demand planning and forecasting mod 2

7/31/2019 Demand Planning and Forecasting Mod 2

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Demand Planning and

Forecasting


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What is Demand Management?

Demand Management is one that takes acomplete view of a business

It means discovering markets, planning

products and services for those markets andthen fulfilling these customer demands

It is an integrative set of business processes,

across, not just the enterprise, but across allits trading partner network ( both customersand suppliers)


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What does Demand Management involve?

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 aproduct/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


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Managing Demand and Supply

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


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Managing Demand

Thro capacity reservation by shifting excess demand to afuture period without losing it by doing advance booking orappointments for future times

Thro differential pricing to reduce peak demands( higher

prices e.g. movie tickets) or build demand in off-season bylowering prices/special discounts)

Thro advertising and sales promotions to even out demandpatterns at different times( lower telecom rates for night use)

Thro complementary products to even out seasonal demandproducts e.g. woolen and cotton garments; winter creamsand suntan lotions; lawn mowers and snow ploughs


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Managing Supply

Thro inventory based alternatives by building excessinventory during periods of lean demand and consumingthem during peak demand times; or by shifting production toa future period beyond demand period; or deliberatelyinducing stock-outs leaving customers to wait longer; final

choice depends on required customer service levels Thro capacity adjustment alternatives by hiring/laying of

workers; working extra hours and shifts; use of part timeworkers

Thro capacity augmentation means by outsourcing and/or

subcontracting, rescheduling maintenance programs and bydebottlenecking projects


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Managing demand and/or supply involves choice amongstmany 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 whilemeeting demand variations largely thro inventories

Chase strategyby matching capacity to demand and dontcarry inventories; planned output for a period is set atexpected demand for that period( with lead-times built in e.g.Jan production for Feb needs); capacity related alternatives (discussed earlier) used flexibly

Mixed strategy use a combination of level and chaseapproaches


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-cost implications

Alternative Cost Implication

Managing demand Capacity reservation Planning & schedulingcosts

Influencing demand Marketing oriented

costs

Managing supply Build inventory Inventory holding costs

Backlog/backorder/

stock-out

Shortage/loss ofgoodwill

Overtime/under-time Overtime costs, Loss of

productivity

Varying shifts Shift change costs

Hiring/layoff workers Training/hiring costs,employee morale

Subcontract/outsource Transaction costs

Debottlenecking/addingnew capacity

Investment,debottlenecking costs


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What is Demand Planning?(1)

This is a subset of Demand Management

It is a business planning process that enablessales teams(and customers) to develop demandforecasts and inputs to feed various planningprocesses, production, inventory planning,procurement planning and revenue planning

Based on estimated product demand, a firm canplan for deployment of its resources to meet this

demand It is a bottom-up process as different from any

top-down management process


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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 linewith 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


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For FMCG/retailing sectors, demand planningtakes a special meaning requiring integrationof point-of-sale information to flow back to

the manufacturer Besides getting such customer level demand

data thro distribution channel partners, key isto leverage it by maximizing success inforecasting efforts and accuracy( withoutnormal distortions like the bull-whip effect)


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Benefits of Demand Planning

Higher service levels and more responsive to actual

demand

Reduced stock levels and inventory costs

Improved purchase planning and subsequentreduction 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


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Forecasting Factors

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


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Types of Forecasts

Economic Forecasts- projections of economic growth,inflation rates, money supply based on economic andfiscal data trends along with policy interventions

Demographic Forecasts- projections of population in

aggregate and disaggregate form forecasts using birthand death rates in each case

Technological Forecasts- predicting technologicalchange e.g. in cloud computing or electronics sectorset al

Other Forecasts- weather, earthquakes, tsunami et al

Business Forecasts- involving demand and salesforecasts our primary interest in this DPF course


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What is Demand Forecasting?(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 involveconsideration of so many price and non-price factors,

no estimate is necessarily 100% accurate


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What is Demand Forecasting/(2)

Demand forecasting involves estimating future overall market demand forthe proposed products/range

This involves extensive market and marketing research into existing andnew markets, end applications, current market size and future demandpotential, market segmentation, customer profiling/attitudes/preferenceset al

Purpose is to finally help business decisions on how to cater to the overallmarket and plan its marketing mix and product-market positioning et al

Demand forecasting is essentially an outward/external looking process

Important as forms basis for sales forecasting operational planning andactions


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Why Demand Forecasting?

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


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Key Functions of Forecasting

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


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Forecasting Characteristics

By its very nature, forecasting always has errors; forecastsrarely match actual demand/sales; forecast accuracy and

errors are real issues

Their chosen time horizon also determines accuracywith

shorter periods having higher accuracy; the constant needto reduce lead times also puts focus on shorter planning

horizons( as in lean manufacturing/JIT environments)

Aggregate demand forecasts are more accuratethan

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


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Forecasting Horizon-focus

Short term forecasts say for next 1-2 months for currentproduction 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 plantlevel planning for product/volume changes requiringredeployment of resources; for product groups, departmentalcapacities, work force management, purchased materials andinventories; tactical focus

Long term forecasts 1 year to 3 years for planning a newplant or facility requiring major investments and otherresources for both new and old product lines; strategic focus


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Forecasting Horizon- methodology

Short-term forecasting( 1 day to 3 months) for productionplanning needing disaggregated product forecasts with highaccuracy 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 seasonalbusiness operations; uses both time series and causalforecasting models

Longterm forecasting( beyond 24 months) useful foraggregate business planning for capacity and site/location

decisions; uses judgment and causal models


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Why Aggregate Production Planning?

Demand fluctuations - seasonal factors, uncertainenvironment et al

Capacity fluctuations number of working days in month(

28-31; weekends/holidays; plant availability/maintenanceschedules)

Production level changes plant loading factors, materialsand resources availability

Production planning has to be done to match demand andsupply on a period-to-period basis in a cost effectivemanner


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Forecasting for Business

Demand forecasting to establish the current total size forany product/service market and its future growth potential

and trends over time

Sales forecasting- required for a firm to plan its overallbusiness operations within the overall market size andpotential for its range of products

Product-life cycle forecasting- to assess the likely

demand development and trends as they move fromintroduction -> growth-> maturity -> decline phases

All above forecasting types are to be looked at


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Sales Forecasting

Within overall demand, firm needs to establish its salesforecast to help operations

Basis of sales forecasting is assessment of market share thatfirm can carve out of the total market given its past sales as

also current marketing strategies Firming up of sales forecasts is a function of available capacity,

plant performance, plant resources and stocks

Sales forecasting is essentially an inward/internal process

Forecasting from now is seen from operational context


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Demand Forecast and Sales Forecast(1)

Demand forecasts relate to the total demand for aproduct/service offered

Demand forecasts consider various factors

influencing the overall demand for aproduct/service including economic anddemographic factors, customer needs andexpectations, market segmentation, disposableincomes et al

Sales forecasts are reflection of actual salesexpected and consequent share of the total marketdemand

Sales forecasts also consider various supply-related

specific company factors like capability, productran e and ca acit


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Demand Forecast and Sales Forecast(2)

It is important to understand separately the needfor demand and sales forecasts linked to theirpurpose

Demand forecasts are called for while doingmarket entry exercises and planning long terminvestments in new /added capacities

Sales forecasts are needed to provide the inputbasis 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


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Demand Forecasting Issues(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


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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


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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


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Forecasting Role in a Supply Chain

Forms basis for all strategic and planning decisionsin a supply chain

Used for both push and pull processes

Examples: Production: scheduling, inventory, aggregate planning

Marketing: sales force allocation, promotions, newproduction introduction

Finance: plant/equipment investment, budgetary

planning Personnel: workforce planning, hiring, layoffs

All of these decisions are interrelated and part ofaggregate production planning(APP)


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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 facedifferent environments)

Hence, need for collaborative supply chains

Thus, born concept of Collaborative Planning and ForecastReplenishment( CPFR)


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Forecasting Problems

Lack of understanding of integrated market and supplyrealities by key decision makers within an organization

Lack of trust and transparency amongst supply chain

elements and partner organizations Lack of proper communication, coordination and

collaboration amongst supply chain partners

Lack of metrics for measuring total supply chainperformance

Lack of IT tools, processes, professional competencies toachieve accurate forecasts


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Forecasting Role in Decision-making

External and

Internal Data

Objectives

And

Constraints

ManagersForecasts

Updated

ForecastsActual

Performance

Planned

Performance

Operations

Resources


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Inputs

Market Conditions

Competitor Action

Consumer Tastes

Products Life CycleSeason

Customers plans

Economic Outlook

Business Cycle Status

Leading Indicators-StockPrices, Bond Yields, Material

Prices, Business Failures, money

Supply, Unemployment

Other Factors

Legal, Political, Sociological,

Cultural

Forecasting

Method(s)

Or Model(s)

Outputs

Estimated Demands

for each Product

in each Time Period

Other Outputs

Sales Forecast

Forecast and Demand

for Each Product

In Each Time Period

Processor

Production Capacity

Available Resources

Risk Aversion

Experience

Personal Values and

Motives

Social and Cultural

Values

Other Factors

Management Team

Forecast

Errors

Feedback


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Sales Forecast

Forecast and Demand

for Each Product

In Each Time Period

Procedure for

Translating Sales

Forecast into

Production

Resource Forecast

Business Strategy

Marketing Plan- Advertising

Sales Effort, Price, Past

Sales

Production Plans- Quality

Levels, Customer Service,

Capacity Costs

Finance PlanCredit Policies, Billing

Policies

Production Resource Forecasts

Long RangeFactory capacities

Capital Funds

Facility Needs

Other

Medium RangeWork Force

Department Capacities

Purchased Material

Inventories

Others

Short RangeLabor by Skill Class

Machine Capacities

Cash

Inventories

Other

Processor

demand planning and forecasting mod 2

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