Lecture 3 Demand Management

Demand Management

The ability of firms throughout the supply chain to collaborate on activities related to the flow of product, services, information, and capital.

Problems in achieving goal: Lack of coordination between departments

Too much emphasis on forecasts of demand, with less attention on the collaborative efforts and the strategic and operational plans

Demand information is used more for tactical and operational than for strategic purposes

Direct-to-Customer (DTC) Fulfillment

Advantages: low start-up costs workforce efficiency because of consolidated operations

Disadvantages: the order profile will change (store orders in case and/or pallet

quantities, consumer orders, “eaches” in smaller order quantities) products might not be available in consumer units (eaches) “fast pick,” or broken case, operation to be added to the distribution

center conflict between a store order and an Internet order

Integrated Fulfillment Retailer maintains both a “bricks-and-mortar” and “clicks-and-

mortar” presence operates one distribution network to service both channels Advantage

low start-up costs existing network can service both

Disadvantages order profile will change with addition of Internet orders case lots versus “eaches” would require a “fast pick,” or broken case operation conflict might arise between a store order and an Internet order

Dedicated Fulfillment Both a store and an Internet presence with two separate

distribution networks Advantage:

separate distribution network for store delivery and consumer delivery eliminates most of the disadvantages of integrated fulfillment

Disadvantage: duplicate facilities and duplicate inventories

Outsourced Fulfillment assumes that another firm will perform the fulfillment

Advantages: low start-up costs for the retailer to service the Internet channel

possible transportation economies

Disadvantage: loss of control over service levels

Drop-Shipped Fulfillment also called direct store delivery, vendor delivers

directly to retailer, bypassing retailer’s distribution network.

works best for products that have a short shelf life Advantages:

reduction of inventory in the distribution network vendor has direct control of its inventories

Disadvantage: possible reduction of inventory visibility

Store FulfillmentThe order is placed through the Internet site and sent to the

nearest store for customer pick up Advantages:

short lead time to the customer low start-up costs for the retailer returns can be handled through the store product availability in consumer units

Disadvantages: reduced control and consistency over order fill conflict may arise between inventories must have real-time visibility to in-store inventories stores lack sufficient space to store product

Flow-Through Fulfillment

Product is picked and packed at distribution center, then sent to the store for pickup

Advantages: eliminates the inventory conflict avoids the cost of the “last mile” returns can be handled through the existing store network

Disadvantage: Storage space at the store for pickup items a problem

Influencing the Order This is the phase where an organization attempts to change the

manner by which its customers place orders.

Order Execution This occurs when the order is received.

Customer service: is anything that touches the customer. This

includes all activities that impact information flow, product flow, and cash flow between the organization and its customers.

PhilosophyPhilosophy elevates customer service to an

organization-wide commitment to providing customer satisfaction through superior customer service.

Customer service: Performance emphasizes customer service as specific performance

measures that pervade all three definitions of customer service and address strategic, tactical, and operational aspects of order management.

Activity treats customer service as a particular task that an

organization must perform to satisfy a customer’s order requirements.

Customer relationship management: is the art and science of strategically positioning customers to

improve the profitability of the organization and enhance its

relationships with its customer base. is not a new concept used by service industries. has not been widely used in the business-to business

environment until lately.

Customer action affects firm’s cost how customers order how much customers order what customers order when customers order an order

Activity-Based Costing

ABC measures the cost and performance of activities, resources, and cost objects. Resources are assigned to activities, then activities are assigned to cost objects based on their use

Traditional cost accounting is well suited to situations where an output and an allocation process are highly correlated.

Traditional cost accounting is not very effective in situations where the output is not correlated with the allocation base.

One method to classify customers by profitability. Protect Zone Those customers who fall into the “Protect” segment are the most profitable.

Danger Zone Customers in the “Danger Zone” segment are the least profitable and incur a

loss.

The firm has has three alternatives for danger zone customers: (1) change customer interaction with firm so the customer can move to

another segment (2) charge the customer the actual cost of doing business (3) switch the customer to an alternative distribution channel

Build Zone These customers have a low cost to serve and a low net sales value, so the firm

should maintain the cost to serve and build net sales value to help drive the customer into the “Protect” segment.

Order Management

This system represents the principle means by which buyers and sellers communicate information regarding orders.

Effective order management is key to operational efficiency and customer satisfaction.

Logistics needs timely and accurate information relating to orders so many firms place order management in the logistics area.

Order to cash Thirteen principle activities constitute the OTC cycle:

D1.1 through D1.7 represent information flows D1.8 through D1.12 represent product flows D1.13 represents cash flow

Order cycle all activities that occur from when an order is received until the

product is received

Replenishment cycle refers to acquisition of additional inventory one firm’s order cycle is another’s replenishment cycle

Order To Cash cycle:

recent attention has centered on the variability or consistency of this process

absolute length of time is important, variability is more important

a driving force is safety stock, as absolute length of the order cycle will influence demand inventory

E-Commerce Order Fulfillment Strategies

Many firms use Internet technology to capture order information for fulfillment systems for picking, packing, and shipping.

Internet allows faster collection of cash by the seller.

The Logistics/Marketing Interface

Customer service is the key link between logistics and marketing within an organization.

Manufacturing can produce a quality product at the right cost and marketing can sell it, but if logistics does not deliver it when and where promised, the customer will not be satisfied.

Three different perspectives on customer service: Three different perspectives on customer service

philosophy

as a set of performance measures

as an activity

Customer service needs to be put into perspective as including anything that touches the customer

Four distinct dimensions of customer service:

Time cycle time safe delivery correct orders

Dependability more important than the absolute length of lead time

Communications pretransaction transaction posttransaction

Convenience service level must be flexible

Customer Service Performance Measures from buyer’s view

Orders received on time

Orders received complete

Orders received damage

Orders filled accurately

Orders billed accurately

Expected Cost of Stockouts: Stockout occurs when desired quantities are not

available Four possible events:

the buyer waits until the product is available

the buyer back-orders the product

the seller loses current revenue

the seller loses a buyer and future revenue

Back Orders: occurs when a seller has only a portion of the

products ordered by the buyer are created to secure the portion of the inventory that

is currently not available

Lost Sales: some customers will turn to alternative supply sources

Lost Customers: customer permanently switches to another supplier

Determining the Expected Cost of Stockouts back order

lost sale

lost customer identify potential consequences calculate each result’s expense or lost profit

Product availability from customer perspective:

Did I get what I wanted?

When I wanted it?

In the quantity I wanted?

Product availability is the ultimate measure of logistics and supply chain performance.

Metrics four are widely used across multiple industries:

internal metrics item fill rate line fill rate

external metrics order fill rate perfect order

Order Cycle Time:

the time that elapses from when a buyer places an order until receipt of the order

absolute length and reliability of order cycle time influences both firm’s inventories, resulting in impacts on both revenues and profits for both organizations

Logistics operations responsiveness (LOR) Examines how well a seller can respond to a buyer’s

needs. This “response” can take two forms:

LOR can be how well a seller can customize its service offerings to the unique requirements of a buyer

LOR can be how quickly a seller can respond to a sudden change in a buyer’s demand pattern.

Logistics System Information:

is critical to the logistics and order management processes

underlies ability to provide quality product availability, order cycle time, logistics operations responsiveness, and post-sale logistics support

timely and accurate information can reduce inventories in the supply chain and improve cash flow to all supply chain partners

Service Recovery

No matter how well an organization plans to provide excellent service, mistakes will occur.

Recovery requires a firm to realize that mistakes will occur and have plans in place to fix them.

GDP versus Inventory

Nominal GDP grew by 127.2 percent between 1990 and 2006.

The value of inventory increased by 78.4 percent during the same time period.

Inventory costs as a percent of GDP declined from 17.9 percent in 1990 to 14.1 percent in 2006.

The absolute value of inventory increased during this time period, but it decreased as a percentage of GDP.

Batching economies or cycle stocks

arises from three sources

procurement

production

transportation

Scale economies are often associated with all three, which

can result in the accumulation of inventory that will not be

used or sold immediately

Uncertainty/Safety Stocks

All organizations are faced with uncertainty.

On the demand side, there is usually uncertainty in how much customers will buy and when they will buy it.

On the supply side, there might be uncertainty about obtaining what is needed from suppliers and how long it will take for the fulfillment of the order.

Time/In-Transit and Work-in-Process Stocks

The time associated with transportation means that even while goods are in motion, an inventory cost is associated with the time period. The longer the time, the higher the cost.

WIP inventories, associated with manufacturing, can be significant while the length of time the inventory sits in a manufacturing facility waiting and should be carefully evaluated in relationship to scheduling techniques and the actual manufacturing/assembly technology.

Inventory Costs Inventory Carrying Costs

Capital Cost (interest or opportunity cost)

cost of capital tied up in inventory and the resulting lost opportunity from investing that capital elsewhere

hurdle rate

weighted average cost of capital (WACC).

Storage Space Cost includes handling costs associated with moving products into

and out of inventory, as well as such costs as rent, heat, and light

Can be variable

Inventory Service Cost includes insurance and taxes

Inventory Risk Cost reflects the possibility that inventory value might decline for

reasons beyond firm’s control

Nature of Carrying Cost Ordering Cost or Setup Cost

refers to the expense of placing an order for additional inventory, not including product cost

Order Cost Cost of placing order which may have both fixed and variable

components

Setup Costs expenses incurred each time an organization modifies a production

or assembly line to produce a different item for inventory

Expected Stockout Cost several consequences might occur:

Back order, which results in the vendor incurring incremental variable costs associated with processing and making the extra shipment

Customer might decide to purchase a competitor’s product resulting in a direct loss for the supplier.

Customer might decide to permanently switch to a competitor’s product with loss of income.

In-Transit Inventory Carrying Cost

Owner of product while it is in transit will incur resulting carrying costs.

In-transit inventory carrying cost becomes especially important on global moves since both distance and time from the shipping location both increase.

Owner should consider its delivery time part of its inventory carrying cost.

Dependent versus Independent Demand

“independent” when such demand is unrelated to the demand for other items

“dependent” when it is directly related, or derives from, the demand for another inventory item or product

Pull versus Push The “pull” approach relies on customer orders to move product through

a logistics system, while the “push” approach uses inventory replenishment techniques in anticipation of demand to move products.

The Just-in-Time Approach

Four major elements

zero inventories

short, consistent lead times

small, frequent replenishment quantities

high quality, or zero defects

Materials Requirements Planning:

deals specifically with supplying materials and component parts whose demand depends on the demand for a specific end product

consists of a set of logically related procedures, decision rules, and records designed to translate a master production schedule into time-phased net inventory requirements and the planned coverage of such requirements for each component item needed to implement this plan

Distribution Requirements Planning: Purpose is to more accurately forecast demand and to explode

that information back to develop production schedules. Firm can minimize inbound inventory in conjunction with

production schedules. Outbound (finished goods) inventory is minimized DRP develops a projection for each SKU requiring the following:

Forecast of demand for each SKU Current inventory level of the SKU (balance on hand, BOH) Target safety stock Recommended replenishment quantity Lead time for replenishment

Vendor-Managed Inventory The basic principles:

The supplier and its customer agree on which products are to be managed using in the customer’s distribution centers.

An agreement is made on reorder points and economic order quantities for each of these products.

As these products are shipped from the customer’s distribution center, the customer notifies the supplier, by SKU, of the volumes shipped on a real-time basis.

This notification is also called “pull” data