Demand Management Best practices:

Process, Principles & Collaboration

 Business Management Today

Integrated Business Management

1. To ensure demand, supply & financial plans are synchronized & executed as planned.
2. To ensure that decisions with regard to demand, supply & products will yield the best financial performance for
the company.
Evolution of Demand Management
 What is demand?

The amount of a particular economic good or service that a

consumer or group of consumers will want to purchase at a
given price.

Two Basic types of demand:

 Independent demand
Demand for an item that is unrelated to the demand for
other items. Demand for finished goods is an examples
of independent demand.
 Dependent demand
Demand that is directly related to or derived from the
bill of material structure for other items or end
products. Such demands are calculated and need not be
forecasted.
 Factors affecting demand
Necessity items Vs. Luxury Items Consumer Taste/ Preference
• Price increase will result in sudden big pull just before it is effective
• At end user level, Brand image is important. “lead free
• When it is in effect, significant demand drop will be seen.
• Ultimate volume gain is expected in this process.
campaign” will increase overall awareness level.
• Consumer can change their preference based on
experience.
Income Level of a region
• Demand changes based on regional scenario
• Regional income/remittance flow is a factor in demand generation. Environmental Factors
• Seasonality
• Natural Calamity
Product Quality • Climate
• Perceived quality matters in retaining demand.
• R&D will help rise in demand if properly communicated. (ex- Toxic
free campaign, Green Energy etc)
Other Factors
Market Size • Festival
• Demand rises when generic market size expands • Political Turmoil/ War
• Growth in infrastructure/construction results in demand rise. • Taxation Policy/ Pattern of Saving
• It is expected to rise in demand in town/suburban region • Technological Advancement
 What is demand management?
Demand Management encompasses planning demand, communicating demand, influencing demand and
managing & prioritizing demand. Demand Management involves influencing the level, timing and
composition of demand. The essence of demand management is being in control of the future by creating
demand, influencing customers & the market & responding to the changes in the market.

1. Responsibility of the marketing organization

 Marketing & Sales organization must actively participate, own & lead the process.
2. Demand forecast is the result of planned marketing efforts.
 Demand forecast stimulates the demand.
A demand forecast is simply an estimate of future demand. The decisions made in reaching consensus turn the
demand forecast into a demand plan.

Two views of demand management:

1. Narrow View: Consists solely of forecasting; yields mediocre result.
2. Broad View: Much more than forecasting.
 Ineffective Demand Management
1. When customers order more product than has been forecasted,
product is not available to fulfill demand.

2. When customers order more/different product than has been

forecasted, the supply organization often must change priorities.
Changing priorities usually requires ineffective & inefficient
expediting resulting in higher costs, lower margin with reduced
profitability.

3. When customers do not order as much product as forecasted,

product is built unnecessarily.

4. When customers do not order as much product as forecasted in

a capacity-constrained environment, precious capacity may be
wasted building the wrong mix of products. product is built
unnecessarily. When a company builds the wrong product in a
tight capacity situation, it cannot build the products that could
otherwise be sold. This increases cost & reduces revenue.
 Investments

1. A well designed& operated process requires:

 An hour or two per month of marketing & sales professional’s
time
 Two to three hours per month of senior marketing & sales
professional’s time
2. A full time demand manager (Team if high Business
Volume/complexity)
3. A forecasting tool
 Major KPIs

Slow
Stock within FG
DPA & BIAS OOS Moving/
Norms Freshness
Non Moving
 DPA & BIAS

Demand Plan Accuracy (DPA) measures the RELIABILITY of Monthly Demand Plan (CDP) that is agreed
and committed by the BUSINESS. It is the percentage accuracy of the Demand Plan against the actual
demand (Orders) for the month.

Demand Bias measures the under or over forecasting of the Demand Plan…

Negative Demand Bias (-ve) : Under Forecasting

Positive Demand Bias (+ve) : Over Forecasting
DPA & BIAS: An Example
 Out of Stock

• It means not in stock or not immediately available for sale. Generally, it is measured through ERP.

 Out-of-Stock Identification
 Active Notification of Out-of-Stocks (Raise flag when critical)

– OOS (%) = (No of days stock available/ Total Working Days) * Contribution (%)
 Freshness

Freshness (FG/RM) = (Remaining Shelf Life/ Total Shelf life) *100%

 Demand Management Process Model
1. Planning Demand:
 Sales & Marketing must actively participate, own & 2. Communicating Demand
lead the process.
 The team must reach consensus on a demand plan.

2. Communicating Demand:
 To the supply & finance organizations & supply chain
partners.
1. Planning Demand 3. Influencing Demand

3. Influencing Demand:
 S&M tactics, product positioning, pricing,
promotions etc.

4. Managing & Prioritizing Demand:

 Managing customer orders to match available 4. Prioritizing Demand
supply.
 Demand Management Process

 Input from sales, marketing &

brand/product organizations
 A demand consensus review  Product availability when anticipated
meeting, conducted monthly  Sales team awareness of supply
problems & capability to make more
by sales & marketing team realistic promises to customers.
 Communication of the  Optimization in FG, RM & Obsolete
Inventory.
consensus demand plan to the
supply organization for
synchronization
 A process for managing
demand uncertainties &
forecast inaccuracies as they
become known
 Planning Demand

Demand plan is a process of planning all demands for products & services to support the marketplace over a
horizon of time. It is a multi-step cross-functionally integrated business planning process used to create reliable
forecasts. It stretches out from Sales & Marketing to Manufacturing and back to Sales through Distribution.

Why Demand Planning?

 To help decide on capacity planning and capital budgeting.
 To help evaluate market opportunities worthy of future investments.
 To help assess its market share amongst other competitors.
 To serve as input to MPS and MRP.
 To plan for other organizational inputs & setting policies and procedures.
 Forecasting Vs. Planning

Forecasting:
It is part of planning demand. It means to predict a future condition or occurrence. Forecasting connotes a
lack of control – something that cannot be predicted with a high degree of accuracy.

Plan:
It means a scheme or method of acting, doing, proceeding, making etc., developed in advance. It denotes
action arranged in advance, which means that someone is determining & controlling the actions taken.
Demand Planning Process
 Best Practices of Demand Planning

 A statistical forecast of 18 months horizon is the best starting point.

 A demand plan is based on the inputs of marketing, sales, brand and statistical analysis & it validates that
the product, marketing & selling plans & tactics will deliver the expected financial & market position results.
 It is a model which is the result of anticipated product, sales & marketing activities to create & influence
demand & drives the financial & supply projections.
 It is a re-planning process. Each cycle (at least monthly), the plan & supporting assumptions are updated.
The best forecast is made with the freshest data (both aggregate & item level).
 It is a bottom-up process as different from any top-down management process.
 The assumptions upon which the demand plan is based are monitored, reviewed & updated in each cycle.
 The demand plan is not constrained by supply limitations; it is only constrained by the demand
organization’s ability to create demand & generate sales.
 Its purpose can be seen as to drive the supply chain to meet customer demands through effective
management of company resources.
 A full time demand manager or team is assigned to support the demand planning process.
Questions to ask about Demand History
What is
different
today?
What is What were
similar the drivers
today? then & now?

?
What was
What is
overlooked
new?
then?
What was
overlooked
now?
 Forward Input Required for Demand Plan
Inputs Information Planning Horizon
Sales Customer Plans 1-12+ months
Individual salesperson plan
Territory/ region sales plan
Sales strategy & tactics
Incentive plan
Marketing Market plan 1-18+ months
Channel plans
Promotion plans
Pricing plans
Monitoring of key economic indicators
Business driver analysis & monitoring
Competitive analysis
Product/ Brand Management New product development 1-18+ months
Product launch plans
Product exit plans
Product life cycles
Product pricing plans
Brand & category plans
Competitors’ product tactics
 Role of Demand Manager
Marketing
Product/ Input Customer
Brand Input
Input

Statistical
Sales
Analysis
Input
Input

Economy Analyze & Business

Input Assimilate Plan Input

Judgement Results in the updated demand plan

 Forecasting

• Forecasting is the art & science of making projections about what future demand & conditions will be.
• --- Sunil Chopra & Peter Meindle

• An estimate of the future demand. It can be determined by mathematical means using historical data, can be
created subjectively by using estimates from informal sources, or it can represent a combination of both
techniques.
• --- APICS Dictionary, 8th Edition

• A forecast is a prediction of future events used for planning purposes.

• --- Lee J. Krajewski, Larry P. Ritzman

• A forecast is a projection of patterns in the past events into the future.

• --- Peter Baily, David Farmer, Barry Crocker
 Characteristics of a Forecast

1. Forecasts are always wrong.
2. Long-term forecasts are usually less accurate than
short-term forecasts
3. Aggregate forecasts are usually more accurate
than disaggregate forecasts.
4. The farther up the supply chain a company is (or
the farther it is from the consumer), the greater is
the distortion of information it receives.
 The perceived pattern is not continued into
the future.
 The past pattern has not been adequately
understood.
 Random fluctuations have prevented the
pattern from being recognised.

A forecast can be determined by:

 Mathematical means using historical data;
 It can be created subjectively by using estimates from informal sources;
 A combination of both techniques.
 Types of Forecast
1. Qualitative  Primarily subjective & rely on human judgment.
 Applicable when little historical data is available & market
intelligence affects the forecast.
 Necessary in a new industry.
1. Panel Approach
2. Delphi Method
3. Scenario Planning

2. Quantitative  Used to Model data.

1. Time Series
2. Causal
3. Simulation
 Methods of Forecasting
A. Time Series:
 Assumes that history repeats itself.
 Use historical demand to make a forecast.
 Most appropriate when the demand pattern does not vary over the years.
 It lacks the bias of human judgement, since it is based on historical demand data.
 It is an efficient method for forecasting a large number of end items.
 It is equally dangerous to assume that history will repeat itself.

B. Causal:
 Assumes that demand is correlated with certain environmental factors.
 Uses estimates of what environmental factors will be to forecast future demand.

C. Simulation:
 Imitate the consumer choices that give rise to demand to arrive at a forecast.
 Using simulation, a firm can combine time-series & causal methods to answer such questions as:
What will be the impact of a price promotion?
 Basic Approach to Forecasting
1. Understand the objective of forecasting:
 Identify the decisions to be made based on forecasts.
2. Integrate demand planning & forecasting throughout the SC:
 Link its forecast to all planning activities throughout the SC.
 These include capacity planning, production planning, promotion planning, and purchasing etc.

3. Identify the major factors that influence the demand forecast :

 Identify demand, supply, and product-related phenomena that influence the demand forecast.

4. Forecast at the Appropriate Level of Aggregation :

 Aggregate forecasts are more accurate than disaggregate forecasts.
 Forecast at a level of aggregation that is appropriate.
5. Establish Performance and Error Measures for the Forecast :
 Evaluate the accuracy and timeliness of the forecast.
 Time-Series Forecasting
Moving Average:
An arithmetic average of a certain number (n) of the most recent observations. As each new
observation is added, the oldest observation is dropped. It is used when demand has no observable
trend or seasonality. It is useful to filter out random fluctuations. The value of n (no. of periods to use
for the average) reflects responsiveness versus stability.

Weighted moving average:

An averaging technique in which the data to be averaged are not uniformly weighted but are given
values according to their importance.

Exponential smoothing:
A type of weighted moving average forecasting technique in which past observations are geometrically
discounted according to their age. The heaviest weight is assigned to the most recent data. It is used
when demand has no observable trend or seasonality.
 Time-Series Forecasting
Regression Models:
A statistical technique for determining the best mathematical expression describing the functional
relationship between one response and one or more independent variables.

Forecast = Constant + Slope*(number of periods in the future)

The method that is used to calculate the constant & the slope is the least squares estimate. This method
minimizes the sum of the square errors between the actual value and the predicted value. The slope
coefficient (b) and the intercept (a) are calculated using the formulas below.

This method is still predicting the future based on the past. There is danger in using this forecast equation
for anything besides a short range forecast.
 Forecasting Error
Mean absolute deviation (MAD):
The average of the absolute values of the deviations of observed values from some expected value. A graph
of the number of times (frequency) actual demand is of a particular value produces a bell-shaped curve.
This distribution is called a normal distribution. Two important characteristics to normal curves: the central
tendency, or average, and the dispersion, or spread, of the distribution. The greater the dispersion, the
larger the standard deviation. The MAD is an approximation of the standard deviation.
1. +/- 1 MAD of the average about 60% of the time
2. +/- 2 MAD of the average about 90% of the time
3. +/- 3 MAD of the average about 98% of the time
 Forecasting Error
Mean squared error (MSE):
It is the average of the square of total forecast errors for a sample. This approximates the variance.

Mean Absolute Percentage Error (MAPE):

It is the average absolute error as a percentage of demand and is given by

Mean Forecast Error (MFE) or BIAS:

It is a consistent deviation from the mean in one direction (high or low).A normal property of a good
forecast is that it is not biased
 Forecasting Error
Tracking Signal:
The ratio of the cumulative algebraic sum of the deviations between the forecasts & the actual values to
the mean absolute deviation. Used to signal when the validity of the forecasting model might be in
doubt.

The TS is recalculated each period & compared with a preset value which is usually somewhere between
±3 standard deviations & ±8 standard deviations. A large negative TS will result is when demand has a
growth trend and the manager is using a forecasting method such as moving average.
 What is it?

It means communicating the demand plan to the supply & finance organizations, and increasingly to supply
chain partners. It makes or breaks the demand management process.

Why is communication difficult?

 It requires a structured process for conveying information, assimilating information, discussion,
decision & feedback.
 Many people believe that transmitting demand data is the same as communicating, which is not.
 Emotion & behavior can stymie communication.

The Demand Planning process itself is a communication process>

 Demand Management Communication
Process
Proposed Consensus
Demand Consensus
Demand Demand
Plan Input review
Plan Plan

Influence Reconcile & synchronize with financial & supply plans (Sales & Operations
Demand Planning)

Master
Prioritize Feedback &
Scheduling
& manage Performance
Monitoring & Supply
demand
Planning
 Feedback & Performance Monitoring

 Feedback to the sales force of decisions made in reaching consensus on the demand plan & in
reconciling and synchronizing demand & supply.
 Feedback to the product, brand & marketing organizations of decisions made in reaching consensus on
the demand plan and in reconciling & synchronizing demand & supply.
 Feedback from the sales force to the demand manager (& vice versa) when demand does not
materialize as planned.
 Feedback from the product, brand & marketing organizations to the demand manager when demand
creation efforts are not executed as planned or do not stimulate demand the way it was anticipated
(either positively or negatively).
 Feedback by the demand manager to the master scheduler and supply planning organization when
demand does not materialize as planned.
 Principles of Communicating Demand

 First Rule: No Surprise.

 Transmitting the demand data is not the same as communication which is ongoing & continuous.
 Changes in demand are communicated in sufficient time & sufficient detail to enable an economical
response.
 Bad news early is better than bad news late; likewise, good news early is better than good news late.
 A structured communication process, including demand information, assimilating the information,
discussion, decision & feedback, is understood and followed to ensure timely communications that
drive sound decision making.
 The demand plan, along with uncertainties must be communicated.
 The demand manager serves as the focal point for communication.
 Facets of Influencing Demand

It means to convince customers to buy products & services in such a way that supports your company’s
objectives and to influence own company to meet.
Influencing Demand Process
Elements of PDCA
 What is it?
Managing for optimum demand performance – from demand volume, sales revenue, profit, and customer service
points of view.

Basic Business realities:

 The volume, timing & mix of demand almost always materialize differently than planned.
 Supply organization almost always has some form of constraint that makes it unable to produce to the exact
volume, timing & mix of the demand plan.

This is the responsibility of the managers in the Demand Organization

Best practices:
 It occurs when the volume, timing & mix of demand are not synchronized & recognized unable to deliver.
 It is not relegated to any individual. Its demand organization’s job.
 The sooner you identify the need, the more options & control you have.
 A few definitions

Baseline
The part of expected sales if no action (Activity / Promotion..) happens.

Uplifts are the expected sales volumes achieved over and above what normally would have been sold if the
Generating Demand activity did not take place.

Impactors
Impactors are events or conditions that will affect baseline volumes.
An Example
Actual

Uplift

Baseline

Impactor
 Process of Baseline Estimation

1. Capture Historical events/impactors in order to generate Actual Base Demand

2. Cleaning the Sales History through formal Learning Log
3. Generate Statistical Forecast based on Actual Base Demand
4. Add Event Uplifts/ Promotion and reflect (+/-) Demand Impactors over Statistical
Demand Forecast.

Primary Data:
Sales History

Secondary Data: Actual

Activity/Promotion Base-line Demand
Seasonality
Macroeconomic situation
Weather Impact
Market insight
 The Objectives CDP Process

 Create the best estimate of future demand, the number upon which all
operational activities will be based

 Generate a Baseline Forecast reflecting the future demand excluding events

 The Baseline Forecast uses cleaned historical data (excluding events and effects
of stock-outs etc.)

 Include Events forecast by Generating Demand (GD)

CDP Process
CDP Cycle: Global Best Practices
Aggregate Identify gaps

Sales & Marketing, National

Yearly Customer between DP and Review Actuals

and Regional Levels

Business Plans Yearly Target versus Targets
Monthly
to DP
Cycle
Obtain and
Select and plan
Assess
corrective
Information on
actions
Events

Enrich and Identify Critical Prepare

Maintain DP Manage DP
Refine Demand Exceptions to adjustments to
Master Data Exceptions
Plan DP DP

Maintain Generate and Weekly

Satistical Review Cycle Prepare for Prepare for MFR
Forecast Statistical Operational DSR Meeting No
Parameters Forecast

Obtain history Clean and

Conduct Conduct MFR
of Sales and Comment
Operational DSR Meeting
Events Historical Data

Evaluate and Update DP DP

Store snapshot
Monitor DP according to Yes adjustments
of agreed DP agreed ?
Performance Meeting

Prepare Customer Sales

Supply
for tactical Service & Target
Planning
DSR Distr. Setting
Standard Business Meetings
Major Standard Business Meetings:

– MFR (Monthly Forecast Review) meeting - Monthly

– MOR / STDSR (Strategic & Tactical Demand & Supply
Review) meeting - Monthly
– OpDSR (Operational Demand & Supply Review)
meeting - Weekly
 MFR
Purpose: Get commitment to national and regional
demand plan and corrective actions. • To achieve a "One-Number" agreement or consensus
on the demand plan by Brand, by month, for all Brands
• Sales Management
and/or product groups and/or SKU per region (either directly
Definition • Trade Marketing
or agreement on split rules) within an operating division.
• Marketing
• Once consensus has been reached, the demand plan values
Responsible • Demand Planner
for all Brands/product groups are collectively known as
Participants • Supply Planner
the demand Plan for that operating division.
Agenda
Agenda Review the following:
• Out of tolerance Demand Plan accuracy
Input
Input MFR
Output
Output simulation... • Exceptions to past month Actual Shipments vs. past Demand Plan
• Exceptions between Statistical Forecast, Sales, Marketing
for future forecasting periods(s)
• Discontinued products, migrations, new products
• Statistical and enriched forecasts at a high level and assumptions
that were incorporated into the forecasts
Agree upon forecast numbers for a minimum of the next three
54
(current +3) forecasting periods
 MFR Summary
Participants:
 D&SP Manager
 Head of Marketing/Brands
 Head of Sales
 Head of Supply Chain

Objective: Frequency:
Agree on Monthly (3rd Week)
one
number
Consensus
Demand Plan

Consensus
Demand Plan Meeting
 MOR / STDSR
Participants:
MANCOM
 Group Product Managers
 Others as needed

Objective:
 Firm-up Outlook
and DF for next 6 Frequency:
qtrs (RIG, EBITA,
PFME) Monthly (4th week)
 Solve structural
problems (if any)

Strategic/Tactical DSR Meeting

Example issue:
Build new production line
 OpDSR
Participants:
 Demand Planner
 Supply Planner
 Factory Planner
 others as needed

Objective: Frequency : Weekly

Solve weekly D&S or ad hoc as needed
issues and ad-hoc
problems

Example issue:
Raw material not available