Kashif Sarwar,CSCP

Lecture # 2
Operational Planning in SCM
Lecture # 2
Key Concepts:
Sources of variability in demand and supply
The bullwhip effect
S&OP process
Synchronizing supply and demand
Implementation best practices
Using metrics for determine supply and demand variability
Supply Chain Dynamics
What causes variability?
How can supply chains reduce
variability?
How can organizations improve
demand forecasts (which are always
wrong)?
How can demand management be
used to reduce the bullwhip effect?
How can supply chain partners
collaborate on demand planning?
Partner
collaboration
Sources of Variability in Demand
Sources of Demand Variability
Demand
Variability
Competition
Seasonal effects
Economic and
other external
trends
Life cycle trends
and customer
expectations
Internet
Promotions
Disasters
Distance
3-4
The Bullwhip Effect
3-5
P&G DiapersMonthly Orders (thousands of units)
J F M A J M J A S O D N
D
e
m
a
n
d

50
0
100
150
200
250
300
350
Key:
= DC orders to factory
= Retail orders to DC
Customer orders
Maximum demand
Minimum demand
Retail orders Distributor orders And so on up the chain
Causes of the Bullwhip Effect
Lack of collaboration and information sharing
Demand forecast errors
Lead times
Order batching
Price fluctuations and promotions
Rationing and shortage gaming
3-7
Using Demand Planning and Communication to
Reduce the Bullwhip Effect
Communicating demand and mutual demand planning are
the primary ways to reduce the bullwhip effect:

Information sharing
Ideally each partner gets retailer demand data directly.
EDI
Can automatically supply demand data into each partners planning and
forecasting software.
Collaborative demand planning
Channel master may be able to use centralized inventory management
strategies or all can use CPFR.
3-8
Using Demand Influence to
Reduce the Bullwhip Effect
Reducing
Lead Times
Reducing Size
of Batched Orders
Maintaining
Stable Prices
Forecast for
shorter periods
Implies reduction in
lead times
Avoid predictable
pricing actions
Automation and process
justification and
simplification
Cross-docking

Better forecasting
Use of EDI
More efficient
transportation
Outsourcing logistics

Eliminate pricing actions
designed solely to fulfill
sales quotas
Encourage buyers to buy
in response to demand
rather than buying early
or delaying
3-9
Using Demand Management and Prioritization to
Reduce the Bullwhip Effect
Preventing
shortage
gaming
Rely on history.
Share
information.
Collaborate on
advance orders.
Penalize effects
of gaming.
Postponement
Wait for actual
demand.
Delay
distribution.
Package to
order.
3-10
Discussion Question
The bullwhip effect can be mitigated by

a) reducing lead times.
b) relying on multiple demand forecasts.
c) increasing end-of-month wholesale
discounts.
d) rationing.
Short QUIZ
3-11
Sources of Supply Variability
Supply
Variability
Global
expansion and
complexity
Natural
cycles and raw
material
availability
Economic and
other external
trends
Bullwhip effect
Demand plan
error or bias
Supply planning
failures
System
nervousness
Supplier failures
3-12
Sources of Variability in Supply
Synchronizing Supply and Demand
Key is to reach internal
consensus on demand plan
and production plan.

S&OP steps (Wallace and
Stahl):
1. Data gathering
2. Demand planning
3. Supply planning
4. Pre-meeting
5. Executive meeting
Product
Review
Demand
Planning
Supply
Planning
Financial
Review
Pre-
Meeting
Executive
Meeting
3-13
Replanning
S&OP
meetings
Demand Planning Phase Meeting
Highest-ranking demand-side
professional chairs.

Demand manager prepares
dashboards.

Consolidates product and brand
management, marketing, sales plans.
Demand plan in units and in dollars.
Metrics, assumptions, events,
opportunities, risks, and decisions.
Meeting briefness:

Product family level, subfamilies by
exception.
What changed since last meeting
(replanning).
Validating assumptions.

Strategies to close gaps
between demand plan and
business plan.
Success of demand plan
depends on quality of
communications.

3-14
Demand Plan DashboardUnits
3-15


15,000
10,000
5,000
3 2 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Demand Plan for 18 Months in Future
Demand for Product Family XYZ in Units
Lead time = 2 weeks
Inventory turnover = 2 weeks
Historical Demand


Key:
Annual business plan
Current demand plan
Prior demand plan
Actual Demand
Product family XYZ:
0
Units
Supply Planning Phase Meeting
3-16


Production plan will match
demand plan.
Supply/Demand
Match


Supply develops alternative plans:
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).
Supply/Demand
Mismatch
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 current 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.
3-17
Questions?
3-18
Principles of Forecasting
Forecasts are:
Necessary (sometimes)
Wrong (almost always, and
they should include an
estimate of error)
More accurate for groups
than for single items
More accurate for near term
than for long term.
1-19
Actual
Forecast
Monthly
Demand
Demand: Components
Trend: linear, geometric,
exponential
Seasonality: holidays,
weather
Random variation:
data fluctuation caused by
random occurrences
Cycle: increases/ decreases
in economy
1-20
Demand




Seasonality
Random
variation
Cycle
Trend
Quantitative Approaches to
Forecasting Demand
Based upon internal factors;
incorporate data collected
during set intervals of time
1-21
Based upon factors related
to demand for product,
such as impact of housing
starts on furniture sales or
leading/ lagging economic
indicators
Intrinsic Extrinsic
Naive Forecasting
1-22
Next periods demand will repeat this periods.
Feb Jan Mar May Apr
Naive
forecast
950
(Previous months
demand)
Actual
demand
Naive
forecast
Method/Calculation
1,000
975
1,125
950 1,125
975
1,000
Example:
May data will equal April data.
3-Month Moving Average Forecast
1-23
Next demand will be simple average of several previous periods.
Moving
average
950
(Avg. of previous 3 mons.)
(975 + 1,125 + 950) 3
= 1,016.67 (1,017)
Actual
demand
3-month
moving
average
Naive
forecast
Method/Calculation
1,000
975
1,125
1,025
950 1,125
1,017
975
1,000
Feb Jan Mar May Apr
Example:
May demand will equal sum of
February, March, and April demand
divided by 3 (3-month moving
average).

Weighted Moving Average Forecast
1-24
Next demand will be weighted average of previous periods.
Weighted
moving
average
950
Actual
demand
3-month
moving
average
Weighted
moving
average
Naive
forecast
1,021
Method/Calculation
1,000
975
1,125
1,025
950 1,125
1,017
1,046
(Weighted average of
previous 3 mons.)
(3 x 975 + 2 x 1,125 + 1 x 950)
(3 + 2 + 1) = 1,020.83
975
1,000
Feb Jan Mar May Apr
Example: May demand will equal sum of
(3 April + 2 March + 1 February) divided by (3 + 2 + 1).
Exponential Smoothing Forecasts
1-25
Forecast equals previous forecast increased by a portion of the
previous forecast error (modified weighted moving average).
*Previously calculated forecast
**Constant = 0.2
950
1,027
Actual
demand
3-month
moving
average
Exponential
smoothing
Weighted
moving
average
Naive
forecast
1,021
Method/Calculation
1,000
975
1,125
1,025
950 1,125
1,017
1,046
Prev. forecast +
Constant** Prev.
forecast error:
1,040 + 0.2 (975 1,040)
= 1,027
Exponential
smoothing
1,040*
975
1,000
Feb Jan Mar May Apr
Intrinsic Forecasting
Methods Compared
1-26
**Constant = 0.2
Naive forecast
Moving average
Weighted moving
average
Average of previous 3 months
Previous months demand
Actual demand
Method/Calculation
Prev. forecast + Constant** Prev.
forecast
Exponential
smoothing
Weighted avg. of previous 3 months
*Previously calculated forecast
950
1,027
1,021
1,000
975
1,125
1,025
950 1,125
1,017
1,046
1,040*
975
1,000
Feb Jan Mar May Apr
Seasonal Index (by Month)


1-27
Average January
demand = 221 % of
monthly average
demand
Demand
Feb
Jan
May
1 2
Deseasonalized Monthly Demand =
Sum of Seasonal Avg. Demand =
34
26
Apr
33
2011
88
Mar
Jul-Dec
2010
Month
31
14
Deseasonalized
Avg. Monthly
Demand 20092011 2009
2 0 4
4 3 5
11 10 12
27
Seasonal
Index
Jun
3
87 89
Seasonal Avg.
Demand
32 31
2
2
4
11
30
168
88
14
14
14
84
2.142
0.786
0.286
0.143
0.143
6.285
2.214
(168 12)
14
14
14
(6 x 14)
Service Sector Forecasting


1-28
Service businesses, such as
restaurants, may track
seasonal demand in units
as short as minutes.
Some restaurant
variables
Workers per shift
Registers in operation
Number of available
tables
Space requirements
Amount and types of
foods
% of
demand
by hour
of day
5-6 4-5 3-4 2-3 1-2 12-1 7-8 11-12 8-9 9-10 6-7
15%
10%
5%
20%
Lunchtime Dinnertime
Hour of day
Qualitative Approaches to
Forecasting Demand


1-29
When to use
qualitative
forecasting methods:
For new products
When hard data are
lacking
Combination
methods: as a check
on quantitative
forecasts
Personal insight
Sales force estimate
Management estimate
Market research
Delphi method
Measures of Forecast Error


1-30

Forecast Error = A F
= 600 units 680 units = 80 units = 80 units
Where:
A = Actual demand
F = Forecast demand
NOTE:
Absolute = | |.

An absolute value has no +/
sign, and so, in this case, it
measures the size of the error,
not the direction.

Measures of Forecast Error


1-31

A F
Forecast Error as a Percentage =
A
600 units 680 units
80 units
= =
600 units 600 units
= 0.1333 = 13.33% error

Forecast Accuracy = 1 Forecast Error as a Percentage

= 1 0.1333 = 0.8667 = 86.67% accuracy
Where:
A = Actual demand
F = Forecast demand
Mean Absolute Deviation (MAD)


1-32

A F
MAD =
n
Where:
|A F| = Total of absolute forecast errors for the periods
n = Number of periods
The Greek uppercase
letter stands for
the sum of.
Mean Absolute Deviation (MAD) with Smoothing


1-33
(65.86 / 8 = 8.23) Mean Absolute Deviation (MAD) 8.23
Absolute
Deviation
Demand
Jun
May
Jul
Total Deviation
Month
2
Exponential Forecast
with 0.4 Smoothing
Error
(Deviation)
3
65.86
25 Nov
16.13
+14.78 (25 10.22)
Oct 15
10.22
+7.96 (15 7.04)
Sep
5.07
10 +4.93 (10 5.07)
Aug 5
5.12
0.12 (5 5.12)
Dec 15.87
14.78
7.96
4.93
0.12
5.2
7.0
10.0
+15.87 (32 16.13)
5.20 (2 7.2)
7.00 (3 10)
10.00 (4 14)
7.04
7.20
10.00
14.00
4
32
Other Measures of Forecast Error


1-34




Algebraic Sum of Forecast Errors
Tracking Signal =
Mean Absolute Deviation (MAD)
( 10) + ( 7) + ( 5.2) + ( 0.12) + (4.93) + (7.96) + (14.78) + (15.87)
=
8.23
21.22
= = +2.58 (rounded)
8.23
Standard Deviation (approximate) = MAD 1.25
Demand Management
Planning demand
Communicating
demand
Influencing
demand
Managing and
prioritizing
demand
1-35
Demand management is
the art of synchronizing
supply and demand
plans:
Long-term strategic
needs
Medium-term
aggregate demand
forecasting and master
planning
Short-term demand
forecasting and item-
level master scheduling
Planning Demand: The Demand Plan
Demand
Plan
Forecasting
Product/
brand
manage-
ment
Marketing Sales
Business
plan/
strategy
1-36
Demand plan is
plan for action
based on:
Forecasts
Planned demand
generation
activities.
Demand
plan inputs:
Communicating Demand
Good
Communications
Communicate
soon to minimize
surprises.
Structure
communications
to ensure that
they occur.
Focus
communications
to fit audience.
1-37
Communications Structure for Communicating Demand
1-38
Demand-influencing
activities
Proposed demand plan
Demand manage-
ment and prioriti-
zation activities
Consensus
review
Performance
monitoring and
feedback
Consensus
demand plan
Master
scheduling and
supply planning
Demand plan inputs
Sales and
operations
planning
Demand Manager as Focal Point
1-39
Demand
manager
Salespersons
Master
scheduler and
supply
planners
Marketing
staff
Product and
brand
managers
Key
customers
Demand manager's
feedback and performance
monitoring goals:
Communicate consensus
demand plan and outcome
of S&OP.
Give feedback to demand
organization on
effectiveness of demand
management efforts.
Alert demand and supply of
need for action.

Demand Plan Dashboard in Units
1-40


15,000
10,000
5,000
3 2 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Demand plan for 18 months in future
Demand for Product Family XYZ in Units
Lead time = 2 weeks
Inventory turnover = 2 weeks
Historical demand


Key:
Annual business plan
Current demand plan
Prior demand plan
Actual demand
Product family XYZ:
0
Units
Situations for Managing and Prioritizing Demand
Extend planning
horizon.
Add incentives
for substitutes.
Establish
process for
unusual demand
evaluation.
Use time fences
to delay
production as
long as feasible.
Find ways to
better use current
capacity.




1-41
Large one-time
sales opportunity
would impact
other orders,
costs,
profit.
Demand
plan overstates
actual demand;
changes will
impact sales and
costs.
Demand plan
understates actual
demand; changes
will impact sales
and costs.
Supply
organization
cannot meet
demand plan
without changes.
Collaborative Planning, Forecasting,
and Replenishment (CPFR

)
Topic 3: Linkages Among the Elements

1-42
Vendor Management
Collaboration Tasks Retailer Tasks
Analysis
Demand & Supply Management
Execution
Strategy & Planning
Manufacturer Tasks
Category Management
Store Execution
Supplier Scorecard
Market Data Analysis
Demand Planning
Exception Management
Logistics/Distribution
Buying/Re-buying
Logistics/Distribution
Execution Monitoring
Customer Scorecard
Production & Supply Planning
Performance Assessment
Sales Forecasting
Order Planning/Forecasting
POS Forecasting
Replenishment Planning
Order Generation
Order Fulfillment
Collaboration Arrangement
Joint Business Plan
Account Planning
Market Planning

Demand
management:
helps parties
understand
each other
Product
development
and brand
management
Marketing Sales
Operations
Demand Management Functional Responsibilities & Interfaces
1-43
Long-term
Seek valued
added
Medium- to
short-term
Tailoring
demand to
capacity
Represent
demand-side
interests in
operations
terms
Daily
Sufficient
inventory
Time to market
Questions?
1-44