MODULE 1: SUPPLY CHAINS,

DEMAND MANAGEMENT, AND

FORECASTING
Section A: Introduction to Supply Chains

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Module 1, Section A

Section A Introduction
Section A Key Processes: Section A Topics:

▪ Design the supply chain ▪ Topic 1: Supply Chain

network. Models
– Flow of product, ▪ Topic 2: Supply Chain
information, and funds Maturity and Complexity

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Topic 1: Supply Chain Models

Basic Supply Chain for a Product

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Topic 1: Supply Chain Models

Funds Flows, Value, and Balance

Funds Flows Value and Balance

▪ Goes upstream: customer >

producer > supplier.
Creating net
▪ Not linear. value in SC
▪ Electronic payments reduce
cash-to-cash cycle time (cash to Value-creating
inventory to credit to cash). activities for all
▪ Advantages: stakeholders
– Improves customer-supplier Balancing
relationships. competing
– Reduces imbalances between interests
larger and smaller players.

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Topic 1: Supply Chain Models

Vertical Integration
▪ Benefits of vertical integration
– No dealing with competitors for supplies, etc.
– Enhanced visibility into operations
– Same ownership and management for all
activities in supply chain
▪ Ford: historic example
▪ McDonald’s doesn’t directly own
its supply chain, but:
– Long-term supply contracts
– Vested interest model
– 100% landowner of all sites
– Significant control

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Topic 1: Supply Chain Models

Lateral (Horizontal) Integration

▪ Benefits of lateral integration
Components
– Economies of scale and scope Components

– Improved business focus

– Leveraging communication and production competencies
▪ Lateral mergers are one way to grow laterally.

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Topic 2: Supply Chain Maturity and Complexity

Supply Chain Stages

Stage 1: Stage 2: Stage 3: Stage 4: Stage 5:

Orchestrated
Multiple Semi- Integrated Extended supply chain
dysfunction functional enterprise enterprise
enterprise

Reactive Reactive Proactive Strategic Consistent

Efficient Efficient Driver Systematic

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Topic 2: Supply Chain Maturity and Complexity

Stage 1: Multiple Dysfunction

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Topic 2: Supply Chain Maturity and Complexity

Stage 2: Semifunctional Enterprise

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Topic 2: Supply Chain Maturity and Complexity

Stage 3: Integrated Enterprise

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Topic 2: Supply Chain Maturity and Complexity

Stage 4: Extended Enterprise

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Topic 2: Supply Chain Maturity and Complexity

Stage 5: Orchestrated Supply Chain

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Topic 2: Supply Chain Maturity and Complexity

Manufacturing Supply Chain Model

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Topic 2: Supply Chain Maturity and Complexity

Services Also Have Supply Chains

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Topic 2: Supply Chain Maturity and Complexity

Specialized Supply Chains

▪ Humanitarian and disaster relief:
Trusted relationships help overcome
infrastructure failures.
▪ Hospital: Cost cutting (given quality),
actual versus contract prices, tracking
and billing accuracy, centralizing supply.
▪ Retailers: Amazon severely pressuring
multichannel distribution model. Stores
as DCs.

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SECTION B:
DEMAND ANALYSIS AND PATTERNS

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Module 1, Section B

Section B Introduction
Section B Key Processes: Section B Topics:

▪ Collect and analyze historical ▪ Topic 1: Demand Analysis

and environmental demand
data. ▪ Topic 2: Demand Patterns
– Perform historical analysis.
▪ Competitive environment
– Perform environmental scan
and market analysis.
– Perform product
assessment.
▪ Demand patterns

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Topic 1: Demand Analysis

SWOT Analysis

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Topic 1: Demand Analysis

Marketing Strategy and Plan

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Topic 1: Demand Analysis

Market Research: Market Analysis

▪ Global, local, and industry economy
▪ Government and third-party sources
▪ Value deals during recessions

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Topic 1: Demand Analysis

Purposes of Market Research

▪ Finding potential markets
– Does anyone care?
▪ Analyzing markets
– Who, where, when, why, what, how many?
▪ Refining product design
– Strategic price.
– Include features with positive contribution margin.

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Topic 1: Demand Analysis

Competition
▪ Scan
▪ Regional unsatisfied demand
▪ Footholds in saturated markets
▪ Benchmark

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Topic 1: Demand Analysis

Global Perspectives
▪ Connected
▪ Complex
▪ Volatile

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Topic 1: Demand Analysis

Product Portfolio Management

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Topic 1: Demand Analysis

Portfolio Complexity and Life Cycle Reviews

Portfolio Complexity Product Life Cycle Review
Impact

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Topic 2: Demand Patterns

Macroeconomic Demand Patterns

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Topic 2: Demand Patterns

Microeconomics
▪ Price goes up, demand goes down and vice versa.
▪ Substitution effect: interrelated prices.
▪ Price adjusts until supply and demand equilibrium.
▪ Given small price change.
– Elastic: large change in demand.
– Inelastic: small change in demand.
– Maximize profit margin with price changes.
▪ Marginal analysis: marginal utility > marginal cost.
– Ignore costs incurred regardless of choice.

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Topic 2: Demand Patterns

Short- to Medium-Term Demand Patterns

Trend

Cycle Seasonality

Random
variation

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SECTION C:
DEMAND MANAGEMENT

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Module 1, Section C

Section C Introduction
Section C Key Processes: Section C Topics:

▪ Influence demand through ▪ Topic 1: Demand

marketing activities. Management
– Apply the four Ps. ▪ Topic 2: Influencing
– Analyze product life Demand
cycles.

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Topic 1: Demand Management

Demand Management
Demand management is the function of recognizing all
demands for goods and services to support the
marketplace:
▪ Prioritizing demand
▪ Planning, executing, controlling,
and monitoring the design,
pricing, promotion, and distribution
of products and services

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Topic 1: Demand Management

Demand Management Road Map

▪ Liaison between
manufacturers and potential
customers.
– Influence organization to
make products the market
needs.
– Convince customers to
purchase in profitable
manner.
▪ Product-service package
should have capability of
being order winner:
– Order qualifiers
– Order winners

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Topic 1: Demand Management

Linkages Among Elements of Demand Management

Planning demand Communicating demand

Managing and prioritizing

demand Influencing demand
February 11
M T W T F S S
1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 5 6

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Topic 1: Demand Management

Planning Demand and Demand Plan

▪ Demand plan is plan for
action based on
– Forecasts
– Planned demand
generation activities.
▪ Planning horizon
– Best practice: 18-month+
– Revise on regular basis

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Topic 1: Demand Management

Communicating Demand

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Topic 1: Demand Management

Communications Structure for Communicating Demand

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Topic 1: Demand Management

Demand Manager as Focal Point

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Topic 2: Influencing Demand

Influencing Demand Using Plan, Do, Check, Action

▪ Brand, marketing, and sales
activities to convince
customers to purchase
products and services so
that business objectives are
met or exceeded
▪ Influencing product
development and supply
sides of organization

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Topic 2: Influencing Demand

Demand Generation
▪ From latent to actual demand
▪ Educating customers
– Product/brand awareness takes a long time.
– Use feedback to modify approach/budget.
▪ Educating SC partners
– Persons who design, build transport, or sell product.

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Topic 2: Influencing Demand

4 Ps: Product (Service) Product

▪ Was: products identical to all Promotion Price

customers; item generated need. Placement

▪ Is: dynamic; customer need is basis.

▪ Designed to be customizable for segments.
▪ Customer care is an implied or explicit product.
▪ Customized design, manufacture, promotion,
distribution, sales methods, and customer care
training.

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Topic 2: Influencing Demand

4 Ps: Price Product

▪ Strategic decision based on Promotion Price

competition, perceived value, and

brand identity. Placement

▪ Commodity price based on competition.

▪ Differentiated market can base price on R&D, marketing
costs, or value to customer.
▪ Customer-focused differentiates products/price by
segment.
▪ Finds optimal balance of profit vs. attractive price to
customers.

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Topic 2: Influencing Demand

4 Ps: Placement Product

▪ How to get it to customer. Promotion Price

▪ Traditionally one-way communication; Placement

now back-forth flow.

▪ Contact channel strategy:
– Means to increase profitability, control, and consistency
– Interactive contact channels (call centers, live dialogue
websites, chat rooms).
– Is itself a product; different segments get different
options.

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Topic 2: Influencing Demand

4 Ps: Promotion Product

Creation of brand image Promotion Price

(name, logo and image).
Loyalty: product → provider. Segmentation of promotions. Placement
Trust they will be taken care of.
Single failure can undo.
Customer-
focused
promotional
activities

Research and analysis: study

Cost-effective customization of
buyer motivation and
advertising materials.
behaviors.

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Topic 2: Influencing Demand

Product Life Cycle Stages

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Topic 2: Influencing Demand

Product Life Cycle Management

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Topic 2: Influencing Demand

NPI Frequency versus Demand Uncertainty

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SECTION D:
FORECASTING

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Module 1, Section D

Section D Introduction
Section D Key Processes: Section D Topics:

▪ Build the forecast. ▪ Topic 1: Forecasting

– Select appropriate Principles and Process
forecasting methods. ▪ Topic 2: Forecasting
▪ Qualitative, quantitative Methods
▪ Intrinsic, extrinsic ▪ Topic 3: Measures of
– Measure forecast accuracy. Forecast Error
▪ Forecast error, forecast
bias

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Topic 1: Forecasting Principles and Process

Principles of Forecasting
Forecasts are: Monthly
Demand
▪ Necessary (sometimes)
▪ Best based on actual demand
rather than just orders
▪ Wrong (almost always, and
they should include an
estimate of error)
▪ More accurate for groups than
for single items Forecast
▪ More accurate for near term Actual
than for long term.

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Topic 1: Forecasting Principles and Process

Forecasting Process
1. Specify purpose, 8. Forecast.
2. Aggregation, units, and 9. Perform S&OP.
3. Time horizon. 10. Review and improve.
4. Visualize data. Raw Data

5. Choose forecasting 40
35

method or model. 30
25

6. Prepare data. 20
15

7. Test (historical data). 10

5
0

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Topic 2: Forecasting Methods

Qualitative and Combination Methods

▪ Estimates Optimistic + (4 × Most Likely) + Pessimistic
▪ Judgmental/ 6
expert judgment
▪ Delphi method
– Anonymous to avoid: ▪ When to use qualitative
▪ “Groupthink” forecasting methods:
▪ “Stake in the ground” – For new products
▪ Combine with quantitative – When hard data are
to add expertise, lacking
assumptions

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Topic 2: Forecasting Methods

Deseasonalizing
1. Calculate month average for each month: e.g.,
(Jan-Y1 + Jan-Y2 + Jan-Y3)/3
2. Calculate year average: Sum month averages and
divide by 12.
3. Calculate seasonal index: Divide each month
average by the year average.
Average Demand for Period (e.g., Month)
Seasonal Index =
Average Demand for all Periods (e.g., Year)

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Topic 2: Forecasting Methods

Deseasonalizing

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 Topic 2: Forecasting Methods

Naïve; Simple or Weighted Moving Average

▪ Naïve: Lasts month’s actual is this month’s forecast
▪ Simple moving average:
(M1 + M2 + M3) 14.00 + 15.87 + 14.64
3-Month Moving Average = = = 14.84
3 3
– Smooths out irregular demand, but lags trend
▪ Weighted moving average:
(1 × M1) + (2 × M2) + (3 × M3)
3-Month Weighted Moving Average =
6
(15.51) + (2 × 19.73) + (3 × 18.61)
= = 18.47
6
– Also smooths, but lags trend less

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Topic 2: Forecasting Methods

Exponential Smoothing
▪ Inputs: last period’s forecast, last period’s demand, and
alpha
– New Forecast = (α ×Last Period’s Demand) + [(1 − α) ×Last
Period’s Forecast]
▪ Alpha, α, a smoothing constant between 0 and 1
– Example: 0.3, 30% weight on demand, 70% on forecast, (0.3
× 14.92) + [(0.7) × 17.71] = 16.87
– Typically between 0.05 and 0.5
– Experience, trial and error, and historical testing
▪ Can minimize lag even more, but not eliminate

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Topic 2: Forecasting Methods

Comparison of Time-Series Forecasts

Forecasting
Forecasting over longer
month-to- periods
month results in
works well. same value
repeated.

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( ) ( ) ( )
Topic 2: Forecasting Methods

Reseasonalizing

0.786 × 14.84 = 11.66 0.071 × 18.47 = 1.32

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Topic 2: Forecasting Methods

Service-Sector Forecasting
Service businesses, such as Some restaurant variables
restaurants, may track
▪ Workers per shift
“seasonal” demand in units
as short as minutes. ▪ Registers in operation
▪ Number of available tables
▪ Space requirements
▪ Amount and types of foods

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Topic 2: Forecasting Methods

Leading and Lagging Economic Indicators

Lagging Indicators Leading Indicators

▪ Unemployment rate ▪ Building permits

▪ Outstanding business and ▪ Initial unemployment claims
commercial loans
▪ Orders for plant equipment
▪ Inventory to sales
▪ Manufacturers’ orders for durable
▪ Changes in company profits
goods and materials
▪ Spending by businesses
▪ Changes in money supply
▪ Consumer price index (CPI)
▪ S&P 500
▪ Average duration of
unemployment ▪ Long- vs. short-term interest rates
▪ Consumer optimism
Past and current trends Future trends
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Topic 2: Forecasting Methods

Associative Forecasting

y = α + βx
Roofing Sales = α + (β ×Prior Month’s Housing Starts)

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Topic 3: Measures of Forecast Error

Forecast Error

Forecast Error = │A − F│

= │29 units − 33.51 units│ = │−4.51 units│ = 4.51 units

NOTE:
Where:
Absolute = | |.
A = Actual demand
F = Forecast demand An absolute value has no +/–
sign, and so, in this case, it
measures the size of the error,
not the direction.

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 Topic 3: Measures of Forecast Error

Forecast Error and Accuracy

│A − F│
Forecast Error as a Percentage =
A
│29 units − 33.51 units│ 4.51 units
= =
29 units 29 units
= 0.155 = 15.5% error

Forecast Accuracy = 1 − Forecast Error as a Percentage

= 1 − 0.155 = 0.845 = 84.5% accuracy

Where:
A = Actual demand
F = Forecast demand
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Topic 3: Measures of Forecast Error

Bias and Random Variation

Bias Random Variation

▪ Consistent deviation from ▪ If cumulative actual demand

the mean in one direction = cumulative forecast
▪ Good forecast: not biased demand, then no bias.
▪ Cumulative Forecast Error ▪ Wide swings in both
= Cumulative Actual directions can still cause
Demand − Cumulative issues.
Forecast Demand
▪ Not absolute (direction
matters)
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Topic 5: Measures of Forecast Error

Mean Absolute Deviation (MAD) with Smoothing

The Greek
uppercase letter
∑ stands for
“the sum of.”

∑│A − F│
MAD =
n
20.2
=
12

= 1.68 units

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Topic 5: Measures of Forecast Error

Distribution Curve for MAD of 1.68 Units

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Topic 5: Measures of Forecast Error

Standard Deviation
Difference between average
and actual observations,
squared, divided by n (or
n−1), then square root.

Standard Deviation =

√ ∑(Sample − Sample Mean)2

n−1

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Topic 5: Measures of Forecast Error

Other Measures of Forecast Error

Algebraic Sum of Forecast Errors −6.69

Tracking Signal = = = −3.98
Mean Absolute Deviation 1.68

∑(Errors for Each Period)2

55.57
MSE = = = 4.63
Number of Forecast Periods 12

│A − F│
∑( A ) 206.87%
MAPE = = = 17.24%
n 12

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Topic 5: Measures of Forecast Error

MAD, Tracking Signal, and MSE

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Topic 5: Measures of Forecast Error

MAPE

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SECTION E:
SUPPLY AND DEMAND ALIGNMENT

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Module 1, Section E

Section E Introduction
Section E Key Processes: Section E Topics:

▪ Align supply with demand. ▪ Topic 1: Supply and

– Execute sales and Demand Alignment
operations planning ▪ Topic 2: Sales and
(S&OP) process. Operations Planning
– Manage inputs and
outputs.
– Perform reconciliation and
analysis.

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Topic 1: Supply and Demand Alignment

Operations Planning and Control

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Topic 1: Supply and Demand Alignment

Strategic and Business Planning

▪ Strategic plan
– Mission and the resources needed to get there
– Goals: Market share, revenue, profits, and growth
– Objectives: Value to customers, owners
▪ Business plan
– Inputs: demand plan and long-term forecasts
– Explicit vision to achieve strategy over 1-3 years
– In dollars and grouped by product family
– Point of reference for S&OP
– Guidance for tactical production and sales plans

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Topic 1: Supply and Demand Alignment

Master Planning and Resource Planning

Master Planning Resource Planning

▪ Long-term resource plan ▪ 15- to 18-month capacity

▪ Near-medium-term sales planning
and operations plan ▪ Capacity at business and
production plan level
▪ Available capacity (S&OP)
plus investments in capacity ▪ Resources that take long to
acquire
(resource planning)
▪ Lead time to get equipment,
▪ Satisfy stakeholders install it, and get it
including ROI producing
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Topic 2: Sales and Operations Planning

Monthly Sales and Operations Planning Process

Step 1 Data gathering Statistical forecast updated.
Step 2 Demand planning Statistical forecast reviewed by
phase product/brand, marketing, sales.
Step 3 Supply planning Supply management team may alter
phase operations plan if necessary.
Step 4 Pre-meeting Key players review data, set executive
meeting agenda.
Step 5 Executive meeting VPs meet monthly to review decisions
and strategy.

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Topic 2: Sales and Operations Planning

Sales and Operations Planning (S&OP)

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Topic 2: Sales and Operations Planning

Demand Planning Phase Meeting

▪ Highest-ranking demand-side ▪ Meeting brevity:
professional chairs. – Product family level,
▪ Demand manager prepares subfamilies by exception.
dashboards. – What changed since last
– Consolidates product and meeting (replanning).
brand management, – Validating assumptions.
marketing, sales plans.
▪ Strategies to close gaps
– Demand plan in units and in between demand plan and
dollars. business plan.
– Metrics, assumptions, ▪ Success of demand plan
events, opportunities, risks, depends on quality of
and decisions. communications.

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Topic 2: Sales and Operations Planning

Demand Plan Dashboard in Units

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Topic 2: Sales and Operations Planning

Evaluating Supply Capability

Supply/Demand Match Supply/Demand Mismatch

▪ Production plan will match ▪ Supply develops alternative

plans:
demand plan.
– Produce above demand for
certain periods to meet later
spikes in demand.
– Increase capacity by hiring,
adding shift, planning
overtime, leasing equipment,
or outsourcing (or opposite).
– Reducing demand plan (as
last resort).
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Topic 2: Sales and Operations Planning

S&OP Inputs and Outputs

▪ Represent ▪ Long-term
demand-side Product ▪ Seek value
interests in Operations
development
and brand added
operations management
terms Demand
management:
helps parties
understand
▪ Daily each other ▪ Medium to
▪ Sufficient short term
inventory Sales Marketing ▪ Tailoring
▪ Time to demand to
market capacity

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Topic 2: Sales and Operations Planning

Reconciliation: Executive Meeting

▪ Participants: CEO and demand, supply, and financial executives and
other direct reports to CEO.
▪ Goal: consensus demand plan.
– Review metrics, changes, new risks and opportunities, and other events.
▪ Executives will want to know:
– Are plans on budget, schedule, and scope?
– How are product mixes performing?
– Do strategies need modifying and when do decisions need to be made?
▪ Communication of agreed-upon plan to all internal participants is
critical.
– Depends on quality of internal communications process.

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Topic 2: Sales and Operations Planning

Implementing S&OP: Coordinating Function

▪ S&OP institutionalizes communications among functional areas
by getting all facts in one place for debate.
▪ Links business planning and
tactics. Business
▪ Opportunity to be proactive. Planning

▪ Defines short to medium term. Planning Sales and

▪ Reconciles functional plans. Operations
Planning
▪ Builds bridge from customer Tactics
value to SC efficiency.
▪ Replanning motivates Demand Master Rough-Cut
Management Scheduling: Capacity
continuous improvement. Master
Production
Plan

Schedule

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 Topic 2: Sales and Operations Planning

Contributions to S&OP
Demand Side Cooperation Supply Side
Demand forecasts Output and resources

Product families
Demand plan
commitments
S&OP
Operations constraints

Demand plan numbers Operations strategies

and assumptions
Supply-demand strategies

Market analysis Actual results and other

performance metric data
Financial feasibility Fit with business plan
Finance
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Topic 2: Sales and Operations Planning

Operations Strategies
Level

Production
Chase
Demand

Hybrid

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Topic 2: Sales and Operations Planning

Supply-Demand Strategies
Allocation: Supply-Demand Option MPS Focus

▪ Assign items to specific Make-to-stock (MTS)

• Few items made from
Schedule
finished
orders but still in inventory many components goods.
▪ Process to distribute • Integral design
Make-to-order (MTO) Schedule
materials in short supply • Many items made raw
from few components materials.
• Custom
Assemble-to-order (ATO) Schedule
• Many end items, few module
components production.
• Assemble near point-
of-sale

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Topic 2: Sales and Operations Planning

Demand Management and Prioritization: MPS and MRP

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Topic 2: Sales and Operations Planning

Situations for Managing and Prioritizing Demand

• Find ways to • Use time fences
better use current Demand to delay
capacity. Supply plan overstates production as
organization actual demand; long as feasible.
cannot meet changes will
demand plan impact sales and
without changes. costs.

Large one-time Demand plan

sales opportunity understates actual
would impact demand; changes
other orders, will impact sales
• Establish costs, • Extend planning
profit. and costs.
process for horizon.
unusual demand • Add incentives
evaluation. for substitutes.
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Topic 2: Sales and Operations Planning

Measures of Customer Service Levels

▪ Is cost of achieving a given ▪ Lead time monitoring
service level a sound – Speed of performance
investment? – Consistency
▪ Fill rates: – Flexibility
– Unit fill rate – Malfunction recovery
– Line item fill rate ▪ Order status reporting
– Monetary value fill rate ▪ Customer satisfaction
▪ Stockout frequency – Establish, then fulfill
expectations

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