Demand Planning Discussion

150 word discussion 

Supply chains are the flow of materials, information, and finances as they move in all directions from supplier to manufacturer to wholesaler to retailer to 

consumer

, so managing the supply chain can be complex. As shown in Figure 1, supply chains are managed by an integrated business plan based on the strategies, mission, and vision of the firm. The business plan drives the demand plan and the supply plan.

Customer demand is the key driver of the supply chain. Demand management is the 

process

 by which manufacturers are able to recognize demand through forecasting and customer orders; it can also influence and shape demand through marketing and sales strategies and activities. The supply plan adheres to the agreed-upon demand plan and delivers the targeted revenue, profitability, and cash flow objectives.

Balancing supply with demand is a constant battle, and companies are continually trying to find ways to improve the process. If there is too much demand and not enough supply, business is lost and may never be recaptured. On the other hand, if there is too much supply, companies might have money tied up in 

inventory

 and storage facilities and run the risk of products becoming obsolete.

The balance between supply and demand can be improved either internally or externally. The internal method for balancing supply and demand means being able to vary how much is produced and how much is stored in inventory. Companies may have production equipment that enables them to change what they are producing quickly, which is a key characteristic of lean manufacturing.

The external balancing method adapts the price and 

lead time

.

Demand planning is a comprehensive, collaborative process that requires the consensus of all departments and relevant personnel in a company. Consensus is achieved through collaboration, which is defined as personnel working jointly to achieve an agreed-upon outcome. The outcome in this case is the actual demand plan shown in Figure 3. This is also referred to as CPFR, a process of sharing visibility, information, and resources that facilitates planning to satisfy customer demands.

The process is driven by a demand forecast, which is based on historical sales data and other business intelligence provided by sales, marketing, and business management personnel. Organizations use S&OP to help develop inputs for the forecast. These processes result in a forecast, or estimate, of future demand. Companies cannot work solely from forecasts or estimates; there must be additional collaboration among other functions to create the most accurate and reliable demand plan possible. The demand plan provides accurate levels of detail by factoring in the demand forecast and matching that with items that need to be procured from suppliers and manufacturing capacities and capabilities. The resulting outputs from the demand plan are the MRP that details what to procure (buy) from suppliers and the 

master production schedule (MPS)

 that specifies which products to make and when to make them. The system that integrates the individual demand forecasts and plans is referred to as the ERP system.

Anticipated customer demand is the real genesis, or baseline, for the demand forecast. The demand forecast is a high-level comprehensive plan initiated by senior-level executives with marketing and sales inputs and is shaped by anticipated customer needs and desires. It also incorporates the business elements of vision and expectations for the company’s shareholder value, revenues, market share, and profitability.

Once the demand forecast is finalized, it enables the creation of the demand plan, which more accurately defines resource requirements such as facilities, equipment, materials, and employees. Finally, the MRP & MPS plans are created to define specific 

raw materials

 and semi-finished goods that are necessary for manufacturing and distribution to achieve the targeted revenue, profitability, and cash flow objectives.

Demand planning acknowledges that demand is generated by the demand forecast and actual customer historical information and customer orders. Forecasting can be accomplished using two methods:

Types of Demand Patterns

Whether a quantitative or qualitative method is used, a model of the demand pattern is determined. Stationary patterns exhibit steady, even demand with very little fluctuation. Random patterns, on the other hand, exhibit changes and variances that are not predictable. Other forecast models include (see Figures 5 – 8):

Trend

Predictable 

growth

 or 

decline

Figure 5. Example of trend demand pattern. Developed by LINCS in Supply Chain Management Consortium.

Seasonal

Patterns of increase and decline that repeat cycle after cycle

Figure 6. Example of seasonal demand pattern. Developed by LINCS in Supply Chain Management Consortium.

Cyclical

Patterns that are influenced by external factors such as the broader economy or changes in customer preferences

Figure 7. Example of cyclical demand pattern. Developed by LINCS in Supply Chain Management Consortium.

Trend with Seasonality

Predictable growth or decline based on cycles

Figure 8. Example of trend with seasonality demand pattern. Developed by LINCS in Supply

Figure 4. Forecasting documentation. Developed by LINCS in Supply Chain Management Consortium.

·

Quantitative Forecasting

: When historical data exists and is helpful in calculating future demand or forecasting based on numbers (see Figure 4)

·

Qualitative Forecasting

: When there is little historical data to rely on, as when launching a new product or with a product that changes frequently, and intuition or expert judgment is required

With each method, it is important to understand the events and conditions that modify demand. The forecasting process focuses on both external and internal inputs. External inputs include current and new customers, the competition, and the overall industry-specific outlook of the economy. Internal inputs to the forecast focus on the pricing and special promotions planned and on the existence of any new product launches.

The output of a forecast that focuses on both external and inte

Challenges of Demand Management

Determining demand for particular products or services can be challenging. One challenge is receiving customer demand data early enough to make a decision, especially if there is a lack of sales force input because of fluctuating demand patterns. Another challenge is determining demand for new products because a highly coordinated effort must be synchronized between departments such as sales, finance, research and development, engineering, and marketing management.

Forecasting is almost never perfect, so plans should consider and allow for potential inaccuracies. Several acceptable methods of measuring forecast error and the actual errors calculated should be shared with key stakeholders. Long-range forecasts tend to have a greater degree of error than short-term forecasts. Short-term forecasts have less uncertainty because of known market conditions, defined customers, and highly accurate materials and production planning. Long-range forecasts run the risk of experiencing larger fluctuations and therefore pose greater risk to the plan.