Chapter 7 DEMAND MANAGEMENT Learning Objectives After reading

Chapter 7 DEMAND MANAGEMENT

Learning Objectives After reading this chapter, you should be able to do the following: ● Understand the critical importance of outbound-to-customer logistics systems. ● Appreciate the growing need for effective demand management as part of an organization’s overall logistics and supply chain expertise. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2

Learning Objectives, continued ● Know the types of forecasts that might be needed, and understand how collaboration among trading partners will help the overall forecasting and demand management processes. ● Understand the basic principles underlying the sales and operations planning process. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3

Learning Objectives, continued ● Identify the key steps in the order fulfillment process and appreciate the various channel structures that might be used in the fulfillment process. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4

Demand Management ● The ability of firms throughout the supply chain to collaborate on activities related to the flow of product, services, information, and capital. ● Problems in achieving goal: • Lack of coordination between departments • Too much emphasis on forecasts of demand, with less attention on the collaborative efforts and the strategic and operational plans • Demand information is used more for tactical and operational than for strategic purposes © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Figure 7. 1 Supply / Demand Misalignment Source: Acenture, Stanford and Northwestern Universities, Customer Driven Demand Networks: Unlocking the Hidden Value in the Personal Computer Supply Chain (Accenture, 1997) 15 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6

Table 7. 1 Demand Management Supports Strategy Source: Jim R. Langbeer II, “Aligning Demand Management with Human Strategy, Supply Chain Management Review (May/Jun 2000) 58 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Balancing Supply and Demand ● External balancing methods • Change demand • Change lead time ● Internal balancing methods • Production flexibility • Inventory © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Traditional Forecasting ● Factors Affecting Demand • Independent demand • Dependent demand ● Simple Moving Average ● Weighted Moving Average ● Exponential Smoothing ● Adjusted Exponential Smoothing for Trend ● Seasonal Influences on Forecasts © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Table 7. 2 Seasonal Moving Average Forecast Source: Robert A. Novak, Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Table 7. 3 Weighted Moving Average Forecast Source: Robert A. Novak, Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Table 7. 4 Exponential Smoothing Forecast Source: Robert A. Novak, Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Table 7. 5 Trend Adjusted Exponential Smoothing Forecast Source: Robert A. Novak, Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Forecast Errors ● Cumulative sum of forecast errors (CFE) ● Mean squared error (MSE) ● Mean absolute deviation (MAD) ● Mean absolute percentage error (MAPE) © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Table 7. 9 Forecast Error Source: Robert A. Novak, Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Sales and Operations Planning ● Step 1: ● Step 2: ● Step 3: ● Step 4: ● Step 5: Run sales forecast reports Demand planning phase Supply planning phase Pre-S&OP meeting Executive S&OP meeting © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Figure 7. 2 Monthly S&OP Process Source: Thomas F. Wallace, Sales and Operations Planning: The How-to Book (2000) 43 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Collaborative Planning, Forecasting, & Replenishment ● Using internet technologies retailers, distributors, and manufacturers collaborate on operational planning. • Transportation providers have now been included with the concept of collaborative transportation management (CTM). © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Figure 7. 3 CPFR Model Source: Larry Smith, “West Marine: A CPFR Success Story”, Supply Chain Management Review (March 2006) 31 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Fulfillment Models ● Channels of Distribution • A distribution channel can be thought of as the physical structures and intermediaries through which goods, services, information, and finances flow. ● Direct to Customer (DTC) Fulfillment • Advantages: ○ low start-up costs ○ workforce efficiency because of consolidated operations • Disadvantages: ○ the order profile will change (store orders in case and/or pallet quantities, consumer orders, “eaches” in smaller order quantities) ○ products might not be available in consumer units (eaches) ○ “fast pick, ” or broken case, operation to be added to the distribution center ○ conflict between a store order and an Internet order © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Figure 7. 5 Logistics and Marketing Channels Source: Robert A. Novak Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Figure 7. 7 Direct to Consumer Fulfillment Source: Robert A. Novak Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Fulfillment Models, continued ● Integrated Fulfillment • Retailer maintains both a “bricks-and-mortar” and “clicks-and-mortar” presence • operates one distribution network to service both channels • Advantage ○ low start-up costs ○ existing network can service both • Disadvantages ○ order profile will change with addition of Internet orders ○ case lots versus “eaches” ○ would require a “fast pick, ” or broken case operation ○ conflict might arise between a store order and an Internet order © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23

Figure 7. 8 Integrated Fulfillment Source: Robert A. Novak Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Fulfillment Models, continued ● Dedicated Fulfillment • Both a store and an Internet presence with two separate distribution networks. • Advantage: ○ separate distribution network for store delivery and consumer delivery eliminates most of the disadvantages of integrated fulfillment • Disadvantage: ○ duplicate facilities and duplicate inventories • Retailer maintains both a “bricks-and-mortar” and “clicks-and-mortar” presence. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25

Figure 7. 9 Dedicated Fulfillment Source: Robert A. Novak Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Fulfillment Models, continued ● Outsourced Fulfillment • Assumes that another firm will perform the fulfillment. • Advantages: ○ low start-up costs for the retailer to service the Internet channel ○ possible transportation economies • Disadvantage: ○ loss of control over service levels © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27

Figure 7. 10 Outsourced Fulfillment Source: Robert A. Novak Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Fulfillment Models, continued ● Drop Shipped Fulfillment • Also called direct store delivery, vendor delivers directly to retailer, bypassing retailer’s distribution network. • Works best for products that have a short shelf life. • Advantages: ○ reduction of inventory in the distribution network ○ vendor has direct control of its inventories • Disadvantage: ○ possible reduction of inventory visibility © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29

Figure 7. 11 Drop-Shipped Fulfillment Source: Robert A. Novak Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Fulfillment Models, continued ● Store Fulfillment • The order is placed through the Internet site and sent to the nearest store for customer pick up. • Advantages: ○ short lead time to the customer ○ low start-up costs for the retailer ○ returns can be handled through the store ○ product availability in consumer units • Disadvantages: ○ reduced control and consistency over order fill ○ conflict may arise between inventories ○ must have real-time visibility to in-store inventories ○ stores lack sufficient space to store product © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31

Figure 7. 12 Store Fulfillment Source: Robert A. Novak Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Fulfillment Models, continued ● Flow-Through Fulfillment • Product is picked and packed at distribution center, then sent to the store for pickup. • Advantages: ○ eliminates the inventory conflict ○ avoids the cost of the “last mile” ○ returns can be handled through the existing store network • Disadvantage: ○ Storage space at the store for pickup items a problem © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33

Figure 7. 13 Flow-Through Fulfillment Source: Robert A. Novak Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Summary ● Outbound-to-customer logistics systems have received the most attention in many companies; but, even in today’s customer service environment, outbound and inbound logistics systems must be coordinated. ● Demand management may be thought of as “focused efforts to estimate and manage customers’ demand, with the intention of using this information to shape operating decisions. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 35

Summary, continued ● Although many forecasts are made throughout the supply chain, the forecast of primary demand from the end user or consumer will be the most important. It is essential that this demand information be shared with trading partners throughout the supply chain and be the basis for collaborative decision making. ● Various approaches to forecasting are available, each serving different purposes. The S&OP process has gained much attention in industry today. It serves the purpose of allowing a firm to operate from a single forecast. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 36

Summary, continued ● The S&OP process is a continual loop involving participation from sales, operations, and finance to arrive at an internal consensus forecast. ● CPFR is a method to allow trading partners in the supply chain to collaboratively develop and agree upon a forecast of sales. This allows for the elimination of inventories held because of uncertainty in the supply chain. ● A number of distribution channel alternatives might be considered by organizations today. Effective management of the various choices requires coordination and integration of marketing, logistics, and finance within the firm, as well as coordination of overall channel-wide activities across the organizations in the channel. 37 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.