23/02/19

Demand  Management  and  

Production  Planning
DR  NINIET  INDAH  ARVITRIDA
NINIET@IE.ITS.AC.ID /  ARVIETRIDA@GMAIL.COM

INSTITUT TEKNOLOGI SEPULUH NOPEMBER (ITS)

Learning  outcomes
In  the  end  of  this  lecture,  students  are  able  to:
1. Understand  the  role  of  demand  management  in  supply  chain
2. Explain  the  instruments  of  demand  management
3. Understand  how  to  develop  production  planning  and  relate  it  to  the  demand  management
4. Understand  the  basic  concept  of  Collaborative  Planning,  Forcasting,  and  Replenishment  
(CPFR)

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DEMAND  MANAGEMENT
Dimension  of  demand

Dimensi Produk Dimensi Waktu

A1,  A2,  A3,  … Bulan 1
Bulan 2
Bulan 3

Dimensi Wilayah
Jawa Timur,  Jawa Barat,  etc

DEMAND  FORECASTING

Forecasting

n n+1 Function n+2

of Time
Forecasting is an approach to estimate something that contains uncertainty and
related to time in the future
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DEMAND  MANAGEMENT

Often, Demand Patterns Lead to Inefficient Supply Chain

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10

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Demand  forecasting  à the  process  that  an  organization  takes  to  predict  the  
level  of  demand.  Demand  forecasting  takes  demand  pattern  as  a  given.

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20

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D
F
10

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

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Problems with Volatile Demand

§High  forecast  errors
◦ High  inventory  investments
◦ Low  service  levels  (shortages  often  occurred)
§High  cost  of  adjusting  the  level  of  capacity
§Fluctuated  resource  utilization

Impetus to Demand Management

Demand  is  never  truly  exogenous,  but  often  very  much  dependent  on  internal  
processes.  Sales  and  marketing  use  promotion  and  other  means  to  inflate  sales.  
While  this  is  good  in  terms  of  increasing  sales  volume,  such  an  effort  could  result  
in  a  serious  danger  if  not  communicated  properly  to  the  related  functions  in  the  
company  as  well  as  to  other  channels  of  the  supply  chain.
Typical  consequences:
◦ Serious  out  of  stock
◦ Excessive  inventory  

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Demand Management
Actively  seeks  to  ensure  that  the  customer  demand  ‘profile’ as  an  input  to  
the  demand-­‐planning  process  is  as  smooth  as  possible  in  order  to  make  
supply  chain  operations  easier.    

In  other  words,  the  company  is  not  only  passively  process  the  given  
demand,  but  is  trying  to  reduce  demand  volatility,  or  improving  demand  
stability.

Thus,  demand  forecasting  is  REACTIVE,  while  demand  management  is  

PROACTIVE  to  customer  demand.  

Ilustration of  Demand  Management

Demand   Production  
Production Delivery
forecasting Planning

Demand  management  makes  the  demand  is  achievable by  the  supply  chain
Demand  management  coordinates  demand  quantities  and  timing  with  the  planning  and  control  
activities  of  the  company

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Demand  management  instruments

1. Promotion
2. Pricing  (e.g.  phone  call  pricing)
3. Shelf  management
4. Deal  structure  (e.g.  product  return,  warranty,  payment  term,  
insurance)

Role  of  Production/Aggregate  Planning

§Capacity  has  a  cost.

§A  company  needs  to  determine the  levels  of  capacity,  production,  subcontracting,  inventory,  stockouts,  
and  pricing  over  a  specified  time  horizon.

§How  can  a  firm  fit  their  resources  best to  maximize  profit?

§Aggregate  plan  is  developed    “to  determine  aggregate  production  quantities  and  levels  of  resources  
required  to  achieve  these  production  goals”.

§The  goal  is  to  maximize  profit

Input: the  demand  forecast  for  each  period  in  the  planning  horizon.

In  an  aggregate  plan,  decisions  made  at  a  product  family  level,  not  SKU.

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Aggregate Planning in Supply Chain

Decisions:
◦ What  to  produce,  how  many,  and  when  in  aggregate  terms
◦ Number  of  workers  to  hire  and  layoff  each  period
◦ Amount  of  overtime
◦ Number  of  units  subcontracted
Parameters  needed:
◦ Production  rate  
◦ Cost  parameters  (regular  production,  inventory  holding,  backlog,  overtime,  
subcontract,  hiring,  layoff)
◦ Capacity  (regular,  overtime,  subcontract)

Trade off in Aggregate Planning

Capacity
(regular,  overtime,  subcontracted)
Backlog/lost  sales  
due  to  delay

Inventory

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Strategies
Chase  à capacity  as  the  lever  (varying  capacity  to  meet  demand).  
Level  à inventory  as  the  lever  (constant  output  rate,  inventory  
and/or  backlog  are  used  to  meet  demand  variability)
Mixed  strategy  à both  capacity  and  inventory  can  vary.

Chase Strategy

Business Cycle
Production
Units

1 2 3 4 5 6 7 8 9 10 11 12 13
Time Periods

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Chase  Strategy (zero  inventory)

— Production  rate  is  synchronized  with  demand  by  varying  
machine  capacity  or  hiring  and  laying  off  workers  as  the  demand  rate  varies
— However,  in  practice,  it  is  often  difficult  to  vary  capacity and  workforce
on  short  notice
— Expensive  if  cost  of  varying  capacity  is  high
— Negative  effect  on  workforce  morale
— Results  in  low levels  of  inventory
— Useful  when  inventory  holding  costs  are  high  and  costs  of  changing  capacity  
are  low

Level Strategy

Business Cycle
Production
Units

1 2 3 4 5 6 7 8 9 10 11 12 13
Time Periods

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Level  Strategy
— Maintain  stable  machine  capacity  and  workforce  levels  
with  a  constant  output  rate
— Shortages  and  surpluses  result  in  fluctuations  in  inventory  levels  
over  time
— Inventories  that  are  built  up  in  anticipation of  future  demand  or  backlogs are  
carried  over  from  high  to  low  demand  periods
— Better  for  worker  morale
— Large  inventories  and  backlogs  may  accumulate
— Should  be  used  when  inventory  holding  and  backlog  costs  are  relatively  low

Mixed  Strategy
Business Cycle
Production
Units

rate break

1 2 3 4 5 6 7 8 9 10 11 12 13
Time Periods

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Using Linear Programming

Parameters:
cH =  cost  of  hiring  one  worker
cF =  cost  of  firing  one  worker
h  =  cost  of  holding  one  unit  of  inventory  for  one  period
cR =  cost  of  producing  one  unit  on  regular  time
cO =  cost  of  producing  one  unit  on  overtime
cU=Idle  cost  per  unit  of  production
cS=  cost  to  subcontract  one  unit  of  product
nt =  number  of  production  days  in  period  t
K  =  aggregate  units  produced  by  one  worker  in  a  day
I0 =  initial  inventory
W0 =  initial  workforce
Dt =  forecast  of  demand  in  period  t

Using Linear Programming

Variables
Wt=  Work  force  level  in  period  t
Pt =  Production  level  in  period  t
It =  Inventory  level  in  period  t
Ht =  Number  of  workers  hired  in  period  t
Ft =  Number  of  workers  fired  in  period  t
Ot =  overtime  production  in  units
Ut =  Undertime (worker  idle)  in  units
St =  Number  of  units  subcontracted  in  period  t

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LP Model
Objective  Function:
Min.   T
å (cH H t + cF Ft + cI It + cOOt + cUU t + cS St )
t =1

Subject  to

Wt = Wt -1 + H t - Ft
Pt = KntWt + Ot - U t
I t = I t -1 + Pt + S t - Dt
H t , Ft , I t , Ot ,U t , St ,Wt , Pt ³ 0

Impacts of Demand Variability on SC Costs

Demand
Costs
January 1600
Material  costs 10/unit
February 3000
March 3200 Holding  cost 2/unit/mth
April 3800 Stockout  cost 5/unit/mth
May 2200 Hiring  &  training 300/worker
June 2200 Layoff 500/worker
Sale  price  40/unit Labor  hours (hrs) 4/unit
Starting  inventory  1000 Regular  time 4/hour
Starting  workforce  80 Overtime 6/hour
Subcontracting 30/unit
Regular  working  hours    8/day
Maximum  overtime  10  hrs/month
Inventory  costs  charged  based  on  
end  of  period  inventory  

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Optimal Solution, Maximizing Revenue

t Ht Lt Wt Ot It St Ct Pt
0 0 0 80 0 1000 0 0 0
1 0 15 65 0 1983 0 0 2583
2 0 0 65 0 1567 0 0 2583
3 0 0 65 0 950 0 0 2583
4 0 0 65 0 0 267 0 2583
5 0 0 65 0 117 0 0 2583
6 0 0 65 0 500 0 0 2583

Financial Performance
Total  costs  over  the  planning  period:  $422,275
◦ Material  costs
◦ Labor  costs
◦ Inventory  holding  costs
◦ Stockout costs
◦ Layoff  costs
◦ Hiring  and  training  costs
◦ Overtime  costs
◦ Subcontracting  costs
Revenue:  $640,000
Profit:  $217,725

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Demand Changes: Promotion in January, price $39/unit :

10% increase in demand, 20% forward buying
Demand
January 3000
February 2400
March 2560
April 3800
May 2200
June 2200

Solution
t Ht Lt Wt Ot It St Ct Pt
0 0 0 80 0 1000 0 0 0
1 0 15 65 0 610 0 0 2610
2 0 0 65 0 820 0 0 2610
3 0 0 65 0 870 0 0 2610
4 0 0 65 0 0 320 0 2610
5 0 0 65 0 90 0 0 2610
6 0 0 65 0 500 0 0 2610

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Financial Performance
Costs $421,915
Revenue     $643,400
Profit   $221,485

Demand Changes: Promotion in April, price $39/unit:

10% increase in demand, 20% forward buying
Demand
January 1600
February 3000
March 3200
April 5060
May 1760
June 1760

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Solution
t Ht Lt Wt Ot It St Ct Pt
0 0 0 80 0 1000 0 0 0
1 0 14 66 0 2047 0 0 2647
2 0 0 66 0 1693 0 0 2647
3 0 0 66 0 1140 0 0 2647
4 0 0 66 0 0 1273 0 2647
5 0 0 66 0 0 387 0 2647
6 0 0 66 0 500 0 0 2647

Financial Performance
Costs $438,857
Revenue     $650,140
Profit     $211,283

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Comparisons: What are your conclusions?

Reg. Promotional Promotional Increase in Percent Profit Average
Price Price Period Demand Forward ($) Inv.
Buy

40 40 - - - 217725 895

40 39 January 10% 20 221485 523

40 39 April 10% 20 211283 938

40 39 January 100% 20 242810 208

40 39 April 100% 20 247320 1492

Coordinated Demand Management

Demand management should be well coordinated within the supply chain
◦ Event potentially increase or decrease sales should be visible to other (especially
upstream) channels.
Market reaction to demand management should be closely monitored.
Incorporate the true supply chain costs corresponding to the demand resulted from the
use of these instruments
Cross functional team à different interests among functions

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Collaborative Planning, Forecasting, and Replenishment

(CPFR)
Traditionally:
Each  function  and  each  supply  chain  channel  could  have  different  forecast  figures

Plans  are  developed  in  isolation  from  other  supply  chain  channels

Minimal  communication  and  coordination  between  channels  takes  place  for  corrective  actions  when  
actual  production  deviates  from  the  plan

Common  CPFR  Scenarios

Where  Applied  in  Supply  
CPFR Scenario Chain Industries  Where  Applied
Retail  event  collaboration Highly  promoted  channels   All  industries  other  than  
or  categories those  that  practice  EDLP
DC  replenishment   Retail  DC  or  distributor  DC Drugstores,  hardware,  
collaboration grocery
Store  replenishment   Direct  store  delivery  or   Mass  merchants,  club  
collaboration retail  DC-­‐to-­‐store  delivery stores
Collaborative  assortment   Apparel  and  seasonal  goods Department  stores,  
planning specialty  retail

Chopra,  Chapter  10

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The  CPFR® Process Model Seller

FRONT END AGREEMENT Collaborative

Planning
JOINT BUSINESS PLAN

CREATE SALES FORECAST Collaborative

Forecasting
IDENTIFY EXCEPTIONS

RESOLVE EXCEPTIONS

CREATE ORDER FORECAST

Buyer
IDENTIFY EXCEPTIONS

RESOLVE EXCEPTIONS

GENERATE ORDER

PUJAWAN,  I  N.,  AND  MAHENDRAWATHI  ER.  (2017),  SUPPLY  CHAIN  MANAGEMENT  

3RD.  ED,  PENERBIT  ANDI

Elemen Pokok CPFR

Strategy & Planning à aturan dasar untuk hubungan kolaboratif. Sepakat
tentang: product mix & placement dan perencanaan event.
Demand & supply management à membuat proyeksi permintaan pelanggan,
order, dan kebutuhan pengiriman selama horizon perencanaan.
Execution à melakukan pemesanan, menyiapkan dan melakukan pengiriman,
menerima dan menyimpan produk di rak ritel, mencatat transaksi penjualan, serta
melakukan pembayaran.
Analysis à memonitor perencanaan dan eksekusi, terutama kalau ada hal-hal
yang terjadi di luar rencana. Hasilnya sebagai dasar untuk melakukan perbaikan
berkelanjutan.

PUJAWAN,  I  N.,  AND  MAHENDRAWATHI  ER.  (2017),  SUPPLY  CHAIN  MANAGEMENT  3RD.  ED,  
PENERBIT  ANDI

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TUGAS
Dikerjakan  individu,  dikumpulkan  softcopy.  Tulis  sumber  referensi  yang  Anda  gunakan  untuk  mengerjakan  tugas  ini.

1. Jelaskan  perbedaan  antara  forecasting dan  demand management.

2. Jelaskan  apa  dampak  pola  permintaan  yang  sangat  fluktuatif  terhadap  supply chain.  Beri  ilustrasi.
3. Sebutkan  strategi  atau  instrumen  yang  masuk  dalam  konteks  demand management.
4. Apa  yang  dimaksud  dengan  CPFR?  Jelaskan  dan  beri  contoh  kasus  perusahaan  yang  telah  berhasil  menerapkan  
CPFR.

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