Time Transportation Supplier Order Received

Forecast Error, & Inventory Requirements
Learning Block 3, Unit 1 Forecast Error, & Inventory Requirements Forecast Error – Difference between actual demand and forecast demand Forecasts are rarely 100% correct Forecast Error Note – this chart is for illustration purposes and does not represent actual data

Aggregate vs. Specific Forecasts
Learning Block 3, Unit 1 Aggregate vs. Specific Forecasts Aggregate forecasts are generally more accurate than very specific forecasts Demand by product family may be forecasted with a high degree of accuracy, yet demand by SKU may be wildly inaccurate. Similarly, forecasts by region are likely to be more accurate than forecasts for specific locations Dairy Yogurt Cherry Blueberry Vanilla Milk Low-fat Skim Whole Division Brand Product

Unit 2: Independent and Dependent Demand
Learning Block 3, Unit 2 Unit 2: Independent and Dependent Demand Two types of forecasts - independent forecasts and dependent forecasts. Independent forecasts are unique needs, typically for an end product. At an automobile manufacturer, an independent forecast would be how many cars would be sold in a week. The forecasts for the parts that go in a car depend on the total number of cars sold. Every car requires four tires (or five, counting the spare), so the forecast for tires depends on the forecast for cars.

Independent and Dependent Demand
Learning Block 3, Unit 2 Independent and Dependent Demand In some instances, items can represent independent or dependent demand based on where they are consumed in the supply chain. Tires sold to a car manufacturer represent dependent demand related to new car sales Tires sold to a retail tire store represent independent demand as the tire is the finished product Tire manufacturers need to consider both types of demand when creating their demand plan However, car manufacturers would create their tire stocking demand plan based on the number of cars they forecast selling

Forecasting Exercise Forecasting demand means estimating future needs.
Learning Block 3, Exercise Forecasting Exercise Forecasting demand means estimating future needs. Independent forecasts predict demand for finished goods Dependent forecasts are derived from the finished goods forecast Tires (4) Doors (2) Steering Wheel (1) Lug Nuts (24) Pickup Truck Independent Demand Dependent Demand (Calculated) Item Jan Feb Mar Apr May June Truck 2 10 8 6 12 16 Tires Doors Steering Wheel Lug Nuts Have class calculate demand on their own and then review as a group.

Forecasting Exercise - Answers
Learning Block 4, Exercise Forecasting Exercise - Answers Forecasting demand means estimating future needs. Independent forecasts predict demand for finished goods Dependent forecasts are derived from the finished goods forecast Tires (4) Doors (2) Steering Wheel (1) Lug Nuts (24) Pickup Truck Independent Demand Dependent Demand (Calculated) Item Jan Feb Mar Apr May June Truck 2 10 8 6 12 16 Tires 4 40 32 24 48 64 Doors 20 Steering Wheel Lug Nuts 240 192 144 288 384

Bill of Materials (BOM)
Learning Block 3, Unit 2 Bill of Materials (BOM) Pickup Truck Example - Independent demand = Number of trucks sold The demand for the parts that go into a truck depends on the total number of trucks sold. So, dependent demand is the tires, steering wheel, etc. The Bill of Materials (BOM) is the comprehensive listing of the dependent demand parts and components required to manufacture and assemble the final products. The finished goods sold by a company are called independent demand, which is derived outside the company and is created by customers. The sale of products, or independent demand, creates a dependent demand for additional finished goods to be manufactured, such as the demand for the components required to complete the product. Note – the finished goods from one company can be the raw materials of another company. The BOM is often also used by repair technicians in the service industry to troubleshoot and pinpoint defective parts and to order replacement (repair) parts. Remind them that they have seen this before (see next slide). Source -

Bill of Materials (BOM)
Learning Block 3, Unit 2 Bill of Materials (BOM) In manufacturing environments, when design engineers draw the finished product; the drawing is accompanied by a BOM. That BOM shows, in line item format, all items (detailed by part number, quantity, item description, and more) needed to assemble the finished product.

Learning Block 3, Unit 2 Forecast Timeframe The time between the creation of a forecast and the event it attempts to predict impacts the accuracy of the forecast. The longer the interval between the forecast and the event it is predicting, the higher the likelihood the forecast will lose accuracy. It is easier to forecast how many cars a company will sell next week than it is to forecast how many cars the company will sell fifty-weeks in advance. Forecasts for near term demand are generally more accurate than long range demand forecasts

Overview of Planning Levels
Learning Block 3, Unit 2 Overview of Planning Levels Companies generate forecasts at different levels or for different categories of products. Highest possible level is worldwide demand for products in a given time period Used to determine required supply of raw materials for same time period Most detailed level of forecast, is for stock keeping units (SKUs) Used to drive daily and weekly production manufacturing schedules. Most companies generate forecasts at multiple levels for planning and customer support.

Example - Planning Levels
Learning Block 3, Unit 2 Example - Planning Levels

Example – Planning Levels
Learning Block 3, Unit 2 Example – Planning Levels

Learning Block 3, Unit 3 Unit 3: The Demand Plan Demand plans are generated based on forecasted demand Determine how much of each product will be sold across the entire company In all regions By timeframe (e.g., year, month, week, or day) Determine how much inventory will be needed to meet the demand. The demand plan should balance projected needs with the desired inventory levels down to the SKU level, such as specific sizes and colors.

Creating the Demand Plan
Learning Block 3, Unit 3 Creating the Demand Plan Demand plans can be top-down, bottom-up or both. Top-down plans begin with an overall number to be broken down into particular products and regions For example, if there were a forecast to sell 100,000 units across the entire company for a year, that number would be broken down by product family and then by SKU and even by SKU/location. Bottom-up plans begin with a forecast for the smallest possible breakdown of demand: a particular SKU in a particular location over a particular timeframe. These detailed forecasts are added together across the company to obtain totals. Many companies generate both top-down and bottoms-up forecasts. They use those forecasts to produce a comprehensive demand plan which considers both forecasts. This ensures that their demand plans are consistent with their forecasts.

Sample Process for Creating the Demand Plan
Learning Block 3, Unit 3 Sample Process for Creating the Demand Plan Sample process for

Key Components of the Demand Plan
Learning Block 3, Unit 3 Key Components of the Demand Plan Demand planners complete the demand plan by using these key components:

Demand forecasting estimates companies’ future needs for the raw materials, finished goods, and components needed to meet projected customer demand over a certain period of time. Forecasting and inventory control are directly related; the more accurate the forecast, the less inventory companies have to carry to make up for forecast error. Accurate demand forecasting helps prevent oversupply and undersupply of inventory and their associated negative impacts. There are two types of demand: independent demand and dependent demand. Independent demand refers to items that do not depend on demand for another item. If the demand for an item, such as a car tire, does depend on another item, such as a new car, the demand for tires is dependent demand. The concept of a BOM is closely tied to dependent demand. A BOM lists every item to create a finished product.

Companies can generate forecasts at different levels or for different categories, from very general to SKU-specific. Demand plans are generated based on the forecasted demand by determining how much of each product will be sold across the entire company in all regions over a given timeframe, such as a year, a month, a week, or a day, and on how much inventory will be needed to meet this demand. Companies can create either top-down or bottom-up demand plans, though some use both to ensure accuracy. Demand plans are made up of a number of key elements.

Demand Planning Tools and Techniques
Learning Block 4 Demand Planning Tools and Techniques

Learning Block 4: Demand Planning Tools & Techniques
Learning Block 4, Overview Learning Block 4: Demand Planning Tools & Techniques Description This learning block provides an overview of the uncertainty that can result from even the best demand planning processes, along with tools and techniques to manage demand, supply, and lead time variability. Variability tends to be costly for companies in the supply chain, so this learning block also includes ways to minimize variability and reduce costs. Lastly, this learning block reviews other supply chain concepts, such as safety stock, reorder points, and order quantities.

Learning Block 4, Overview Learning Block 4 Learning Objectives Upon completing this learning block, the learner will be able to: Recognize the various types of uncertainty related to demand planning in terms of demand, supply, and lead times Explain the causes and impacts of variability or uncertainty Apply the basic types of forecasting techniques, such as reorder points, economic order quantity (EOQ), lead times, and technology uses

Unit 1: Uncertainty in Demand Planning
Learning Block 4, Unit 1 Unit 1: Uncertainty in Demand Planning Uncertainty - The quality or state of being uncertain, or something that is itself doubtful or unknown In demand planning, uncertainty occurs in demand, supply, and lead time. While demand can be forecasted, it is virtually impossible to know exactly what will be needed to meet customer requirements. Uncertainty in Demand Uncertainty in demand means not knowing the precise amount that will be needed. In retail stores, an uncertainty may be not being sure about how many units of a particular item will be bought by customers on a particular day. Forecasts are never 100% correct, and not knowing precisely how incorrect a forecast is creates uncertainty.

Uncertainty in Supply Planning
Learning Block 4, Unit 1 Uncertainty in Supply Planning Uncertainty in Supply Sources of supply can be uncertain due to supplier instability, potential raw material shortages or unreliable transportation. Suppliers might not have on hand to fill orders on time, as requested Labor disruptions or a shortage of critical skills could occur Source:

Uncertainty in Lead Time
Learning Block 4, Unit 1 Uncertainty in Lead Time Uncertainty in Lead Time Uncertainty can be a result of differing processing times, fulfillment times, or transportation times. Machine breakdowns can interrupt the manufacturing process Warehouses labor shortages might delay fulfillment Transportation could be delayed due to bad weather, equipment failure, or labor disruptions. In this chart, the lead time from order to receipt varies from 1-12 days. This variance makes planning very difficult.

External Causes of Uncertainty
Learning Block 4, Unit 1 External Causes of Uncertainty

Unit 2: Addressing Causes of Uncertainty and Variability
Learning Block 4, Unit 2 Unit 2: Addressing Causes of Uncertainty and Variability If companies understand the causes of variability, they may be able to mitigate or even eliminate variability. For instance, by partnering with suppliers to improve communication and sharing of sales data, planners can improve the accuracy of their demand forecasts and information about customers’ actual demand can be integrated into the demand plan. Variability in the supply chain can increase operating costs. If a company is unsure of how much inventory they will need, they must carry more in order to cover the range of possible requirements. Increased variability in demand, supply, or lead time could result in increased levels of inventory, raw materials, packaging and supplies to cover the variations and prevent stock-outs and lost sales.

Learning Block 4, Unit 2 Safety Stock Safety stock - Additional inventory needed to cover variability or uncertainty. Also referred to as buffer stock, because it is a buffer against uncertainty. For instance, if the forecast is to sell 100 units, but potential sales could be as high as 150 units, the company would need to stock 50 units of safety stock in order to provide a customer service level of 100% at all times. However, if the sales peak is extremely unlikely, the company will need to balance the need for safety stock against the carrying cost of the additional inventory. Supply chains usually have multiple points where plans can go awry. Safety stock protects against: Late deliveries Incorrect quantities, incorrect items, defective receipts Demand spikes Supplier failures

Learning Block 4, Unit 2 Safety Stock If there is 100% certainty about the amount of product a company will sell, and there are no uncertainties in their supply chain, then safety stock is not required. If a product’s lead time is known with certainty, safety stock is not needed to cover demand during the lead time period. However, if the lead time for an order is usually five days but the order arrives a day late, the company could sell out of stock and lose sales. Alternatively, the demand planner could incorporate the potential lead time variance into their plan and ensure that there was enough buffer stock to cover late deliveries.

Safety Stock Inventory
Learning Block 4, Unit 2 Safety Stock Inventory Service level - used to calculate safety stock; likelihood of having available stock in a replenishment cycle (time period from placing the order until it is received) Months/Days of Inventory on Hand - how long inventory should last based on past product demand history or projected future product demand (similar to Days Sales in Inventory) Inventory Accuracy – compares inventory levels as recorded in the system to actual stock levels as counted

Unit 3: Tools / Techniques to Reduce Uncertainty
Learning Block 4, Unit 3 Unit 3: Tools / Techniques to Reduce Uncertainty There are many techniques to reduce uncertainty in the supply chain. Lower levels of uncertainty mean less inventory will be required to cover for contingencies. Less inventory means lower costs. Methods to reduce uncertainty in demand planning include: Statistical forecasting techniques Point logic in replenishment Economic Order Quantity (EOQ) Lead time analysis Technology

Basic Forecasting Models
Learning Block 4, Unit 3 Basic Forecasting Models Typically, companies use historical data to try to predict future sales. The simplest forecast is using the demand for the last sales period to craft a forecast for the next sales period. Similarly, to estimate next week’s sales, a company might refer back to what it sold during the same week in the previous year. Most companies try to incorporate more complex data into their forecasts. Moving Average Forecast Very simple but often reasonably accurate Created by using recent sales numbers to predict an upcoming period There are more complex methods of statistical forecasting, but they are often difficult to explain to non-experts; simpler forecasts can be explained more easily. There are many software packages companies can use to automate forecast generation.

Basic Forecasting Models
Learning Block 4, Unit 3 Basic Forecasting Models Historical Data - Using the demand for the last sales period to craft a forecast for the next sales period Moving Average - Using recent sales numbers to predict an upcoming period. Simple Moving Average Forecast weights each time period equally, will not capture trends Weighted Moving Average Forecast typically puts more weight on more recent time periods and does a better job of capturing trends Determine the use of the forecast Select the items to be forecast Determine the time horizon of the forecast Select the forecasting model(s) Gather the data Make the forecast Validate and implement results Forecasting Process

Statistical Forecasting Techniques
Learning Block 4, Unit 3 Statistical Forecasting Techniques Statistical forecasting techniques use available data to improve accuracy. Greater forecast accuracy means less uncertainty in the demand plan Two techniques covered: Simple Moving Average Weighted Moving Average Simple Moving Average - Historical data are used to predict future demand. Can be calculated using any time horizon (weeks, months, quarters, or years) Rolling forecasts are generated by dropping the oldest demand observation when a new one is added Weighted Moving Average - Variation of the simple moving average which places more weight or emphasis on some time periods than on others. Usually, more weight is placed on the most recent sales, and less weight is placed on older sales.

Simple Moving Average Forecast - Example
Learning Block 4, Unit 3 Simple Moving Average Forecast - Example To create a sales forecast for the month of April using a three-month simple moving average forecast, Add up what sold in January, February, and March and then divide by three. The result would be the three-month simple moving average forecast for April. January sales: 200 units February sales: 300 units March sales: 400 units So, ( units = 900/3) Based on a three-month simple moving average from January to March, the forecast for April is 300 units. Since it weights each time period equally, if there is a trend, either upward or downward, the simple moving average will not capture it.

Weighted Moving Average Forecast
Learning Block 4, Unit 3 Weighted Moving Average Forecast An extension of the simple moving average is the weighted moving average. The weighted moving average adds an additional factor to the simple moving average: the time periods in the forecast must be weighted (i.e., given different levels of emphasis). The weighted moving average typically puts more weight on more recent time periods, thus doing a better job of capturing trends. A weighted moving average applies a factor, or weight, to each period to reflect how much emphasis a company wants to put on each time period, then multiplies the weighting factor by the demand or actual sales for each time period. Companies generally want to put more weight on more recent sales numbers and less on older numbers. The weighting factor is an amount between zero and one; together, all the weights must add up to one.

Weighted Moving Average Forecast - Example
Learning Block 4, Unit 3 Weighted Moving Average Forecast - Example The sales from January to March in the previous example show an increase, so the most weight would be placed on the most recent month of March, less weight on the next most recent month, and the least weight on the most distant month. For example, this company might decide to weight March at 60% (0.6), February at 30% (0.3), and January at 10% (0.1). January sales: 200 units × 0.1 = 20 February sales: 300 units × 0.3 = 90 March sales: 400 units × 0.6 = 240 With the simple moving average, the forecast for April was 300 units, but the weighted moving average predicts April sales of 350 units. The weighted moving average forecast is larger, reflecting the recent month-over-month increase in sales, which the simple moving average could not detect.

Learning Block 4, Unit 3 Statistical Forecasting Techniques Where there are clear trends in sales over a period of time, the weighted moving average process accounts for differences in actual versus forecast sales better than the simple moving average. Emphasizing the most recent sales results in predicting future sales can lead to more accurate demand forecasts In some products (seasonal, holiday, etc.) using a previous year’s sales for the same period may be more accurate than using a moving average. For example, forecasting Valentine’s Day sales based on January’s sales may be less accurate than using the previous year’s sales for Valentine’s Day. Note - The size of the period chosen for averaging can impact the accuracy of the demand forecast.

Learning Block 4, Unit 3 Statistical Forecasting Techniques Caution - Using averages to forecast “spikey” demand can lead to problems Other forecast methods include causal forecasts and expert forecasts. Causal forecasts use specific factors to determine future demand For example, lowering prices will (usually) increase sales Expert forecasting uses inputs from subject matter experts (SMEs) to generate forecasts. SMEs may be internal or external to the company

Learning Block 4, Unit 3 Reorder Points The reorder point occurs, or is tripped, once the inventory of an item reaches a predetermined level Sets off a new order to replenish the level to a predefined quantity Reorder methods: Fixed Order Quantity - Same quantity is reordered each time but the interval between orders varies Fixed Order Interval – Quantity ordered varies but the time between orders remains the same

Reorder Points Fixed Order Quantity Fixed Order Interval
Learning Block 4, Unit 3 Reorder Points Fixed Order Quantity Fixed Order Interval Inventory is monitored regularly, when the amount on hand reaches the predetermined reorder point, the standard replenishment quantity is ordered Reorder quantity - Amount of inventory needed to cover demand for the typical lead time. If daily demand were 10 units and the lead time were five days, then the reorder point would be 50 units; a replenishment order would be triggered when inventory drops to 50 units An optimal inventory level is set for each product. At reorder time, the on-hand inventory is reviewed and an order is generated to bring the inventory back to the desired level. Reorder quantity – Amount of product needed to bring inventory back to the desired level If the optimal product inventory is 50 units, if the level is 30 when it is checked at reorder time, 20 units would be ordered. Book says that the fixed order quantity approach is used on more critical items and the interval approach is more suitable for B and C items. This is not correct. The inventory levels of more critical items may be reviewed weekly – or even daily – to ensure that the company is always in stock. The actual order quantity may depend on the vendor’s minimum order quantity and may not be within the company’s control. In addition, the order interval needs to be more frequent for items with uncertain demand. Reorder techniques may vary depending on the product, lead time, sales velocity and minimum order quantity.

Reorder Points Learning Block 4, Unit 3
Source -

Economic Order Quantity (EOQ)
Learning Block 4, Unit 3 Economic Order Quantity (EOQ) Economic Order Quantity – Order quantity that minimizes the total holding costs and ordering costs. There is a fixed cost for each order placed, regardless of the number of units ordered. There is also a cost for each unit held in storage (inventory carrying cost.) EOQs help companies determine how much to reorder for the fixed quantity model The EOQ will sometimes change as a result of quantity discounts offered by some suppliers as an incentive to customers who place larger orders. Inventory carrying costs are separate from the value of the actual goods in the inventory. They include: The cost of space to store the inventory, the cost of personnel to manage inventory, the cost of obsolescence, and the cost of any potential damage to inventory. The book is incorrect - Manufacturing set up costs are not usually considered as part of EOQ since ordering inventory / raw materials are independent from production scheduling. Production cannot take place unless raw materials/inventory is on hand. However, ordering can o

Learning Block 4, Unit 3 Economic Order Quantity (EOQ) Economic Order Quantity – fixed order quantity that minimizes the total holding costs and ordering costs As inventory quantity increases, holding costs increase. When you place larger orders, ordering costs decrease. Inventory on Hand

Learning Block 4, Unit 3 Economic Order Quantity (EOQ) Additional key assumptions about the simple EOQ model are: Demand rates are continuous, constant, and known Replenishment lead times are constant and known That all demand will be satisfied by the quantity ordered; for example, 100 units will cover demand until the next order Costs per unit purchased and transportation costs remain the same, no matter what quantity is purchased

EOQ Examples Learning Block 4, Unit 3
Figure 16. Graph A: The order cost decreases as the quantity increases; at the same time, the holding costs increase as the quantity increases. The combined cost shows the lowest cost when taking both into account. Developed by LINCS in Supply Chain Management Consortium. Figure 17. Graph B: Shows a fixed order quantity of 50,000 with a consistent, even demand. Purchases are received, bringing inventory to the fixed max level. The inventory is then consumed until it reaches zero. At the consistent point of two months, a new order arrives, bringing inventory back to the max. Developed by LINCS in Supply Chain Management Consortium

Learning Block 4, Unit 3 Calculating EOQ

Learning Block 4, Unit 3 Lead Time Analysis Lead Time Analysis - Analyzing the components of lead time to see if the times can be reduced or made more consistent. Benefits include: Increased responsiveness of the supply chain Reduced uncertainty Components of lead time may include: Time required to receive, review and process an order Time to transmit the order to a supplier or a warehouse Time to prepare, pick and/or pack an order Transportation / Delivery time Longer lead times result in the need for larger inventories to cover demand during the lead time. Therefore, if lead time can be shortened, inventory can usually be reduced. Reduced lead time variability can help reduce the need for safety stock inventory.

Learning Block 4, Unit 3 Role of Technology Demand planning and forecasting techniques can be applied more easily with the help of software which can automate the processes. Software applications May offer multiple forecast options to improve accuracy Can set target inventory levels and replenishment quantities Use built-in statistical models to forecast sales and demand based on historical data, helping to provide a more accurate idea of what to expect in the future.

In demand planning, three types of uncertainty exist: demand, supply, and lead time. Uncertainty in any of these elements may increase the level of inventory required to avoid stock-outs. If companies can understand and address the causes of variability, they can reduce variability. Several forecasting techniques exist, including the simple moving average and the weighted moving average. These techniques are examples of time series forecasts in which historical data is used to create forecasts. Reorder points determine when another order needs to be placed to replenish product. Two common types of reorder points are fixed order quantity and fixed order interval. EOQs help companies determine how much inventory to reorder. EOQs determine the best quantity to order for replenishment by balancing the costs of ordering with inventory carrying costs. Lead time analysis involves analyzing the various components of lead time to see if the time required can be reduced or if any component can be made more consistent in order to reduce uncertainty.

Communicating and Managing Demand
Learning Block 5 Communicating and Managing Demand

Learning Block 5: Communicating & Managing Demand
Learning Block 5, Overview Learning Block 5: Communicating & Managing Demand Description The effective management of demand planning processes is a key factor in the success of any organization. Companies must have processes in place for effectively gauging changes in demand, communicating these changes, managing demand, and prioritizing demand as necessary. It is important for supply chain personnel to understand these key aspects of demand management, each of which is outlined in this learning block.

Learning Block 5, Overview Learning Block 5 Learning Objectives Upon completing this learning block, the learner will be able to: Recognize the key aspects of communication Understand the key aspects of gaining demand consensus in organizations Apply the key metrics used in demand management Analyze the key aspects of managing and prioritizing demand

Unit 1: Communicating Demand
Learning Block 5, Unit 1 Unit 1: Communicating Demand Accurately and effectively communicating demand in a timely fashion is vital for companies and requires structured and integrated processes. Once the demand plan has been developed, it should be communicated to other groups, normally by those who have developed this plan. Effective demand management depends on: Clear, continuous, and timely communication between the demand manager and other key groups within the company, including marketing, sales, manufacturing, and procurement Focus on should be on communicating the true state of demand, the actions required to meet the demand objectives, including the actions needed to keep supply and demand coordinated. Changes to demand plans must be communicated quickly to ensure timely response and coordination between groups

Learning Block 5, Unit 1 Communicating Demand Example - If the sales group learns that a customer is planning to increase their orders for a specific product over the next few months. Sales should quickly communicate this increase to the demand manager so that there is time to adjust manufacturing schedules, as necessary, to ensure that products are available to meet the increase in demand. Regular feedback and communication must take place continuously because demand changes with time and can be affected by the various factors, including Market size Complementary and substitute products / services Customer preferences Income levels and demographics Market forces Risk events

Feedback & Performance Monitoring
Learning Block 5, Unit 1 Feedback & Performance Monitoring Function Communication To Communication From Sales Inform the sales force of available products and expected sales. Feedback from sales alerts demand managers to changes or anticipated changes in demand and timing so that the necessary actions can be carried out to prioritize accordingly. Marketing If the demand plan changes, Marketing may need to change their plans in order to meet the company’s demand objectives. Communicate marketing related demand shaping expectations for stimulating or slowing demand. Procurement Procurement needs the demand plan so that they can ensure raw materials and components are available when needed. Feedback from procurement alerts demand managers of changes or anticipated changes in the timing or quantities of goods on order. Master Production Scheduler Schedulers must be informed of changes in demand mix or volumes so they can alter the master production schedule, as necessary. Demand planning must be informed if there is a manufacturing issue that affects the supply of product.

Effective Demand Management
Learning Block 5, Unit 1 Effective Demand Management Demand management requires quick communication and the ability to respond effectively to changes. Collaborative is essential, particularly when changes in demand occur: Supply capacity should be managed to meet increases and decreases in demand. Demand changes might be caused by changes in order sizes, expedited orders, or unexpected variability. The demand forecast should be managed and prioritized to meet supply capacity. Demand management techniques include changing prices and modifying advertising or promotions. Continuous communication is required because demand changes constantly.

Learning Block 5, Unit 2 Gaining Consensus Isolated groups within a company often establish their own demand plans using their own demand forecasts and their own projected sales numbers These discordant plans can cause multiple issues within the supply chain. To ensure high levels of customer service, the company must deploy the right product, at the right place, at the right time, and for the right customer. Establishing consensus throughout the organization is vitally important in achieving this goal Periodic demand consensus meetings, normally monthly, where attendees come together to agree on a single demand plan. Consensus is reached by reviewing the overall demand plan as well as the individual products that make up this plan. Demand planners then complete the demand plan using the agreed-upon figures. The demand plan is reviewed for volumes of anticipated product demand and the revenue that will be generated over time, such as 12 to 18 months, broken down for each month.

Gaining Consensus Consensus Demand Plan Input Input Input Input Input
Learning Block 5, Unit 2 Gaining Consensus Finance (Budgets, Cash flow) Customer & Competitor Information Sales, Marketing (New Products, Events, Promos/Ads) Manufacturing & Procurement (Production Capacity, Supplier Issues) Input Input Input Consensus Demand Plan Historical Baseline Forecast Logistics (Transportation Issues / Delays) Input Input The consensus demand plan is a working document that is regularly evaluated and modified, as necessary, through ongoing reporting and consensus meetings.

Learning Block 5, Unit 3 Unit 3: Demand Metrics Metrics are instrumental for properly understanding the effectiveness of the demand management process and how accurately the demand plan reflects reality. Demand Plan Accuracy – How closely the demand plan matches real demand as it occurs As demand plan accuracy improves, inventory turns, customer retention, and customer satisfaction levels should also improve.

Key Demand Metrics Market Share Customer Satisfaction
Learning Block 5, Unit 3 Key Demand Metrics Market Share Customer Satisfaction Percentage of an industry or market’s total sales that is earned by a particular company over a specified time period Calculated by taking a company’s sales for a defined period of time and dividing it by the total sales in the industry over the same period. Used to provide a general idea of a company’s size relative to its market and competitors. Measures how well products and services supplied by a company meet or surpass customer expectations. Different ways to measure satisfaction, including: Independent surveys/polls Number of customers that express satisfaction with a company’s products and services according to specified satisfaction goals Amount of repeat business a company receives from customers.

Key Demand Metrics Customer Retention Overall or Gross Profit Margin
Learning Block 5, Unit 3 Key Demand Metrics Customer Retention Overall or Gross Profit Margin Ability of a company to retain its customers over time Measured by the amount of repeat business received from customers over an extended period of time. Financial metric used to assess a firm's financial health Calculated by determining the proportion of money left over from revenues after accounting for the cost of goods sold Inventory Metrics Cost and Profit per Customer Used to determine whether a company is managing inventory effectively and efficiently. Many different inventory metrics used to measure inventory management effectiveness and efficiency. Costs incurred to service a given customer and profit generated from that customer. Costs include attracting, selling, and servicing each customer, while profits include any profit the firm makes from serving a customer over a specified period of time.

Measuring the Accuracy of the Demand Plan
Learning Block 5, Unit 3 Measuring the Accuracy of the Demand Plan Understanding how closely the demand plan predicts actual demand over time allows companies to: Determine the demand plan’s reliability Assess whether accuracy is improving or worsening Improve consensus building and take corrective action, if necessary Note – Accuracy, or the degree of difference, includes instances where demand has fallen short of projections as well as instances in which demand has exceeded projections To determine accuracy, the demand plan must be broken down by item (SKU) so that projected vs. actual demand can be measured for individual products. For example, cereal would be broken down by brand, flavor and container size. Cheerios, Original, 10 oz. box Cheerios, Honey Nut, 10 oz. box This breakdown allows targeting of the specific items where demand is being more/less accurately predicted Cheerios, Original, 24 oz. box Cheerios, Honey Nut, 24 oz. box

Measuring the Accuracy of the Demand Plan
Learning Block 5, Unit 3 Measuring the Accuracy of the Demand Plan Measurement frequency should allow sufficient time to understand the causes of plan inaccuracy as well as permit meaningful adjustments to the demand plan Frequency and plan periods should be tailored to the company’s specific products and environment Many companies set demand plan accuracy goals of 95% at the product family level. A product family is a group of related goods that are manufactured by a single company

Learning Block 5, Unit 3 Demand Plan Accuracy Accuracy goals should also consider level of sales volume, according to the ABC classification, as follows: A items are the ~20% of items that account for ~80% of the sales volume. B items are the ~30% of items that account for ~15% of the sales volume. C items are the remaining ~50% of items that account for ~5% of the sales volume. Different accuracy levels and objectives may be developed and set for each category. Management time and attention should be allocated based on the relative importance of the item

Unit 4: Prioritizing Demand
Learning Block 5, Unit 4 Unit 4: Prioritizing Demand Prioritizing demand - Deciding which products need the most focus Focusing on certain products may involve changing resource allocation as demand changes or is projected to change The volume, timing, and mix of demand change constantly, so it is necessary to re-evaluate priorities on a regular basis. When is Demand Prioritization Necessary? In manufacturing and supply departments, there are typically constraints on manufacturing capacities, lead times, and available funds. These constraints can prevent the production of goods that meet the exact volumes, timing, and mix contained in the demand plan and make it necessary to shift priorities between products. Re-allocating may require adding machine capacity or reducing production, dedicating additional funds for supply or reducing spending on supply, etc.

Learning Block 5, Unit 4 Best Practices Managing and prioritizing, or reprioritizing, should occur when it becomes evident that the volume, mix, and timing of actual demand is different from the demand plan or the company’s ability to meet the actual demand. Collaboration and communication are essential Demand planners must work closely with the sales, marketing, manufacturing, and supply groups. This collaboration will ensure all groups have a better understanding of the current expectations, allocation of resources and the ramifications of changing the demand’s plan and/or priorities. Changes must be quickly and effectively communicated throughout the organization. Companies must also have a process in place to prioritize demand continually and communicate any changes throughout the organization.

Management should strive to communicate the true state of demand, the actions that need to be carried out to accomplish demand objectives, and the actions needed to keep supply and demand coordinated. Obtaining consensus in the demand plan is vital, which happens through regular demand consensus review meetings. To gauge how effective the demand management process is and how accurately the demand plan reflects reality, a series of metrics must be in place. Companies should understand how well the demand plan matches actual demand.

Demand management may start with estimation and planning, but it also involves working together with several elements in an organization. Successful demand management requires not simply reacting to changes in demand patterns but also trying to influence these patterns. Additionally, the volume, timing, and mix of demand constantly change, so re-evaluating priorities on a regular basis is crucial. A process must also be in place within companies to prioritize demand continually and to communicate this prioritization throughout the organization.

Contemporary Approaches to Demand Planning and Management
Learning Block 6 Contemporary Approaches to Demand Planning and Management

Learning Block 6, Overview
Learning Block 6: Contemporary Approaches to Demand Planning and Management Description Relatively recent developments have been made in supply chain processes to improve demand planning and management. One of these developments is CPFR, a system for helping suppliers and customers work together to increase service and reduce costs. In addition to CPFR, demand shaping and the difference between pull systems and push systems will be reviewed. Demand shaping is a concept in which companies try to influence what customers purchase. Lastly, some key best practices in demand planning will be outlined.

Learning Block 6, Overview Learning Block 6 Learning Objectives Upon completing this learning block, the learner will be able to: Understand CPFR, its operation, and its benefits Compare pull systems versus push systems Describe the key aspects of demand sensing Explain the concept of demand shaping Apply some key best practices in demand planning

Unit 1: Collaborative Planning, Forecasting, and Replenishment (CPFR)
Learning Block 6, Unit 1 Unit 1: Collaborative Planning, Forecasting, and Replenishment (CPFR) CPFR - Method of cooperation between suppliers and customers which aligns forecasts, production, and orders more accurately so as to reduce the amount of inventory. Defined framework in conjunction with collaborative forecasting Collecting and reconciling information from both inside and outside organizations Working together with other supply chain partners in order to come up with a single demand projection CPFR Benefits Helps decrease inventory levels and reduce the bullwhip effect Improves customer service through increased product availability Improves profitability throughout the supply chain by reducing inventory, transportation, and logistics costs Reduces uncertainty

Collaborative Planning, Forecasting, & Replenishment
Learning Block 6, Unit 1 Collaborative Planning, Forecasting, & Replenishment CPFR Objective - Increase product availability for customers, while reducing inventory, transportation, and logistics costs. CPFR involves supply chain partners’ collaborating to forecast demand requirements, which helps reduce forecast inaccuracies within the overall supply chain. Partners share real-time information through regular meetings and via secure information systems Improved planning Quick response to demand fluctuations Shorter lead times More economical production levels Communication and collaboration is crucial in a supply chain; it can lead to reduced uncertainty in forecasting, which can help avoid the bullwhip effect.

Collaborative Planning, Forecasting & Replenishment
Learning Block 6, Unit 1 Collaborative Planning, Forecasting & Replenishment Information sharing helps supply-chain partners plan for and meet customer demand, including variability due to anticipated and actual customer demand, lead times, forecasts, and production levels. Partners receive real-time updates on inventory and demand, which reduces uncertainty and the amount of inventory needed to satisfy customers Source:

Learning Block 6, Unit 1 Demand Transparency CPFR improves supply chain efficiency and effectiveness by making demand transparency drive supply chain activities. Its aim is to convert from a “push” system to a coordinated “pull” system based upon end customer demand.

Learning Block 6, Unit 1 The Bullwhip Effect Bullwhip Effect – a small variance becomes much larger as travels through the supply chain Causes include Lack of communication among various functions Disorganization Poor demand planning Variations are compounded further back in the supply chain. Primary manufacturers and raw materials suppliers feel the greatest impact.

Learning Block 6, Unit 1 The Bullwhip Effect Typically occurs when actual orders placed with manufacturers and suppliers are more variable than expected. Variations in one part of the supply chain are compounded in other parts of the chain as each function overestimates or underestimates demand, resulting in exaggerated fluctuations and leading to over- or under-stocking of inventory. When businesses are situated further back in the supply chain, inventory swings occur in larger waves in response to customer demand, so that the largest impact of the whip hits suppliers of raw materials, who feel the greatest demand variation in response to customer demand variation The bullwhip effect results from many factors in the supply chain, including lack of communication among various functions, disorganization, and poor demand planning.

Bullwhip Example Demand forecast is 20 units per week.
Learning Block 6, Unit 1 Bullwhip Example Demand forecast is 20 units per week. To protect against a potential stock out, the Retailer orders 25 units from their distributor The distributor orders 30 units from the manufacturer, leaving it with five available units for future demand. The manufacturer orders enough supplies and materials to manufacturer 40 units for efficiency and to meet anticipated demand. As a result, 40 units have been manufactured when the actual customer demand was for 20 units, creating a potential surplus of 20 units. Depending on actual customer demand, repeating this process over multiple weeks and with multiple retailers might further increase excess supply. As a result, companies in the supply chain might have to decrease prices and increase marketing and advertising expenses to sell their remaining units.

Bullwhip Example Learning Block 6, Unit 1
Figure 21. Impact of the bullwhip affect creating excess demand through the supply chain. Developed by LINCS in Supply Chain Management Consortium.

Bullwhip Affect on Inventory
Learning Block 6, Unit 1 Bullwhip Affect on Inventory Depending on forecast accuracy and safety stock requirements at each organization, significantly more inventory may be manufactured than is warranted by actual demand. Results include Lower prices Increased marketing expense Waste, obsolescence Increased carrying costs Actual Demand 6 units 10 Ordered (6 Sold, 4 floor stock) 16 Ordered (10 Sold, 6 stored) 20 Ordered (16 Sold, 4 stored) 50 manufactured (20 Sold, 30 stored) Collaborative forecasting and planning can help alleviate the Bullwhip Effect.

Factors that Contribute to the Bullwhip Effect
Learning Block 6, Unit 1 Factors that Contribute to the Bullwhip Effect Collaboration using accurate and timely data can prevent the bullwhip effect and smooth out the flow of products. Additional factors include: Insufficient or ineffective communication within the supply chain Lack of effective communication Distrust or discomfort with sharing information Lack of clarity in the information that is shared Inconsistent or untimely demand information Demand information is outdated or history is weighted too heavily Disorganization and inaccuracy Inaccurate lead time estimates and demand forecasts Delays in communicating changes to the affected groups Lack of trust among supply chain partners Businesses pad their real requirements because accurate data is not shared among partners and companies fear being caught short

How CPFR Works and Produces Results
Learning Block 6, Unit 1 How CPFR Works and Produces Results Goal – Improved information flow and product visibility throughout the supply chain Individual organizations prepare their company’s internal forecast. That forecast is shared with and agreed to by all participants Participants make appropriate plans

Learning Block 6, Unit 1 CPFR Example Example - a major retailer discovered that one of its suppliers, a pharmaceutical company, was unable to hold enough stock to satisfy demand on a regular basis. The two companies met and developed a process that would synchronize customer demand with replenishment plans throughout the supply chain. Pilot program looked at forecast demand for a vitamin that was routinely running out of stock. Joint planning group created to forecast demand Real-time system set up to sharing demand through a secure Internet link These innovations allowed the supplier to see demand in real time and adjust its manufacturing and delivery schedules accordingly. These changes reduced the vitamin stock outs at the retailer’s stores, reduced supply lead times, and increased overall sales for both companies.

Learning Block 6, Unit 1 How CPFR Works The retailer and supplier set up a joint planning group to forecast demand and a real-time system for sharing demand through a secure Internet link. The supplier is then able to see demand in real time and adjust its planning and delivery schedules accordingly. This information results in optimal stock levels at the retailer’s stores, reduced lead times, and increased overall sales for both companies. CPFR does not require a lab for testing. For many companies it’s the culmination of many small steps, beginning with EDI an progressing to CPFR Source:

Learning Block 6, Unit 1 Typical CPFR Results According to the Voluntary Inter-industry Commerce Standards (VICS), the benefits of implementing CPFR include: Increased sales by 10% to 30% by having product in stock more often Increased margin rate by 2% to 6% by reducing inventory costs Increased in-stock percentages by 2% to 7% from better stock planning Decreased inventory by 10% to 30% by lowering safety stock levels Improved forecast accuracy by 20% to 30% from sharing data Decreased logistics and operating costs by 10% to 28% from all of the above CPFR does not require a lab for testing. For many companies it’s the culmination of many small steps, beginning with EDI an progressing to CPFR

Unit 2: Push and Pull Systems
Learning Block 6, Unit 2 Unit 2: Push and Pull Systems Inventory management approaches generally distinguish between pull ordering systems and push ordering systems. Sometimes called a reactive system, the pull approach relies on customer demand to pull product through the supply chain. In contrast, the push or proactive approach uses inventory replenishment to anticipate future demand. For example, a fast-food giant such as McDonald’s operates on a pull system, while a typical apparel retailer operates on a push system. McDonald’s cooks hamburgers in response to current demand: individual purchases trigger more food item production. In contrast, Banana Republic attempts to anticipate what customers will want and pushes apparel items to the locations where customers will purchase them so items are available when shoppers walk in the door.

Push vs. Pull Systems Pull Systems - React to demand
Learning Block 5, Unit 4 Push vs. Pull Systems Pull Systems - React to demand Key advantage - Ability to respond quickly to sudden or abrupt changes in demand Customer demand pulls product through the supply chain Respond quickly to sudden changes in demand May involve only one-way communication between point of need and point of supply Push Systems - Anticipate demand Meets system-wide inventory needs in an orderly and disciplined way based on a master production plan Trigger originates upstream, with downstream entities managing the consequences. Trigger is often a forecast of anticipated demand that sets the supply chain in motion. Requires multiple levels of communication between point of need and point of supply

Push Systems in Manufacturing
Learning Block 6, Unit 2 Push Systems in Manufacturing Push manufacturing operations are concerned with equipment utilization. Companies that invest capital in equipment want to see that equipment used as much as possible and as efficiently as possible. Performance measures focus on efficiency, pieces produced per hour, and equipment utilization. Many manufacturing operations will produce items to anticipate demand, sometimes to ensure high equipment utilization, which essentially means that they are pushing items into the supply chain. Equipment utilization may be one of manufacturing’s metrics and, if so, they may be incentivized to produce. This is another reason why it is important that all groups within the organization collaborate and agree on the demand plan. However, idle equipment may be better than increased inventory and unneeded components, assemblies, and finished products.

Push Systems – Hyundai Example
Learning Block 6, Unit 2 Push Systems – Hyundai Example Hyundai (U.S.) had a history of building factories to produce vehicles without any orders placed for specific vehicles, thus anticipating future demand. At one point, Hyundai had about 32,000 unsold Sonata sedans located at its Alabama assembly plant The company established its sales targets based on what it could produce rather than what it could sell Pushing production without immediate demand resulted in excess inventory and high inventory carrying costs

Learning Block 6, Unit 3 Unit 3: Sensing Demand Demand Sensing - Collecting information about real-time changes in demand using a broad range of demand signals Current data from the supply chain and analytics is used to create an accurate forecast that responds to real-world events like changes in markets, extreme weather events, and consumer buying behavior. External data from sources like social media may help fine tune the forecasts

Learning Block 6, Unit 3 Unit 3: Shaping Demand Demand Shaping - Influencing demand by altering pricing, promotions or advertising in order to change customer buying behavior Influencing customer orders while also reducing the uncertainty of when those orders will occur Prices can be decreased to increase demand or increased in order to slow demand (to avoid stock outs) Pricing can also be used to shape demand of related products For example, if whole milk is in short supply but there is an excess of skim, the retailer could lower the price of skim and raise the price of whole milk. This price differential would cause some price sensitive customers to buy skim instead of whole milk. Demand shaping is the influencing of demand to match planned supply.

Demand Plan Impact from Shaping and Sensing
Learning Block 6, Unit 3 Demand Plan Impact from Shaping and Sensing Shaping and sensing activities must be communicated with demand planners and all other relevant groups Communication between the groups allows everyone to adjust their plans as necessary Based on the expected results of these activities, demand planners can Update the demand plan Work with key partners inside the firm Ensure the demand plan is met Confirm that all tasks are being undertaken by the appropriate groups in line with the demand plan For example, if demand is being shaped in favor of a particular substitute product, procurement and manufacturing must ensure that there is enough of that product to meet the revised demand expectations

CPFR aids in cooperation between suppliers and customers to align forecasts, production, and orders more accurately and reduce inventory amounts. Supply chain factors, demand and supply variations, lack of communication, and disorganization can result in the bullwhip effect, while CPFR can help reduce the bullwhip effect. With CPFR, supply chain partners create plans to reduce variances between supply and demand and share the benefits of a more efficient and effective supply chain.

Sometimes called a reactive system, the pull approach relies on customer demand to pull product through the supply chain. Pull systems feature actions taken in response to direct requests rather than anticipating needs or requests that may never arise. In contrast, the push or proactive approach uses inventory replenishment to anticipate future demand. Demand sensing is a method of obtaining information about demand that focuses on real-time changes in demand and demand management. To be genuinely effective, methods are needed for sensing demand and changes to demand as soon after they arise as possible. Demand management cannot be accomplished effectively without clear, continuous, and timely communication between demand managers and key groups at all levels within companies.

Demand shaping occurs when companies try to influence what customers will buy; one of its key principles is encouraging customers to buy alternative products or delaying purchasing products. Demand shaping can influence demand and inventory planning. A common tactic to increase demand is offering price discounts. All attempts to shape demand must be communicated with demand planners and all other relevant groups within companies.

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