Chapter:5

Demand Management in Supply Chain

Meaning Of Demand
Demand is an economic concept that relates to a consumer’s desire to purchase goods and
services and willingness to pay a specific price for them.
Meaning of Demand Management
It is a planning methodology used to forecast, plan for and manage the demand for products
and services. Planning and using resources for profitable business results.
Types of Demand
Independent Demand
Dependent Demand
Derived Demand
Independent Demand
It is the demand for finished products, it does not depend on the demand for other products.
Finished products include any item sold directly to a consumer.
Dependent Demand
It refers to the item whose demand is required by the one-by-one calculation base on the
independent demand items such as products and service parts, and assemblies, subassemblies,
processed parts, and raw materials.
Derived Demand
It is a demand which is the result of demand of a related another product or services.

Demand Management Objectives

1. Identifying partners to perform the functions needed in the demand
2. Move functions to the channel member who can perform them most effectively and
efficiently
3. To improve capabilities that enhances the firm’s ability to serve its customers
4. Share knowledge and develop products and services that solve customer’s problem.
5. Gather and analyses knowledge about customers, their problem and their unmet needs.
Demand Management Challenges
1. Lack of communication between departments results in little or no coordinated response to
demand information.
2. Lack of process, to match demand and supply
3. Too much emphasis placed on demand forecasts with little attention paid to collaborative
efforts, strategic and operational plans that need to be developed from the forecasts.
4. Resulting business successes will be a outcome of the better match of demand to product
availability.
Demand Forecasting
Meaning
Demand forecasting is the process of understanding and predicting customer demand in order
to make smart decisions about supply chain operations, profit margins, cash flow, capital
expenditures, capacity planning, and more. Demand forecasting helps businesses estimate the
total sales and revenue for a future period of time, often – but not always – by looking at
historical data.
examples of Demand Forecasting are – A leading car maker, refers to the last 12 months of
actual sales of its cars at model, engine type, and colour level; and based on the expected
growth, forecasts the short-term demand for the next 12 month for purchase, production and
inventory planning
Role of demand forecasting in supply chain
➢ Planning Processes
➢ Seasonal variations in demand
➢ Predict product demand
➢ Customer satisfaction
➢ Reduce safety stock
➢ Reduce Inventory stock outs
➢ Improve shipping
➢ Improve Pricing
1. Planning Processes
The scheduling and planning process is vastly improved through forecasting. Paying
attention to the past and present demand for products allows a supply chain to stay
on top of the game.
2. Seasonal Variations in Demand
Among the many reasons that forecasting is needed in supply chain management is
being able to predict and plan for seasonal variations in demand. In a similar vein,
planning for promotional activity and product launches are just as important and
benefit greatly from demand forecasting. With data to back up predictions, there is
less guesswork to fret over.

3. Predict Product Demand

In a broader sense of the term, demand forecasting allows for the prediction of
product demand in even the most specific of situations. While no company can
predict the future with complete accuracy, relying on patterns and making informed
decisions based on past and present data will get a company as close as possible.

4. Customer Satisfaction
Understanding customer needs is essential in product-focused industries. Being able
to predict customer demand will result in fulfilling orders with short lead times on
time. This will also have the effect of increasing trust between customer and
supplier.

5. Reduce Safety Stock

By definition, safety stock is the excess stock that is kept around as a safety net in
case demand for a product increases. With forecasting, however, this extra measure
is not needed. This frees up storage space and saves time and worry.

6. Reduce Inventory Stockouts

When it comes to JIT (Just In Time) systems and buying from long lead time
suppliers, forecasting demand is essential. When it comes to JIT systems, demand
forecasting allows for products to sit in storage for less time, thus less money is
wasted than if items were to take up space in the warehouse for an extended period
of time. For long lead time suppliers, forecasting demand is needed in order for
suppliers to get your products to you in a timely manner.
7. Improve Shipping
Supply and demand affect every aspect of the supply chain process. For example,
being able to predict the demand for a certain product will allow supply chain
managers time to ensure that enough workers are present to ship a certain amount of
product. Not having enough workers results in orders not getting to customers on
time. Likewise, having too many workers on the clock results in high labor costs.

8. Improve Pricing
Price forecasting puts the power back into the hands of a company. The impact
price changes have on a particular area of a supply chain can be predicted and
handled accordingly.

Factors affecting demand forecasting

Seasonality
As seasons change, so can demand. A highly seasonal brand, or a cyclical business,
may have a peak season when sales are booming followed by off-seasons when
sales are steady or even very slow. Some demand forecasting examples based on
seasonality include products used during specific seasons (boating gear during the
summer), holidays (costumes and candy on Halloween) or events (wedding season,
for example).

Competition
When competition enters or exits the scene, demand can drop or skyrocket. For
example, if a new player enters the market and starts vying for its share of the pie,
established businesses may suffer; on the other hand, if an existing competitor folds,
or begins losing ground because of bad product, service, or PR, other businesses
will be in greater demand as consumers make a switch.

Geography
Where your customers reside and where you manufacture, store, and fulfil orders
from can have a huge impact on inventory forecasting (not to mention shipping
costs). So, it pays to be strategic when choosing geographic locations of your supply
chain. For example, if you sell swimwear, you’ll probably want to store the majority
of your product in a state like Florida where they are ordered most; that way, you
don’t have to ship to faraway locations.

Economy
Economic conditions can have a big impact on forecasting product demand. For
example, if an economy enters into depression or recession, and fewer people are
working, the demand for high-priced, luxury products is likely to fall, while demand
for low-priced, generic products is likely to increase.
Types of Goods
Different products and services have very different demand forecasting. For
example, forecasting demand for perishable goods with a short shelf-life must be
very precise or a lot of inventory could be lost. On the other hand, demand can more
or less be predicted for a subscription box service that’s shipped to the same
customers at the same time each month (assuming customer retention and attrition
are relatively steady).

Types of demand forecasting

1. Passive Demand Forecasting

Passive demand forecasting doesn’t require statistical methods or analysis of
economic trends; it simply involves using past sales data to predict future sales data.
So, while this makes passive data forecasting fairly easy, it’s really only useful for
businesses that have a lot of historical data to pull from.
Because the passive model assumes this year’s sales data will be similar to last
year’s sales data, it should only be used by companies that aim for steady sales
rather than rapid sales growth.

2. Active Demand Forecasting

Active demand forecasting is typically used by start-up businesses and companies
that are growing rapidly. The active approach takes into account aggressive growth
plans such as marketing or product development and also the general competitive
environment of the industry, including the economic outlook, market growth
projections, and more.

3. Short-Term Demand Forecasting

Short-term demand forecasting looks at a small window of time in order to inform
the day-to-day (e.g., it may be used to look at inventory planning for a Black Friday
promotion). It’s also useful for managing a just-in-time (JIT) supply chain or a
product line up those changes frequently. However, most businesses will only use it
in conjunction with longer-term projections.

4. Long-Term Demand Forecasting

Long-term demand forecasting is conducted for a period greater than a year, which
helps to identify and plan for seasonality, annual patterns, and production capacity.
A long-term projection is like a blueprint; by forecasting farther out into the future,
businesses can focus on shaping the growth trajectory of their brands, creating their
marketing plan, planning capital investments and expansion strategies, and more to
prepare for future demand.

5. Macro & Micro Demand Forecasting

Demand forecasting at a macro level looks at external forces disrupting commerce
such as economic conditions, competition, and consumer trends. Understanding
these forces help businesses identify product or service expansion opportunities,
 predict upcoming financial challenges or raw material shortages, and more. Even if
your company is more interested in stability than growth, a look at external market
forces can still keep you in the loop when it comes to issues that could impact your
supply chain.
Demand at a micro level is still external, however, it drills down to the particulars of
a specific industry or customer segment (for example, projecting demand for an
organic peanut butter among millennial parents in Austin, Texas).

6. Internal Demand Forecasting

A limiting factor for business growth is internal capacity; say you project that
customer demand will triple in the next three years; does your business have the
capacity to meet that demand? With internal forecasting, the needs of all operations
that may impact future sales are identified. For example, in human resources,
demand forecasting could help identify how many people will need to be hired
within those next three years to keep things running smoothly and fill future
customer demand.

Common Methods for creating Demand Forecasts

Demand forecasting methods can be broken down into two basic categories
1.Quantitative
2.Qualitative

Quantitative forecasting relies on historical data about customer demand, supply

chain performance, seasonal demand. Some of the common quantitative forecasting
methods include:
1. Barometric forecasting
2. Trend Projection
3. Exponential Smoothing
4. Regression analysis
5. Econometric forecasting

Barometric forecasting
It uses past demand to predict future demand. Barometric demand planning uses
statistical analysis to create a demand forecast.

Trend Projection
It is the process of using market research and consumer data to create predictions
about customers future buying habits and preferences.

Exponential Smoothing
This forecasting method uses historical data as an input and creates a result that also
considers seasonal variations in sales.
To Regression Analysis
Studying the relationships between data points. Which can help to predict sales in the near
and long term. Understand inventory level understand supply and demand.

Qualitative forecasting (It requires Expert opinion)

1. Sales forces composite
2. Market Research
3. The Delphi Method

Sales Forces composite

Sales team members have the most interaction with customers. They can often spot sales
trends before other sources of market information.

Market Research
This forecasting method uses data about market trends and opportunities to create a demand
forecast. It is useful for start-ups that don’t have historical data.

The Delphi Method

This method sometimes called as expert method. Demand planner assembles a panel of
experts and ask them to answer a set of questions. Questions reveal the expert opinions
about future demand.

Components of a successful demand forecasting strategy for

supply chain management
TO be successful, demand forecasting for a supply chain should include these components.

1. Clean, reliable data, including historical data and trend projections

2. Actionable inputs, including from sales team members, outside experts, and market
research
3. Flexibility to find and correct potential forecast errors and to change course as needed
4. Collaboration with supply chain partners, both internal and external.
5. Robust (strong) Supply chain analytics

For example, of demand forecasting for a fine art, you don’t need to look any further than
Amazon. The largest e-commerce company in the world also runs one of the world’s most
extensive logistics operations.
Amazon’s sophisticated supply chain planning allows it to anticipate demand and move
products to the warehouses supply chain planning allows it to anticipate demand and move
products to the
customers most likely order them. That next level demand forecasting, powered by AI, is
what allows amazon to offer 1-hour delivery. Thanks to amazon demand forecasting
combined with its deep understanding of customer demand.
Basic Approach to Demand Forecasting
The following FIVE points are important for an organisation to forecast effectively:

1. Understand the objective of forecasting

2. Integrate demand planning and forecasting throughout the supply chain
3. Identify the major factors that influences the demand forecast.
4. Forecast at the appropriate level of aggregation.
5. Establish performance and error measures for the forecast.

Understand the objective of forecasting

Every forecast supports decisions that are based on it, so an important first step is to
identify these decisions clearly.
Examples of such decisions include how much of a particular product to make, how much
inventory needed and how much to order. All parties affected by a supply chain decision
should be aware of the link between the decision and the forecast.

Example
DMart plans to discount detergent during the month of July must be shared with the
manufacturer, the transporter, and others involved in filling demand as they all must
affected by the forecast of demand.

Integrate demand planning and forecasting throughout the supply chain

A company should link its forecast to all planning activities throughout the supply chain.
These include capacity of planning, production planning, promotion planning and
purchasing, among others. In one common scenario, a retailer develops forecasts based on
promotional activities, whereas a manufacturer, unaware of these promotions, develops a
different forecast for its production planning based on historical orders. this leads to a
mismatch between supply and demand.

Identify the major factors that influences the demand forecast.

Next, a firm must identify demand supply, and product-related phenomena that influence
the demand forecast. On the company side, a company must ascertain whether demand is
growing or declining or has a seasonal pattern. These estimates must be based on demand,
not on sales data.

Forecast at the Appropriate Level of Aggregation

Given that aggregate forecasts are more accurate than disaggregate forecasts, it is
important to forecast at a level of aggregation that is appropriate, given the supply chain
decision that is driven by the forecast. Consider a buyer at a retail chain who is forecasting
to select an order size for shirts. One approach is to ask each store manager the precise
number of shirts needed and add up all the requests to get an order size with the supplier.
Establish Performance and Error Measures for the Forecast
Companies should establish clear performance measures to evaluate the accuracy and
timeliness of the forecast. These measures should be linked to the objectives of the
business decision based on these forecasts. Consider a mail-order company that uses a
forecast to place orders with its suppliers, which take two months to send order. the mail
order company must ensure that the forecast is created at least two months before the start
of the sales season because of the two-month lead time for replenishment.

Basic Forecasting Techniques

Forecasting Techniques refer to specific demand forecasting research methodologies. They
can be divided into three groups

1.Survey-based forecasting
2. Statistical methods
3. Machine learning (Software system)

Demand forecasting is a critical business process. It can help you future-proof of

organisation and improve and optimize marketing, production, sales, recruitment, and
budgeting processes.

Survey Method
Survey method is one of the most common and direct methods of forecasting demand in
the short term. This method encompasses the future purchase plans of consumers and their
intentions.
In this method, an organisation conducts surveys with consumers to dertermine the
demand for their existing products and services and services and anticipate the future
demand accordingly.
1. Experts Opinions Poll
2. Delphi Method
3. Market Experiment Method

Experts Opinions Poll

Refers to a method in which experts are requested to provide their opinion about the
product. Generally, in an organisation, sales representatives act as experts who can assess
the demand for the product in different areas, regions or cities.
Sales representatives are in close touch with consumers therefore, they are well
aware of the consumers future purchase plans, their reactions to market change, and their
perceptions for other competing products.

Limitations of this method

1. Depends on data provided by sales representative who may have inadequate information
about the market.
2. Provides estimates that are dependent on the market skills of experts and their experts
and their experience. These skills differ from individual to individual. In this way,
making exact demand forecasts become difficult.
Delphi Method
Refers to a group decision-making technique of forecasting demand. In this method
questions are individually asked from a group of experts to obtain their opinions on
demand for products in future.

Market Experiment Method

Involves collecting necessary information regarding the current and future demand for a
product. This method carries out the studies and experiments on consumer behaviour
under actual market conditions.
In this method, some areas of markets are selected with similar features, such as
population, income levels, cultural background, and tastes of consumer.

Limitation of this method

1. Refers to an expensive method; therefore, it may not be affordable by small-scale
organisations.
2. Affects the results of experiments due to various social-economic conditions, such as
strikes, political instability, natural calamities.

Statistical Method
In this method, sales forecasts are made through analysis of past data taken from previous
Year’s books of accounts. In case of new organisations, sales data is taken from
organisations already existing in the same industry.

Graphical method
Helps in forecasting the future sales of an organisation with the help of a graph. The sales
data is plotted on a graph and a drawn on platted points.

Fitting Trend Method

Implies a least square method in which a trend line(curve) is fitted to the time-series data
of sales with the help of statistical techniques.

Types:
Linear Trend- In which sales show a rising trend. In this trend following straight line
trend equation is fitted.
Exponential Trend- in which sales increases over the past years at an increasing rate or
constant rate.

Box-Jenkins Method
It is used only for short-term predictions. This method forecasts demand only with
stationary time-series data not reveal the long-term trend.
This method can be used for estimating the sales forecasts of woollen clothes the winter
season.

Barometric method
In this method, demand is predicted on the basis of key variables occurring in the present.
This method is also used to predict various economic indicators, such as savings,
investments and income. This technique helps in determining the general trend of business
activities.
Example
Suppose government allots land to the XYZ society for constructing buildings. This
indicates that there would be high demand for cement, bricks, and steel.

Economic Method
Econometric methods combine statistical tools with economic theories for forecasting.
This method consists of two types of method study,
Regression Methods
1. Simple Regression
2. Multiple Regression

Simultaneous Equations
Exogenous Variables- Refer to inputs of the model. Examples are Time, government
spending and weather conditions.
Endogenous Variables- Refers to inputs that are determined within the model. These are
controlled variables.

Collaborative Planning, Forecasting and Replenishment (CPFR)

It is a business methodology which integrates multiple parties in the planning and
fulfilment of customer demand. The idea behind CPFR is that by coordinating activities
throughout the supply chain inventories can be moved more efficiently, in the correct
quantities, to the correct inventory locations to meet customer demand.

CPFR Model

The customer as the creator of demand for a product, is at the centre of the CPFR model.
Surrounding the customer is the retailer and the supporting activities provided by the
retailer. Category management, forecasting, Replenishment management, buying, logistics
and distribution, store execution, supplier scorecard and vendor Management.

The outside ring of the CPFR model is comprised of the manufacturer and their activities.
The model is broadly organised into four quadrants comprised of strategy and planning,
demand and supply management execution and analysis.

The Retailer, manufacturer, and supply chain partners interact through a series of eight
business activities: Collaboration Arrangement, Joint Business plan, Sales Forecasting,
Order Planning and Forecasting, Order Generation, Order Fulfilment, Exception
Management, and Performance Assessment.

Replenishment System Barriers to CPFR

Most retailers have invested heavily into information systems to forecast demand monitor
sales, and place automatic orders based on min/max inventory rules. These systems can be
very sophisticated and accurate at an aggregated level, but they are not typically
monitoring individual store and product inventory positions.

A Replenishment manager at the retailer is responsible for monitoring and adjusting the
replenishment system to ensure inventory level are maintained. However, an open to buy
budget has a large impact on the decisions the information system or the replenishment
manager can implement.

Far too often inventory has built up in one area while other stores are starved for inventory
but the overall financial position of the retailer is constrained and additional purchase
orders cannot be issued.

Manufacturer may identify inventory out of stock situations and communicate the problem
to the replenishment manager but the replenishment manager may be powerless to do
anything to react.

For a CPFR initiative to be successful the retailer and manufacturer must define the
communication process and action steps before the inventory shortages begin to occur.

Aggregate Planning in Supply Chain Management

It is the process of analysing and forecasting the demand for an organisation’s goods or
services and its capacity to fulfil it.
Its main purpose is to give the company’s management an idea regarding the resources it
needs to cover the demand in an efficient way, without over or underproduction.

It includes the Following

1. Solid Demand Forecast
2. Production Capacity
3. Limitations on capital
Solid Demand Forecast
It is important to anticipate demand for your product before you can plan your supply
ordering. Using historical data as well as industry trends and forecast, you are able to
accurately predict demand for your products for upcoming months. The forecast will tell
how much that the company needs to produce in order to meet demand.

Production Capacity
The ability to produce depends on machinery, work staff and efficiency. You are able to
evaluate your production department to accurately determine how many products you can
reasonably produce during the period that you are planning for.

Limitations on Capital
No matter what quantity of supplies you would like to order, you need to take your cash
into account. You may be limited by what you can afford. If you plan to buy supplies,
include the interest costs in your estimate of the profits you will make from the products
you manufacture.

Factors affecting Aggregate Planning

It is an operational activity critical to the organisation as it looks to balance

long-term strategic planning with short term production success. Following
factors are critical before an aggregate planning process can actually start:

1. A complete information is required about available production facility and

new materials.
2. A solid demand forecast covering the medium range product
3. Financial planning surrounding the production cost which includes raw
material, labour, inventory planning Etc.
4. Organisational policy around labour management, quality management etc.

For Success of a Aggregate planning following inputs are required

1. An aggregate demand forecast for the relevant period.
2. Evaluation of all the available means to manage capacity planning like
sub-controlling, outsourcing etc.
3. Existing operational status of workforce (number, skill, set, etc) inventory
level and production efficiency.

Importance of Aggregate Planning

1. Achieving financial goals by reducing overall variable cost and improving
the bottom lines
2. Maximum utilization of the available production facility
3. Provide customer delight by matching demand and reducing wait time for
customer’s
4. Reduce investment in inventory stocking.
5. Able to meet scheduling goals there by creating a happy and satisfied work
force.

Aggregate Planning Strategies

Level Strategy
Chase Strategy
Hybrid Strategy

Level Strategy
As the name suggests, level strategy looks to maintain a steady production rate and
workforce level. Th this strategy, organisation requires a robust forecast demand as to
increase advantage of level strategy is steady workforce.
Demerit of this strategy is high inventory and increase back logs.

Chase Strategy
As the name suggests, chase strategy looks to dynamically match demand with production.
Merit – lower inventory levels and back logs.
Demerit- lower productivity, quality and depressed work force.

Hybrid strategy
As the name suggests, this strategy looks to balance between level strategy and chase
strategy.

Customer Order Decoupling (Divide) Point

This term describing the process or needs in the supply chain network where the activities
are no longer driven by individual orders.
The behavioural of process upstream and downstream of the customer order decoupling
point is quite different

Upstream Process
Driven by forecast based planning information. Materials are pushed. Optimization is
realised by balancing inventory and capacity.
Downstream Process
Driven by actual customer orders. Materials are pulled by the order. Optimization is
realised by balancing capacity and lead times.

Types of Firms
Make-to-Stock (MTS)
Assemble -to-Order (ATO)
Make-to-Order (MTO)
Make-to-Stock (MTS)
Firms that serve customers from finished goods inventory. It includes all options regarding
keeping inventory in the distribution system.
Product is produced to stock with respect to the firm.

Assemble -to-Order (ATO)

Firms that combine a number of preassembled modules to meet a customer’s
specialisations. A primary task is to define a customer’s order of alternative components
since these are carried in inventory.

Make-to-Order (MTO)
Make the customer’s product from raw materials, parts, and components. It Is selected for
special products with wide range and low individual product volume per period.

New Trends in CODP

1. With increasing in Customized product, more focus on shifting CODP in Upstream.
Like in Cars, apparels, consumer products
2. Investing in research creating a methodology for defining the optimal position of CODP
for a closer and mutually beneficial cooperation with the customer.
3. Service company also focusing on CODP improve customer satisfaction.