UNIT-Ⅱ

Demand Management in Supply Chain

Demand management is a process within an organisation which enables that organisation to
tailor its capacity to meet variations in demand or to manage the level of demand using
marketing or supply chain management strategies.
Demand management is a planning methodology. Companies use it to forecast and plan how
to meet demand for services and products. Demand management improves connections
between operations and marketing.

Types of Demand
1. Push Demand
Push demand is the term given to demand that is built up by the actions of a seller.
Manufacturers and other original sellers create push demand to entice distributors and
wholesalers to give new products a try or to stock up on existing products with larger-than-
normal orders. Wholesalers and distributors can create push demand through their retailer
customers, as well, who in turn can create push demand through their own customers.

Supply chains must be robust and adaptable enough to compensate for larger-than-usual loads
from time to time due to suppliers generating push demand.

2. Pull Demand
Pull demand comes straight from consumers. Pull demand is generated when end-consumers
ask for products by name at retail outlets. Recognizing an opportunity to make money by
stocking the requested product, retailers will request the product from their distributors or
wholesalers, who will in turn create more demand for the original seller.
Supply chain linkages must be adaptable enough to carry new types of products from new
suppliers with short notice to compensate for advertisers generating pull demand.

Demand Planning & Forecasting

Demand planning is a supply chain management process of forecasting, or predicting, the
demand for products to ensure they can be delivered and satisfy customers. The goal is to
strike a balance between having sufficient inventory levels to meet customer needs without
having a surplus. A wide variety of factors can influence demand, including labour force
changes, economic shifts, severe weather, natural disasters or global crisis events.
With demand planning, business leaders can stay in front of market shifts and make more
proactive decisions, while being responsive to their customers’ needs.
Methods of Demand Forecasting
Quantitative Forecasting Methods
Quantitative forecasting methods fall into two broad categories: time series and explanatory,
also known as causal methods. Time-series methods build upon historical data. The pattern
in historical data becomes a baseline to forecast the pattern of future customer demand. Data
collected in past years can help predict customer demand in the next year.
On the other hand, explanatory methods collect data about all variables that may have
potential effects on customer demand. For instance, brand awareness (a proxy for demand)

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can be dependent upon the consumer’s perception of the product, the celebrity who promotes
the product, consumer income, consumer age, and promotional events.

Explanatory methods can help managers understand how these factors interrelate and
influence brand awareness.
Several techniques and tools are available within each category of quantitative forecasting
methods. Each technique has specific applications for different forecasting situations.
Managers should understand the strengths and weaknesses of each technique and decide how
to leverage them to the advantage of their company.
Four time-series methods: simple moving average (SMA), weighted moving average
(WMA), exponential smoothing, and simple regression.
1. Simple Moving Average
The moving average is a time-series technique to smooth out short-term fluctuations. A 3-
month moving average uses the past three periods of data, a 4-month moving average uses
the past four periods of data, and so on. The longer the averaging period used, the smoother
the forecast becomes. In addition, moving average forecasts always lag actual results; the
longer the averaging period, the longer the lag. In addition to smoothing and lagging, the
moving average also is limited in that it can provide only short-term forecasts.
2. Weighted Moving Average
The WMA is a variation of the SMA. The results are different as the WMA assigns more
weight to the most recent periods. The assumption is that recent observations have a
stronger influence on future changes than less recent observations. In the area of SCM,
SMA and WMA methods are used to forecast customer demand for products over short
period; however, they are not useful in forecasting for extended periods.
The formula for calculating the WMA is as follows

𝐀𝐜𝐭𝐮𝐚𝐥𝐧−𝟑 𝐱𝟑 + 𝐀𝐜𝐭𝐮𝐚𝐥𝐧−𝟐 𝐱𝟐 + 𝐀𝐜𝐭𝐮𝐚𝐥𝐧−𝟏 𝐱𝟏

Forecastn = 𝐱𝟑 + 𝐱𝟐 + 𝐱𝟏
3. Exponential Smoothing
Exponential smoothing is another time-series method of forecasting. While the moving
average method requires using multiple periods of past data, exponential smoothing uses
only the previous period’s forecast and actual data. It adjusts the previous period forecast
by multiplying an alpha (α) factor of less than 1.0 by the difference between the previous
actual and forecast amounts and by adding the result to the previous forecast. The formula
is
Forecastn= Forecast n-1 + (Actualn-1 − Forecastn-1)
4. Regression Analysis
The regression analysis is called a causal method of forecasting. The causal method attempts
to predict demand by identifying other variables that can influence demand. This forecast
method makes use of a regression model to increase the forecast accuracy. For instance, if
experts think the weather and consumer income could significantly affect the sales volume
of apparels, a model can be constructed to predict the sales volume of apparels based on these
two predefined variables. This method constructs a causal model based on a rigid judgmental
process. A linear dependence relationship between a series of independent variables and a
dependent variable is formulated as follows:

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where
R is a coefficient
X is an independent variable
Qualitative Forecasting Methods
When historical data are not available or not applicable to the studied subjects, an effective
quantitative forecasting model cannot be constructed. In these cases, qualitative forecasting
methods can be utilized. A major approach central to qualitative forecasting methods is to
rely on the insights of expert opinions. The collective intelligence and experience of experts
can help derive insights on customer demand for unique products or services. Two major
qualitative forecasting methods are the survey and the Delphi method.
1. Survey Method
The survey process begins when a company identifies a reference population or a
representative group in order to help understand the buying patterns of its potential
customers.
2. Delphi Method
The Delphi method relies on a panel of experts to engage in a series of systematic, interactive
discussions. Experts are chosen based on the fit of their expertise to the subjects under study.
Questions are then posed to these experts and after rounds of discussions, ideas and opinions
are narrowed down, until a consensus is reached. Since the responses are solicited in an
anonymous manner, the experts are less likely to feel self-conscious about their ideas if they
appear to go against the trend of other responses in the group. This advantage can contribute
to an increase in the number of ideas generated.

The Future of Demand Planning in the Supply Chain

Like many business needs, supply chain and demand planning are going digital. Advances in
applications of machine learning within the supply chain are making it possible to adapt and
update forecasts in real time, allowing inventory to run leaner, without missing the mark on
demand.
For supply chain professionals, understanding how to use digital enterprise architectures and
implementing artificial intelligence and machine learning programs that can help optimize a
lean, agile and data-driven approach will reveal new ways to cut costs in operations, boost
revenue and offer a greater competitive edge.
A better-connected supply chain means demand planning can be conducted even more in the
moment. When implemented well, demand planning can be a pivotal process in boosting a
supply chain’s profitability.

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Drivers of Supply Chain Management
1. Facilities are the actual physical locations in the supply chain network where product
is stored, assembled, or fabricated. The two major types of facilities are production sites
and storage sites. Decisions regarding the role, location, capacity, and flexibility of
facilities have a significant impact on the supply chain’s performance.
2. Inventory encompasses all raw materials, work in process, and finished goods within
a supply chain. The inventory belonging to a firm is reported under assets. Changing
inventory policies can dramatically alter the supply chain’s efficiency and
responsiveness.
3. Transportation entails moving inventory from point to point in the supply chain.
Transportation can take the form of many combinations of modes and routes, each with
its own performance characteristics. Transportation choices have a large impact on
supply chain responsiveness and efficiency. Responsiveness can be achieved by a
transportation mode that is fast and flexible such as trucks and airplanes.
4. Information consists of data and analysis concerning facilities, inventory,
transportation, costs, prices, and customers throughout the supply chain. Information is
potentially the biggest driver of performance in the supply chain because it directly
affects each of the other drivers. Information presents management with the opportunity
to make supply chains more responsive and more efficient.
5. Sourcing is the choice of who will perform a particular supply chain activity such as
production, storage, transportation, or the management of information. At the strategic
level, these decisions determine what functions a firm performs and what functions the
firm outsources. Sourcing decisions affect both the responsiveness and efficiency of a
supply chain.
6. Pricing determines how much a firm will charge for the goods and services that it
makes available in the supply chain. Pricing affects the behaviour of the buyer of the
good or service, thus affecting supply chain performance. Differential pricing provides
responsiveness to customers that value it and low cost to customers that do not value
responsiveness as much. Any change in pricing impacts revenues directly but could
also affect costs based on the impact of this change on the other drivers.

Obstacles of Supply Chain Management-

Any factor that leads to either local optimization by different stages of the supply chain or an
increase in information delay, distortion, and variability within the supply chain is an obstacle.
We divide the major obstacles into five categories:
• Incentive obstacles
• Information-processing obstacles
• Operational obstacles
• Pricing obstacles
• Behavioural obstacles

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Incentive Obstacles
Incentive obstacles occur in situations when incentives offered to different stages or
participants in a supply chain lead to actions that increase variability and reduce total supply
chain profits.
1. LOCAL OPTIMIZATION WITHIN FUNCTIONS OR STAGES OF A SUPPLY
CHAIN-
Incentives that focus only on the local impact of an action result in decisions that do not
maximize total supply chain surplus. For example, if the compensation of a transportation
manager at a firm is linked to the average transportation cost per unit, the manager is likely to
take actions that lower transportation costs even if they increase inventory costs or hurt
customer service. It is natural for any participant in the supply chain to take actions that
optimize performance measures along which they are evaluated.
2. SALES FORCE INCENTIVES
Improperly structured sales force incentives are a significant obstacle to coordination in a
supply chain. In many firms, sales force incentives are based on the amount the sales force sells
during an evaluation period of a month or quarter. The sales typically measured by a
manufacturer are the quantity sold to distributors or retailers (sell-in), not the quantity sold to
final customers (sell-through). Measuring performance based on sell-in is often justified on the
grounds that the manufacturer’s sales force does not control sell-through. For example, Barilla
offered its sales force incentives based on the quantity sold to distributors during a four- to six-
week promotion period. To maximize their bonuses, the Barilla sales force urged distributors
to buy more pasta toward the end of the evaluation period, even if distributors were not selling
as much to retailers. The sales force offered discounts they controlled to spur end-of-period
sales. This increased variability in the order pattern, with a jump in orders toward the end of
the evaluation period followed by few orders at the beginning of the next evaluation period.

Information-Processing Obstacles
Information-processing obstacles occur when demand information is distorted as it moves
between different stages of the supply chain, leading to increased variability in orders within
the supply chain.
1. FORECASTING BASED ON ORDERS AND NOT CUSTOMER DEMAND
When stages within a supply chain make forecasts that are based on orders they receive, any
variability in customer demand is magnified as orders move up the supply chain to
manufacturers and suppliers. In supply chains where the fundamental means of communication
among different stages are the orders that are placed, information is distorted as it moves up
the supply chain. Each stage views its primary role within the supply chain as one of filling
orders placed by its downstream partner.

Thus, each stage views its demand as the stream of orders received and produces a forecast
based on this information. In such a scenario, a small change in customer demand becomes
magnified as it moves up the supply chain in the form of customer orders. Consider the impact
of a random increase in customer demand at a retailer. The retailer may interpret part of this
random increase as a growth trend. This interpretation will lead the retailer to order more than
the observed increase in demand because the retailer expects growth to continue into the future
and thus orders to cover for future anticipated growth. The increase in the order placed with
the wholesaler is thus larger than the observed increase in demand at the retailer. Part of the
increase is a one-time increase. The wholesaler, however, has no way to interpret the order
increase correctly. The wholesaler simply observes a jump in the order size and infers a growth
trend. The growth trend inferred by the wholesaler will be larger than that inferred by the
retailer (recall that the retailer increased the order size to account for future growth).
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The wholesaler will thus place an even larger order with the manufacturer. As we go farther up
the supply chain, the order size is magnified.
2. LACK OF INFORMATION SHARING
The lack of information sharing between stages of the supply chain magnifies the information
distortion. A retailer such as Wal-Mart may increase the size of a particular order because of a
planned promotion. If the manufacturer is not aware of the planned promotion, it may interpret
the larger order as a permanent increase in demand and place orders with suppliers accordingly.
The manufacturer and suppliers thus have much inventory right after Wal-Mart finishes its
promotion. Given the excess inventory, as future Wal-Mart orders return to normal,
manufacturer orders will be smaller than before. The lack of information sharing between the
retailer and manufacturer thus leads to a large fluctuation in manufacturer orders.

Operational Obstacles
Operational obstacles occur when actions taken in the course of placing and filling orders lead
to an increase in variability.
1. ORDERING IN LARGE LOTS
When a firm places orders in lot sizes that are much larger than those in which demand arises,
variability of orders is magnified up the supply chain. Firms may order in large lots because a
significant fixed cost is associated with placing, receiving, or transporting an order. Large lots
may also occur if the supplier offers quantity discounts based on lot size.
2. LARGE REPLENISHMENT LEAD TIMES
Information distortion is magnified if replenishment lead times between stages are long.
Consider a situation in which a retailer has misinterpreted a random increase in demand as a
growth trend. If the retailer faces a lead time of two weeks, it will incorporate the anticipated
growth over two weeks when placing the order. In contrast, if the retailer faces a lead time of
two months, it will incorporate into its order the anticipated growth over two months (which
will be much larger). The same applies when a random decrease in demand is interpreted as a
declining trend.
3. RATIONING AND SHORTAGE GAMING
Rationing schemes that allocate limited production in proportion to the orders placed by
retailers lead to a magnification of information distortion. This can occur when a high-demand
product is in short supply. In such a situation, manufacturers come up with a variety of
mechanisms to ration the scarce supply of product among various distributors or retailers. One
commonly used rationing scheme is to allocate the available supply of product based on orders
placed. Under this rationing scheme, if the supply available is 75 percent of the total orders
received, each retailer receives 75 percent of its order. This rationing scheme results in a game
in which retailers try to increase the size of their orders to increase the amount supplied to
them.
If the manufacturer is using orders to forecast future demand, it will interpret the increase in
orders as an increase in demand even though customer demand is unchanged. The manufacturer
may respond by building enough capacity to be able to fill all orders received. Once sufficient
capacity becomes available, orders return to their normal level because they were inflated in
response to the rationing scheme. The manufacturer is now left with a surplus of product and
capacity. These boom-and-bust cycles thus tend to alternate.

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Pricing Obstacles
Pricing obstacles arise when the pricing policies for a product lead to an increase in variability
of orders placed.
1. LOT SIZE–BASED QUANTITY DISCOUNTS
Lot size–based quantity discounts increase the lot size of orders placed within the supply chain
because lower prices are offered for larger lots. As discussed earlier, the resulting large lots
magnify the bullwhip effect within the supply chain.
2. PRICE FLUCTUATIONS
Trade promotions and other short-term discounts offered by a manufacturer result in forward
buying, by which a wholesaler or retailer purchases large lots during the discounting period to
cover demand during future periods. Forward buying results in large orders during the
promotion period followed by very small orders after that.

Behavioural Obstacles
Behavioural obstacles are problems in learning within organizations that contribute to
information distortion. These problems are often related to the way the supply chain is
structured and the communications among different stages. Some of the behavioural obstacles
are as follows:
1. Each stage of the supply chain views its actions locally and is unable to see the impact of its
actions on other stages.
2. Different stages of the supply chain react to the current local situation rather than trying to
identify the root causes.
3. Based on local analysis, different stages of the supply chain blame one another for the
fluctuations, with successive stages in the supply chain becoming enemies rather than partners.
4. No stage of the supply chain learns from its actions over time because the most significant
consequences of the actions any one stage takes occur elsewhere. The result is a vicious cycle
in which actions taken by a stage create the very problems that the stage blames on others.
5. A lack of trust among supply chain partners causes them to be opportunistic at the expense
of overall supply chain performance. The lack of trust also results in significant duplication of
effort. More important, information available at different stages either is not shared or is
ignored because it is not trusted.

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 Manufacturing Management
Manufacturing management refers to all aspects of the product manufacturing process.
Managing a manufacturing plant means responsibility for the process, from assembly design
to packaging and sending out the finished product. Employee work shifts, quality control, and
accounting all fall under the general umbrella of manufacturing management.
Key elements in manufacturing management include the development of an assembly design,
ethics in business, accountability, and forecasting for the future. Each step of managing a
manufacturing scenario works in tandem with the step before and after to present a smooth-
running operation. Members of manufacturing management are typically assigned specific
duties or departments to oversee during their work shifts.
Manufacturing management adheres to the company vision or mission statement. Whether the
product being manufactured is a small paperclip or a massive earth-moving machine, the
mission statement of the company reflects the end goal of the entire company. Members of
management must attempt to set goals in keeping with the mission statement. For example,
part of a mission statement might be to get products out to customers as quickly as possible.
This could mean streamlining the assembly process to build products and get them shipped
within a week from the initial order.
Planning for the future is also the responsibility of manufacturing management members.
Whether it is a budget forecast, a hiring program, or an expansion of products to be offered,
the management must have clear cut objectives and goals. Steps are then planned that will
allow the company to attain those goals, and it is up to management to see that the steps are
followed.

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