Demand Planning/Supply

Chain 101
Microsoft Partner Summit,
Phoenix, AZ
February 12, 2013
Agenda

Introduction
Definition of Demand Planning
Why Demand Planning
Demand Forecasting
Inventory Planning
Replenishment Planning
Summary of Benefits from integrated Demand
Planning
Q&A

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Introduction

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Introduction

Jeff Livingston Director, Partner

Development
15+ years Supply Chain Planning Industry
Experience
Supply Chain Planning experience across SMB
and Tier 1 businesses with domain expertise in
Demand Planning, Inventory Optimization,
Replenishment/Supply Planning and S&OP.
Experience with Logility, Oracle/Demantra,
JustEnough and other applications.
B.S. Mathematics Purdue University, MBA
California Polytechnic

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What is Demand Planning

Demand planning is a multi-step operational supply

chain planning process used to create reliable
forecasts of customer demand and align inventory
levels and supply plans to achieve the targeted
level of customer service desired by a business.

In Short:
Having the Right Product, at the Right
Place, at the Right Time and at the Right Price,
to satisfy customer demand.

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Realities of the New Business
Environment
Companies encounter continuous change and require
the ability to rapidly adapt in a fast changing
business environment

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We Live in Turbulent Times

Things beyond your control can have a major impact

on your supply chain.

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Traditional Planning Systems Dont
Work Anymore
Traditional tools (spreadsheets and disconnected,
fragmented systems) can not respond quickly
enough to the rapid pace of change:
Global Sourcing
Longer lead-times
Increased Demand Volatility
Faster Product Lifecycles
More choices & new competitors
Fewer Resources, People, Capacitydoing more with
less.
Greater Demand + Longer + More Full = Increased

Variability Lead-Times Container Inventory Risk

Shipments

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Traditional Approach = Disconnected
Slow Processes, limited collaboration, no consensus
forecasting Typical Company

Finance Sales Marketing Inventory Manufacturing

Budget Forecasts/Quotas New Products Planning Capacity/Scheduling

Manual E-mail Multiple,

processes overload non-integrated
systems

Low forecast accuracy

Departmental/Silo orientation to Supply Chain Planning
Misalignment between metrics and objectives
Reactive vs. Proactive/Exception based
Multiple versions of The Truth

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A Better Approach = Integrated Sales
Forecasting, Inventory Planning and
Replenishment Planning

Integrated Supply Chain Planning Driving the

business via ONE PLAN:

Demand Forecasting

Statistical Inventory Planning

Merchandise Financial Planning
Forecasting Order Planning &
Market Strategic
Intelligence
Replenishment
Inventory
Seasonality Management Recommended
Lost Sales ABC POs, WOs and
Supersessions Stratification Transfer Orders
Promotion Scenario Constrained
Planning Analysis Orders
Time-phased Alerts/Exceptions
Optimization (Potential Stock
Outs, Excess,
Defers, Cancels,
Expedites, etc.)
Opportunity
Buying
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Better Approach = Significant Benefits (Supply
Chain Champs)

Demand-Driven Supply Chain Planning Leaders

Have:
15% Less Inventory
17% Better Order Performance
35% Shorter Cash-to-Cash Cycle
times
Which Translates To:
60% Better Profit Margins
65% Better EPS
2-3 X ROA Source:

1/10 the Stock outs of their peers

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Better Approach - People, Plans &
Objectives Aligned

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Demand Planning Core Components
Integrated Forecasting, Inventory Planning and
Replenishment Planning
A holistic planning system that is also
linked/integrated to the ERP backbone execution
system (i.e. MS Dynamics)
Events, Promotions & MS Dynamics
Market Intelligence ERP
Sales History
On Hand balance Recommended
Open Orders Orders:
Demand MOQ, Multiples, etc. Purchase Orders,
Work Orders &
Forecasting Transfer Orders
Inventory Time-Phased
Inventory Plan

Forecasts, and
Planning
Statistical Standard
Replenishment
Deviation Time-phased Inventory Planning
Policies & Strategy, ABC
Stratification, Order
Constraints, Lead times, etc. Exceptions: Potential Stock outs, Excess,
Defers, Cancels, Expedites, etc.
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Do You Have an Accurate Picture of

Customer Demand?

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Demand Forecasting
Demand Forecasting Best Practice process approach

There are four generally applied and recognized

forecasting methods that when combined help
generate an accurate demand plan: Future statistical
projections/extrapolations
based on historical data
patterns and trends

Generating forecasts
based on pre-defined
profiles and
continuously Predict and incorporate
maintaining those the effect of particular
profiles based on events, promotions, and
performance other factors

Seeking extrinsic
knowledge from internal or
market sources and coming
to a forecast consensus
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Demand Forecasting
Time Series/Statistical Forecasting

The Process Starts with a Statistical Forecast as a

baseline forecast
Premise Historical customer demand patterns are the
best indicator of future demand patterns.
Requires import/integration of Historical Sales Demand
from ERP/Transaction system as foundation data (Typically
2 to 3 years of prior monthly/weekly demand)

Statistical Forecast Engine analyzes demand

history/patterns
Evaluates multiple forecast methods/algorithms to determine
best-fit or most statistically accurate method/model.
Determines appropriate level of expected sales, projected
growth/decline trends and seasonal patterns.
Statistical Mean Square Error or Standard Deviation used to
select best-fit model (Standard Deviation can be used as input to
16
Statistical Safety Stock calculation in Inventory Planning)
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Demand Forecasting
Statistical Forecasting and selecting best statistical
method

Typical Types of Statistical Methods/Models applied:

Consta Straight/flat line

nt

Trend Linear or non-linear

growth projection

Season Repetition at fixed

al intervals

Sporadi Random pattern

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Demand Forecasting
Statistical Forecasting and selecting best statistical
method

Typical Types of Statistical Methods/Models applied:

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Demand Forecasting
Add Market Intelligence and Demand Shaping activities

The Process Continues Improve the forecast with

market intelligence inputs & forecast overrides

Demand Shaping for Profitability:

Plan promotions, events & incentives
Plan new product introductions
Identify cross-selling opportunities

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Demand Forecasting
Group/Hierarchical & Attribute Forecasting
Forecasts are often required or better managed at
multiple levels of detail/aggregation:
Top-Down
- Forecast by Product Family/Groups
- Fair-share disaggregation to SKU
- Leverage Law of Large Numbers
- Strategy/Budget focused
- Greater visibility to Seasonality or Trends
Bottoms-up
- Sum SKU history/forecasts to family/groups
- Operationally/customer focused
Middle Out
- Blended Method

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Demand Forecasting
Forecasting New Products

Need to polish-up your Crystal Ball?

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Demand Forecasting
New Product Forecasting

Forecasting New Items Approaches to forecasting

items that have no prior demand history?
Manual Forecast (Judgment)
Like-Item Forecasting
- Supersessions/Chaining
- Copy/Merge similar product
Profile/Curve Shaping
- Life Cycle Profiling
- Attribute based Profiling
- Seasonality Group Profiling

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Demand Forecasting
Measure/Monitor Forecast Accuracy

Measure and monitor forecast accuracy for

continuous improvement:
Typical forecast accuracy measurements include:
- MAD (Mean Absolute Deviation) Used for inventory calculations
- MAPE (Mean Absolute Percent Error) Common Forecast
Accuracy metric
- Relative Error Relative measure of error for diagnostic purposes
exceptions
Measure Accuracy of Multiple Inputs:
- Accuracy of Statistical Forecast
- Accuracy of Overrides & Market Intelligence inputs
(Did inputs help/hurt the forecast accuracy?)

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Demand Forecasting
Collaboration and Consensus Forecasting

Consensus forecast process results in best single

number to drive downstream planning process

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Demand Forecasting
Gain Competitive Advantage via Better Forecasting

Improved forecast accuracy hits the bottom line:

Costs go down & earnings go up:

- 17% stronger perfect order fulfillment
- 15% less inventory
- 35% shorter cash-to-cash cycle times
- 1/10 of the stock outs of their peers

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Inventory Planning
Balancing Inventory Investment with Desired Service
Level

Inventory Planning Optimizing inventory

investment.

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Inventory Planning
Why Do Businesses Carry Inventory/Safety Stock?

Economic Reasons
- Lot Sizes/Ordering Costs
- Minimum Order Quantities
Transportation Inventory
- Pipeline fill
Special Events
- Promotions/Incentives, etc.
Fluctuation Inventory Due to Uncertainty (Safety
Stock)
- Uncertainty of Demand (Forecast Error)
- Uncertainty of Supply (Supplier Delivery variability)

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Inventory Planning
The Inventory/Service Level Exponential Relationship

Safety Stock Inventory Increases dramatically as

Service Levels approach 100%

Safety
Safety Stock
Stock
Safety Stock Quantity

increases
increases
dramatically
dramatically as
as
Service Level
Service Level
increases
increases

80 85 90 95 100
Service Level %

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Inventory Planning
Forecast Accuracy & Safety Stocks

Forecast Error has a direct relationship with Safety

Stocks: Small Item A
Standard
Deviation Low Standard Deviation Item
requires less Safety Stock
Carrying too much Safety
Item A Stock would be costly!!!

Big Standard
Deviation Item B
Higher Standard Deviation
item requires more safety
stock
Item B Having too little Safety
Stock increases the risk of
stock outs!!

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Inventory Planning
Not All Items are the Same

Inventory Stratification Pareto Principle ABC

Classifications
ABC stratification can be used to set strategic
inventory policies
Focus investment attention on A items 200 Total
SKUs
Apply Uniform Rules to Like Items 40 SKUs
account
Reduce Decision Time for 80%
of the
revenue
120 SKUs
account for
15% of the
revenue

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Inventory Planning
Safety Stock Policy Setting

Common techniques/policies for setting safety

stocks and inventory objectives:
Fixed Safety Stock Levels
Periods of Supply ( 2 weeks of Supply)
Statistical Safety Stock Policy
- Target Service Level (i.e. 98% Service Level)
- Accounts for Variability of Supply/Demand
- Accounts for Lead-time and Order Quantities

Policies can be dynamic for optimization over

time/season.

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Inventory Planning
Time-Phased Supply Chain Network Planning

Modeling the Distribution Network Nodes, Sources

and Lead Times:
Manufacturing/Vendors

East Region USA West Region USA

DC DC

Midwest USA
Canadian DC
DC

Customers/Consumers

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Inventory Planning
Planning for the Entire Supply Chain Network

An optimal replenishment plan demand-driven pull

planning
Manufacturing/Vendors
Dependent Dependent
Demand Demand

East Region USA West Region USA

DC DC
Dependent Dependent
Demand Optimal Demand
replenishment policy
Midwest USA considers all Canadian DC
DC network
dependencies
Independentand
dependent
Demand
independent
demand
Customers/Consumers

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Replenishment Planning
Time-Phased Supply Chain Network Planning

Traditional Re-order Point (ROP systems) trigger

orders when stock falls below a defined level
Re-Order Point Logic DRP Planning Logic
Reactive process orders
are initiated based on
inventory level only
Assumes inventories in y ?
a
supply chain network are
r W
independent t te
Be
Orders are needed NOW A
not forward looking
based on the true need
date
Static ordering settings
(i.e. min & Max levels)
Promotes PUSH planning
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Replenishment Planning
Time-Phased Supply Chain Network Planning

An optimal replenishment plan proactively proposes

orders over a future horizon based on planned
inventory projections
Re-Order Point Logic DRP Planning Logic
Reactive process orders Proactive process -
are initiated based on orders are
inventory level only recommended based
on projected
Assumes inventories in
inventory position
supply chain network are
independent Orders are Time-
Phased over a defined
Orders are needed NOW
future horizon based
not forward looking
on future need
based on the true need
date(s)
date
Dynamic Ordering
Static ordering settings
Policies
(i.e. min & Max levels)
Holistic plan for all
Promotes PUSH planning
supply chainnetwork
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Replenishment Planning
How Much to Re-Order and When?

The Saw-Tooth Diagram: Orders Recommended (at

lead-time) to be received into inventory on the day
that you plan to dip into Safety Stock.
Units
Inventory Max Replenishment
SS + OQ Plan
OQ Orders suggested
Rate of Inventory
Depletion
in lead-time
As demand occurs, on-
advance
hand decreases

OQ = 100 Model Stock

Order Date = SS + CS
CS Cycle Stock Sept. 1
OQ

SS
Lead Due Date = Dec.
14
Time Order Received In
The Saw-Tooth Diagram Potential risk for stock out
Time

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Replenishment Planning
Output = Recommended Orders + Bonus Prize

The Replenishment Planning Optimal Order

Generation Engine generates a stream of
Recommended Orders into the future:
Purchase Orders
Manufacturing Orders
Transfer Orders
Re-distribution Orders

Plus a Bonus Prize = Actionable Exception/Alert

conditions:
Stock Outs/Excess Inventory
Potential Stock Outs/Shortfalls
Surplus/Defer/Cancel Orders
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Replenishment Planning 101
Closed-Loop Planning Release Orders to ERP

Integration of the Demand Planning

Recommendations with the ERP system for Execution
(Closed Loop Planning)
MS Dynamics
ERP

Real/Actual POs, Recommended

WOs and POs, WOs and
Transfer Orders Transfer Orders

Demand
Planning

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Replenishment Planning
Inventory Optimization and Process Maturity

Optimizing Inventory across the Supply Chain

Network:
Strategically defining where inventory should be kept
in the network
Setting specific stocking/ordering policies by item,
location, etc.
Advanced Inventory Optimization practices
- Postponement A strategy used to eliminate excess
Finished Goods Inventory , by delaying the final
activities (assembly, production, packaging, tagging,
etc.) until the latest possible time.
- Risk Pooling - Risk pooling suggests that demand
variability is reduced by aggregating demand across
multiple locations, This reduction in variability allows a
decrease in safety stock and therefore reduces 39
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Replenishment Planning
Inventory Optimization and Process Maturity

Optimizing Inventory across the Supply Chain

Network what companies are really doing (level of
process maturity):

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Demand Planning Summary
Recent Trends

DDSN Demand Driven Supply Networks

Demand-driven supply networks are driven from the front
by customer demand vs. push planning (build it and they
will come).
Partners in a supply chain will work more closely to shape
market demand by sharing and collaborating information
goal is to bring the supply chain eco-system into balance.

Demand Sensing Closer to the Point of Consumption

Leverage POS Databetter picture of true market demand
Technological Advances (Big Data) enabling use of
retail/store data

S&OP, Demand Shaping, and Business

Intelligence/Analytics
Make better and more profitable business decisions, more 41
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Demand Planning Summary
Competitive Advantage in a Fast Changing World

Improve forecast accuracy

Sense demand changes and respond more quickly
Optimize inventory across the full supply chain
Improve customer service while reducing costs
Increase visibility for better/faster decision making
Increase efficiency/productivity via exception/alert-
based workflow
Bottom-line impact/results

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Demand Planning Summary
Makes running a business a little bit easier

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