MODULE 1: SUPPLY CHAINS, DEMAND

MANAGEMENT, AND FORECASTING

SECTION A:
INTRODUCTION TO SUPPLY CHAINS
Module 1, Section A
Section A Introduction
Section A Key Processes: Section A Topics:
▪ Design the supply chain ▪ Topic 1: Supply Chain Models
network. ▪ Topic 2: Supply Chain Maturity
– Flow of product, information, and Complexity
and funds

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Topic 1: Supply Chain Models
Basic Supply Chain for a Product

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Topic 1: Supply Chain Models
Funds Flows, Value, and Balance
Funds Flows Value and Balance

▪ Goes upstream: customer >

producer > supplier. Creating net value in
SC
▪ Not linear.
▪ E-payments reduce cash-to- Value-creating
cash cycle time. activities for all
stakeholders
▪ Better customer-supplier
relationships Balancing competing
▪ Fewer imbalances between interests
larger and smaller players.
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Topic 1: Supply Chain Models
Vertical Integration
▪ Benefits of vertical integration
– No dealing with competitors for supplies, etc.
– Enhanced visibility into operations
– Same ownership and management for
all activities in supply chain
▪ Ford: historic example
▪ McDonald’s doesn’t directly own
its supply chain, but:
– Long-term supply contracts
– Vested interest model
– 100% landowner of all sites
– Significant control

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Topic 1: Supply Chain Models
Lateral (Horizontal) Integration
▪ Benefits of lateral integration Components
Components
– Economies of scale and scope
– Improved business focus
– Leveraging communication and production competencies
▪ Lateral mergers are one way to grow laterally.

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Topic 2: Supply Chain Maturity and Complexity
Supply Chain Stages
Reactive Proactive Strategic Consistent
Reactive
Efficient Efficient Driver Systematic

Stage 1: Stage 2: Stage 3: Stage 4: Stage 5:

Orchestrated
Multiple Semi-functional Integrated Extended supply chain
dysfunction enterprise enterprise enterprise

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Topic 2: Supply Chain Maturity and Complexity
Stage 1: Multiple Dysfunction

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Topic 2: Supply Chain Maturity and Complexity
Stage 2: Semifunctional Enterprise

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Topic 2: Supply Chain Maturity and Complexity
Stage 3: Integrated Enterprise

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Topic 2: Supply Chain Maturity and Complexity
Stage 4: Extended Enterprise

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Topic 2: Supply Chain Maturity and Complexity
Stage 5: Orchestrated Supply Chain

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Topic 2: Supply Chain Maturity and Complexity
Manufacturing Supply Chain Model

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Topic 2: Supply Chain Maturity and Complexity
Services Also Have Supply Chains

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Topic 2: Supply Chain Maturity and Complexity
Specialized Supply Chains
▪ Humanitarian and disaster relief: Trusted
relationships help overcome infrastructure
failures.
▪ Hospital: Cost cutting (given quality), actual
versus contract prices, tracking and billing
accuracy, centralizing supply.
▪ Retailers: Amazon severely pressuring
multichannel distribution model. Stores as DCs.

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SECTION B:
DEMAND ANALYSIS AND PATTERNS
Module 1, Section B
Section B Introduction
Section B Key Processes: Section B Topics:
▪ Collect and analyze historical ▪ Topic 1: Demand Analysis
and environmental demand ▪ Topic 2: Demand Patterns
data.
– Perform historical analysis.
▪ Competitive environment
– Perform environmental scan
and market analysis.
– Perform product assessment.
▪ Demand patterns

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Topic 1: Demand Analysis
SWOT Analysis

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Topic 1: Demand Analysis
Marketing Strategy and Plan

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Topic 1: Demand Analysis
Market Research: Market Analysis
▪ Global, local, and industry economy
▪ Government and third-party sources
▪ Value deals during recessions

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Topic 1: Demand Analysis
Purposes of Market Research
▪ Finding potential markets
– Does anyone care?
▪ Analyzing markets
– Who, where, when, why, what, how many?
▪ Refining product design
– Strategic price.
– Include features with positive contribution margin.

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Topic 1: Demand Analysis
Competition
▪ Scan
▪ Regional unsatisfied demand
▪ Footholds in saturated markets
▪ Benchmark

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Topic 1: Demand Analysis
Global Perspectives
▪ Connected
▪ Complex
▪ Volatile

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Topic 1: Demand Analysis
Product Portfolio Management

Source: Ross, Distribution

Planning and Control, 3rd edition.

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Topic 1: Demand Analysis
Portfolio Complexity and Life Cycle Reviews
Portfolio Complexity Impact Product Life Cycle Review

Source: Bowersox, et. al. Supply Chain Logistics Management, 5th ed., which cites David Closs,
Mark Jacobs, Morgan Swink, and G. Scott Webb, “Toward a Theory of Competencies for the
Management of Product Complexity, Six Case Studies.” Journal of Operations Management,26.

Source: Ross, Distribution Planning and Control, 3rd edition.

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Topic 2: Demand Patterns
Macroeconomic Demand Patterns

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Topic 2: Demand Patterns
Microeconomics
▪ Price goes up, demand goes down and vice versa.
▪ Substitution effect: interrelated prices.
▪ Price adjusts until supply and demand equilibrium.
▪ Given small price change.
– Elastic: large change in demand.
– Inelastic: small change in demand.
– Maximize profit margin with price changes.
▪ Marginal analysis: marginal utility > marginal cost.
– Ignore costs incurred regardless of choice.
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Topic 2: Demand Patterns
Short- to Medium-Term Demand Patterns
Tren
d

Cycle Seasonalit
y

Random
variation

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SECTION C:
DEMAND MANAGEMENT
Module 1, Section C
Section C Introduction
Section C Key Processes: Section C Topics:
▪ Influence demand through ▪ Topic 1: Demand Management
marketing activities. ▪ Topic 2: Influencing Demand
– Apply the four Ps.
– Analyze product life cycles.

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Topic 1: Demand Management
Demand Management
Demand management is the function of recognizing all
demands for goods and services to support the marketplace:
▪ Prioritizing demand
▪ Planning, executing, controlling, and monitoring the design,
pricing, promotion, and distribution of products and
services

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Topic 1: Demand Management
Demand Management Road Map
▪ Liaison
– Influence to make products
market needs.
– Convince customers to
purchase in profitable ways.
▪ Product-service package
order winner capability:
– Order qualifiers
– Order winners
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Topic 1: Demand Management
Linkages Among Elements of Demand Management

Planning demand Communicating demand

Managing and prioritizing

demand Influencing demand
February 11
M T W T F S S
1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 5 6

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Topic 1: Demand Management
Planning Demand and Demand Plan
▪ Demand plan is plan
for action based on
– Forecasts
– Planned demand
generation
activities.
▪ Planning horizon
– Best practice: 18-
month+
– Revise on regular
basis
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Topic 1: Demand Management
Communicating Demand

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Topic 1: Demand Management
Communications Structure for Communicating Demand

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Topic 1: Demand Management
Demand Manager as Focal Point

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Topic 2: Influencing Demand
Influencing Demand Using Plan, Do, Check, Action
▪ Brand, marketing, and
sales activities to convince
customers to purchase
products and services to
meet or exceed business
objectives
▪ Influencing product
development and supply
sides of organization
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Topic 2: Influencing Demand
Demand Generation
▪ From latent to actual demand
▪ Educating customers
– Product/brand awareness takes a long time.
– Use feedback to modify approach/budget.
▪ Educating SC partners
– Persons who design, build transport, or sell product.

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Topic 2: Influencing Demand
4 Ps: Product (Service)
▪ Was: products identical to all customers; item
generated need.
Product
▪ Is: dynamic; customer need is basis.
▪ Designed to be customizable for segments.
▪ Customer care is an implied or explicit product.
Placement Price
▪ Customized design, manufacture, promotion,
distribution, sales methods, and customer care
training.
Promotion

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Topic 2: Influencing Demand
4 Ps: Price
▪ Strategic decision based on competition,
perceived value, and
Product
brand identity.
▪ Commodity price based on competition.
▪ Differentiated market can base price on R&D,
Placement Price
marketing costs, or value to customer.
▪ Customer-focused differentiates products/price
by segment.
▪ Finds optimal balance of profit vs. attractive Promotion

price to customers.
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Topic 2: Influencing Demand
4 Ps: Placement
▪ How to get it to customer.
▪ Traditionally one-way communication;
Product
now back-forth flow.
▪ Contact channel strategy:
– Means to increase profitability, control, and
Placement Price
consistency
– Interactive contact channels (call centers,
live dialogue websites, chat rooms).
– Is itself a product; different segments get
Promotion

different options.
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Topic 2: Influencing Demand
4 Ps: Promotion: Customer-Focused Promotion Activities

Brand name, logo, image

Loyalty: product →
Segmentation of Product
provider.
promotions.
Trust: Single failure can
undo.
Customer focus Placement Price

Research and analysis: Cost-effective

study buyer motivation customization of Promotion
and behaviors. advertising materials.

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Topic 2: Influencing Demand
Product Life Cycle Stages

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Topic 2: Influencing Demand
Product Life Cycle Management

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Topic 2: Influencing Demand
NPI Frequency
versus Demand
Uncertainty
▪ Clockspeed:
industry, market, or
product rate of
technology change

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SECTION D:
FORECASTING
Module 1, Section D
Section D Introduction
Section D Key Processes: Section D Topics:
▪ Build the forecast. ▪ Topic 1: Forecasting Principles
– Select appropriate forecasting and Process
methods. ▪ Topic 2: Forecasting Methods
▪ Qualitative, quantitative ▪ Topic 3: Measures of Forecast
▪ Intrinsic, extrinsic Error
– Measure forecast accuracy.
▪ Forecast error, forecast bias

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Topic 1: Forecasting Principles and Process
Principles of Forecasting
Monthly
Demand
Forecasts are:
▪ Necessary (sometimes)
▪ Best based on actual demand
rather than just orders
▪ Wrong (almost always, and
they should include an
estimate of error)
▪ More accurate for groups than
for single items
▪ More accurate for near term Forecast
than for long term. Actual

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Topic 1: Forecasting Principles and Process
Forecasting Process
1. Specify purpose, Raw Data 6. Prepare data.
40
2. Aggregation, units, 7. Test (historical data).
30
and 8. Forecast.
20
3. Time horizon. 10 9. Perform S&OP.
4. Visualize data. 0 10. Review and improve.
5. Choose forecasting
method or model.

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Topic 2: Forecasting Methods
Qualitative and Combination Methods
▪ Estimates ▪ Combine with
Optimistic + 4 × Most Likely + Pessimistic quantitative to add
– expertise,
6
▪ Judgmental/expert judgment assumptions
▪ When to use
▪ Delphi method
qualitative
– Anonymous to avoid: forecasting
▪ “Groupthink” methods:
▪ “Stake in the ground” – For new products
– When hard data
are lacking

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Topic 2: Forecasting Methods
Deseasonalizing
▪ Calculate month average for each month: e.g.,
(Jan-Y1 + Jan-Y2 + Jan-Y3)/3
▪ Calculate year average: Sum month averages and divide
by 12.
▪ Calculate seasonal index:
– Divide each month average by the year average.
Average Demand for Period (e.g., Month)
– Seasonal Index =
Average Demand for all Periods (e.g., Year)

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Topic 2: Forecasting Methods
Deseasonalizing

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Topic 2: Forecasting Methods
Naïve; Simple or Weighted Moving Average
▪ Naïve: Lasts month’s actual is this month’s forecast
▪ Simple moving average:
M1 + M2 + M3
– 3−Month Moving Average = =
3
14.00 + 15.87 + 14.64
= 14.84
3
– Smooths out irregular demand, but lags trend
▪ Weighted moving average:
1 × M1 + 2 × M2 + 3 × M3
– 3−Month Weighted Moving Average = =
6
15.51 + 2 × 19.73 + 3 × 18.61
= 18.47
6
– Also smooths, but lags trend less
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Topic 2: Forecasting Methods
Exponential Smoothing
▪ Inputs: last period’s forecast, last period’s demand, and alpha
– New Forecast =
(α ×Last Period’s Demand) + [(1 − α) × Last Period’s Forecast]
▪ Alpha, α, a smoothing constant between 0 and 1
– Example: 0.3, 30% weight on demand, 70% on forecast,
(0.3 × 14.92) + [(0.7) × 17.71] = 16.87
– Typically between 0.05 and 0.5
– Experience, trial and error, and historical testing
▪ Can minimize lag even more, but not eliminate

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Topic 2: Forecasting Methods
Comparison of Time-Series Forecasts Exponential Forecast = (  Last Per. Demand ) + (1 −  )  Last Per. Forecast 
16.87 = ( 0.3 14.92) + ( 0.7 ) 17.71

Forecasting month-to- Forecasting over longer

month works well. periods results in same
value repeated.

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3-Mo. Moving Average =
M1+M2+M3
3-Mo. Weighted Average =
(1 M1) + ( 2  M2 ) + (3  M3)
Topic 2: Forecasting Methods
Reseasonalizing

0.786 × 14.84 = 11.66 0.071 × 18.47 = 1.32

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Topic 2: Forecasting Methods
Service-Sector Forecasting
▪ Service sector may track
“seasonal” demand in units
as short as minutes.
▪ Restaurant variables
– Workers per shift
– Registers in operation
– Number of available tables
– Space requirements
– Amount and types of foods
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Topic 2: Forecasting Methods
Leading and Lagging Economic Indicators
Lagging Indicators Leading Indicators
▪ Unemployment rate ▪ Building permits
▪ Outstanding loans ▪ Initial unemployment claims
▪ Inventory to sales ▪ Orders for plant equipment, durable
▪ Changes in company profits goods and materials
▪ Spending by businesses ▪ Changes in money supply
▪ Consumer price index (CPI) ▪ S&P 500
▪ Average duration of unemployment ▪ Long- vs. short-term rates
▪ Consumer optimism
Past and current trends Future trends
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Topic 2: Forecasting Methods
Associative Forecasting
▪ y = α + βx
▪ Roofing Sales = α + (β ×Prior Month’s Housing Starts)

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Topic 3: Measures of Forecast Error
Forecast Error
Forecast Error = │A − F│
= │29 units − 33.51 units│ = │−4.51 units│ = 4.51 units

▪ Where:
– A = Actual demand
– F = Forecast demand
– Absolute = | |
▪ NOTE: An absolute value has no +/– sign, and so, in this case,
it measures the size of the error, not the direction.
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Topic 3: Measures of Forecast Error
Forecast Error and Accuracy
▪ Forecast Error as a Percentage =
A −F 29 units − 33.51 units 4.51 units
= = = 0.155 =
A 29 units 29 units
15.5% error
▪ Forecast Accuracy = 1 − Forecast Error as a Percentage =
1 − 0.155 = 0.845 = 84.5% accuracy
▪ Where:
– A = Actual demand
– F = Forecast demand
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Topic 3: Measures of Forecast Error
Bias and Random Variation
Bias Random Variation
▪ Consistent deviation from the ▪ If cumulative actual demand =
mean in one direction cumulative forecast demand,
▪ Good forecast: not biased then no bias.
▪ Cumulative Forecast Error = ▪ Wide swings in both directions
Cumulative Actual Demand − can still cause issues.
Cumulative Forecast Demand
▪ Not absolute (direction matters)

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Topic 3: Measures of Forecast Error
Mean Absolute Deviation (MAD) with Smoothing
σ A−F
▪ MAD = =
n
20.2
= 1.68 units
12
▪ Note: the Greek
uppercase letter ∑
stands for “the sum
of.”

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Topic 3: Measures of Forecast Error
Distribution Curve for MAD of 1.68 Units

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Topic 3: Measures of Forecast Error
Standard Deviation
▪ Difference between average and
actual observations, squared,
divided by n (or n−1), then square
root.
▪ Standard Deviation
2
σ Sample − Sample Mean
=
n −1

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Topic 3: Measures of Forecast Error
Other Measures of Forecast Error
Algebraic Sum of Forecast Errors
▪ Tracking Signal = =
Mean Absolute Deviation
−6.69
= − 3.98
1.68
2
σ Errors for Each Period 55.57
▪ MSE = = = 4.63
Number of Forecast Periods 12
A−F
σ
A 206.87%
▪ MAPE = = = 17.24%
n 12
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Topic 3: Measures of Forecast Error
MAD, Tracking Signal, and MSE

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Topic 3: Measures of Forecast Error
MAPE

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SECTION E:
SUPPLY AND DEMAND ALIGNMENT
Module 1, Section E
Section E Introduction
Section E Key Processes: Section E Topics:
▪ Align supply with demand. ▪ Topic 1: Supply and Demand
– Execute sales and operations Alignment
planning (S&OP) process. ▪ Topic 2: Sales and Operations
– Manage inputs and outputs. Planning
– Perform reconciliation and
analysis.

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Topic 1: Supply and Demand Alignment
Operations Planning and Control

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Topic 1: Supply and Demand Alignment
Strategic and Business Planning
▪ Strategic plan
– Mission and the resources needed to get there
– Goals: Market share, revenue, profits, and growth
– Objectives: Value to customers, owners
▪ Business plan
– Inputs: demand plan and long-term forecasts
– Explicit vision to achieve strategy over 1-3 years
– In dollars and grouped by product family
– Point of reference for S&OP
– Guidance for tactical production and sales plans

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Topic 1: Supply and Demand Alignment
Master Planning and Resource Planning
Master Planning Resource Planning
▪ Long-term resource plan ▪ 15- to 18-month capacity
▪ Near-medium-term sales and planning
operations plan ▪ Capacity at business and
▪ Available capacity (S&OP) plus production plan level
investments in capacity ▪ Resources that take long to
(resource planning) acquire
▪ Satisfy stakeholders including ▪ Lead time to get equipment,
ROI install it, and get it producing

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Topic 2: Sales and Operations Planning
Monthly Sales and Operations Planning Process
Step 1 Data gathering Statistical forecast updated.
Step 2 Demand planning phase Statistical forecast reviewed by
product/brand, marketing, sales.
Step 3 Supply planning phase Supply management team may alter
operations plan if necessary.
Step 4 Pre-meeting Key players review data, set executive
meeting agenda.
Step 5 Executive meeting VPs meet monthly to review decisions and
strategy.

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Topic 2: Sales and Operations Planning
Sales and Operations Planning (S&OP)

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Topic 2: Sales and Operations Planning
Demand Planning Phase Meeting
▪ Highest-ranking demand- ▪ Meeting brevity:
side professional chairs. – Product family, rest by
▪ Dashboards exception.
– Consolidate product, brand, – What changed since last
marketing, sales plans. meeting (replanning).
– Demand plan: units and $. – Validating assumptions.
– Metrics, assumptions, ▪ Strategies to close demand
events, opportunities, risks, and business plan gaps.
and decisions. ▪ Success: communications.
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Topic 2: Sales and Operations Planning
Demand Plan Dashboard in Units

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Topic 2: Sales and Operations Planning
Evaluating Supply Capability
Supply/Demand Match Supply/Demand Mismatch

▪ Production plan will match ▪ Supply develops alternative plans:

demand plan. – 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).
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Topic 2: Sales and Operations Planning
S&OP Inputs and Outputs
▪ Operations Product ▪ Product development
– Represent demand- Operations
development and brand management
and brand
side interests in management – Long-term
operations terms – Seek value added
▪ Sales Demand ▪ Marketing
management: helps
– Daily parties understand – Medium to short term
– Sufficient inventory each other – Tailoring demand to
– Time to market capacity

Sales Marketing

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Topic 2: Sales and Operations Planning
Reconciliation: 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 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.
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Topic 2: Sales and Operations Planning
Implementing S&OP: Coordinating Function
▪ S&OP institutionalizes functional area communications.
▪ Assembles all facts for debate and reconciles functional plans.
▪ Links business planning and tactics (short to medium term) to enable proactive responses.
▪ Builds bridge from customer value to SC efficiency.
▪ Replanning motivates continuous improvement.

Business
Planning

Tactics
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Topic 2: Sales and Operations Planning
Contributions to S&OP: Cooperation Among…
Demand Side Finance Supply Side

▪ Demand forecasts ▪ Financial feasibility ▪ Output and resources

▪ Demand plan ▪ Fit with business plan ▪ Product families
commitments ▪ Operations constraints
▪ Demand plan numbers ▪ Operations strategies
and assumptions ▪ Supply-demand
▪ Market analysis strategies
S&OP ▪ Actual results and
other performance
metric data
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Topic 2: Sales and Operations Planning
Operations Strategies
Level

Production

Chase

Demand

Hybrid

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Topic 2: Sales and Operations Planning
Supply-Demand Strategies
Allocation: Supply-Demand Option MPS Focus
▪ Assign items to Make-to-stock (MTS) Schedule finished
• Few items made from many goods.
specific orders but components
still in inventory • Integral design
▪ Process to distribute Make-to-order (MTO) Schedule raw
materials in short • Many items made from few materials.
components
supply • Custom
Assemble-to-order (ATO) Schedule module
• Many end items, few components production.
• Assemble near point-of-sale

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Topic 2: Sales and Operations Planning
Demand Management and Prioritization: MPS and MRP

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Topic 2: Sales and Operations Planning
Situations for Managing and Prioritizing Demand
• Find ways to better • Use time fences to
use current Supply Demand delay production as
capacity. organization plan overstates long as feasible.
cannot meet actual demand;
demand plan changes will impact
without changes. sales and costs.

Large one-time Demand plan

sales opportunity understates actual
would impact demand; changes
• Establish unusual other orders, will impact sales •Extend planning
costs,
demand evaluation profit. and costs. horizon.
process. • Incentivize substitutes.
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Topic 2: Sales and Operations Planning
Measures of Customer Service Levels
▪ Is cost of achieving a given ▪ Lead time monitoring
service level a sound – Speed of performance
investment? – Consistency
▪ Fill rates: – Flexibility
– Unit fill rate – Malfunction recovery
– Line-item fill rate ▪ Order status reporting
– Monetary value fill rate ▪ Customer satisfaction
▪ Stockout frequency – Establish, then fulfill
expectations
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