Demand Management

Introduction

• How does an organization determine what

the customer wants? (demand
management)

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DEMAND MANAGEMENT

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 Demand Management

• The creation across the supply chain and its

markets of a coordinated flow of demand

Source: John T. Mentzer, “A Telling Fortune”, Industrial Engineer, April 2006,

42-47.

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 Demand Management

• Demand (sales) forecasting

– Refers to an effort to project future demand
– Is a key component in demand management
– Is helpful in make-to-stock situations
• finished goods are produced prior to receiving a
customer order
– Is helpful in make-to-order situations
• finished goods are produced after receiving a
customer order
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 Demand Management
• Demand forecasting issues:
– Selection of forecasting technique(s) depends
on many factors
– Selecting an inappropriate technique will
reduce forecast accuracy
– Forecast accuracy can have important
logistical implications
– Computer forecasting software unable to
completely eliminate forecast errors

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 Demand Management
• Three basic types of demand forecasting
models:
– Judgmental
• Use judgment or intuition
• Where there is limited or no historical data, such
as with a new product introduction
– Time series
• Assumption: demand is solely dependent on past
demand
• SMA and WMA etc.
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 Contd.
– Cause and effect (associative)
• one or more factors are related to demand
• Eg: as interest rates increase, housing sales tend
to decrease
• Simple and multiple regression

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 Time Series Analysis
• Using the past to predict the future
Short term – forecasting less than 3 months

• Used mainly for tactical decisions

Medium term – forecasting 3 months to 2 years

• Used to develop a strategy that will be implemented over the next 6 to

18 months (e.g., meeting demand)

Long term – forecasting greater than 2 years

• Useful for detecting general trends and identifying major turning points

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 Model Selection

• Choosing an appropriate forecasting model

depends upon
– Time horizon to be forecast
– Data availability
– Accuracy required
– Size of forecasting budget
– Availability of qualified personnel

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 1. Simple Moving Average
• Forecast is the average of a fixed number of past periods.

• Useful when demand is not growing or declining rapidly and no

seasonality is present.

• Removes some of the random fluctuation from the data.

• Selecting the period length is important.

– Longer periods provide more smoothing.

– Shorter periods react to trends more quickly.

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 Simple Moving Average Formula
•

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Simple Moving Average – Example

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 Example
• Calculate the three month and five month
moving average for following data.

Month Orders Month Orders

January 120 June 50
February 90 July 75
March 100 August 130
April 75 September 110
May 110 October 90
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Month Orders 03 months M A 05 months M A

January 120
February 90
March 100
April 75 =(120+90+100)/3=
104
May 110 =(90+100+75)/3=89
June 50 = (100+75+110)/3=95 =(120+90+100+75+110)/5=99
July 75 =(75+110+50)/3=79 =(90+100+75+110+50)/5=85
August 130 =(110+50+75)/3=79 =(100+75+110+50+75)/5=82
Septembe 110 =(50+75+130)/3=85 =(75+110+50+75+130)/5=88
r
October 90 =(75+130+110)/ =(110+50+75+130+110)/5=95
3=105
Novembe =(130+110+90)/ =(50+75+130+110+90)/5=91
r 3=110

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 2. Weighted Moving Average

• The simple moving average formula implies equal

weighting for all periods.
• A weighted moving average allows unequal
weighting of prior time periods.
– The sum of the weights must be equal to one.
– Often, more recent periods are given higher weights than
periods farther in the past.

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 𝐹 𝑡=𝑤 1 𝐴𝑡 −1+𝑤 2 𝐴 𝑡 −2+…+𝑤𝑛𝐴𝑡 −𝑛

• w1 = Weight to be given to the actual occurrence for

the period t-1
• w2 = Weight to be given to the actual occurrence for
the period t-2
• w3 = Weight to be given to the actual occurrence for
the period t-n
• n = Total number of periods in the forecast
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A department store may find that in a four-month
period, the best forecast is derived by using 40 percent
of the actual sales for the most recent month, 30
percent of two months ago, 20 percent of three months
ago, and 10 percent of four months ago.
If actual sales experience was as below

Month 1 Month 2 Month 3 Month 4 Month 5

100 90 105 95 ?

What is the forecast for Month 5 using WMA ?

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 Month 1 Month 2 Month 3 Month 4 Month 5

100 90 105 95 ?

• The forecast for Month 5 using WMA

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 Selecting Weights
• Experience and/or trial-and-error are the simplest
approaches.

• The recent past is often the best indicator of the

future, so weights are generally higher for more
recent data.

• If the data are seasonal, weights should reflect this

appropriately.
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 3. Exponential Smoothing

• A weighted average method that includes all past

data in the forecasting calculation
• More recent results weighted more heavily
• The most used of all forecasting techniques
• An integral part of computerized forecasting

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 Exponential Smoothing
• Well accepted for six reasons
– Exponential models are surprisingly accurate
– Formulating an exponential model is relatively
easy
– The user can understand how the model works
– Little computation is required to use the model
– Computer storage requirements are small
– Tests for accuracy are easy to compute

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Exponential Smoothing Model

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 Exponential Smoothing Example
Week Demand Forecast
1 820
α = 0.2
2 775
3 680
Forecast for 10th Month
4 655
5 750
6 802
7 798
8 689
9 775
10

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 Exponential Smoothing Example
Week Demand Forecast α = 0.2
1 820 820
2 775 820
3 680 811
4 655 785
5 750 759
6 802 757
7 798 766
8 689 772
9 775 756
10 760

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 Question
Sunrise Baking Company markets doughnuts through a chain of
food stores. It has been experiencing over and underproduction
because of forecasting errors. The following data are its demand in
dozens of doughnuts for the past four weeks. Doughnuts are made
for the following day; for example, Sunday's doughnut production
is for Monday's sales, Monday's production is for Tuesday’s sales,
and so forth. The bakery is closed Saturday, so Friday’s production
must satisfy demand for both Saturday and Sunday.

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Make a forest for this week on the Following basis:
a. Daily, using a simple four-week moving average.

b. Daily, using a weighted average of 0.40, 0.30, 0.20,

and 0.10 for the past four weeks.
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 Contd.
c. Sunrise is also planning its purchases of ingredients for bread
production. If bread demand had been forecasted for last
week at 22,000 loaves and only 21,000 loaves were
demanded, what would Sunrise's forecast be for this week
using exponential smoothing with α = 0.10?

d. Suppose, with the forecast made in c, this week's demand

actually turns out to be 22,500. What would the new forecast
be for the next week?

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 Linear trend line
• Forecasting method in which a mathematical
relationship is developed between demand and
some other factors that causes demand behavior.
Y = a + bx

a =Intercept ( demand at period 0)

b= Slope of the line
x = time period
y = Forecast for demand for period x
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• b =

n = Number of periods.
x=/n
y=/n
a = y - bx
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Find the trend line and the demand for
period 13.
X (Time Period) Y ( Demand)
1 37
2 40
3 41
4 37
5 45
6 50
7 43
8 47
9 56
10 52
11 55
12 54

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 x y xy x^2
1 37 37 1
2 40 80 4
3 41 =3*41=123 9
4 37 =4*37=148 16
5 45 =5*45=225 25
6 50 =6*50=300 36
7 43 =7*43=301 49
8 47 =8*47=376 64
9 56 =9*56=504 81
10 52 =10*52=520 100
11 55 =11*55=605 121
12 54 =12*54=648 144
78 557 3867 650 36
 x y xy x^2
1 37 37 1
2 40 80 4
3 41 123 9
4 37 148 16
5 45 225 25
6 50 300 36
7 43 301 49
8 47 376 64
9 56 504 81
10 52 520 100
11 55 605 121
12 54 648 144
3867 650 37
• x = 6.5
y = 46.42

b = 1.72
a = 35.2
y= 35.2 + 1.72x

Demand for period 13, 57.56

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• The state university athletic department wants to develop
its budget for the coming year using a forecast for football
attendance. Football attendance accounts for the largest
portion of its revenue, and the athletic director believes
attendance is directly related to the number of wins by
the team. The business manager has accumulated total
annual average attendance figures for the past eight
years.

• Given the number of returning starters and the strength

of the schedule. the athletic director believes the team
will win at least seven games next year. Develop a simple
regression equation for this data to forecast attendance
for this level of success.
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x (Wins) y (Attendance, 1000)
4 36.3
6 40.1
6 41.2
8 53
6 44
7 45.6
5 39
7 47.5
49 346.7
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 y
(Attendance,
x (Wins) 1000) xy x^2
4 36.3 =4*36.3=145.2 =4*4=16
6 40.1 =6*40.1=240.6 =6*6=36
6 41.2 =6*41.2=247.2 =6*6=36
8 53 =8*53=424 64
6 44 =6*44=264 36
7 45.6 =7*45.6=319.2 49
5 39 =5*39=195 25
7 47.5 =7*47.5=332.5 49
49 346.7 2167.7 311
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• x = 6.125
y = 43.36

b = 4.06
a = 18.46
y= 18.46 + 4.06x

For the x= 7, 46.88 = 46880

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THANK YOU

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