Session 2 Demand Management

Basics of Supply Chain Management
Demand Management
Session 2
APICS Certified in Production and Inventory Management (CPIM)

21
2009 APICS CONFIDENTIAL AND PROPRIETARY
Basics of Supply Chain Management

1.
2.
3.
4.
5.
Demand
Management
Master
Planning
Material
Requirements
Planning
Capacity
Management
and Production
Activity
Control
Aggregate
Inventory
Management
Item Inventory
Management
Purchasing
and Physical
Distribution
Lean/JIT and
Quality
Systems
Theory of
Constraints
and Review
Activity
6.
7.
Introduction to
Supply Chain
Management
22
8.
9.
10.
Learning Objectives
Upon completion of this session, participants will be
able to:
Demand Management Business Processes
Describe the significance of marketing management and
customer relationship management
Explain the role and objectives of demand planning (forecasting
and customer order management)
Characteristics of Demand
Differentiate independent from dependent demand
Identify at least five sources of independent demand
Recognize at least four demand patterns
23
Learning Objectives (cont.)

able to:
Basic Forecasting Concepts
Describe three planning levels that are supported by demand forecasts
Explain four major principles of forecasting and three principles of data
collection and preparation
Differentiate quantitative from qualitative forecasting techniques
Estimate Demand
Calculate and explain the logic of an exponential smoothing forecast
Explain the logic behind the calculation of a seasonal forecast
Calculate and explain the use of the mean absolute deviation
24
Chapter 8 Page 216 in Intro to Materials Mgmt, sixth edition
Demand Management
Session 2
Demand
Management
25
Demand Management Processes
Marketing
Management
Demand
Planning
26
Customer
Relationship
Management
(CRM)
Marketing Management and Mix

Marketing
Strategy
Product Positioning/
Differentiation, and
Market Segmentation
Decisions
Marketing
Management
Potential Order
Qualifying and
Winning Products
Marketing Mix Decisions
Product
Price
Promotion
Place
27
Order Qualifying
and Order Winning
Products
Customer Relationship Management

Help customers achieve better business results
through:
Design assistance: helping in the design of new products
or improvement of existing ones
Customer needs: assessing the customers business
and creating (expanding) product offerings
Information and communications: collecting and
analyzing customer data to support marketing, sales,
and customer service
28
Order Management
Lilly Manufacturing Customer Service
CRM plays a major role in operations efficiency and

customer service through:
Fast and accurate order entry and tracking
Meet promised delivery dates and quantities
Handle customer inquiries and service
complaints, returns, and repair
Accurate and timely shipping documentation,
invoicing, and recording of sales history
29
Demand Planning
Recognition of customer requirements through
Forecasts
Management of orders from
Internal customers
External customers
2 10
- Lilly Shanghai
- Validation Lots
- Patheon
Demand Management
Session 2
Characteristics
of Demand
2 11
Independent vs. Dependent Demand

Only independent demand needs to be forecasted
MPS
Dependent demand should never be forecasted; it

should be calculated
MRP
2 12
Sources of Demand
Forecasts
Ex Lilly
Customer orders
Orders from Singapore
Replenishment orders from DCs
Demand in BPCS
Interplant transfers
Transfer WA to WX
Other
Validation
2 13
Demand Patterns: Trend

Insulin
Increasing
Decreasing
Demand
Level
Quarters
2 14
Demand Patterns: Seasonal Demand
Demand
Ceclor
Quarters
2 15
Demand Patterns: Random

5
Demand
Quarters
2 16
Stable vs. Dynamic Demand

Stable demand retains same general shape over time
Dynamic demand tends to be erratic
Dynamic
Stable vs.
Dynamic
Demand
Stable
Average demand
2 17
Demand Management
Session 2
Forecasting
2 18
Introduction
Purposes and uses of the forecast
Principles of forecasting
Principles of data collection and preparation
2 19
How Forecasting Supports Planning

Planning Level
Forecast
Horizon (up to)
Business Planning
Sales volume ($); new

market and supply
chain initiatives
2 to 10 years
Physical units of
production at the
product family level
1 to 3 years
Physical units of
production at the end
item level
3 to 18 months
Sales and Operations

Planning
Master Scheduling
2 20
Principles of Forecasting
Forecasts
Are rarely 100% accurate over time

Should include an estimate of error
Are more accurate for product groups and families
Are more accurate for nearer periods of time
Bad forecast = high safety stocks / inventory

Good Forecast = low safety stocks / inventory
2 21
Data Collection and Preparation

Record data in terms needed for the forecast
No data no Fcst.
Record circumstances relating to the data
Promotions, ..
Record demand separately for different customer

Hospitals /
groups
Wholesalers
2 22
Data Collection and Preparation Example

Month
6000
10
11
12
6000
500
500
500
500
500
500
500
500
500
500
500
500
Average
Forecast
1500
1500
1500
1500
1500
1500
1500
1500
1500
1500
1500
1500
Customer As annual demand:

Customer Bs annual demand:
Total:
Average over 12 months:
2 23
12,000
6,000
18,000
1,500 per month
!!!
Demand Management
Session 2
Forecasting
Techniques
2 24
Forecasting Techniques
Forecasting Techniques
Qualitative
Quantitative
Judgment
Mathematics
Intrinsic
(Time Series)
2 25
Extrinsic
(Causal)
Qualitative Techniques
Are based on intuition and informed opinion
Tend to be subjective
Are used for business planning and forecasting for new
products
Are used for medium-term to long-term forecasting
Lilly Products?
2 26
Quantitative Techniques: Extrinsic

Furniture industry looks at home building industry index
Based on correlation and causality

Rely on external indicators
Useful in forecasting total company demand or demand
for families of products
Two types of leading indicators
Economic
Demographic
- Construction awards, house prices,

- Population, birth rate,
Lilly Products?
2 27
Quantitative Techniques: Intrinsic

Based on several assumptions
The past helps you understand the future
Time series are available
The past pattern of demand predicts the future pattern of
demand
Examples
Moving Averages
Exponential Smoothing
2 28
Average past sales
Moving Averages: Principles

Best used when demand is stable and there is little
trend or seasonality, and demand variations are
random
When past demand shows random variation
Do not second-guess what the effect of random variation
will be
It is better to forecast based on average demand
2 29
Moving Average Forecast Example

Assume it is the end of December;
forecast demand for the next month, January
Jan
92
2 30
Feb
83
Mar
66
Apr
74
May Jun
75
Jul
84
84
Aug Sep Oct
81
75
Nov Dec Jan
Mo.1
Mo.2
Mo.3
63
91
84
Moving Average Forecast Logic

Moving average forecast = average demand of past periods
Moving average forecast for month 4
Demand for months 1 - 3 288
=
=
= 96 units
No. of months
3
Month
Demand
102
91
95
Three - Month Total
Next Month
Forecast
288
96
Key: = Sum
2 31
MONTH 4 FORECAST
Class Problem 2.1
2 32
Mont
h
Demand
102
91
95
105
94
101
Three-Month
Total
Next Month
Forecast
Class Problem 2.1 Solution
2 33
Three-Month
Total
Next Month
Forecast
Month
Demand
102
91
95
288
96
105
291
97
94
294
98
101
300
100
Class Problem 2.1 Solution (cont.)

Forecast variability will covered by safety stock
106
Actual
3-Month
Total
Forecast
288
96
291
97
294
98
96
100
94
300
Forecast
102
Demand
Month
104
100
98
92
90
0
Period
2 34
Three-Month Moving Average Forecast

Faster reaction on forecast
2 35
Month
Demand
Three-Month Total
Next-Month
Forecast
89
272
91
89
272
91
94
272
91
91
274
91
95
280
93
104
290
97
106
305
102
110
320
107
Six-Month Moving Average Forecast

Slower reaction on forecast
2 36
Month
Demand
Six-Month Total
Next-Month
Forecast
89
545
91
89
544
91
94
549
92
91
546
91
95
552
92
104
562
94
106
579
97
110
600
100
Moving Averages: Lessons Learned

The moving average forecast will lag the
development of a rising or falling trend
The farther back the moving average forecast reaches
for data, the greater the lag
The three-month moving average forecast may have
overreacted if the demand surge had abated
The moving average forecast works best when demand
is stable with random variation; it will filter out random
variation
2 37
Exponential Smoothing Logic

Take the old forecast and the actual demand for the
latest (most current) period
Assign a weighting factor or smoothing constant
(, alpha) to the latest period demand vs. the old
forecast
Calculate the weighted average of the old forecast and
the latest demand
New forecast = () (latest demand) + (1 ) ( old forecast)
2 38
Smoothing Constant (, Alpha)

New forecast = () (latest demand) + (1 ) (previous forecast)
Low smoothing constant gives more weight to the old

forecast: e.g.,
= .2 for latest demand (e.g. period X)

1 = .8 for old forecast (also period X)
20%
100%
80%
Appropriate if demand is stable, not rising or falling

Run simulations with different values to see which one
best fits the historical demand pattern
2 39
Class Problem 2.2

A. Prepare an exponential smoothing forecast for June.
May data: actual demand = 220; forecast = 200.
Calculate the forecast for June using a smoothing constant () of .20
B. Prepare an exponential smoothing forecast for July.

June data: actual demand = 240
Calculate the forecast for July also using a smoothing constant () of .20
2 40
Class Problem 2.2 Solution

A. Prepare an exponential smoothing forecast for June.
= (.2) 220 + (.8) 200 =
=
44 +
160 =
204
B. Prepare an exponential smoothing forecast for July.

= (.2) 240 + (.8) 204 =
=
48 +
163 =
2 41
211
Seasonal Demand
Demand (units)
Average demand
for all periods
Seasonal demand
Time (quarters)
2 42
Seasonal Forecast Process

New seasonal Fcst.
1
2 43
Develop a seasonal forecast for each

period of the year being forecast
Develop a deseasonalized demand forecast

spanning all periods
Calculate a seasonal index of demand for

each period to establish seasonality
Avg. Fcst.
Season Impact
Seasonal Demand Indexes (Step 1)

Demand History
Year
1
2
3
Average
Quarter
Total
122
130
132
128
108
100
98
102
81
73
71
75
90
96
99
95
401
399
400
400
Average demand for all quarters = 400 = 100 units

4
2 44
Quarter
Average Quarterly Demand/100
128/100
1.28
102/100
1.02
75/100
0.75
95/100
0.95
Total
4.00
Seasonal Index
Deseasonalized Forecast (Step 2)

Make the forecast for the next year
Assume 420
Deseasonalize the forecast distribute it evenly across

the four quarters
Deseasonalized demand
(average demand/period)
2 45
Annual forecast
No. of periods
420
4
= 105 units
Seasonal Forecast (Step 3)

Calculation
2 46
Demand Management
Session 2
Tracking the
Forecast
2 47
Tracking the Forecast

Forecasts are rarely 100% correct over time.
Why track the forecast?
To understand why demand differs from the forecast - Trend?
To plan around error in the future
- One-time events
To improve forecasting methods
- Tools
2 48
Bias vs. Random Variation

Check Forecast
Forecast OK
Bias
Random Variation
Cumulative demand may not be the

same as forecast
Demand will vary plus and minus

about the average
Month
Forecast
Actual
Variation
Forecast
Actual
Variation
100
90
-10
100
105
+5
100
125
+25
100
94
-6
100
120
+20
100
98
-2
100
125
+25
100
104
+4
100
120
+20
100
103
+3
100
110
+10
100
96
-4
Cumulative
Total
600
690
+90
600
600
Bias exists since cumulative

variation is not zero.
2 49
There is no bias since

cumulative variation is zero.
Forecast Error Data
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Total
Forecast
500
500
500
500
500
500
500
500
500
500
500
500
Actual
460
520
530
490
460
500
530
490
530
480
490
520
Absolute
deviation
40
20
30
10
40
30
10
30
20
10
20
260
Forecast Sales variation
2 50
Mean Absolute Deviation (MAD)

||
MAD =
MAD =
|A - F|
Absolute errors
No. of periods
Average variation
260
= 22 units
12
Key: = Sum; I I = Absolute Value
2 51
MAD Analysis: Normal Distribution

Statistically
60% = 1
90% = 2
98% = 3
Important for safety stock
1%
2 52
4%
15%
-3
-2
-1
-88
-44
-22
30%
30%
15%
MAD
22
44
88
Units
4%
1%
Uses of Forecast Measurement

Identify changes and trends in demand
Identify and adjust for forecast error that results from
random events
Adjust the period forecast so that it is close to the true
forecast average demand to minimize bias
Making decisions on safety stock and service levels
based on the degree of random variation (forecast error)
2 53
Supply Chain Management Implications

Deal with demand uncertainty through process improvements
Decrease reliance on long-term forecasts and increase
ability to react quickly to demand
Collaborate with customers and suppliers, especially in
sharing demand information
Increase manufacturing flexibility internally and
operations integration externally with customers and
suppliers
How can Suzhou handle Forecast variation
2 54
Demand Management
Session 2
Wrap-Up and
Homework
2 55
Learning Objectives
able to:
Demand Management Business Processes
Describe the significance of marketing management and
customer relationship management
Explain the role and objectives of demand planning
(forecasting and customer order management)
Characteristics of Demand
Differentiate independent from dependent demand
Identify at least five sources of independent demand
Recognize at least four demand patterns
2 56
Learning Objectives (cont.)

able to:
Basic Forecasting Concepts
Describe three planning levels that are supported by demand forecasts
Explain four major principles of forecasting and three principles of data
collection and preparation
Differentiate quantitative from qualitative forecasting techniques
Estimate Demand
Calculate and explain the logic of an exponential smoothing forecast
Explain the logic behind the calculation of a seasonal forecast
Calculate and explain the use of the mean absolute deviation
2 57
Vocabulary Check
Objective:
Reinforce terminology used in this session
Complete the activity in class, individually or in pairs, or as
homework
2 58
Vocabulary Check
1
O R D E R Q
U
A
I
L
N
I
D
T
M E A N A
Q
P
T
U
E
I
A
N
V
N
D
E
T R E N D
I
N
T
T
A
F O
T
I
I N T R
V
E X P O N E
5
13
15
16
17
2 59
U A L I F I E R S
M O V I N G A V
B S O L U T E D E V
10
11
D E P E N D E
X
T
D
R
S E A
I
M
N
A
R E C A S T
N
I
D
I N S I C
12
14
O
R
D
E
R
W
I
N
N
E
R
S
A N D O M
R A G E
7
B
A T I O N
A
T
S
O N A L
N T I A L S M O O T H I N G
Problem 2.4
2 60
Month
1
Demand
102
91
95
105
94
101
108
91
101
10
99
Next Month Forecast
Problem 2.4 (Solution)
2 61
Month
Demand
102
91
95
96
105
97
94
98
101
100
108
101
91
100
101
100
10
99
97
Next Month Forecast
Demand Management Summary

Various models to build forecast
Forecast is not the same as sales/demand
Important to watch forecast
Close connection to the customer is important
2 62

Session 2 Demand Management

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Basics of Supply Chain Management

APICS Certified in Production and Inventory Management (CPIM)

2009 APICS CONFIDENTIAL AND PROPRIETARY

Basics of Supply Chain Management

2009 APICS CONFIDENTIAL AND PROPRIETARY

2009 APICS CONFIDENTIAL AND PROPRIETARY

Learning Objectives (cont.)

2009 APICS CONFIDENTIAL AND PROPRIETARY

Chapter 8 Page 216 in Intro to Materials Mgmt, sixth edition

2009 APICS CONFIDENTIAL AND PROPRIETARY

Demand Management Processes

2009 APICS CONFIDENTIAL AND PROPRIETARY

Marketing Management and Mix

Marketing Mix Decisions

2009 APICS CONFIDENTIAL AND PROPRIETARY

Customer Relationship Management

2009 APICS CONFIDENTIAL AND PROPRIETARY

Lilly Manufacturing Customer Service

CRM plays a major role in operations efficiency and

2009 APICS CONFIDENTIAL AND PROPRIETARY

2009 APICS CONFIDENTIAL AND PROPRIETARY

2009 APICS CONFIDENTIAL AND PROPRIETARY

Independent vs. Dependent Demand

Dependent demand should never be forecasted; it

2009 APICS CONFIDENTIAL AND PROPRIETARY

Orders from Singapore

Replenishment orders from DCs

2009 APICS CONFIDENTIAL AND PROPRIETARY

Demand Patterns: Trend

2009 APICS CONFIDENTIAL AND PROPRIETARY

Demand Patterns: Seasonal Demand

2009 APICS CONFIDENTIAL AND PROPRIETARY

Demand Patterns: Random

2009 APICS CONFIDENTIAL AND PROPRIETARY

Stable vs. Dynamic Demand

2009 APICS CONFIDENTIAL AND PROPRIETARY

2009 APICS CONFIDENTIAL AND PROPRIETARY

2009 APICS CONFIDENTIAL AND PROPRIETARY

How Forecasting Supports Planning

Horizon (up to)

Sales volume ($); new

Sales and Operations

2009 APICS CONFIDENTIAL AND PROPRIETARY

Are rarely 100% accurate over time

Bad forecast = high safety stocks / inventory

2009 APICS CONFIDENTIAL AND PROPRIETARY

Data Collection and Preparation

Record circumstances relating to the data

Record demand separately for different customer

2009 APICS CONFIDENTIAL AND PROPRIETARY

Data Collection and Preparation Example

Customer As annual demand:

2009 APICS CONFIDENTIAL AND PROPRIETARY

2009 APICS CONFIDENTIAL AND PROPRIETARY

2009 APICS CONFIDENTIAL AND PROPRIETARY

2009 APICS CONFIDENTIAL AND PROPRIETARY

Quantitative Techniques: Extrinsic

Based on correlation and causality

- Construction awards, house prices,

2009 APICS CONFIDENTIAL AND PROPRIETARY

Quantitative Techniques: Intrinsic

2009 APICS CONFIDENTIAL AND PROPRIETARY

Average past sales

Moving Averages: Principles