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Christian HeinrichLehrstuhl für BWL und Wirtschaftsinformatik
Demand Planning & ForecastingPart II
1
Learning Objectives
• After this lecture you should
• Know the difference between demand management, demand planning and demand forecasting
• Be capable to distinguish between processing, influencing and anticipating demand
• Understand the interdependencies of demand planning with other elements of SC-Planning
• Be able to link theoretical concepts to software applications
• Be able to transfer the findings into a demand planning organization in a company
2Dipl.-Kfm. Christian Heinrich
3
Example 4: Chemical Supply Chain
Source: http://www.basf.com/group/corporate/de/about-basf/profile/verbund/verbund-sites
Dipl.-Kfm. Christian Heinrich
Planning with complex product structures
4
Kraftwerk
Aromaten-Anlage
Anolon-/KetonFabrik
Caprolactam-Fabrik
Polyamidproduktion(Polymerisation)
Polyamidproduktion(Konfektionierung)
Hydroxylamin-Fabrik
Polyamid-SortimentErdöl-Raffinerie Schwefelsäure-Fabrik
Cyclohexan-Fabrik
Salpetersäure-Fabrik
Düngemittel-Fabrik
Ammoniak-Fabrik
Source: BASFDipl.-Kfm. Christian Heinrich
5
Stages from raw material to end-customer
Sales - - Buy
Benzol Styrol Poly-styrol
Ethyl-benzol
CHEM CHEM CHEM CHEM
Supply
ConstructorDistributor Constructionmaterialstrade
Productportfolio
Naphtha
Raffinerie
Exxon, Shell, ...
Company C
Isover G+H, ...
Styrodur-platten
CHEM
Styrodur Factory ,Germany, Italiy, ...
Company BCompany A
Execution- Commodity -
- Relocation- Tank
PlanningCompany D
Pipeline
Productportfolio
Source: BASFDipl.-Kfm. Christian Heinrich
Where do you see complexity?
6
North AmericaProduct 1 N-XYZProduct 2 N-ABCProduct 3 N-ABCProduct 4 N-ABC
Europe• Product 1 E-XYZ• Product 2 E-JKL• Product 3 E-GHI• Product 4 E-DEF
Asia/Location 2• Product 3 A-MNO• Product 4 A-MNO
Asia/Location 1• Product 2 A-MNO
Sales in Europe with external customers
Sales in North America with external customers
Raw material product 2 Europe - Asia
Raw material product 2Location 1 and 2in Asia
Sales in Asia with external customers
Usage of APO-DP for customer demands and transfers between regions
APO-DP
APO-DP
APO-DPAPO-DP
APO-DP
Dipl.-Kfm. Christian Heinrich
Raw material product 2North America - Asia
7
Questions
• What does BASF want to achieve with its Supply Chain? What are key objectives?
• What are the main differences compared to the previous examples(i.e. the iPhone & the H&M Supply Chain)?
• What are the key decisions that have to be taken in this Supply Chain, in the
• long term?• medium term?• short term?
• Who takes these decisions?
Dipl.-Kfm. Christian Heinrich
8
Supply Chain Planning - Overview
Monitoring/Event Management
MaterialsManagement Production
Planning Sales & Distribution ERP*
Purchasing
*Relevant modules for Supply Chain Management
Strategic Network Design
SC Master Planning
Material Requirements
Planning&
Purchasing
ProductionPlanning
DistributionPlanning
Scheduling TransportationPlanning
DemandPlanning
OrderFulfillment
APS
Pla
nnin
g H
oriz
on
Monitoring/Event ManagementMonitoring/Event Management
MaterialsManagement Production
Planning Sales & Distribution ERP*
Purchasing
*Relevant modules for Supply Chain Management
MaterialsManagement Production
Planning Sales & Distribution ERP*
Purchasing
MaterialsManagement Production
Planning Sales & Distribution ERP*
Purchasing
MaterialsManagement Production
Planning Sales & Distribution ERP*
Purchasing
*Relevant modules for Supply Chain Management
Strategic Network Design
SC Master Planning
Material Requirements
Planning&
Purchasing
ProductionPlanning
DistributionPlanning
Scheduling TransportationPlanning
DemandPlanning
OrderFulfillment
APS
Strategic Network Design
SC Master Planning
Material Requirements
Planning&
Purchasing
ProductionPlanning
DistributionPlanning
Scheduling TransportationPlanning
DemandPlanning
OrderFulfillment
APS
Strategic Network Design
SC Master Planning
Material Requirements
Planning&
Purchasing
ProductionPlanning
DistributionPlanning
Scheduling TransportationPlanning
DemandPlanning
OrderFulfillment
APS
Pla
nnin
g H
oriz
onP
lann
ing
Hor
izon
Dipl.-Kfm. Christian Heinrich
Managing the sell side of a business
9
Plant
Plant
Plant
Warehouse
Sup
plie
rs
Cus
tom
ers
Supply-Demand Management"Make, Move, Store"
SupplierRelationshipManagement
"Buy"
CustomerRelationshipManagement
"Sell"
Dipl.-Kfm. Christian Heinrich
Scope of demand management
• What is demand management?
Concerned with processing, influencing, and anticipating demand
• Processing demand or, in more common terms, order processing or order fulfillment will be the basis for better demand planning results
• Main focus will be then on influencing
• Anticipating demand has been covered in last lesson as Forecasting
10Dipl.-Kfm. Christian Heinrich
Order processing
• Order processing is usually viewed to span order booking to order shipment
• Example steps?
• Customer validation, order entry, credit checking, pricing, design changes, availability checks, delivery time estimation, notification of shipment, notification of delays
11Dipl.-Kfm. Christian Heinrich
Information flow in the order processing
12
CUSTOMER ORDER ENTRY ANDCHECKING
Customer ValidationCredit Control Operations…
ERP
INVOICING
SHIPPING
CUSTOMER SERVICE
ORDERINTERRUPTION
ORDERPICKING AND
ASSEMBLY
RETURNS
Dipl.-Kfm. Christian Heinrich
Characteristics
• Can be a complex & time consuming process dealing largely with information flow
• Susceptible to ad hoc modifications over time in response to problems (e.g., extra credit check added due to expensive nonpaying customer a few years ago)
• A major customer contact point with organization
Can significantly impact customer perceptions
• IT advances & high customer impact
A potential profitable target for improvement
13Dipl.-Kfm. Christian Heinrich
Influencing demand
• Some customers are more profitable than others
• Advancing technologies more practical to estimate profit potential of individual customers
• Can guide efforts/investments for customer retention & acquisition . . . investments to influence demand
• E.g.,
• Electronics manufacturer: reviews historical customer profit before sending service contract renewal
• Wireless phone firm: churn scores & lifetime value estimates influence number of customer contacts & attractiveness of offerings
Ongoing development of data mining methods
15Dipl.-Kfm. Christian Heinrich
Demand Planning Strategies
16Source: Lee, Aligning Supply Chain Strategies with product uncertainities, California Management Review 2002
Demand Characteristics
Dipl.-Kfm. Christian Heinrich
Supply Planning Strategies
17
Supply Characteristics
Source: Lee, Aligning Supply Chain Strategies with product uncertainities, California Management Review 2002Dipl.-Kfm. Christian Heinrich
Consideration of Demand and Supply situation
18Source: Lee, Aligning Supply Chain Strategies with product uncertainities, California Management Review 2002
Dipl.-Kfm. Christian Heinrich
Consideration of Demand and Supply situation
19Source: Lee, Aligning Supply Chain Strategies with product uncertainities, California Management Review 2002
Dipl.-Kfm. Christian Heinrich
Segmentation according to uncertainty
20
• Efficient• Risk-hedging• Responsive• Agile
What are the consequences?
Demand uncertaintySu
pply
unc
erta
inty
low(stable
processes)
high(new
processes)
low(functional products)
high(innovative products)
Dipl.-Kfm. Christian Heinrich
Segmentation with characteristics
21
Demand
stable demand
variable lead times
inflexibleflexible
stable, increased profits
Innovative productsFunctional productsSupply
low quality problems
variable, low profitsstable, increased profits
reliable lead times
variable demand
long product life cycle
considerable quality problems
easier changeover more difficult changeover
predictable demand demand is difficult topredict
low profit margin high profit marginhigh storage costslow storage costs
short sale periods
Dipl.-Kfm. Christian Heinrich
How to cluster a product portfolio? Functional attributes
23
• Number and type of intermediate products• Procurement frequency• Delivery flexibility and reliability• Procurement times• Intermediate product life cycle
Procurement type
• Organization type of the production process• Repetition rate• Set-up cost and times• Production bottlenecks• Working time flexibility
Production type
• Distribution structure• Delivery frequency• Transportation• Loading restrictions
Distribution type
• Customer relations and service• Security of demand• Sales trend and product life cycle• Number of products• Mass Customization• Bill of material/Recipes
Sales type Que
lle:
Sta
dtle
r, K
ilger
(201
0, S
. 71)
Dipl.-Kfm. Christian Heinrich
How to cluster a product portfolio? Structural attributes
24
Que
lle:
Sta
dtle
r, K
ilger
(201
0, S
. 71)
• Network structure• Degree of globalization• Location of decoupling points• Key bottlenecks (capacity limits)
Topographie
• Legal status• Balance of power• Direction of coordination• Type of communication
Integration and
coordination
Dipl.-Kfm. Christian Heinrich
Exercise: SC-Configuration
• Describe critical attributes of products/product groups of a company of your choice in the consumer goods and computer industry!
• Categorize these product groups into the right segment according to their uncertainties!
25Dipl.-Kfm. Christian Heinrich
Demand Planning Rules
• Get the process right• Decide what levels you need to plan demand at that make sense
for your business.• Demand planning is a collaborative process, not a test of statistical
algorithms.• Demand planning is not just forecasting.• You can't control what you can't measure.• Cleanse the data.• Trust the numbers and manage by exception.
26Source: Blanchard, Newsweek, 2008Dipl.-Kfm. Christian Heinrich
Get the process right
• Demand planning is a sub-process within sales and operations planning or integrated business planning, not a stand-alone activity.
• Create an integrated business plan that is a cross-company activity and drives the rest of the business forward for profitably meeting customer demand.
27
Supply Network Planning
Demand Planning
Balance Demand &Supply
Additional Demand Information
ForecastingDemand and Supply Strategy
Production Planning/ Detailed Scheduling
Sales & Operations Planning
Dipl.-Kfm. Christian Heinrich
Sales & Operations Planning
Execution
SC- Planning
Planning Overview
28
FinancePlanning
StrategicPlanning
Control ofOperations
Production, Warehousing, Delivery
Demand /Supply
Balance
DemandManagement
Supply Management
Demand Planning
MasterPlanning
CapacityPlanning
Frequency Horizon DetailsAnnual 2-5 years Markets,
Regions
Monthly 2-18 month Productfamily
Weekly 1-3 month Products,articles
Daily 1-2 weeks Articles
BusinessPlanning
Dipl.-Kfm. Christian Heinrich
Decide what levels you need to plan demand at that make sense for your business.
• Some companies analyze and plan demand at the product family level, customer level or geographic level. The way you forecast and plan demand is unique to your business.
29
Long term forecasts
• Single or multi-year horizon• Monthly or annual time bucket• Aggregate units (e.g., product/
service categories)• Input to “long term” decisions• Expensive & time consuming
methods
Short term forecasts
• Weekly or monthly horizon• Daily & weekly time bucket• Detailed units (e.g., SKU)• Input to “short term” decisions• Inexpensive & quick methods
For what purpose do you use short term forecasting and for whatlong term forecasting?
Dipl.-Kfm. Christian Heinrich
Demand planning is a collaborative process, not a test of statistical algorithms.
• The statistics provide a solid foundation to work with, but the real value comes from over-laying knowledge that systems cannot possibly know.
• Deploy internal collaboration before external collaboration, recognizing that the closer you get to the true demand signal, the better the forecast will be
30Dipl.-Kfm. Christian Heinrich
Demand Planning in Advanced PlanningSystems (APS)
• Focus on forecasts
31Dipl.-Kfm. Christian Heinrich
Demand Planning in SAP APO
• Statistical models
• Time-series analysis
• Causal models
• Combined forecasting
• Automated model selection
• Promotion-Planning
• Life-cycle Planning
• Like-Modelling
• Phase In/Out-Profile
• KPI-Reports
• Profit/Cost-Analysis
• Forecast Accuracy
• Horizons32
InfoCubesInfoCubes
OLAP+ Models Macros
Adminstration WorkbenchAdminstration Workbench
Planning Book
Dipl.-Kfm. Christian Heinrich
Administration of Demand Planning in APO-DP
• Key figures• Characteristics
(product, location, brand)
• Planning ObjectStructrue
• Storage buckets profiles
• Planning area• Planning books• Master data for
DP
34Source: Hoppe, M. Sales and Inventory Planning with APO-DPDipl.-Kfm. Christian Heinrich
Data flow into the APO System
35Source: Hoppe, M. Sales and Inventory Planning with APO-DPDipl.-Kfm. Christian Heinrich
Data structure of an infocube
36Source: Hoppe, M. Sales and Inventory Planning with APO-DPDipl.-Kfm. Christian Heinrich
Demand planning is not just forecasting.
• Forecasting is a component of demand planning and relates to your best estimate of future demand.
• Companies that excel in this area will challenge the forecast (and the integrated business plan) and seek opportunities to influence demand through marketing events and promotions to bring the forecast more in line with the company plan.
37Dipl.-Kfm. Christian Heinrich
IMPORTANCE OF EXCELLENT FORECASTS FOR SUBSEQUENT PLANNING PROCESSES
38
Market / C
ustomerDemand Planning:Creation and post-processing of the sales forecast
Distribution Planning:Planning of transport und replenishment
MRP:Requirement explosion for input materials according to recipes
Master Scheduling:Assessment of net requirement, balancing with capacity
Detailed Scheduling: Assessment of an optimal executable production plan
Dipl.-Kfm. Christian Heinrich
Combination of Demand Forecasting andDemand Planning with additional functions
39
Month DaysFunction
DistributionPlanning
DemandPlanningSupport
Sales/Marketing
SystemAPS / ERP
0 10 20
Bookdemand
Adjust plans (4)
Data management (2)
Collect market information (6)
StockserkennenOvercapacities
erkennenIdentify issues of production
DemandReview (7)
(3)Maintenance:- Forecasts- Exceptions
Inform about forecastingresults( 5) Maintencance of
forecasting parameters (8)
Automatedforecasting(1)
Approval of forecast
Dipl.-Kfm. Christian Heinrich
You can't control what you can't measure.
• Put the right set of linked key performance indicators in place and measure regularly against these
• Example: Forecast Accuracy
• What level of aggregation for which purpose?
40Dipl.-Kfm. Christian Heinrich
Why is Demand Planning necessary?
41
Bedarfsplanung(Disposition)
Angebot / Auftrag anlegen
SOP / Programmplanung
Verrechnung /Abbauder Bedarfe
Bestell-abwicklung WE / Lager LagerVorproduktion
Abfüllung /Verpackung
Ggf.Einkauf
= kundenspezifisch
= kundenneutral
Ziel der Vorplanung = kundenneutrale Vorproduktion um schneller zu reagieren !Goal of Demand Planning = customer neutral „pre-planning“ to allow faster reaction to the market
• Customer specific vs. customer neutral order execution
Dipl.-Kfm. Christian Heinrich