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S essi on 2
Demand Management and Planning -the business perspective By K . Sashi Rao Management Teacher and Trainer
W hat i s D em and M anagem ent ?
Demand Management is one that takes a
o! a business
"t means discovering markets# planning
products and services !or those markets and then !ul!illing these customer demands
"t is an integrative set o! business processes#
across# not $ust the enterprise# but across all its trading partner net ork % both customers and suppliers&
W hat does D em and M anagem ent i nvol ve?
Discovering and understanding your market 'stablishing your customers needs and e(pectations
hat dra s them to your business
)hallenge o! managing
hat# hen# and ho a product*service is designed# made# distributed# displayed # promoted and serviced various levels o! market and channels segmentation
Doing the pricing and inventory optimi+ation at Satis!ying customers on product# price# delivery and
M anagi ng D em and and Suppl y "n any operating organi+ation# it is important to manage both demand and supply singly or together by. Managing Demand thro various options Managing Supply thro various options -ll chosen options have their o n implications on customer service levels and di!!erent costs incurred .
e. movie tickets& or build demand in o!!-season by lo ering prices*special discounts& demand patterns at di!!erent times% lo er telecom rates !or night use& demand products .g.g. oolen and cotton garments/ inter creams and suntan lotions/ la n mo ers and sno ploughs Thro advertising and sales promotions to even out Thro complementary products to even out seasonal .M anagi ng D em and Thro capacity reservation by shi!ting e(cess demand to a !uture period ithout losing it . by doing advance booking or appointments !or !uture times Thro di!!erential pricing to reduce peak demands% higher prices e.
M anagi ng Suppl y Thro inventory based alternatives by building e(cess inventory during periods o! lean demand and consuming them during peak demand times/ or by shi!ting production to a !uture period beyond demand period/ or deliberately inducing stock-outs leaving customers to ait longer/ !inal choice depends on re0uired customer service levels o! orkers/ orking e(tra hours and shi!ts/ use o! part time orkers and*or subcontracting# rescheduling maintenance programs and by debottlenecking pro$ects Thro capacity ad$ustment alternatives by hiring*laying Thro capacity augmentation means by outsourcing .
3an production !or 4eb needs&/ capacity related alternatives % discussed earlier& used !le(ibly approaches Mi(ed strategy .g. use a combination o! level and chase . by matching capacity to demand and don2t carry inventories/ planned output !or a period is set at e(pected demand !or that period% ith lead-times built in e. 1evel strategy . not to disturb e(isting production system at all/ maintain a steady rate o! regular time output hile meeting demand variations largely thro inventories )hase strategy .M anagi ng D em and and Suppl y Managing demand and*or supply involves choice amongst many options ith varying implications Some basic strategies to help make a choice are.
M anagi ng D em and and Suppl y cost i m pl i cat i ons Alternative Cost Implication Managing demand Capacity reservation Influencing demand Planning & scheduling costs Marketing oriented costs Inventory holding costs Shortage/loss of good ill !vertime costs" #oss of productivity Shift change costs Managing supply Build inventory Backlog/backorder/ stock-out !vertime/under-time $arying shifts %iring/layoff orkers &raining/hiring costs" employee morale &ransaction costs Investment" debottlenecking costs Subcontract/outsource 'ebottlenecking/adding ne capacity .
W hat i s D em and Pl anni ng?( 1) This is a subset o! Demand Management "t is a business planning process that enables sales teams%and customers& to develop demand !orecasts and inputs to !eed various planning processes# production# inventory planning# procurement planning and revenue planning Based on estimated product demand# a !irm can plan !or deployment o! its resources to meet this demand "t is a bottom-up process as di!!erent !rom any top-do n management process .
ise pro!itability "ts purpose can be seen as to drive the supply chain to meet customer demands thro e!!ective management o! company resources .W hat i s D em and Pl anni ng?( 2) "t is also seen as a multistep operational S)M process to create reliable demand !orecasts '!!ective demand planning helps to improve accuracy o! revenue !orecasts# align inventory levels in line ith demand changes and enhance product.ise*channel.
hip e!!ect& .W hat i s D em and Pl anni ng?( ) 4or 4M)5*retailing sectors# demand planning takes a special meaning re0uiring integration o! point-o!-sale in!ormation to !lo back to the manu!acturer Besides getting such customer level demand data thro distribution channel partners# key is to leverage it by ma(imi+ing success in !orecasting e!!orts and accuracy% ithout normal distortions like the bull.
!ene" i t s o"D em and Pl anni ng 6igher service levels and more responsive to actual demand Reduced stock levels and inventory costs "mproved purchase planning and subse0uent reduction in supply input costs 'nhanced capacity utili+ation o! production !acilities and logistics assets 4ocused promotion and product planning*assortment*stocking levels at retail level !or 4M)5 products .
For ecast i ng Fact or s Time re0uired in !uture -vailability o! historical data Relevance o! historical data into !uture Demand and sales variability patterns Re0uired !orecasting accuracy and likely errors Planning hori+on*lead time !or operational moves .
predicting technological change e. our primary interest in this DP4 course .involving demand and sales !orecasts .pro$ections o! economic gro th# in!lation rates# money supply based on economic and !iscal data trends along policy interventions ith Demographic 4orecasts.pro$ections o! population in aggregate and disaggregate !orm !orecasts using birth and death rates in each case Technological 4orecasts. in cloud computing or electronics sectors et al 7ther 4orecasts- eather# earth0uakes# tsunami et al Business 4orecasts.g.#ypes o"For ecast s 'conomic 4orecasts.
W hat i s D em and For ecast i ng?( 1) Demand 4orecasting is predicting the !uture demand !or products*services o! an organi+ation To !orecast is to estimate or calculate in advance Since !orecasts are estimates and involve consideration o! so many price and non-price !actors# no estimate is necessarily 899: accurate .
W hat i s D em and For ecast i ng$ ( 2) Demand !orecasting involves estimating !uture overall market demand !or the proposed products*range This involves e(tensive market and marketing research into e(isting and ne markets# end applications# current market si+e and !uture demand potential# market segmentation# customer pro!iling*attitudes*pre!erences et al Purpose is to !inally help business decisions on ho to cater to the overall market and plan its marketing mi( and product-market positioning et al looking process Demand !orecasting is essentially an out ard*e(ternal "mportant as !orms basis !or sales !orecasting operational planning and actions .
W hy D em and For ecast i ng? To help decide on !acility capacity planning and capital budgeting To help evaluate market opportunities orthy o! !uture investments To help assess its market share amongst other competitors To serve as input to aggregate production planning and materials re0uirement planning To plan !or other organi+ational inputs % like manpo er# !unds and !inancing& and setting policies and procedures .
%ey Funct i ons o"For ecast i ng "ts use as an estimation tool .vital prere0uisite !or the overall business planning process .ay to address the comple( and uncertain business environment issues .tool to predicting events related to operations planning and control .
For ecast i ng &har act er i st i cs By its very nature# forecasting always has errors/ !orecasts rarely match actual demand*sales/ !orecast accuracy and errors are real issues Their chosen time horizon also determines accuracy ith shorter periods having higher accuracy/ the constant need to reduce lead times also puts !ocus on shorter planning hori+ons% as in lean manu!acturing*3"T environments& market segmental !orecasts% e.g. all Maruti <99 cars versus red Maruti <99s/ all paints versus blue color paints/ all toothpastes versus herbal toothpastes&/ these have implications at di!!erent levels*stages o! the supply chain Aggregate demand forecasts are more accurate than .
8 year to > years !or planning a ne plant or !acility re0uiring ma$or investments and other resources !or both ne and old product lines/ strategic !ocus . say !or ne(t >-8= months !or plant level planning !or product*volume changes re0uiring redeployment o! resources/ !or product groups# departmental capacities# ork !orce management# purchased materials and inventories/ tactical !ocus 1ong term !orecasts .For ecast i ng ' or i (on" ocus Short term !orecasts . say !or ne(t 8-= months !or current production planning and scheduling/ !or speci!ic products# machine capacities and deployment# labor skills and usage# cash inventories / operational !ocus Medium term !orecasts .
term !orecasting% beyond =? months& .For ecast i ng ' or i (on .methodology Short-term !orecasting% 8 day to > months& !or production planning needing disaggregated product !orecasts ith high accuracy levels/ primarily uses time series data methods Medium-term !orecasting% > months to 8=-=? months& use!ul !or aggregate sales and operational planning/ also !or seasonal business operations/ uses both time series and causal !orecasting models use!ul !or aggregate business planning !or capacity and site*location decisions/ uses $udgment and causal models 1ong .
number o! orking days in month% =<->8/ eekends*holidays/ plant availability*maintenance schedules& !actors# materials and resources availability demand and supply on a period-to-period basis in a cost e!!ective manner Production level changes .seasonal !actors# uncertain environment et al )apacity !luctuations .W hy )ggr egat e Pr oduct i on Pl anni ng? Demand !luctuations . plant loading Production planning has to be done to match .
For ecast i ng " or !usi ness Demand !orecasting . to establish the current total si+e !or any product*service market and its !uture gro th potential and trends over time Sales !orecasting.to assess the likely demand development and trends as they move !rom introduction -@ gro th-@ maturity -@ decline phases -ll above !orecasting types are to be looked at .re0uired !or a !irm to plan its overall business operations ithin the overall market si+e and potential !or its range o! products Product-li!e cycle !orecasting.
ithin overall demand# !irm needs to establish its sales !orecast to help operations Basis o! sales !orecasting is assessment o! market share that !irm can carve out o! the total market given its past sales as also current marketing strategies available capacity# plant per!ormance# plant resources and stocks process conte(t 4irming up o! sales !orecasts is a !unction o! Sales !orecasting is essentially an in ard*internal 4orecasting !rom no is seen !rom operational .Sal es For ecast i ng .
D em and For ecast and Sal es For ecast ( 1) Demand forecasts relate to the total demand !or a product*service o!!ered Demand forecasts consider various !actors in!luencing the overall demand !or a product*service including economic and demographic !actors# customer needs and e(pectations# market segmentation# disposable incomes et al Sales forecasts are re!lection o! actual sales e(pected and conse0uent share o! the total market demand Sales forecasts also consider various supply-related speci!ic company !actors like capability# product range and capacity .
D em and For ecast and Sal es For ecast ( 2) "t is important to understand separately the need !or demand and sales !orecasts linked to their purpose Demand !orecasts are called !or hile doing market entry e(ercises and planning long term investments in ne *added capacities production planning and supply chain operations Sales !orecasts are needed to provide the input basis !or all During this DP4 course# demand and sales !orecasts terms may be used interchangeably# but the clear distinction should be understood .
D em and For ecast i ng * ssues( 1) 4orecasting is the deliberate attempt to predict the !uture.in all its dimensions A )rystal ball ga+ing or making astrological predictions are also e(ercises in !orecasting the !uture "s both an art and science as based on signi!icant behavioral and unstructured issues and an analytical e(ercise using scienti!ic principles Despite its limitations# essential !or planned business operations .
D em and For ecast i ng * ssues( 2) -ll decisions need in!ormation about !uture circumstances Best e can do is to !orecast these circumstances hat the market needs# it is necessary to !orecast market demand hat their customers need# it is necessary to !orecast e(pected sales Since business decisions are driven by Since operational decisions are driven by .
Demand 4orecasting "ssues%>& • • 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 organi ation .
plant*e0uipment investment# budgetary planning Personnel. sales !orce allocation# promotions# ne production introduction 4inance. scheduling# inventory# aggregate planning Marketing.For ecast i ng +ol ei n a Suppl y &hai n 4orms basis !or all strategic and planning decisions in a supply chain Csed !or both push and pull processes '(amples. Production. ork!orce planning# hiring# layo!!s -ll o! these decisions are interrelated and part o! aggregate production planning%-PP& .
!eed for "ollaborative #upply "hains S)M integrates and optimi+es the processes# but does not eliminate inherent con!lict S)M mostly remains an in-corporate initiative S)M does not address the total business environment %di!!erent components o! e(ternal value chain !ace di!!erent environments& 6ence# need !or collaborative supply chains Thus# born concept o! )ollaborative Planning and 4orecast Replenishment% )P4R& .
$orecasting Problems 1ack o! understanding o! integrated market and supply realities by key decision makers organi+ation ithin an 1ack o! trust and transparency amongst supply chain elements and partner organi+ations 1ack o! proper communication# coordination and collaboration amongst supply chain partners per!ormance 1ack o! metrics !or measuring total supply chain 1ack o! "T tools# processes# pro!essional competencies to achieve accurate !orecasts .
For ecast i ng +ol ei n D eci si onm a.i ng External and Internal Data Objectives And Constraints $lanned $erformance !orecasts anagers O#erations "#dated !orecasts Actual $erformance %esources .
For ecast i ng i n !usi ness Pl anni ng In#uts Market )onditions )ompetitor -ction )onsumer Tastes Products2 1i!e )ycle Season )ustomers2 plans Economic Outloo& Business )ycle Status 1eading "ndicators-Stock Prices# Bond Dields# Material Prices# Business 4ailures# money Supply# Cnemployment 4orecastin g Method%s& 7r Model%s& Out#uts 'stimated Demands !or each Product in each Time Period 7ther 7utputs anagement 'eam Production )apacity -vailable Resources Risk -version '(perience Personal Ealues and Motives Social and )ultural Other !actors 1egal# Political# Sociological# 4orecast )ultural Processor 'rrors 4eedback Sales !orecast 4orecast and Demand !or 'ach Product "n 'ach Time .
ork 4orce 1abor by Skill )lass )apital 4unds Department )apacities Machine )apacities 4acility Heeds Purchased Material )ash 7ther "nventories "nventories 7thers 7ther .Sales !orecast 4orecast and Demand !or 'ach Product "n 'ach Time Period Processor (usiness Strategy Marketing Plan-dvertising Sales '!!ort# Price# Past Sales Production PlansFuality 1evels# )ustomer Service# )apacity )osts 4inance PlanG )redit Policies# Billing Policies Procedure !or Translating Sales 4orecast into Production Resource 4orecast $roduction %esource !orecasts )ong %ange edium %ange Short %ange 4actory capacities .
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