Constituent of Symbiosis International (Deemed University)

Supply Chain Management

By : Rohit Deshmukh
For: Semester -I
Planning Supply & Demand
Demand Management
• Recognizing and managing all demands for a
product
• Short, medium and long term
 Long term- strategic planning
 Medium term- Production planning
 Short term- master production scheduling
• Crucial to identify all sources of demand
Demand Management
4 major activities:
•Forecasting
•Order processing
•Making delivery promises
•Interfacing between Manufacturing planning and
control and the marketplace
Role of Forecasting in a Supply Chain
• The basis for all planning decisions in a supply
chain
• Used for both push and pull processes
 Production scheduling, inventory, aggregate
planning
 Sales force allocation, promotions, new
production introduction
 Plant/equipment investment, budgetary
planning
 Workforce planning, hiring, layoffs
• All of these decisions are interrelated
Demand Patterns
1. On plotting historical data on time scale, we get
a pattern- general shape of a time series
 Demand Patterns

1. Trend: Demand changes in a steady pattern over

a period. Linear, Geometric, Exponential trend,
etc.
2. Seasonality: Demand fluctuates depending on
time bucket, e.g. month of year
3. Random variation: Many factors affect demand
on random basis
4. Cycle: Wavelike increase/decrease over a span
of several years/decades
 Demand

1. Stable v/s Dynamic:

 Stable- Demand retaining same general shape of
plot over time
 Dynamic- Demand changing in nature/shape over
time
2. Dependent v/s Independent:
 Independent: Not related to any other
product/service demand
 Dependent: Derived from that of another item
 Characteristics of Forecasts

1. Forecasts are always inaccurate and should thus

include both the expected value of the forecast
and a measure of forecast error
2. Long-term forecasts are usually less accurate
than short-term forecasts
3. Aggregate forecasts are usually more accurate
than disaggregate forecasts
4. In general, the farther up the supply chain a
company is, the greater is the distortion of
information it receives
 Collection & Preparation of
Data
1. Record data in same terms as needed for
forecast
 Forecast on demand and not shipments
 Forecast period should be same as schedule period
 Item forecast same as manufacturing variety
2. Record circumstances related to data
3. Record demand separately for different
customer groups
 Components and Methods

• Companies must identify the factors that

influence future demand and then ascertain the
relationship between these factors and future
demand
 Past demand
 Lead time of product replenishment
 Planned advertising or marketing efforts
 Planned price discounts
 State of the economy
 Actions that competitors have taken
Components and Methods
1. Qualitative
 Primarily subjective
 Rely on judgment

2. Time Series
 Use historical demand only
 Best with stable demand

3. Causal
 Relationship between demand and some other factor

4. Simulation
 Imitate consumer choices that give rise to demand
Components of An Observation
Observed demand (O) = systematic component (S)
+ random component (R)
• Systematic component – expected value of demand
– Level (current deseasonalized demand)
– Trend (growth or decline in demand)
– Seasonality (predictable seasonal fluctuation)
• Random component – part of forecast that deviates from
systematic part
• Forecast error – difference between forecast and actual demand
Five Important Points in the
Forecasting Process
1. Understand the objective of forecasting.
2. Integrate demand planning and forecasting
throughout the supply chain.
3. Identify the major factors that influence the
demand forecast.
4. Forecast at the appropriate level of aggregation.
5. Establish performance and error measures for
the forecast.
Intrinsic Techniques

1. Use historical data

2. Assumption: What happened in the past will
happen in future
3. Some important intrinsic techniques:
 Average demand
 Moving Averages
 Exponential smoothing
Intrinsic Techniques

1. Simple average: avg monthly demand for next

year = 12 month avg for last year
2. Moving average: Rolling average of 12 months
considering latest month
3. Exponential smoothing
 Define weightage for latest demand (smoothing
constant)
 New fc = α(latest demand) + (1- α)(previous fc)
 Works well for stable items, not for low or
intermittent demand
Seasonality

1. Seasonal index: degree of seasonal variation

2. Estimate of how much the demand during the
season will be above or below normal average
3. Seasonal index = (Period average)/(Overall
average)
 Period can be daily/weekly/monthly/quarterly
 Avg demand for all periods averages out
seasonality, called deseasonalized demand
Seasonality
Seasonality
 Time Series Models

Forecasting Method Applicability

Moving average No trend or seasonality
Simple exponential smoothing No trend or seasonality
Holt’s model Trend but no seasonality
Winter’s model Trend and seasonality
Measures of Forecast Error
• Forecast errors contain valuable information and must be
analyzed for two reasons:
1. Managers use error analysis to determine whether the current
forecasting method is predicting the systematic component of
demand accurately
2. All contingency plans must account for forecast error
Measures of Forecast Error
• Errors can happen in 2 ways:

1. Bias- when cumulative actual demand varies from cumulative forecast

Systematic error in which actual demand consistently above or below
actual demand
2. Random- above or below forecast, avg error is zero
Bias
Bias
Random Variation
Random Variation
Measures of Forecast Error
• Mean Absolute Deviation (MAD):

1. MAD = (Sum of absolute deviations)/(no. of observations)

2. In above data:
– Sum of abs dev = 5+6+2+4+3+4 = 24
– MAD = 24/6 = 4
 The Role of Software Tools in
Forecasting

• Software is important
 Large amounts of data
 Frequency of forecasts
 Importance of high-quality results
• Can forecast demand by products and markets
• Real time updates help firms respond quickly to changes in
marketplace
• Facilitates demand planning
 Aggregate Planning

• Create a plan to meet expected demand

• Satisfy demand and maximize profit
• Planning at aggregate level and not SKU level
• Sets optimum level of production and inventory for 3-18
months
• Framework for short term decisions on production, inventory
and distribution
Forecasting variables
 Aggregate Planning approaches

• Trade-offs among 3 variables:

 Amount of production capacity
 Level of utilization of production capacity
 Amount of inventory to carry
• Use production capacity to match demand
• Utilize varying levels of total capacity to match demand
 Aggregate Planning approaches

• Use production capacity to match demand

 Use 100% of capacity at all times
 Add/eliminate capacity, Hire/layoff employees
 Low inventory levels but cost of changing capacity is key
 Disruptive/demoralizing for employees
 Works when cost of carrying inventory is high and cost of
capacity and workforce change is low
 Aggregate Planning approaches

• Utilize varying levels of total capacity to match demand

 If excess production capacity available
 Workforce size constant
 Overtime/flexible work scheduling
 Low inventory levels, low avg capacity utilization
 Works when cost of carrying inventory is high and cost of excess
capacity is low
 Aggregate Planning approaches

• Use inventory and backlogs to match demand

 Stable capacity, workforce and output
 Production not matched with demand
 Inventory built up in low demand period
 Higher capacity utilization, lower cost of changing capacity
 Large inventory levels/backlogs
 Use when cost of capacity/changing capacity is high, cost of
carrying inventory/backlog is low
35