Demand and Forecasting in supply chain

By
Prasad Kulkarni

What is Demand Management?

Demand Management is one that takes a
complete view of a business
It means discovering markets, planning
products and services for those markets
and then fulfilling these customer
demands
It is an integrative set of business
processes, across, not just the enterprise,
but across all its trading partner network
( both customers and suppliers)

What does Demand Management

involve?
Discovering and understanding your market
Establishing your customers needs and
expectations and what draws them to your
business
Challenge of managing what, when, and how a
product/service is designed, made, distributed,
displayed , promoted and serviced
Doing the pricing and inventory optimization at
various levels of market and channels
segmentation
Satisfying customers on product, price, delivery
and post-sales services

Managing Demand and Supply

In any operating organization, it is
important to manage both demand and
supply singly or together by:
Managing Demand thro various options
Managing Supply thro various options
All chosen options have their own
implications on customer service levels
and different costs incurred

Managing Demand
Thro capacity reservation by shifting excess demand
to a future period without losing it by doing advance
booking or appointments for future times
Thro differential pricing to reduce peak
demands( higher prices e.g. movie tickets) or build
demand in off-season by lowering prices/special
discounts)
Thro advertising and sales promotions to even out
demand patterns at different times( lower telecom
rates for night use)
Thro complementary products to even out seasonal
demand products e.g. woolen and cotton garments;
winter creams and suntan lotions; lawn mowers and
snow ploughs

Managing Supply
Thro inventory based alternatives by building
excess inventory during periods of lean demand
and consuming them during peak demand times;
or by shifting production to a future period beyond
demand period; or deliberately inducing stockouts leaving customers to wait longer; final choice
depends on required customer service levels
Thro capacity adjustment alternatives by
hiring/laying of workers; working extra hours and
shifts; use of part time workers
Thro capacity augmentation means by
outsourcing and/or subcontracting, rescheduling
maintenance programs and by debottlenecking
projects

Managing Demand and Supply

Managing demand and/or supply involves choice
amongst many options with varying implications
Some basic strategies to help make a choice are:
Level strategy not to disturb existing production
system at all; maintain a steady rate of regular
time output while meeting demand variations
largely thro inventories
Chase strategy by matching capacity to demand
and dont carry inventories; planned output for a
period is set at expected demand for that
period( with lead-times built in e.g. Jan production
for Feb needs); capacity related alternatives
( discussed earlier) used flexibly
Mixed strategy use a combination of level and
chase approaches

Managing Demand and Supply

-cost implications

Managing demand

Managing supply

Alternative

Cost Implication

Capacity reservation

Planning & scheduling

costs

Influencing demand

Marketing oriented
costs

Build inventory

Inventory holding costs

Backlog/backorder/
stock-out

Shortage/loss of
goodwill

Overtime/under-time

Overtime costs, Loss of

productivity

Varying shifts

Shift change costs

Hiring/layoff workers

Training/hiring costs,
employee morale

Subcontract/outsource

Transaction costs

Debottlenecking/adding
new capacity

Investment,
debottlenecking costs

What is Demand Planning?(1)

This is a subset of Demand Management
It is a business planning process that enables
sales teams(and customers) to develop demand
forecasts and inputs to feed various planning
processes, production, inventory planning,
procurement planning and revenue planning
Based on estimated product demand, a firm can
plan for deployment of its resources to meet this
demand
It is a bottom-up process as different from any
top-down management process

What is Demand Planning?(2)

It is also seen as a multistep operational SCM
process to create reliable demand forecasts
Effective demand planning helps to improve
accuracy of revenue forecasts, align inventory
levels in line with demand changes and
enhance product-wise/channel-wise
profitability
Its purpose can be seen as to drive the supply
chain to meet customer demands thro
effective management of company resources

What is Demand Planning?(3)

For FMCG/retailing sectors, demand
planning takes a special meaning requiring
integration of point-of-sale information to
flow back to the manufacturer
Besides getting such customer level
demand data thro distribution channel
partners, key is to leverage it by
maximizing success in forecasting efforts
and accuracy( without normal distortions
like the bull-whip effect)

Benefits of Demand Planning

Higher service levels and more
responsive to actual demand
Reduced stock levels and inventory
costs
Improved purchase planning and
subsequent reduction in supply input
costs
Enhanced capacity utilization of
production facilities and logistics assets
Focused promotion and product
planning/assortment/stocking levels at

Forecasting Factors
Time required in future
Availability of historical data
Relevance of historical data into future
Demand and sales variability patterns
Required forecasting accuracy and likely
errors
Planning horizon/lead time for operational
moves

Types of Forecasts
Economic Forecasts- projections of economic growth,
inflation rates, money supply based on economic and
fiscal data trends along with policy interventions
Demographic Forecasts- projections of population in
aggregate and disaggregate form forecasts using birth
and death rates in each case
Technological Forecasts- predicting technological change
e.g. in cloud computing or electronics sectors et al
Other Forecasts- weather, earthquakes, tsunami et al

Business Forecasts- involving demand and

sales forecasts our primary interest in this
DPF course

What is Demand Forecasting?(1)

Demand Forecasting is predicting the
future demand for products/services of
an organization
To forecast is to estimate or calculate in
advance
Since forecasts are estimates and
involve consideration of so many price
and non-price factors, no estimate is
necessarily 100% accurate

What is Demand Forecasting/(2)

Demand forecasting involves estimating future overall
market demand for the proposed products/range
This involves extensive market and marketing research
into existing and new markets, end applications, current
market size and future demand potential, market
segmentation, customer profiling/attitudes/preferences
et al
Purpose is to finally help business decisions on how to
cater to the overall market and plan its marketing mix
and product-market positioning et al
Demand forecasting is essentially an outward/external
looking process
Important as forms basis for sales forecasting
operational planning and actions

Why Demand Forecasting?

To help decide on facility capacity planning
and capital budgeting
To help evaluate market opportunities worthy
of future investments
To help assess its market share amongst other
competitors
To serve as input to aggregate production
planning and materials requirement planning
To plan for other organizational inputs ( like
manpower, funds and financing) and setting
policies and procedures

Key Functions of Forecasting

Its use as an estimation tool
Way to address the complex and
uncertain business environment issues
A tool to predicting events related to
operations planning and control
A vital prerequisite for the overall
business planning process

Forecasting Characteristics
By its very nature, forecasting always has errors;
forecasts rarely match actual demand/sales; forecast
accuracy and errors are real issues
Their chosen time horizon also determines
accuracy with shorter periods having higher accuracy;
the constant need to reduce lead times also puts focus
on shorter planning horizons( as in lean
manufacturing/JIT environments)
Aggregate demand forecasts are more accurate
than market segmental forecasts( e.g. all Maruti 800
cars versus red Maruti 800s; all paints versus blue
color paints; all toothpastes versus herbal
toothpastes); these have implications at different
levels/stages of the supply chain

Forecasting Horizon-focus
Short term forecasts say for next 1-2 months for current
production planning and scheduling; for specific products,
machine capacities and deployment, labor skills and
usage, cash inventories ; operational focus
Medium term forecasts say for next 3-12 months for
plant level planning for product/volume changes requiring
redeployment of resources; for product groups,
departmental capacities, work force management,
purchased materials and inventories; tactical focus
Long term forecasts 1 year to 3 years for planning a
new plant or facility requiring major investments and other
resources for both new and old product lines; strategic
focus

Forecasting Horizon- methodology

Short-term forecasting( 1 day to 3 months) for
production planning needing disaggregated
product forecasts with high accuracy levels;
primarily uses time series data methods
Medium-term forecasting( 3 months to 12-24
months) useful for aggregate sales and
operational planning; also for seasonal
business operations; uses both time series
and causal forecasting models
Long term forecasting( beyond 24 months)
useful for aggregate business planning for
capacity and site/location decisions; uses
judgment and causal models

Why Aggregate Production

Planning?
Demand fluctuations - seasonal factors, uncertain
environment et al
Capacity fluctuations number of working days in
month( 28-31; weekends/holidays; plant
availability/maintenance schedules)
Production level changes plant loading factors,
materials and resources availability
Production planning has to be done to match demand
and supply on a period-to-period basis in a cost
effective manner

Forecasting for Business

Demand forecasting to establish the
current total size for any product/service
market and its future growth potential and
trends over time

Sales forecasting- required for a firm to

plan its overall business operations within the
overall market size and potential for its range
of products

Product-life cycle forecasting- to assess

the likely demand development and trends as
they move from introduction -> growth->
maturity -> decline phases
All above forecasting types are to be looked

Sales Forecasting
Within overall demand, firm needs to establish
its sales forecast to help operations
Basis of sales forecasting is assessment of
market share that firm can carve out of the total
market given its past sales as also current
marketing strategies
Firming up of sales forecasts is a function of
available capacity, plant performance, plant
resources and stocks
Sales forecasting is essentially an
inward/internal process
Forecasting from now is seen from operational
context

Demand Forecast and Sales

Forecast(1)
Demand forecasts relate to the total demand for a
product/service offered
Demand forecasts consider various factors influencing
the overall demand for a product/service including
economic and demographic factors, customer needs
and expectations, market segmentation, disposable
incomes et al
Sales forecasts are reflection of actual sales expected
and consequent share of the total market demand
Sales forecasts also consider various supply-related
specific company factors like capability, product range
and capacity

Demand Forecast and Sales

Forecast(2)
It is important to understand separately the need
for demand and sales forecasts linked to their
purpose
Demand forecasts are called for while doing
market entry exercises and planning long term
investments in new /added capacities
Sales forecasts are needed to provide the input
basis for all production planning and supply chain
operations
During this DPF course, demand and sales
forecasts terms may be used interchangeably,
but the clear distinction should be understood

Demand Forecasting Issues(1)

Forecasting is the deliberate attempt to predict the
future- in all its dimensions !
Crystal ball gazing or making astrological predictions are
also exercises in forecasting the future
Is both an art and science as based on significant
behavioral and unstructured issues and an analytical
exercise using scientific principles
Despite its limitations, essential for planned business
operations

Demand Forecasting Issues(2)

All decisions need information about future
circumstances
Best we can do is to forecast these
circumstances
Since business decisions are driven by what
the market needs, it is necessary to forecast
market demand
Since operational decisions are driven by what
their customers need, it is necessary to
forecast expected sales

Demand Forecasting Issues(3)

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 organization

Forecasting Role in a Supply Chain

Forms basis for all strategic and planning decisions in a
supply chain
Used for both push and pull processes
Examples:
Production: scheduling, inventory, aggregate planning
Marketing: sales force allocation, promotions, new production
introduction
Finance: plant/equipment investment, budgetary planning
Personnel: workforce planning, hiring, layoffs

All of these decisions are interrelated and part of

aggregate production planning(APP)
7-30

Need for Collaborative Supply

Chains
SCM integrates and optimizes the processes, but
does not eliminate inherent conflict
SCM mostly remains an in-corporate initiative
SCM does not address the total business
environment (different components of external value
chain face different environments)
Hence, need for collaborative supply chains
Thus, born concept of Collaborative Planning and
Forecast Replenishment( CPFR)

Forecasting Problems
Lack of understanding of integrated market and
supply realities by key decision makers within an
organization
Lack of trust and transparency amongst supply chain
elements and partner organizations
Lack of proper communication, coordination and
collaboration amongst supply chain partners
Lack of metrics for measuring total supply chain
performance
Lack of IT tools, processes, professional
competencies to achieve accurate forecasts

Forecasting Role in Decision-making

External and
Internal Data

Objectives
And
Constraints

Forecasts

Managers

Updated
Forecasts

Actual
Performance

Planned
Performance

Operations

Resources

Forecasting in Business Planning

Inputs
Market Conditions
Competitor Action
Consumer Tastes
Products Life Cycle
Season
Customers plans

Forecastin
g
Method(s)
Or
Model(s)

Economic Outlook
Business Cycle Status
Leading Indicators-Stock
Prices, Bond Yields,
Material
Prices, Business Failures,
money
Supply, Unemployment

Management Team

Other Factors
Legal, Political,
Sociological,
Forecast
Cultural

Errors

Feedback

Outputs
Estimated Demands
for each Product
in each Time Period
Other Outputs

Processor

Sales Forecast
Forecast and
Demand
for Each Product
In Each Time

Production
Capacity
Available
Resources
Risk Aversion
Experience
Personal Values
and
Motives
Social and
Cultural

Sales Forecast
Forecast and Demand
for Each Product
In Each Time Period

Business Strategy
Marketing PlanAdvertising
Sales Effort, Price,
Past Sales
Production PlansQuality
Levels, Customer
Service,
Capacity Costs
Finance Plan
Credit Policies, Billing
Policies

Processor

Procedure for
Translating Sales
Forecast into
Production
Resource Forecast
Production Resource Forecasts

Long Range Medium Range

Short Range
Factory capacities
Work Force
Labor by Skill Class
Capital Funds Department Capacities
Machine Capacities
Facility Needs Purchased Material Cash
Other
Inventories
Inventories
Others
Other