D em and Pl anni ng and For ecast i ng

S essi on 2

Demand Management and Planning -the business perspective By K . Sashi Rao Management Teacher and Trainer

W hat i s D em and M anagem ent ?

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)

W hat does D em and M anagem ent i nvol ve?

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

M anagi ng D em and and Suppl y

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

M anagi ng D em and
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) demand patterns at different times( lower telecom rates for night use) demand products e.g. woolen and cotton garments; winter creams and suntan lotions; lawn mowers and snow ploughs

Thro advertising and sales promotions to even out

Thro complementary products to even out seasonal

M anagi ng Suppl y
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 of workers; working extra hours and shifts; use of part time workers and/or subcontracting, rescheduling maintenance programs and by debottlenecking projects

Thro capacity adjustment alternatives by hiring/laying Thro capacity augmentation means by outsourcing

M anagi ng D em and and Suppl y

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 dont

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 approaches

Mixed strategy use a combination of level and chase

M anagi ng D em and and Suppl y cost i m pl i cat i ons

Alternative Cost Implication

Managing demand

Capacity reservation Influencing demand

Planning & scheduling costs Marketing oriented costs Inventory holding costs Shortage/loss of goodwill Overtime costs, Loss of productivity Shift change costs Training/hiring costs, employee morale Transaction costs Investment, debottlenecking costs

Managing supply

Build inventory Backlog/backorder/ stock-out Overtime/under-time Varying shifts Hiring/layoff workers Subcontract/outsource Debottlenecking/adding new capacity

W hat i s D em and Pl anni ng?( 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

W hat i s D em and Pl anni ng?( 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

W hat i s D em and Pl anni ng?( 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)

Benef i t s ofD em and Pl anni ng

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

For ecast i ng Fact or s

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 ofFor ecast s

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

W hat i s D em and For ecast i ng?( 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

W hat i s D em and For ecast i ng/ ( 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 looking process

Demand forecasting is essentially an outward/external Important as forms basis for sales forecasting

operational planning and actions

W hy D em and For ecast i ng?

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 Funct i ons ofFor ecast i ng

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

For ecast i ng Char act er i st i cs

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

For ecast i ng H or i zonf ocus

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

For ecast i ng H or i zon - 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 useful for aggregate business planning for capacity and site/location decisions; uses judgment and causal models

Long term forecasting( beyond 24 months)

W hy Aggr egat e Pr oduct i on Pl anni ng?

Demand fluctuations - seasonal factors,

uncertain environment et al

Capacity fluctuations number of working

days in month( 28-31; weekends/holidays; plant availability/maintenance schedules) factors, materials and resources availability demand and supply on a period-to-period basis in a cost effective manner

Production level changes plant loading

Production planning has to be done to match

For ecast i ng f or Busi ness

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

Sal es For ecast i ng

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 available capacity, plant performance, plant resources and stocks process context

Firming up of sales forecasts is a function of

Sales forecasting is essentially an inward/internal Forecasting from now is seen from operational

D em and For ecast and Sal es For ecast ( 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

D em and For ecast and Sal es For ecast ( 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

D em and For ecast i ng I ssues( 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

D em and For ecast i ng I ssues( 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

For ecast i ng Rol ei n a Suppl y Chai n

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 chain elements and partner organizations

Lack of trust and transparency amongst supply Lack of proper communication, coordination and

collaboration amongst supply chain partners performance

Lack of metrics for measuring total supply chain Lack of IT tools, processes, professional

competencies to achieve accurate forecasts

For ecast i ng Rol ei n D eci si onm aki ng

External and Internal Data

Objectives And Constraints

Planned Performance

Forecasts

Managers

Operations

Updated Forecasts

Actual Performance

Resources

For ecast i ng i n Busi ness Pl anni ng

Inputs
Market Conditions Competitor Action Consumer Tastes Products Life Cycle Season Customers plans

Economic Outlook
Business Cycle Status Leading Indicators-Stock Prices, Bond Yields, Material Prices, Business Failures, money Supply, Unemployment

Forecastin g Method(s) Or Model(s)

Outputs Estimated Demands for each Product in each Time Period Other Outputs

Management Team Production Capacity Available Resources Risk Aversion Experience Personal Values and Motives Social and Cultural

Other Factors
Legal, Political, Sociological, Forecast Cultural

Processor

Errors

Feedback

Sales Forecast Forecast and Demand for Each Product In Each Time

Sales Forecast Forecast and Demand for Each Product In Each Time Period

Processor

Business Strategy Marketing PlanAdvertising Sales Effort, Price, Past Sales Production PlansQuality Levels, Customer Service, Capacity Costs Finance Plan Credit Policies, Billing Policies

Procedure for Translating Sales Forecast into Production Resource Forecast Production Resource Forecasts

Long Range Medium Range Short Range Factory capacities Work Force Labor by Skill Class Capital Funds Department Capacities Machine Capacities Facility Needs Purchased Material Cash Other Inventories Inventories Others Other