Demand and Forecasting in supply chain

By

Prasad Kulkarni

What is Demand Management?

• Demand Management is one that takes a complete view of a business

• It means discovering markets, planning products and services for those markets and then fulfilling these customer demands

• It is an integrative set of business processes, across, not just the enterprise, but across all its trading partner network ( both customers and suppliers)

What does Demand Management involve?

• Discovering and understanding your market• Establishing your customers needs and

expectations and what draws them to your business

• Challenge of managing what, when, and how a product/service is designed, made, distributed, displayed , promoted and serviced

• Doing the pricing and inventory optimization at various levels of market and channels segmentation

• Satisfying customers on product, price, delivery and post-sales services

Managing Demand and Supply

• In any operating organization, it is important to manage both demand and supply singly or together by:

• Managing Demand thro various options• Managing Supply thro various options• All chosen options have their own

implications on customer service levels and different costs incurred

Managing Demand

• Thro capacity reservation by shifting excess demand to a future period without losing it – by doing advance booking or appointments for future times

• Thro differential pricing to reduce peak demands( higher prices e.g. movie tickets) or build demand in off-season by lowering prices/special discounts)

• Thro advertising and sales promotions to even out demand patterns at different times( lower telecom rates for night use)

• Thro complementary products to even out seasonal demand products – e.g. woolen and cotton garments; winter creams and suntan lotions; lawn mowers and snow ploughs

Managing Supply

• Thro inventory based alternatives by building excess inventory during periods of lean demand and consuming them during peak demand times; or by shifting production to a future period beyond demand period; or deliberately inducing stock-outs leaving customers to wait longer; final choice depends on required customer service levels

• Thro capacity adjustment alternatives by hiring/laying of workers; working extra hours and shifts; use of part time workers

• Thro capacity augmentation means by outsourcing and/or subcontracting, rescheduling maintenance programs and by debottlenecking projects

Managing Demand and Supply

• Managing demand and/or supply involves choice amongst many options with varying implications

• Some basic strategies to help make a choice are:• Level strategy – not to disturb existing production

system at all; maintain a steady rate of regular time output while meeting demand variations largely thro inventories

• Chase strategy – by matching capacity to demand and don’t carry inventories; planned output for a period is set at expected demand for that period( with lead-times built in e.g. Jan production for Feb needs); capacity related alternatives ( discussed earlier) used flexibly

• Mixed strategy – use a combination of level and chase approaches

Managing Demand and Supply-cost implications

Alternative Cost Implication

Managing demand Capacity reservation Planning & scheduling costs

Influencing demand Marketing oriented costs

Managing supply Build inventory Inventory holding costs

Backlog/backorder/stock-out

Shortage/loss of goodwill

Overtime/under-time Overtime costs, Loss of productivity

Varying shifts Shift change costs

Hiring/layoff workers Training/hiring costs, employee morale

Subcontract/outsource Transaction costs

Debottlenecking/adding new capacity

Investment, debottlenecking costs

What is Demand Planning?(1)

• This is a subset of Demand Management• It is a business planning process that enables

sales teams(and customers) to develop demand forecasts and inputs to feed various planning processes, production, inventory planning, procurement planning and revenue planning

• Based on estimated product demand, a firm can plan for deployment of its resources to meet this demand

• It is a bottom-up process as different from any top-down management process

What is Demand Planning?(2)

• It is also seen as a multistep operational SCM process to create reliable demand forecasts

• Effective demand planning helps to improve accuracy of revenue forecasts, align inventory levels in line with demand changes and enhance product-wise/channel-wise profitability

• Its purpose can be seen as to drive the supply chain to meet customer demands thro effective management of company resources

What is Demand Planning?(3)

• For FMCG/retailing sectors, demand planning takes a special meaning requiring integration of point-of-sale information to flow back to the manufacturer

• Besides getting such customer level demand data thro distribution channel partners, key is to leverage it by maximizing success in forecasting efforts and accuracy( without normal distortions like the bull-whip effect)

Benefits of Demand Planning

• Higher service levels and more responsive to actual demand

• Reduced stock levels and inventory costs

• Improved purchase planning and subsequent reduction in supply input costs

• Enhanced capacity utilization of production facilities and logistics assets

• Focused promotion and product planning/assortment/stocking levels at retail level for FMCG products

Forecasting Factors

• Time required in future• Availability of historical data• Relevance of historical data into future• Demand and sales variability patterns• Required forecasting accuracy and likely

errors• Planning horizon/lead time for operational

moves

Types of Forecasts

• Economic Forecasts- projections of economic growth, inflation rates, money supply based on economic and fiscal data trends along with policy interventions

• Demographic Forecasts- projections of population in aggregate and disaggregate form forecasts using birth and death rates in each case

• Technological Forecasts- predicting technological change e.g. in cloud computing or electronics sectors et al

• Other Forecasts- weather, earthquakes, tsunami et al

• Business Forecasts- involving demand and sales forecasts – our primary interest in this DPF course

What is Demand Forecasting?(1)

• Demand Forecasting is predicting the future demand for products/services of an organization

• To forecast is to estimate or calculate in advance

• Since forecasts are estimates and involve consideration of so many price and non-price factors, no estimate is necessarily 100% accurate

What is Demand Forecasting/(2)

• Demand forecasting involves estimating future overall market demand for the proposed products/range

• This involves extensive market and marketing research into existing and new markets, end applications, current market size and future demand potential, market segmentation, customer profiling/attitudes/preferences et al

• Purpose is to finally help business decisions on how to cater to the overall market and plan its marketing mix and product-market positioning et al

• Demand forecasting is essentially an outward/external looking process

• Important as forms basis for sales forecasting operational planning and actions

Why Demand Forecasting?

• To help decide on facility capacity planning and capital budgeting

• To help evaluate market opportunities worthy of future investments

• To help assess its market share amongst other competitors

• To serve as input to aggregate production planning and materials requirement planning

• To plan for other organizational inputs ( like manpower, funds and financing) and setting policies and procedures

Key Functions of Forecasting

• Its use as an estimation tool• Way to address the complex and

uncertain business environment issues• A tool to predicting events related to

operations planning and control• A vital prerequisite for the overall

business planning process

Forecasting Characteristics

• By its very nature, forecasting always has errors; forecasts rarely match actual demand/sales; forecast accuracy and errors are real issues

• Their chosen time horizon also determines accuracy with shorter periods having higher accuracy; the constant need to reduce lead times also puts focus on shorter planning horizons( as in lean manufacturing/JIT environments)

• Aggregate demand forecasts are more accurate than market segmental forecasts( e.g. all Maruti 800 cars versus red Maruti 800s; all paints versus blue color paints; all toothpastes versus herbal toothpastes); these have implications at different levels/stages of the supply chain

Forecasting Horizon-focus

• Short term forecasts – say for next 1-2 months for current production planning and scheduling; for specific products, machine capacities and deployment, labor skills and usage, cash inventories ; operational focus

• Medium term forecasts – say for next 3-12 months for plant level planning for product/volume changes requiring redeployment of resources; for product groups, departmental capacities, work force management, purchased materials and inventories; tactical focus

• Long term forecasts – 1 year to 3 years for planning a new plant or facility requiring major investments and other resources for both new and old product lines; strategic focus

Forecasting Horizon- methodology

• Short-term forecasting( 1 day to 3 months) for production planning needing disaggregated product forecasts with high accuracy levels; primarily uses time series data methods

• Medium-term forecasting( 3 months to 12-24 months) useful for aggregate sales and operational planning; also for seasonal business operations; uses both time series and causal forecasting models

• Long –term forecasting( beyond 24 months) useful for aggregate business planning for capacity and site/location decisions; uses judgment and causal models

Why Aggregate Production Planning?

• Demand fluctuations - seasonal factors, uncertain environment et al

• Capacity fluctuations – number of working days in month( 28-31; weekends/holidays; plant availability/maintenance schedules)

• Production level changes – plant loading factors, materials and resources availability

• Production planning has to be done to match demand and supply on a period-to-period basis in a cost effective manner

Forecasting for Business

• Demand forecasting – to establish the current total size for any product/service market and its future growth potential and trends over time

• Sales forecasting- required for a firm to plan its overall business operations within the overall market size and potential for its range of products

• Product-life cycle forecasting- to assess the likely demand development and trends as they move from introduction -> growth-> maturity -> decline phases

• All above forecasting types are to be looked at

Sales Forecasting

• Within overall demand, firm needs to establish its sales forecast to help operations

• Basis of sales forecasting is assessment of market share that firm can carve out of the total market given its past sales as also current marketing strategies

• Firming up of sales forecasts is a function of available capacity, plant performance, plant resources and stocks

• Sales forecasting is essentially an inward/internal process

• Forecasting from now is seen from operational context

Demand Forecast and Sales Forecast(1)

• Demand forecasts relate to the total demand for a product/service offered

• Demand forecasts consider various factors influencing the overall demand for a product/service including economic and demographic factors, customer needs and expectations, market segmentation, disposable incomes et al

• Sales forecasts are reflection of actual sales expected and consequent share of the total market demand

• Sales forecasts also consider various supply-related specific company factors like capability, product range and capacity

Demand Forecast and Sales Forecast(2)

• It is important to understand separately the need for demand and sales forecasts linked to their purpose

• Demand forecasts are called for while doing market entry exercises and planning long term investments in new /added capacities

• Sales forecasts are needed to provide the input basis for all production planning and supply chain operations

• During this DPF course, demand and sales forecasts terms may be used interchangeably, but the clear distinction should be understood

Demand Forecasting Issues(1)

• Forecasting is the deliberate attempt to predict the future- in all its dimensions !

• Crystal ball gazing or making astrological predictions are also exercises in forecasting the future

• Is both an art and science as based on significant behavioral and unstructured issues and an analytical exercise using scientific principles

• Despite its limitations, essential for planned business operations

Demand Forecasting Issues(2)

• All decisions need information about future circumstances

• Best we can do is to forecast these circumstances

• Since business decisions are driven by what the market needs, it is necessary to forecast market demand

• Since operational decisions are driven by what their customers need, it is necessary to forecast expected sales

Demand Forecasting Issues(3)

• All factors influencing demand for a product or service have to

be first identified• These factors could be both price and non-price determinants of

demand( including consideration of substitutes and

complementary products) • Evolve a suitable methodology to assess these demand factors

and do quantitative and qualitative data analysis to arrive at

short term and long term demand estimates with identifiable

trends• Prepare such forecasts to assist both long term and short term

decision-making needs of an organization

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Forecasting Role in a Supply Chain

• Forms basis for all strategic and planning decisions in a supply chain

• Used for both push and pull processes• Examples:

– Production: scheduling, inventory, aggregate planning– Marketing: sales force allocation, promotions, new

production introduction– Finance: plant/equipment investment, budgetary planning– Personnel: workforce planning, hiring, layoffs

• All of these decisions are interrelated and part of aggregate production planning(APP)

Need for Collaborative Supply Chains

• SCM integrates and optimizes the processes, but does not eliminate inherent conflict

• SCM mostly remains an in-corporate initiative• SCM does not address the total business

environment (different components of external value chain face different environments)

• Hence, need for collaborative supply chains• Thus, born concept of Collaborative Planning and

Forecast Replenishment( CPFR)

Forecasting Problems

• Lack of understanding of integrated market and supply realities by key decision makers within an organization

• Lack of trust and transparency amongst supply chain elements and partner organizations

• Lack of proper communication, coordination and collaboration amongst supply chain partners

• Lack of metrics for measuring total supply chain performance

• Lack of IT tools, processes, professional competencies to achieve accurate forecasts

Forecasting Role in Decision-making

External andInternal Data

ObjectivesAnd

Constraints

ManagersForecasts

UpdatedForecasts

ActualPerformance

PlannedPerformance

Operations

Resources

Forecasting in Business Planning

InputsMarket ConditionsCompetitor ActionConsumer TastesProducts’ Life CycleSeasonCustomers’ plans

Economic OutlookBusiness Cycle StatusLeading Indicators-Stock Prices, Bond Yields, Material Prices, Business Failures, money Supply, Unemployment

Other FactorsLegal, Political, Sociological,Cultural

Forecasting Method(s)Or Model(s)

OutputsEstimated Demands for each Product in each Time PeriodOther Outputs

Sales ForecastForecast and Demand for Each Product In Each Time Period

Processor

Production CapacityAvailable ResourcesRisk AversionExperiencePersonal Values and MotivesSocial and Cultural ValuesOther Factors

Management Team

Forecast Errors

Feedback

Sales ForecastForecast and Demand for Each Product In Each Time Period

Procedure for Translating Sales Forecast into Production Resource Forecast

Business StrategyMarketing Plan- Advertising Sales Effort, Price, Past SalesProduction Plans- Quality Levels, Customer Service, Capacity CostsFinance Plan—Credit Policies, Billing Policies

Production Resource Forecasts Long Range

Factory capacitiesCapital FundsFacility NeedsOther

Medium RangeWork ForceDepartment CapacitiesPurchased MaterialInventoriesOthers

Short RangeLabor by Skill ClassMachine CapacitiesCashInventoriesOther

Processor