Demand Forecasting &

Order Fulfilment in Supply

Chains
 Learning Objectives
 To understand the types of forecasts that
may be needed
 To understand how collaboration among
trading partners will help the overall
forecasting and demand management
process.
 To identify the key steps in order fulfillment
process and understand how effective order
management can create value for a firm and
its customers.
Traditional Forecasting – Demand Forecasting

 A major component of demand management

is forecasting - the amount of product that
will be purchased by consumers or end
users.
 Although many techniques are available to
forecast demand, they are all invariably
wrong.
 There are many factors in market that will
change actual demand as against forecasted
demand.
Traditional Forecasting – Demand Forecasting

 Two types of demands exist: (i) Independent

and (ii) Dependent .
 For some items their demand is
independent(bicycles). This is the demand
created directly by the final users
(consumers).
 Dependent demand is influenced by the
demand for the independent item.
 The
demand for bicycle tires is dependent on the
demand for bicycles.
 Most forecasts focus on independent
Traditional Forecasting – Demand Forecasting

 The demand for independent demand is aka

base demand (normal demand).
 All demands are subject to certain
‘fluctuations’.
 One type is random variation. This can’t be
anticipated (that’s why safety inventory).
 Another type is called trend (demand for VCRs).
 Another type is called seasonal variation.
 It was already suggested that all forecasts
will be wrong.
 Most forecasts are higher/lower than actual
Traditional Forecasting – Demand Forecasting

 The demand for independent demand is aka

base demand (normal demand).
 All demands are subject to certain
‘fluctuations’.
 One type is ‘random variation’. This can’t be
anticipated (that’s why safety inventory).
 Another type is called ‘trend’ (demand for VCRs).
 Another type is called ‘seasonal variation’.
 It was already suggested that all forecasts
will be wrong.
 Most forecasts are higher/lower than actual
 Sales and Operations Planning
 Historically many firms developed several functional
forecasts for same products for same time period.
 It was possible for a manufacturer to have financial
forecast, manufacturing forecast, marketing
forecast, distribution forecast.
 The problem with multiple functional forecasting
was that most of the times these functional
forecasts did not agree.
 E.g: Marketing would forecast higher demand that
neither manufacturing nor distribution could execute.
 Finance forecasts would be higher than marketing
would be able to meet.
 Sales and Operations Planning
 It is necessary for a firm to arrive at an agreeable
forecasts internally that can be used execute.
 This process is called ‘sales and operations planning
consensus.’
 This involves a five-step process

Step 1 Step 2 Step 3

Run Sales Forecast Demand Planning Supply Planning
Reports Phase Phase

Step 5
Step 4
Executive S&OP
Pre-S&OP Meeting
Meeting
 Sales and Operations Planning
 Step 1 - Sales Forecast Reports:
 Requires development of statistical forecasts for the
future sales. Firms use many techniques to develop
sales forecast reports.
 Step 2 – Demand Planning Phase:
 The sales and marketing departments to review the
forecast and make adjustments based on promotion
of existing products, the introductions of new
products, or the elimination of products.
 The revised forecasts is stated in terms of both units
(operations department) and pound/dollar since
(finance department).
 Sales and Operations Planning
 Step 3 - Supply Planning Phase:
 Requires operations (manufacturing, warehousing,
transportation, etc.,) to analyse the sales forecast to
determine if existing capacity is adequate to handle
forecasted volumes.
 Existing capacity might be adequate if demand is
stable. However, if ‘promotions’ are introduced,
demand will spike (capacity may not be sufficient).
 Two options available to manage capacity constraints.
 Promotions could be curtailed to bring demand down
(lost sales/revenue/profit).
 Additional manufacturing capacity could be generated
internally or externally (contract manufacturing/
outsourcing, etc.,) with additional costs. This needs to
be repeated for other operations as well.
 Sales and Operations Planning
 Step 3 – Pre-S&OP Meeting:
 This process involves individuals from sales,
marketing, operations, and finance.
 Initial forecasts will be reviewed along with any
capacity issues that emerged in step 3.
 Attempts made to resolve capacity issues by
attempting to balance supply and demand.
 Alternative scenarios are developed to be
considered at executive S&OP meeting (Step 5).
 These scenarios will identify potential lost sales and
increased costs associated with balancing of supply
and demand.
 Sales and Operations Planning
 Step 3 – Pre-S&OP Meeting:
 Final decisions are made regarding sales forecasts
and capacity issues.
 Executives from various functional areas agree on a
forecast and convert it into operating plan for firm.
 Consensus among functional areas is critical here.
 Decisions regarding trade-offs between revenue
and costs are made.
 The final decision is approved in this meeting for
execution.
 S&OP to CPRF
Problems in Traditional Forecasting

 The S&OP process describes how firms arrive at a

consensus on forecasts internally.

 The next step is for the members of a supply chain

to agree upon a consensus forecast.

 Problems in Traditional Forecasting
 Many initiatives attempted to create
efficiency and effectiveness through the
integration of supply chain activities and
processes
 QR (quick response)
 VMI (vendor managed inventory)
 CRP (continuous replenishment planning),
 ECR (efficient customer response).
 EDI (electronic data interchange)
 However, they were all found to be
inefficient as there was no incentive for
 Problems in Traditional Forecasting
 They fell short of expectations in integrating supply

chain activities and processes with participants.

 An important initiative aimed at achieving true

supply chain integration is CPFR.

 Collaborative Planning, Forecasting, and
Replenishment (CPFR)

 CPFR is recognised as a breakthrough

business model for planning, forecasting and
replenishment.
 In this method, knowledge and information
that exists internally and externally is
brought together into a single, more
accurate, forecast that has the support of the
entire supply chain.
 Manufacturers, retailers, transport providers,
 Collaborative Planning, Forecasting, and
Replenishment (CPFR)
 Previously, manufacturers and retailers have had 20
or more forecasts between them for single product.
 Each more or less accurate, all trying to predict
consumer behaviour.
 CPFR simplifies and streamlines overall demand
planning.
 CPFR allows trading partners to agree on a single
forecast for an item where each partner translates
this forecast into a single execution plan.
 This replaces traditional forecasting methods,
where forecasts are made throughout the chain
(not connected to primary demand – Mentzer &
Moon – ‘Islands of analysis’).
 Collaborative Planning, Forecasting, and
Replenishment (CPFR)
 Previously, manufacturers and retailers have had 20
or more forecasts between them for single product.
 Each more or less accurate, all trying to predict
consumer behaviour.
 There were no co-operational aspect to traditional
forecasting.
 Developed by Wal-Mart and Warner-Lambert in
1995 (Listerine product).
 These two firms, in addition to collaborating to
rationalise inventories and out-of-stock
occurrences, also collaborated to increase the
forecast accuracy.
 Collaborative Planning, Forecasting, and
Replenishment (CPFR)

 Three month pilot produced significant results and

improvements for both parties thereby resulting in

the adoption of this approach.
 The CPFR Model

Larry Smith, West Marine: A CPFR Success Story, Supply Chain

Management Review (March, 2006).
 CPFR Model
 The model is a sequence of several business
processes that include the consumer, retailer and
manufacturer.
 The four major processes are (i) Strategy and
Planning; (ii) Demand and Supply Management; (iii)
Execution and (iv) Analysis.
 CPRF emphasises a sharing of consumer purchasing
data (point of sale data) as well as forecasts at
retail among and between partners to help manage
supply chain activities.
 From these data, the manufacturer can analyse his
ability to meet forecasted demand.
 CPFR Model
 If he can’t meet the demand, a collaborative effort
is undertaken between the retailer and
manufacturer to arrive at a mutually agreed-upon
forecast from which execution plans are developed.
 The strength of CPRF is that it provides a single
forecast.
 The trading partners can develop manufacturing
strategies, replenish strategies and merchandising
strategies based on this single forecast.
 CPFR Model
 CPFR emphasises a sharing of consumer purchasing
data among and between supply chain partners.
 In this regard, CPFR creates a direct link between
the consumer and the supply chain.
 The plan and the forecast are entered by suppliers
and buyers into an Internet accessible system.
 Within established parameters, any of the
participating partners are empowered to change the
forecast.
 CPFR Model
 The results of CPFR initiatives are impressive (Wal-
Mart, Sara Lee reported reduction of inventory and
increase in sales).
 Collaborative planning improves the quality of the
demand signal for the entire supply chain through a
constant exchange of information from one end to
the other.
 Goes beyond the traditional practice.
 Effective implementation is based on systematic
collaboration between trading partners (not the
previous approaches).
 CPFR Model
 Warner-Lambert’s service levels increased from
87% to 98%, while the lead times to deliver the
product decreased from 21 to 11 days.
 The partnership also increased Listerene sales by
$8.5 million over the test period (Hill, 1999).
 The success prompted the Voluntary Interindustry
Commerce Standards (VICS) to set up guidelines
for synchronising business processes, forecasts, and
replenishments, now formalised as CPFR.
 The central theme of the CPFR guidelines was to
align processes and standardise technologies to
share forecast and other planning information
securely, simultaneously, globally and in real-time.
 Fulfillment Models
 Early part of this lecture focused on planning and
forecasting aspects of demand management.
 Once these aspects are agreed upon, the plan
needs to be executed (called fulfillment process).
 Various distribution channels and strategies are
used to deliver on the demand forecast.
 A channel consists of one or more organisations
who participate in the flow of goods, services,
information and finances from the point of
production to point of consumption.
 A channel consists of both logistics channel and a
marketing channel.
 Channels of Distribution
 The logistics channel refers to the means by which
the products flow from point of production to point
of consumption.
 The marketing channel refers to the means by
which the necessary transactional elements are
managed (such as customer orders, billing,
accounts receivable, etc.).
 The logistics and marketing channels need to work
together in fulfilling customer orders.
 Numerous channels are responsible for delivering
products to consumers.
 Channels of Distribution
 It is important to note that channel structure

involves elements of fixed costs and variable costs.

 Distribution centres, stores, etc. – Fixed costs
 Transportation, packaging, etc. – variable costs

 Organisations tend to choose distribution channel

that reduces fixed costs and increases variable

costs (while managing the fulfillment process).
Direct-to-Customer Fulfillment
 Direct-to-Customer Fulfillment
 Integrated Fulfillment:
 Many firms operate both bricks-and-mortar and click-
and-mortar (Tesco, Sainsbury, M&S, etc.).
 i.e. Retailers have both retail stores & internet sites.
 In integrated fulfillment strategy, a retailer operates
one distribution network to service both channels.
 Direct-to-Customer Fulfillment
 Dedicated Fulfillment:
 Another option for the retailer to desire to have both
a store and an internet presence.
 This option achieves the same delivery goals, but
with two separate distribution networks.
 This option eliminates some disadvantages of
previous distribution network. However, one
channel, unfortunately, duplicates another channel.
 Direct-to-Customer Fulfillment
 Outsourced fulfillment:
 While the previous two fulfillment options assume
that the retailer would perform fulfillment,
outsourced fulfillment assumes that another outside
firm will perform the fulfillment.
 Direct-to-Customer Fulfillment
 Drop-Shipped Fulfillment:
 The manufacturer delivers the product direct to the
retailer’s stores, by passing the retailer’s distribution
network. A major advantage is reduction of inventory
in distribution networks.
 Direct-to-Customer Fulfillment
 Store Fulfillment:
 For a retailer with both store & internet presence
store fulfillment offers several opportunities.
 The order is placed through internet site. It is sent to
the nearest retail store, where it is picked and put
aside for the customer to pick up.
 Conclusions
 Although many forecasts are made throughout the
supply chain, the forecast of primary demand from
end user or consumer will be the most important.
 The S&OP process has gained much attention as it
serves the purpose of allowing a firm to operate
from a single forecast.
 CPFR is a method to allow trading partners to
collaboratively develop and agree upon a forecast.
 A number of distribution channels are available to
fulfill customer orders.