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

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The Bullwhip Effect

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P&G Diapers—Monthly Orders (thousands of units)

J F M A JM J A S O DN

Dem

and

50

0

100

150

200

250

300

350

Key:= DC orders to factory= Retail orders to DC

Customer orders

Maximum demand

Minimum demand

Retail ordersDistributor ordersAnd so on up the chain

Causes of the Bullwhip Effect

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 partner’s planning and

forecasting software.

►Collaborative demand planning– Channel master may be able to use centralized inventory management

strategies or all can use CPFR.

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Using Demand Influence to Reduce the Bullwhip Effect

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Using Demand Management and Prioritization to Reduce the Bullwhip Effect

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Discussion QuestionThe bullwhip effect can be mitigated bya) 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

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 gathering2. Demand planning 3. Supply planning4. Pre-meeting5. Executive meeting

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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.

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Demand Plan Dashboard—Units

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 weeksInventory turnover = 2 weeks

Historical Demand

Key:

Annual business plan

Current demand plan

Prior demand plan

Actual Demand

Product family XYZ:

0Units

Supply Planning Phase Meeting

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• Production plan will match demand plan.

Supply/DemandMatch

• 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/DemandMismatch

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.

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Questions?

3-18

Principles of ForecastingForecasts 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

ActualForecast

Monthly Demand

Demand: Components

• Trend: linear, geometric, exponential

• Seasonality: holidays, weather

• Random variation: data fluctuation caused by random occurrences

• Cycle: increases/ decreases in economy

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Seasonality

Random variation

Cycle

Trend

Quantitative Approaches to Forecasting Demand

• Based upon internal factors; incorporate data collected during set intervals of time

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• 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

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Next period’s demand will repeat this period’s.

FebJan Mar MayApr

Naive forecast

950(Previous month’s demand)

Actual demandNaive 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

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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/Calculation1,000

975

1,125

1,025

950 1,125

1,017

975

1,000

FebJan Mar MayApr

Example: May demand will equal sum of February, March, and April demand divided by 3 (3-month moving average).

Weighted Moving Average Forecast

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Next demand will be weighted average of previous periods.

Weighted moving average

950

Actual demand

3-month moving averageWeighted moving average

Naive forecast

1,021

Method/Calculation1,000

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

FebJan Mar MayApr

Example: May demand will equal sum of (3 April + 2 March + 1 February) divided by (3 + 2 + 1).

Exponential Smoothing Forecasts

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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

1,046Prev. forecast + Constant** Prev. forecast error: 1,040 + 0.2 (975 – 1,040) = 1,027

Exponential smoothing1,040*

975

1,000

FebJan Mar MayApr

Intrinsic Forecasting Methods Compared

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**Constant = 0.2

Naive forecast

Moving average

Weighted moving average

Average of previous 3 months

Previous month’s demand

Actual demandMethod/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

FebJan Mar MayApr

Seasonal Index (by Month)

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Average January demand = 221 % of monthly average

demandDemand

FebJan

May

1 2

Deseasonalized Monthly Demand =

Sum of Seasonal Avg. Demand =

34

26

Apr

33

2011

88

Mar

Jul-Dec

2010Month

31

14

Deseasonalized Avg. Monthly

Demand2009–20112009

2 04

4 35

11 1012

27

Seasonal Index

Jun 3

8789

Seasonal Avg. Demand

32 31

2

2

4

11

30

168

88

14

14

1484

2.142

0.786

0.286

0.143

0.1436.285

2.214

(168 ÷12)

14

14

14

(6 x 14)

Service Sector Forecasting

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Service businesses, such as restaurants, may track “seasonal” demand in units as short as minutes.

Some restaurant variables

Workers per shiftRegisters in operationNumber of available tablesSpace requirements Amount and types of foods

% of demand by hour of day

5-64-53-42-31-212-1 7-811-12 8-9 9-106-7

15%

10%

5%

20%Lunchtime Dinnertime

Hour of day

Qualitative Approaches to Forecasting Demand

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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

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Forecast Error = A F

= 600 units 680 units = 80 units = 80 units

Where:A = Actual demandF = 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

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A FForecast Error as a Percentage =

A600 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 demandF = Forecast demand

Mean Absolute Deviation (MAD)

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A F

MAD = n

Where:|A – F| = Total of absolute forecast errors for the periodsn = Number of periods

The Greek uppercase letter ∑ stands for

“the sum of.”

Mean Absolute Deviation (MAD) with Smoothing

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(65.86 / 8 = 8.23)Mean Absolute Deviation (MAD) 8.23

Absolute DeviationDemand

Jun

May

Jul

Total Deviation

Month

2

Exponential Forecast with 0.4 Smoothing

Error (Deviation)

3

65.86

25Nov

16.13

+14.78 (25 – 10.22)

Oct 15

10.22

+7.96 (15 – 7.04)

Sep 5.0710 +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

14.004

32

Other Measures of Forecast Error

1-34

Algebraic Sum of Forecast ErrorsTracking 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

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Demand management is the art of synchronizing supply and demand plans:

Long-term strategic needsMedium-term aggregate demand forecasting and master planningShort-term demand forecasting and item-level master scheduling

Planning Demand: The Demand Plan

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Demand plan is plan for action based on:

Forecasts

Planned demand generation activities.

Demand plan inputs:

Communicating Demand

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Communications Structure for Communicating Demand

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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

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Demand manager

Salespersons

Master scheduler and

supply planners

Marketing staff

Product and brand

managersKey

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

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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 weeksInventory turnover = 2 weeks

Historical demand

Key:

Annual business plan

Current demand plan

Prior demand plan

Actual demand

Product family XYZ:

0Units

Situations for Managing and Prioritizing Demand

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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

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Vendor Management

Collaboration Tasks Retailer Tasks

Analysis

Demand & Supply Management

Execution

Strategy & PlanningManufacturer Tasks

Category Management

Store ExecutionSupplier Scorecard

Market Data AnalysisDemand Planning

Exception Management

Logistics/DistributionBuying/Re-buyingLogistics/Distribution

Execution MonitoringCustomer Scorecard

Production & Supply Planning

Performance Assessment

Sales ForecastingOrder Planning/Forecasting

POS ForecastingReplenishment Planning

Order GenerationOrder Fulfillment

Collaboration ArrangementJoint Business Plan

Account PlanningMarket Planning

Demand Management Functional Responsibilities & Interfaces

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Long-termSeek valued added

Medium- to short-termTailoring demand to capacity

Represent demand-side interests in operations terms

DailySufficient inventoryTime to market

Questions?

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