Chapter 2 Demand Management

James Kaconco
0772 653191
Room 217 Faculty of Technology
 Chapter Objectives
• By end of the chapter students should be in position to:
– Define demand and demand management
– List the sources of demand (internal and or external)
– Explain dependent and independent demand
– Explain application of demand management as
regards to PPC, Production Planning and MPS
– Apply demand management techniques
– Explain the strategies for meeting and managing
demand
– Distinguish between Planning and Control
– List and explain benefits of demand management
 Definitions
• Demand: Desire plus ability to purchase. Demand
triggers the productive system to perform; zero demand
implies no operations
• Demand Management: Helps to coordinate customer
requirements and productive system capacity. A good
developed demand management module has got several
significant benefits namely:
– Company capacity can be better planned and
controlled.
– Timely and honest customer order promises can be
made.
– Physical distribution activities can be improved
significantly.
 Demand Management

• Demand Management is based on

“forecast” and plans.
– customer demand forecast are developed
(quantities and timing).
– Planned customer deliveries for each
period is the output of the demand
management process.
 Sources of Demand
• Two common sources of demand (that make a
productive system to perform) are:
– External demand: (Customers, Warehouses,
Retailers, pipeline inventory, samples, donations,
etc), big percentage of revenue is generated from this
type of demand
• Use of invoices is common
– Internal demand or In-house demand: (Inter-
department, intra-company, etc), No revenue
generated from this type of demand
• Use of transshipment documents is common
• Note: In some situations external demand may be
starved in favour of internal demand.
 Dependent and Independent
Demand
• Dependent demand:
– Demand for component parts, subassemblies that are required
to build the final / end product.
– Company has got strong control over this type of demand.
– Materials Requirement Planning (MRP) is used to manage this
type of demand
• Independent demand:
– Demand for the final / end product to be offered to the market.
– This demand is very much affected by macro environment
factors, and need to forecast independent demand.
– Independent Inventory Management models are used to
manage this type of demand
 Demand Management and PPC
System
• Links and synchronizes the market to the
productive system capacity
• Concerned with planning and controlling of all
sources of demand as regards to:
– quantities, timing and delivery dates (customer contact
very essential)
• Doing what is required to help make the demand
happen
• Prioritizing demand when supply is lacking.
 Demand Management and PPC
System
• Demand Management at this level encompasses
the following:
– demand forecasting (item and aggregate level from all
sources), order entry, order delivery date promising,
customer order service, physical distribution, and other
customer contact related activities, new product
introduction
• Hence, it is noticed that there is:
• Demand that adds value and is desirable and met
• Demand that adds value, is desirable, but cannot be
met
• Demand that does not add value, undesirable, and
should not be met.
 Demand Management at the
Production Planning Level
• Production planning is sometimes referred to
as Aggregate planning
• Demand (Production Plans) may be stated as
follows:
– Quarterly statement of output in dollars or units or
some other financial measures.
– Delivery dates may be more significant.
– Major change in distribution inventory policy
• The demand (production plan) information
must be accurately communicated to all the
concerned parties for resource planning
 Demand Management Techniques

• Demand Forecast figures of are the major input

• The demand forecast figures come from different
sources and are required for different purposes.
• To ensure consistency in demand forecast the
following techniques are used:
– Bill of Material (BOM) and
– Pyramid Forecasting
 Bill of Material BOM
– Lists the items that go into the final (end) product,
– includes a brief description of each item (material
type, process to use, staff skills needed, etc), and
– specifies when (timing) and in what quantity each
item is needed in the assembly process
 Pyramid Forecasting
• Procedure starts with individual items
• Roll up to determine the TOTAL business
requirement (Units or Monetary Terms)
• Force down to ensure consistency in case of
changes at the top level
 Make to Stock - Demand
Management
• Ensure adequate stocks at all distribution points to offer
high level of customer satisfaction, safety stock concept
is used
– Required is accurate quantity forecast and timing for each
item by location for all distribution points
• Total demand on the central unit is the summation of
all distribution points requirements
• Example (with single distribution point); develop one with
several points
Omaha Ware House
Period 1 2 3 4 5
Forecast Requirements 10 10 10 10 10
In Transit 20
Projected Available Bal. 6 16 6 16 6 16
Planned Shipments 20 20

Lead Time (LT) = 1, Lot Size (Q) = 20, Safety Stock (SS) = 3, On hand stock = 6
 Assemble to Order - Demand
Management
• Ensures accurate promise dates to customers then
• Applies the concept of available to promise (ATP)
• Company carries stock of ready to use individual end items
• Example
Item Name:
Period 1 2 3 4 5
Forecast 60 60 60 60 60
Booked Orders 90 80 50 20
Availabe (Bal) 50 80 0 60 0 60
Master Production Schedule (MPS) 120 120 120
Available to Promise (ATP) 0 50 120
Lot Size (Q) = 120; Safety Stock = 0

The example shows that all the stock available in the first two periods (50+120)
is committed to customer orders already booked.
Note:
• MPS is used to avoid negative balance in a given period
• Available (Balance) for a period = opening stock + MPS – (whichever is larger
forecast or booked order)
• Available to promise = Available + MPS – (sum of Booked orders till next MPS)
– For period 1 available is equal to stock at hand
– For any other period with MPS, available = zero (The past doesn’t count we assume that
all we produced in the past from one scheduled receipt (MPS) to the next was sold.
 Make to Order - Demand
Management
• Ensure full control of customer order as it enters the productive
system
– As customer tastes and technology are likely to change
• Demand management has to track these orders through all the
phases of plant activity, due to the following reasons:
– Final product specification changes will affect parts design,
component lead times, and customer promise dates for the product as a
whole.
– Final product overall lead-time that satisfies customer service must be
managed very well.
– Customer taste changes have an impact on use of engineering
resources and will have an effect on other customer orders in the
factory.
• Uncertainties are being overcome by use of:
– Buffer (Safety) stocks.
– Computer aided design / computer aided manufacturing.
– Bill of materials based on similar produced items.
 Strategies for Managing Demand
• Strategies are vital when demand is
fluctuating
• Strategies applied include
– Level production with the following options:
• Some or nil end inventory
• With no stock out in any period
• Hire or fire staff where necessary
• Overtime or undertime or with subcontracting work to other
firms or purchasing similar products / services from other
firms
• Part time workers
– Chase demand
– Hybrid strategies
Strategies for Managing Demand -
Proactive
• These are proactive strategies for
managing demand and include
– Pricing differentials to create demand
– Promotions: Shifting demand into other time
periods with incentives, sales promotions, and
advertising campaigns
– Creating demand for idle resources: Maintaining
resources for high-demand levels (loaning out
players and hiring out facilities / space)
– Back ordering: serving customer at a late time
instead of losing the order completely
– Use of inventories
– Mitigating information distortion along a supply
chain, through partnering with suppliers directly
 SUPPLY - Inputs

• This provides the INPUTS required by the

operations activities
• Supplies include:
– Transformed inputs
– Transforming inputs
• Under normal environment, supply is
expected to be equal to demand
 SUPPLY MORE THAN DEMAND
• Control options available to management:
1. Reduce on number of staff; and send some
staff to paid vacation
2. Reduce on the number of working hours per
day
3. Reduce on number of shifts
4. Reduce capacity (close off some production
lines or production of some items, subcontract)
5. Fire staff is another option
6. Enter new market areas and maintain supply
7. Carry out promotions to trigger demand
 SUPPLY LESS THAN DEMAND
• Control options available to management
1. Increase on number of staff
2. Increase on the number of working hours per
day and consider overtime
3. Increase on number of shifts
4. Increase capacity
5. Increase price
6. Shift demand to low demand zones (sales
promotions)
7. Subcontracting
 BENEFITS OF DEMAND
MANAGEMENT
1. Control over product availability
2. Confidence of sales force in ability to
deliver product
3. Smoother product introductions
4. Improved ability to respond to demand
change
5. A single game plan, based on the same
set of numbers
 Supply Does Not Naturally Match
Demand
 Inventory results from a mismatch between supply and demand
 Mismatch can take one of the following two forms
– Supply waits for Demand
» Inventory = Finished goods and resources
– Demand waits for Supply
» Inventory is negative or said to be backordered in manufacturing
» Inventory = Waiting customers in services
 Mismatch happens because
– the demand varies
– the capacity is rigid and finite.
» If the capacity is infinite, products (or services) can be provided at an infinite rate
and instantaneously as the demand happens. Then there is no mismatch.
 Consequences of the Mismatch are
Severe
Air travel Emergency room Retailing Iron ore plant Pacemakers

Supply Seats on specific Medical service Consumer Iron ore Medical equipment
flight electronics

Demand Travel for specific Urgent need for Consumers buying a Steel mills Heart surgeon
time and destination medical service new video system requires pacemaker
at exact time and
location

Supply Empty seat Doctors, nurses, and High inventory costs; Prices fall Pacemaker sits i n
exceeds infrastructure are few inventory turns inventory
demand under-utilized

Demand Overbooking; Crowding and delays Foregone profit Prices rise Foregone profit
exceeds customer has to take in the ER, potential opportunity; (typically not
supply different flight (profit diversion of consumer associated with
loss) ambulances dissatisfaction medical risk)

Actions to Dynamic pricing; Staffing to predicted Forecasting; quick If prices fall too low, Distribution system
match supply booking policies demand; priorities response production facility is holding pacemakers
and demand shut down at various locations

Managerial About 30% of all Delays in treatment or Per unit inventory Prices are so Most products
importance seats fly empty; a 1- transfer have been costs for consumer competitive that the (valued $20k) spend
2% increase in seat linked to death; electronics retailing primary emphasis is 4-5 months waiting in
utilization makes commonly exceed on reducing the a trunk of a sales
difference between net profits. cost of supply person before being
27 profits and losses used