University Supply Chain Management: Module 4 - Demand Forecasting

This document serves as a comprehensive overview of Module 4, focusing on demand forecasting within the context of supply chain management. It elucidates the significance of demand and supply planning, emphasizing the proactive role of supply chain managers in maximizing profits through effective management of demand and supply. The document outlines key decisions inherent in the planning process and explores various tools and methodologies for forecasting future demand based on historical data, with a strong emphasis on the ethical considerations throughout these processes. The content covers essential topics such as the components of a demand forecast, the application of time-series methodologies for forecasting, and the analysis of demand forecasts to estimate forecast error. It also delves into inventory control, including strategies to avoid stock-outs and the utilization of just-in-time inventory systems. Furthermore, it highlights the importance of collaborative planning, forecasting, and replenishment (CPFR) and the use of demand-planning software to enhance forecast accuracy. The document includes references to various academic resources, providing a well-rounded understanding of the subject matter.

Module 4 – Demand Forecasting in a Supply Chain.
What's the benefit of studying this
topic?
The benefit of studying these topics is the
significance of demand and supply
planning in a supply chain; identify
decisions that are part of the planning
process; and, discuss tools that supply
chain managers can use for planning.
Planning allows a supply chain manager
to be proactive and manage demand and
supply to ensure that profits are
maximized. Because most supply chain
decisions are based on an estimate of
future demand, this unit describes
methodologies that can be used to
forecast future demand based on
historical demand data. Ethical decision
making throughout these processes is
addressed.
Readings:
 http://2012books.lardbucket.org/books/
marketing-principles-v2.0/s12-02-demand-
planning-and-inventory-.html
 http://ocw.mit.edu/courses/sloan-school-of-
management/15-772j-d-lab-supply-chains-fall-
2014/lecture-notes/MIT15_772JF14_Lec04-
Lec05.pdf
 http://www.ijert.org/download/12237/the-role-of-
forecasting-parameters-in-reducing-bullwhip-
effect
 https://dspace.mit.edu/handle/1721.1/42899
 http://ojs.excelingtech.co.uk/index.php/IJSCM/
article/view/1080
 http://www.cluteinstitute.com/ojs/index.php/
RBIS/article/viewFile/8001/8055
 http://www.hindawi.com/journals/mpe/
2015/918045/
 http://www.degruyter.com/view/j/
demo.2015.3.issue-1/demo-2015-0005/demo-
2015-0005.xml
 http://www.sciencedirect.com/science/article/
pii/S1877050915006766
 http://2012books.lardbucket.org/books/
marketing-principles-v2.0/s12-02-demand-
planning-and-inventory-.html
 http://www.sciencedirect.com/science/article/
pii/S1665642314723478
 cluteinstitute.com/ojs/index.php/AJBE/article/
viewFile/7815/7877
 http://ezproxy.umuc.edu/login?url=http://
sk.sagepub.com.ezproxy.umuc.edu/reference/
hdbk_supplychain/n27.xml
 Lecture 1 (below)
Module 4 (Lecture 1)
Demand Forecasting in a Supply Chain.
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Overview
This study explains the significance of demand and supply planning in a supply chain, identifies
decisions that are part of the planning process, and discusses tools that supply chain managers
can use for planning. Planning allows a supply chain manager to be proactive and manage
demand and supply to ensure that profits are maximized. Because most supply chain decisions
are based on an estimate of future demand, this unit describes methodologies that can be used
to forecast future demand based on historical demand data.
Objectives: This study presents that forecasts of future demand are essential for making
supply chain decisions. Understanding the role of forecasting for both an enterprise and a
supply chain is important, as well as, the identification of the components of a demand forecast.
This unit also explains various forecast demands in a supply chain given historical data using
time-series methodologies. The study further analyzes demand forecasts to estimate forecast
error.
Outcomes:
After completing this study, you will be able to:
1. Understand the role of forecasting for both an enterprise and a supply chain.
2. Identify the components of a demand forecast.
3. Forecast demand in a supply chain given historical demand data using time-series
methodologies.
4. Analyze demand forecasts to estimate forecast error.
Supply Chain Management is an integrating function with primary responsibility for linking major
business functions and business processes within and across companies into a cohesive and
high-performing business model. It includes all of the Logistics Management activities as well
as manufacturing operations, and it drives coordination of processes and activities within and
across marketing, sales, product design, finance, and information technology. Logistics
management is that part of the supply chain management process, which plans, implements,
and controls the efficient, effective forward and reverse flows and storage of goods, services,
and related information between the point of origin and the point of consumption in order to
meet customers’ requirements.
Demand Planning
Imagine you are a marketing manager who has done everything in your power to help develop
and promote a product—and it’s selling well. But now your company is running short of the
product because the demand forecasts for it were too low. Recall that this is the scenario
Nintendo faced when the Wii first came out. The same thing happened to IBM when it launched
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the popular ThinkPad laptop in 1992.
Not only is the product shortage going to adversely affect the profitably of your company, but
it’s going to adversely affect you, too. Why? Because you, as a marketing manager, probably
earn either a bonus or commission from the products you work to promote, depending on how
well they sell. And, of course, you can’t sell what you don’t have.
As you can probably tell, the best marketing decisions and supplier selections aren’t enough if
your company’s demand forecasts are wrong. Demand planning is the process of estimating
how much of a good or service customers will buy from you. If you’re a producer of a product,
this will affect not only the number of goods and services you have to produce but also the
materials you must purchase to make them. It will also affect your production scheduling, or the
management of the resources, events, and processes need to create an offering. For example,
if demand is heavy, you might need your staff members to work overtime. Closely related to
demand forecasting are lead times. A product’s lead time is the amount of time it takes for a
customer to receive a good or service once it’s been ordered. Lead times also have to be taken
into account when a company is forecasting demand.
Sourcing decisions—deciding which suppliers to use—are generally made
periodically. Forecasting decisions must be made more frequently—sometimes daily. One way
for you to predict the demand for your product is to look at your company’s past sales. This is
what most companies do. But they don’t stop there. Why? Because changes in many factors—
the availability of materials to produce a product and their prices, global competition, oil prices
(which affect shipping costs), the economy, and even the weather—can change the picture.
For example, when the economy hit the skids in 2008, the demand for many products fell. So if
you had based your production, sales, and marketing forecasts on 2007 data alone, chances
are your forecasts would have been wildly wrong. Do you remember when peanut butter was
recalled in 2009 because of contamination? If your firm were part of the supply chain for peanut
butter products, you would have needed to quickly change your forecasts.
The promotions you run will also affect demand for your products.
Consider what happened to KFC when it first came out with its new
grilled chicken product. As part of the promotion, KFC gave away
coupons for free grilled chicken via Oprah.com. Just twenty-four hours
after the coupons were uploaded to the Web site, KFC risked running
out of chicken. Many customers were turned away. Others were given
“rain checks” (certificates) they could use to get free grilled chicken
later.
In addition to looking at the sales histories of their firms, supply chain
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managers also consult with marketing managers and sales executives when they are
generating demand forecasts. Sales and marketing personnel know what promotions are being
planned because they work more closely with customers and know what customers’ needs are
and if those needs are changing.
Firms also look to their supply chain partners to help with their demand planning. Collaborative
planning, forecasting, and replenishment (CPFR) is a practice whereby supply chain partners
share information and coordinate their operations. Walmart has developed a Web-based CPFR
system called Retail Link. Retailers can log into Retail Link to see how well their products are
selling at various Walmart stores, how soon more products need to be shipped to the company
and where, how any promotions being run are affecting the profitability of their products, and so
forth. Because different companies often use different information technology systems and
software, Web-based tools like Retail Link are becoming a popular way for supply chain
partners to interface with one another.
Not all firms are wild about sharing every piece of information they can with their supply chains
partners. Some retailers view their sales information as an asset—something they can sell to
information companies like Information Resources, Inc., which provides competitive data to
firms that willing to pay for it. By contrast, other firms go so far as to involve their suppliers
before even producing a product so they can suggest design changes, material choices, and
production recommendations.
The trend is clearly toward more shared information, or what businesspeople refer to as supply
chain visibility. After all, it makes sense that a supplier will be not only more reliable but also in
a better position to add value to your products if it knows what your sales, operations, and
marketing plans are—and what your customers want. By sharing more than just basic
transaction information, companies can see how good operations are proceeding, how
products are flowing through the chain, how well the partners are performing and cooperating
with one another, and the extent to which value is being built in to the product.
Demand-planning software can also be used to create more accurate demand
forecasts. Demand-planning software can synthesize a variety of factors to better predict a
firm’s demand—for example, the firm’s sales history, point-of-sale data, warehouse, suppliers,
and promotion information, and economic and competitive trends. So a company’s demand
forecasts are as up-to-date as possible, some of the systems allow sales and marketing
personnel to input purchasing information into their mobile devices after consulting with
customers.
Litehouse Foods, a salad dressing manufacturer, was able to improve its forecasts dramatically
by using demand-planning software. Originally the company was using a traditional sales
database and spreadsheets to do the work. “It was all pretty much manual calculations. We had
no engine to do the heavy lifting for us,” says John Shaw, the company’s Information
Technology director. In a short time, the company was able to reduce its inventory by about
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one-third while still meeting its customers’ needs.
Inventory Control
Demand forecasting is part of a company’s overall inventory control activities. Inventory
control is the process of ensuring your firm has an adequate supply of products and a wide
enough assortment of them meet your customers’ needs. One of the goals of inventory
management is to avoid stock-outs. A stock-out occurs when you run out of a product a
customer wants to buy. Customers will simply look elsewhere to buy the product—a process
the Internet has made easier than ever.
When the attack on the World Trade Center occurred, many Americans rushed to the store to
buy batteries, flashlights, American flags, canned goods, and other products in the event that
the emergency signaled a much bigger attack. Target sold out of many items and could not
replenish them for several days, partly because its inventory tracking system only counted up
what was needed at the end of the day. Walmart, on the other hand, took count of what was
needed every five minutes. Before the end of the day, Walmart had purchased enough
American flags, for example, to meet demand and in so doing, completely locked up all their
vendors’ flags. Meanwhile, Target was out of flags and out of luck—there were no more to be
had.
To help avoid stock-outs, most companies keep a certain amount of safety stock on
hand. Safety stock is backup inventory that serves as a buffer in case the demand for a product
surges or the supply of it drops off for some reason. Maintaining too much inventory, though,
ties up money that could be spent other ways—perhaps on marketing promotions. Inventory
also has to be insured, and in some cases, taxes must be paid on it. Products in inventory can
also become obsolete, deteriorate, spoil, or “shrink.” Shrinkage is a term used to describe a
reduction or loss in inventory due to shoplifting, employee theft, paperwork errors, or supplier
fraud. When the economy went into its most recent slide, many firms found themselves
between a rock and a hard place in terms of their inventory levels. On the one hand, because
sales were low, firms were reluctant to hold much safety stock. Many companies, including
Walmart, cut the number of brands they sold in addition to holding a smaller amount of
inventory. On the other hand, because they didn’t know when business would pick up, they ran
the risk of running out of products. Many firms dealt with the problem by maintaining larger
amounts of key products. Companies also watched their supply chain partners struggle to
survive. Forty-five percent of firms responding to one survey about the downturn reported
providing financial help to their critical supply chain partners—often in the form of credit and
revised payment schedules.
Just-in-Time Inventory Systems
To lower the amount of inventory and still maintain they stock they need to satisfy their
customers, some organizations use just-in-time inventory systems in both good times and bad.
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Firms with just-in-time inventory systems keep very little inventory on hand. Instead, they
contract with their suppliers to ship them inventory as they need it—and even sometimes
manage their inventory for them—a practice called vendor-managed inventory (VMI). Dell is an
example of a company that utilizes a just-in-time inventory system that’s vendor managed. Dell
carries very few component parts. Instead, its suppliers carry them. They are located in small
warehouses near Dell’s assembly plants worldwide and provide Dell with parts “just-in-time” for
them to be assembled.
Dell’s inventory and production system allows customers to get their computers built exactly to
their specifications, a production process that’s called mass customization. This helps keep
Dell’s inventory levels low. Instead of a huge inventory of expensive, already-assembled
computers consumers may or may not buy, Dell simply has the parts on hand, which can be
configured or reconfigured should consumers’ preferences change. Dell can more easily return
the parts to its suppliers if at some point it redesigns its computers to better match what its
customers want. And by keeping track of its customers and what they are ordering, Dell has a
better idea of what they might order in the future and the types of inventory it should hold.
Because mass customization lets buyers “have it their way,” it also adds value to products, for
which many customers are willing to pay.
Product Tracking
Some companies, including Walmart, are beginning to experiment with new technologies such
as electronic product codes in an effort to better manage their inventories. An electronic
product code (EPC) is similar to a barcode, only better, because the number on it is truly
unique. You have probably watched a checkout person scan a barcode off of a product
identical to the one you wanted to buy—perhaps a pack of gum—because the barcode on your
product was missing or wouldn’t scan. Electronic product codes make it possible to distinguish
between two identical packs of gum. The codes contain information about when the packs of
gum were manufactured, where they were shipped from, and where they were going to. Being
able to tell the difference between “seemingly” identical products can help companies monitor
their expiration dates if they are recalled for quality of safety reasons. EPC technology can also
be used to combat “fake” products, or knockoffs, in the marketplace.
Additional Tools and Resources to Support Market Research
In addition to the different types of methods used for demand
forecasting in a Supply Chain, there are also a number of ways to
analyze this data. Regardless of the methods of contract analysis, a
business employs and the qualitative and quantitative factors used in
assessing this data, technological advances have enabled
businesses to better analyze the data that has been complied on
consumer behavior.
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One method for assessing this information is called database marketing. In short, business
intelligence (BI) analytics is a technological means for conducting market analysis that enable a
business enterprise to limit their contract analysis to consumers who are most likely to
purchase their products.
Not only have technological advances given businesses enhanced means for compiling and
analyzing data about consumers and other businesses, technology offers enhanced means for
reaching consumers by providing access to information about the business and its products via
the Internet. At the same time, the Internet has enabled consumers to become more
knowledgeable about products and the companies that provide these products.
Assigned Presentations:
Please review the attached briefing below on demand forecasting in a Supply Chain and
answer the discussion questions.
Discussion Questions:
1. Define the role of forecasting for both an enterprise and a supply chain.
2. Identify the components of a demand forecast.
Next Steps:
Complete the reading assigned and discussion questions for the module, and review how your
course site is organized, so that you are prepared to think more thoughtfully about the study of
demand forecasting in a Supply Chain at the same time, navigate the course website for
interesting topics and new links to be well oriented for your learning.
As weeks of the course are completed, consider how you can explore each module to compare
and contrast the understanding you have from your observations. What ideas seem to be most
relevant? How you might adjust, fine-tune, or change your Market skills to become more
effective in your career or organization?
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Curious? Want to Know More?
Consider the UMUC online Library and use these search words:
 Demand Planning
 Inventory Control
 Supply Chain
 Network Design
 Closed-Loop
 Production Scheduling
 Collaborative Planning, Forecasting, and Replenishment (CPFR)
http://www.umuc.edu/library/index.cfm is the Library Link.
More Web links with research and ideas:
 http://2012books.lardbucket.org/books/marketing-principles-v2.0/s12-02-demand-planning-
and-inventory-.html
 http://ocw.mit.edu/courses/sloan-school-of-management/15-772j-d-lab-supply-chains-fall-
2014/lecture-notes/MIT15_772JF14_Lec04-Lec05.pdf
 http://www.ijert.org/download/12237/the-role-of-forecasting-parameters-in-reducing-
bullwhip-effect
 https://dspace.mit.edu/handle/1721.1/42899
 http://ojs.excelingtech.co.uk/index.php/IJSCM/article/view/1080
 http://www.cluteinstitute.com/ojs/index.php/RBIS/article/viewFile/8001/8055
 http://www.hindawi.com/journals/mpe/2015/918045/
 http://www.degruyter.com/view/j/demo.2015.3.issue-1/demo-2015-0005/demo-2015-
0005.xml
 http://www.sciencedirect.com/science/article/pii/S1877050915006766
 http://2012books.lardbucket.org/books/marketing-principles-v2.0/s12-02-demand-planning-
and-inventory-.html
 http://www.sciencedirect.com/science/article/pii/S1665642314723478
 cluteinstitute.com/ojs/index.php/AJBE/article/viewFile/7815/7877
 http://ezproxy.umuc.edu/login?url=http://sk.sagepub.com.ezproxy.umuc.edu/reference/
hdbk_supplychain/n27.xml
Developed by Dr. Jim Bryant and Dr. Freda Powell-Bell.
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