DEMAND MANAGEMENT

1. DEMAND MANAGEMENT

2. Learning Objectives • Understand the critical importance of outbound-to-customer logistics systems. • Appreciate the growing need for effective demand management as part of an organization’s overall logistics and supply chain expertise.

3. Learning Objectives, continued • Know the types of forecasts that might be needed, and understand how collaboration among trading partners will help the overall forecasting and demand management processes. • Understand the basic principles underlying the sales and operations planning process.

4. Learning Objectives, continued • Identify the key steps in the order fulfillment process and appreciate the various channel structures that might be used in the fulfillment process.

5. Demand Management • The efforts to estimate and manage customer’s demand, and using the information to form operating decisions. • In essence, it is to further the ability of the firms on the supply chain, to collaborate on activities related to the flow of product, services, information, and capital.

6. Figure 7.1 Supply / Demand Misalignment Source: Acenture, Stanford and Northwestern Universities, Customer Driven Demand Networks: Unlocking the Hidden Value in the Personal Computer Supply Chain (Accenture, 1997) 15

7. Table 7.1 Demand Management Supports Strategy Source: Jim R. Langbeer II, “Aligning Demand Management with Human Strategy, Supply Chain Management Review (May/Jun 2000) 58

8. Balancing Supply and Demand • External balancing methods • Change demand • by changing price • Change lead time • by increasing the lead time • Internal balancing methods • Production flexibility • To quickly change the production line setup from one to another product. • Inventory

9. Traditional Forecasting • Factors Affecting Demand • Independent demand • Dependent demand • Simple Moving Average • Weighted Moving Average • Exponential Smoothing • Adjusted Exponential Smoothing for Trend • Seasonal Influences on Forecasts

10. Table 7.2Seasonal Moving Average Forecast Source: Robert A. Novak, Ph.D.

11. Table 7.3Weighted Moving Average Forecast Source: Robert A. Novak, Ph.D.

12. Table 7.4Exponential Smoothing Forecast Source: Robert A. Novak, Ph.D.

13. Table 7.5Trend Adjusted Exponential Smoothing Forecast Source: Robert A. Novak, Ph.D.

14. Forecast Errors • Cumulative sum of forecast errors (CFE) • Mean squared error (MSE) • Mean absolute deviation (MAD) • Mean absolute percentage error (MAPE)

15. Table 7.9Forecast Error Source: Robert A. Novak, Ph.D.

16. Sales and Operations Planning (SOP) • Step 1: Run sales forecast reports • Step 2: Demand planning phase • Step 3: Supply planning phase • Step 4: Pre-SOP meeting • Step 5: Executive SOP meeting

17. Figure 7.2Monthly S&OP Process Source: Thomas F. Wallace, Sales and Operations Planning: The How-to Book (2000) 43

18. Collaborative Planning, Forecasting, & Replenishment (CPFR) • Retailers, distributors, and manufacturers collaborate on operational planning (using internet technologies) • Transportation providers have now been included with the concept of collaborative transportation management. • CPFR was first attempted by Walmart and Johnson & Johnson in 1995 for its Listerine product line. • To rationalize inventory, reduce out of stock occurrences and increase their forecast accuracy.

19. Figure 7.3CPFR Model Source: Larry Smith, “West Marine: A CPFR Success Story”, Supply Chain Management Review (March 2006) 31

20. CPFR Business Model Planning Phase • Develop front-end agreement • Create joint business plan Forecasting Phase • Create sales forecast • Identify exceptions for sales forecast • Resolve/collaborate on exception items • Create order forecast • Identify exceptions for order forecast • Resolve/collaborate on exception items Replenishment Phase • Order generation • Delivery execution

21. Distribution Channels • Channels of Distribution • A logistics channel is the means by which products flow physically from where they are available to where thy are needed • A distribution channel can be thought of as the physical structures and intermediaries (such as distributors, wholesalers, retailers, transportation providers, and brokers) through which goods, services, information, and finances flow.

22. Figure 7.5Logistics and Marketing Channels Source: Robert A. Novak Ph.D.

23. Fulfillment Models • Integrated fulfillment • Dedicated fulfillment • Outsourced fulfillment • Drop-shipped fulfillment • Store fulfillment • Flow-through fulfillment

24. Figure 7.7Direct to Consumer Fulfillment Source: Robert A. Novak Ph.D.

25. Fulfillment Models, continued • Integrated Fulfillment • Retailer maintains both a “bricks-and-mortar” and “clicks-and-mortar” presence • Operates one distribution network to service both channels • Advantage • low start-up costs • existing network can service both • Disadvantages • order profile will change with addition of Internet orders • case lots versus “eaches” • would require a “fast pick,” or broken case operation • conflict might arise between a store order and an Internet order

26. Figure 7.8Integrated Fulfillment Source: Robert A. Novak Ph.D.

27. Fulfillment Models, continued • Dedicated Fulfillment • Both a store and an Internet presence with two separate distribution networks. • Advantage: • separate distribution network for store delivery and consumer delivery eliminates most of the disadvantages of integrated fulfillment • Disadvantage: • duplicate facilities and duplicate inventories • Retailer maintains both a “bricks-and-mortar” and “clicks-and-mortar” presence.

28. Figure 7.9Dedicated Fulfillment Source: Robert A. Novak Ph.D.

29. Fulfillment Models, continued • Outsourced Fulfillment • Assumes that another firm will perform the fulfillment. • Advantages: • low start-up costs for the retailer to service the Internet channel • possible transportation economies • Disadvantage: • loss of control over service levels

30. Figure 7.10Outsourced Fulfillment Source: Robert A. Novak Ph.D.

31. Fulfillment Models, continued • Drop Shipped Fulfillment • Also called direct store delivery, vendor delivers directly to retailer, bypassing retailer’s distribution network. • Works best for products that have a short shelf life. • Advantages: • reduction of inventory in the distribution network • vendor has direct control of its inventories • Disadvantage: • possible reduction of inventory visibility

32. Figure 7.11Drop-Shipped Fulfillment Source: Robert A. Novak Ph.D.

33. Fulfillment Models, continued • Store Fulfillment • The order is placed through the Internet site and sent to the nearest store for customer pick up. • Advantages: • short lead time to the customer • low start-up costs for the retailer • returns can be handled through the store • product availability in consumer units • Disadvantages: • reduced control and consistency over order fill • conflict may arise between inventories • must have real-time visibility to in-store inventories • stores lack sufficient space to store product

34. Figure 7.12Store Fulfillment Source: Robert A. Novak Ph.D.

35. Fulfillment Models, continued • Flow-Through Fulfillment • Product is picked and packed at a distribution center, then sent to the store for pickup. • Advantages: • eliminates the inventory conflict • avoids the cost of the “last mile” • returns can be handled through the existing store network • Disadvantage: • Storage space at the store for pickup items a problem

36. Figure 7.13Flow-Through Fulfillment Source: Robert A. Novak Ph.D.

37. Summary • Outbound-to-customer logistics systems have received the most attention in many companies; but, even in today’s customer service environment, outbound and inbound logistics systems must be coordinated. • Demand management may be thought of as “focused efforts to estimate and manage customers’ demand, with the intention of using this information to shape operating decisions.

38. Summary, continued • Although many forecasts are made throughout the supply chain, the forecast of primary demand from the end user or consumer will be the most important. It is essential that this demand information be shared with trading partners throughout the supply chain and be the basis for collaborative decision making. • Various approaches to forecasting are available, each serving different purposes. The S&OP process has gained much attention in industry today. It serves the purpose of allowing a firm to operate from a single forecast.

39. Summary, continued • The S&OP process is a continual loop involving participation from sales, operations, and finance to arrive at an internal consensus forecast. • CPFR is a method to allow trading partners in the supply chain to collaboratively develop and agree upon a forecast of sales. This allows for the elimination of inventories held because of uncertainty in the supply chain. • A number of distribution channel alternatives might be considered by organizations today. Effective management of the various choices requires coordination and integration of marketing, logistics, and finance within the firm, as well as coordination of overall channel-wide activities across the organizations in the channel.