Operations Management - Session 5

Demand Management

 How to manage the demand

 Demand management process
 Managing and prioritizing the demand
 Various forecasting techniques
 Capacity management
 Demand Management

• Class discussion: What do you mean by ‘Demand Management”

• Socrative quiz: Why accurate demand forecasting is important?

• Demand forecast definition as per APICS : an estimate of future demand

• Demand plan to – Bottom line to drive supply chain and financial plans

• Demand should be more accurate -> Monthly rather than quarterly or

yearly

• Supply chain partners are collaborating for near real time – Weekly and
Daily
 Demand Management

• Inaccurate demand will results in unwanted inventory pile up,

compromise customer service and poor financial performance

• Companies can’t sustain without effective forecasting and demand plans,

it is impossible to reduce inventory and supply chain costs

• Companies started collaborating than ever before – it means seamless

demand management sharing across their systems

• If the forecast is significantly inaccurate – Root cause for a company

failure

• Resource based view (RBV) – Core competency

 Demand Management

• Class exercise : silver bullet – use of IT system will ensure accurate forecast
and effective demand management?

• Who owns demand management for a company? , Sales and marketing,

Tactical and strategic demand planning process

• Accuracy of data and how the people will take wise decision from the
data

• Effective demand management = revenue growth + lower inventories +

increased profit margins + enhanced share holder value

• Broader demand management – Results in better understanding about

customer and market expectations from the product, service and pricing
requirements
• True demand management competency = Human judgement + integrated
business processes operated by knowledge people + timely execution
Demand Management
 Demand Management

• Example:
• Lucas TVS
• ADFSC
• Special Technical Services (STS), Oman
• Chalmers Engg
 Demand Management

Socrative Quiz: Demand forecast is the result of only sales and marketing
team efforts?
What is sale revenue- result of fulfilling the customer demand, hence the
entire organization should work towards fulfilling the demand

The mode of communication and speed of communication is of paramount

importance

A consensus should be achieved with all stakeholder involved to turn

demand forecast into demand plan

Sales, marketing, product development, production and logistics

stakeholder perspectives

Effective demand management – Joint effect by sales, ,marketing,

operations, finance etc
 Demand Management

Effective demand management – many clients expect that IT systems should

produce most efficient forecast?

Effects of inaccurate demand management:

- Customer order more products -Revenue loss
- Customer order more products – Inefficient plan change results in higher
cost, lower margins,
- Customer do not order as anticipated – Build huge inventory, risk of
obsolesce, huge financial pressure
 Demand Management

Robust demand management process:

Effective demand management process: results in min 20% inventory reduction

 Demand Management
Industry case study: Cisco
 Demand Management

Class exercise: Is demand management worth the effort?

Industry case: Consumer good industry

 Demand Management
Socrative Quiz: Difference between forecast and plan?
 Demand Management

Demand planning never be 100% perfect It is a continuous evolving process

Demand Management
 Demand Management

a:

Advantages of
statistical forecast:
 Demand Management
Critical factors:
 Demand Management
Demand Inputs:
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Demand Inputs:
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Use of statistical forecast:

Stress on the
importance
of past data
to avoid any
unilateral
decision from
the
sales/marketi
ng team
 Demand Management
Demand Vs SCM Capability:

Class exercise: Will you plan for demand based on any explicit supply constraints?
 Demand Management

Determine synchronization procedures:

Source: Supply Chain Management Practices and Challenges: Case Studies of Four Supply Chains
Demand Management
Demand Management
 Demand Management
Matching the supply and demand – Always there is a tension exists
between these two paradigms

Supply side managers

• manufacturing
• Procurement
• Stores
• Logistics

Main objectives: Cost reduction, resource optimization, minimal inventory

Demand side managers

Marketing
Sales
Customer service

Main objectives: maximize revenue and market share

Historically there was a joint decision making process in place

 Demand Management

Today executives – need forecast for every decision they take

Not a luxury for managers, but necessity

Need to cope with seasonality, change in demand, price manoeuvres, union

issues and unpredictable economy swings

If they know forecasting principles – they can understand what it can do and
can’t do and what techniques can work for them
 Demand Management
Three basic methods

• Same forecasting technique – Not good enough to apply entire product life
cycle, ex: a forecasting method that use past data may not provide useful
information about completely new product.

• Qualitative techniques – Expert opinion, focus group interview

• Time series analysis and projection: Depends on past data, patterns and
pattern changes are vital

• Casual models: Considers special information about variables, highly

refined data, can consider special events into consideration

Qualitative techniques:
• New product introduction, can transform qualitative into quantitative data
• Bring together unbiased, systematic view of all information and
judgements which relates to the factors being estimated.
• Divergent product features from consumers, R&D team is struggling to
gather such information
 Demand Management
Time series analysis:
• Past few years data available, relationship and trends are both clear and relatively
stable

• Past data – need to clean as it may contains seasonal variations, effect of

promotions,
• This task is done by time series analysis

• Time series – Chronologically ordered points of raw data. By month and years.

• Analysis + Projection

• Assumption: Future will looks like past. Applicable over short term than long
term.
• Cant predict with significant changes (Slow growth to rapid decay) – TURNING
POINTS, forecaster must use different tools to identify and eliminate these
outliers.
 Demand Management

Casual method:
 Demand Management
Casual method:
If there is no data available, make some assumptions. Validate these
assumptions during the course of execution.
Demand Management
Demand Management
 Demand Management

Time-series forecasting is a method

for predicting activities through
a chronological order. These
methods forecast future
developments by evaluating
previous patterns under the basic
assumption that future trends
would be comparable to historical
patterns.

The different time-series models

•Simple Moving Average

•Simple Exponential Smoothing
•ARIMA
Demand Management

Month Actual
1 1104
2 885
3 976
4 1101
5 1120
6 1276
7 1419
8 1615
9 1836
10 1730
11 1686
12 1769
13 1521
14 1504
15 1478
16 1480
17 1726
18 1759
 Demand Management

Month Actual SME 3 SME 5 SMA 3

1 1104 1104 1104 Forecast for month 4 = Average of
2 885 885 885 Month 1 + Month 2 + Month 3
3 976 976 976
4 1101 988 1101 SMA 5
5 1120 987 1120 Forecast for month 6 = Average of
6 1276 1066 1037 Month 1 + Month 2 + Month 3 +
7 1419 1166 1072 Month 4 + Month 5
8 1615 1272 1178
9 1836 1437 1306
10 1730 1623 1453
11 1686 1727 1575
12 1769 1751 1657
13 1521 1728 1727
14 1504 1659 1708
15 1478 1598 1642
16 1480 1501 1592
17 1726 1487 1550
18 1759 1561 1542
Demand Management

Forecast for Current Period

Alpha of last period Sales

(1 – Alpha) of last period forecast

 Demand Management
Month Actual SES .8 SES .4
1 1104 1104 1104
2 885 1104 1104 SES 0.8
3 976 929 1016 Forecast for Period 2
4 1101 967 1000
5 1120 1074 1041 0.8 * Period 1 Sales
6 1276 1111 1072 +
7 1419 1243 1154 0.2 * Period 1 Forecast
8 1615 1384 1260
9 1836 1569 1402
10 1730 1783 1576
SES 0.4
11 1686 1741 1637
12 1769 1697 1657
Forecast for Period 2
13 1521 1755 1702
14 1504 1568 1629 0.4 * Period 1 Sales
15 1478 1517 1579 +
16 1480 1486 1539 0.6 * Period 1 Forecast
17 1726 1481 1515
18 1759 1677 1600
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Demand Management
 Demand Management

Mean Absolute Deviation

Month Actual SME 3 SME 5 SMA 2 SES .8 SES .4 SME 3 SME 5 SMA 2 SES .8 SES .4
1 1104 1104 1104 1104 1104 1104 0 0 0 0 0
2 885 885 885 885 1104 1104 0 0 0 219 219
3 976 976 976 995 929 1016 0 0 19 47 40
Absolute Value of
4 1101 988 1101 931 967 1000 113 0 171 134 101 Forecast - Sales
5 1120 987 1120 1039 1074 1041 133 0 82 46 79
6 1276 1066 1037 1111 1111 1072 210 239 166 165 204
7 1419 1166 1072 1198 1243 1154 253 347 221 176 265
8 1615 1272 1178 1348 1384 1260 343 437 268 231 355
9 1836 1437 1306 1517 1569 1402 399 530 319 267 434
10 1730 1623 1453 1726 1783 1576 107 277 5 53 154
11 1686 1727 1575 1783 1741 1637 41 111 97 55 49
12 1769 1751 1657 1708 1697 1657 18 112 61 72 112
Which technique is
13 1521 1728 1727 1728 1755 1702 207 206 207 234 181
14 1504 1659 1708 1645 1568 1629 155 204 141 64 125 a better predictor?
15 1478 1598 1642 1513 1517 1579 120 164 35 39 101
16 1480 1501 1592 1491 1486 1539 21 112 11 6 59
17 1726 1487 1550 1479 1481 1515 239 176 247 245 211
18 1759 1561 1542 1603 1677 1600 198 217 156 82 159
142 174 122 119 158
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MAPE
Month Actual SME 3 SME 5 SMA 2 SES .8 SES .4 SME 3 SME 5 SMA 2 SES .8 SES .4
1 1104 1104 1104 1104 1104 1104
2 885 885 885 885 1104 1104 75% 75% (Absolute Value of
3 976 976 976 995 929 1016 98% 95% 96%
4 1101 988 1101 931 967 1000 90% 85% 88% 91%
Forecast – Sales) /
5 1120 987 1120 1039 1074 1041 88% 93% 96% 93% Sales x 100
6 1276 1066 1037 1111 1111 1072 84% 81% 87% 87% 84%
7 1419 1166 1072 1198 1243 1154 82% 76% 84% 88% 81%
8 1615 1272 1178 1348 1384 1260 79% 73% 83% 86% 78%
9 1836 1437 1306 1517 1569 1402 78% 71% 83% 85% 76%
Which
10 1730 1623 1453 1726 1783 1576 94% 84% 100% 97% 91%
11 1686 1727 1575 1783 1741 1637 98% 93% 94% 97% 97% technique is
12 1769 1751 1657 1708 1697 1657 99% 94% 97% 96% 94% a better
13 1521 1728 1727 1728 1755 1702 86% 86% 86% 85% 88% predictor?
14 1504 1659 1708 1645 1568 1629 90% 86% 91% 96% 92%
15 1478 1598 1642 1513 1517 1579 92% 89% 98% 97% 93%
16 1480 1501 1592 1491 1486 1539 99% 92% 99% 100% 96%
17 1726 1487 1550 1479 1481 1515 86% 90% 86% 86% 88%
18 1759 1561 1542 1603 1677 1600 89% 88% 91% 95% 91%
89% 85% 91% 91% 88%
Demand Management
Demand Management

Enrollment for a Course?

Larger Advertisement
Spend?

Larger Unemployment?

Larger Government
Projects?
 Demand Management

An econometric
model is one of the
tools economists
Econometricians measure past use to forecast
relationships among such variables as future
developments in
• Consumer spending the economy.
• Household income
• Tax rates
• Interest rates
• Employment

Forecast how changes in some variables

will affect the future course of others.
Demand Management

Units umbrella sold

equation can be used to
extrapolate future based
on the predicted rainfall
Demand Management

Hard work vs Smart work

Human inputs complement
statistical tool inputs
Its not one vs other, its once plus
other
 Capacity Management

Capacity management
 LET US SUM UP

- Demand management more than just forecasting

- It’s a business decision from multiple stakeholders
- Various forecasting mechanisms are available
- Right capacity model is critical success factor