2.

Demand Management

2.1. Demand Management in the MPC

Demand Management is the key connection
to the market in the front end of the MPC sy
stem. As such, we gather information from a
nd about the market by engaging in forecasti
ng customer demand, entering orders, and d
etermining specific product requirements.
It is through this module that quantities and t
iming for all sources of demands must be de
veloped and coordinated with the planning
(via SOP) and control (via MPS) activities of
the company.

2.2. Demand Management & MPC Environments

Classifying MPC environment in terms of

customer order decoupling point.
Customer order decoupling point is the poin
t at which the firm, not the customer, becom
es responsible for determining the timing a
nd quantity of materials to be purchased, m
ade, and finished. That is, the point at whic
h demands changes from independent to d
ependent.

2.2. Demand Management & MPC Environments

A. Make-to-Stock (MTS) Demand Management

The key focus in this environment is on the mainten
ance of finished goods inventories.
Considering the tradeoffs between inventory level a
nd customer service level; defying the tradeoffs by
being lean and flexible?
Forecasts are needed for individual item level by lo
cation (e.g., plant warehouses, distribution center, l
ocal warehouses, and VMI) and time period.
Concerns of increased forecast error at the item lev
el? Use ratio/mix or % of aggregated forecasts as p
roduct mix is relative constant over time.

2.2. Demand Management & MPC Environments

B. Assemble-to-Order (ATO) Demand Management

ATO is made possible through built-in modularity in e
ngineering design .
The key task in this environment is to define custome
r orders in terms of available options, and to keep cu
stomer due date promise.
Advantages of moving from MTS to ATO: improved p
roduct flexibility, forecast, and reduced inventory carr
ying costs (e.g., Dell PC; xn vs. nx).
Component inventory affects customer service.

2.2. Demand Management & MPC Environments

C. Make-to-Order (MTO) Demand Management

The primary task in this environment is to get produ
ct specifications from the customers and translate th
ese into manufacturing terms in the company (e.g.,
QFD).
Two key factors are design (specification) and lead t
ime (components) since they can affect the resourc
e availability (e.g., components and engineering) of
other products.
Adjusting capacity after orders are released to the s
hop floor.

2.3. Communication with Others

Demand Management <=> SOP

Demand management needs to provide SOP with all sources of

demand forecast information (spare parts, promotion, inventory
buildups or backlog, etc.) both in timing and quantity (e.g., gree
n Volvo).

Demand Management <=> MPS

The underlying concept is that forecasts are consumed over tim

e by actual customer demands/orders, in terms of planned mate
rials and capacities. Thus, as customer orders are received and
entered into the MPS, the detailed order information must be pr
ovided to the master production scheduler. Likewise, the status
of orders, capacity consumed (and available) must be provided
to demand management to keep customers informed. MPS exa
mple.

Demand Management <=> Customers

Order booking/service/entry: communication from the customer

(order and change requests) and to the customer (delivery date
and order status).
A process of consuming the forecast with actual orders.

2.4. Information Use in Demand Management

EDI (electronic data interchanges, since 1970s)
A technology that enables the transmission of routine
business documents having a standard format from
computer-to-computer, phone or dedicated lines. The
software is complex (X12 Form has 150 fields) and
expensive using batch processing (orders, invoices,
payments, etc.)

E-Commerce (Internet-based systems)

flexible (Java applets) for any communication (ftp,
http, email, etc), low cost, near real-time, reaches
wider community of users.

2.4. Information Use in Demand Management

Supply Chain Management (SCM) represents one of the most s
ignificant paradigm shifts of modern business management by re
cognizing that individual businesses no longer compete as solely
autonomous entities, but rather as supply chains.

Make-to-Knowledge (replacing forecasts with knowledge)

The notion that allows supply chain members (between a pair

of supplier and customer) to operate with knowledge of the ot
her firms needs/operations to enhance the competitiveness o
f the entire chain, not just that of each of the companies indep
endently. Fig. 2.6

2.4. Information Use in Demand Management

Data Capture and Monitoring
For SOP: capturing the overall market trends and pa
tterns for the product families.
For MPS: monitoring the detailed product mix.
CRM (customer relationship management) technologies link
front office (e.g., sales, marketing, and customer servic
e) and back office (e.g., operations, logistics, and huma
n resources) functions with the companys customer to
uch points including the Internet, email, sales, call cent
ers, stores, etc.

Data from CRM, reflecting more closely actual customer dema

nd, can be used to develop make-to-knowledge plan.

Reading: Understanding CRM by Chen and Popovich in BPMJ

2.5. Managing Demand

Demand Management is the gateway between the firm
and marketplace, where:
market intelligence is gathered
forecasts of demand are developed
status of customer orders is maintained

Demand Management responsibility is fulfilled by various

functional departments.
For example, when an order is received,
credit check
order entry
materials/parts
delivery logistics dept.

2.5. Managing Demand

credit check finance/accounting dept.
order entry
sales (customer service) dept. materials/parts purchasing
(supply management) dept. delivery logistics dept.

The coordination can be done by sales and marketing or

supply chain management dept. or
materials management dept.
Responsibility

of coordination must be well defined !

Authority for order changes (see figure)

2.5. Managing Demand

Service level setting: service level = 1- stock-out risk
Inventory investment increases exponentially as
service level is increased!
Demand Filter Monitoring: checking demand against
a range of reasonable values (e.g., 4 MADs).
When an unusual demand is found, it could be
treated separately so that it wont influence the
average (forecast). e.g., 10, 9, 11, 32, 12, 14, 13
Demand Management capability (see DELLs DNA)

2.5. Dells Supply Chain DNA

Dells Four Core Capabilities
SCM Capabilities Processes

People

Demand Management
Direct model (A-T-O) Maniacal about
execution/ Bias for
action

Business fundamentals Balance sheet/ P&L Rewarded for

decreasing costs

2.6. CPFR

Collaborative Forecasting, Planning, and

Replenishment (CFPR)

Recall uncertainty and the Bullwhip effects.

CFPR is a supply chain initiative designed to improve
competitiveness by focusing on communication and
information sharing among supply chain trading
partners in planning, forecasting, and inventory

2.6. CPFR

Collaborative Forecasting, Planning, and

Replenishment (CFPR)

Goal: reducing variance between supply and demand

Eliminates typical order processing.
Forecasts can be frozen and then converted into a
shipping plan.
Developed by the Voluntary Interindustry Commerce
Standards Association (VICS)

2.6. CPFR

Background:

Wal-Mart has long been known for its careful analysis

of cash register receipts and for working with
suppliers to reduce inventories. In the past, like most
other retailers, Wal-Mart did not share its forecasts
with its suppliers.
Retailers ordered more than they needed in order to
avoid product shortages and lost sales, and suppliers
produced more than they could sell.

2.6. CPFR

Background:

Benchmarking Partners, Inc. was funded by Wal-Mart,

IBM, SAP, and Manugistics to develop a software
package called CFAR (pronounced see far), which
stands for collaborative forecasting and replenishment.

Wal-Mart initiated CFAR with Warner-Lamberts Listerine

product.

2.6. CPFR

Background:
The parties went through as many cycles as needed to
converge on an acceptable forecast.
Wal-Mart benefits: 1. in-stock position from 85% to 98%,
2. increases in sales and
reduction in inventory costs.
Warner-Lambert benefits: 1. smoother production plan,
2. lower average costs.

2.6. CPFR: Other Results

Nabisco and Wegmans
50% increase in category sales

Wal-Mart and Sara Lee

14% reduction in store-level inventory
32% increase in sales

Kimberly-Clark and Kmart

Increased category sales that exceeded market
growth

2.6. CPFR: Other Results

Sears and Michelin
25% combined inventory reduction

Campbell Soup
reduced the inventories of retailers from 4 to 2 w
eeks supply = savings of 1% of retail sales.

 Resolve/collaborate on exception items

Identify exceptions to the sales forecast
Create sales forecast
Create joint business plan
Establish collaborative relationship may
require culture change & process redesign

5
4
3
2
1

9-Step CPFR (Fig. 2.7)

 Generate order
Resolve/collaborate on exception
items
Identify exceptions to order forecast
Create order forecast

9
8
7
6

9-Step CPFR (Fig. 2.7)

2.6. CPFR
Culture change from traditional transactional relations
hips between buyers and suppliers to collaborative rel
ationships.
CPFR is grounded on the paradigm of strategic mana
gement theory that emphasizes the development of co
llaborative advantage, as opposed to competitive adva
ntage. Within the collaborative paradigm, the business
world is composed of a network of interdependent rela
tionships developed and fostered with the goal of deriv
ing greater and mutual benefits (JOM, Chen and Paulraj 200
4).

Buyer-Supplier Relations
Competitive (arms length) Orientation:
Zero-sum game between supplier and buyer
When a buyer has more clout?
Big share of suppliers sales

Buyer-Supplier Relations
Cooperative/Collaborative Orientation:
Seller and buyers are partners
Becomes popular with dramatic JIT success

Supplier as a Partner
Aspect

Competitive

Cooperative

Number of suppliers

Many

One or a few

Length of
relationship

May be brief

Long-term

Low price

Major consideration

Moderately important

Reliability

May not be high

High

Openness

Low

High

Quality

May be unreliable;
buyer inspects

At the source;
vendor certified

Volume of business

May be low

High

Flexibility

Relatively low

Relatively high

Location

Widely dispersed

Nearness is
important

2.6. CPFR Adoption

Despite promising pilots, CPFRs adoption rate h
as been slower than expected.
companies may still have legacy information
systems that delay implementation.
Information sharing requires that partners tru
st that they are working in each others best in
terests.
A good Research paper topic. (current state,
success factors, implementation barriers, etc.)