Chapter 7: Demand Management

Value of the stock of goods held by a company.
Inventory (Stock) Financial Definition
The products or supplies of an organization maintained on hand or in transit to buffer against variations in supply, demand, production, or lead time.
Inventory (Stock) Operational Definition
Components and sub-assemblies
Raw Material (RM)
Inventory currently under assembly and manufacture.
Work in process (WIP)
Products ready for sale.
Finished goods (FG)
The inventory a company holds above normal needs as a buffer against delays in receipt of supply or changes in customer demand.
Safety Stock
Focused efforts to estimate and manage customer demands with the intention of using this information to shape operating decisions. It requires all the firms in the supply chain to collaborate on activities related to the flow of information, product, services, and capital.
Demand management
Barriers to Demand Management:
-Lack of interdepartmental coordination.
-Emphasizing forecasting demand while ignoring collaborative planning, and strategic and operational plans.
-Using demand management for tactical or operational rather than for strategic purposes.
Balancing Supply and Demand External Mechanisms if Demand > Supply:
Increase Price: Will decrease customer demand (assuming elastic demand).
Balancing Supply and Demand External Mechanisms if Supply > Demand:
Reduce Price: Will increase customer demand (assuming elastic demand).
The most common and expensive internal mechanism used to manage imbalances between supply and demand. Safety stock is used as an additional buffer against variations in lead time and demand.
Internal mechanism used to manage imbalances between supply and demand. It quickly changes over production from one product to another. Trade-off between production changeover cost and inventory cost.
Production Flexibility
The starting point for marketing and operations to set goals and plan and develop execution strategies.
Cannot be anticipated and makes it hard to forecast.
Random Variation
Independent Demand:
Primary Item
Dependent Demand:
Parts whose demand is influenced by primary item demand.
A strategic process used to reconcile conflicting business function objectives and arrive at a consensus cross functional/interdepartmental forecast.
Step 1 of the S&OP Process:
Develop statistical forecasts of future sales.
Step 2 of the S&OP Process:
Review forecasts and adjust for promotions, new product introductions, discontinued products.
Step 3 of the S&OP Process:
-Determine if existing capacity meets forecasted volumes.
-Eliminate promotions and lower revenue forecasts.
-Increase operations budget to improve operational flexibility.
Step 4 of the S&OP Process:
Representatives from sales, marketing, production, logistics, and finance review forecasts and capacity issues.
Step 5 of the S&OP Process:
-Functional leaders agree on forecasts and convert them into operating plans
-Metrics are identified.
Allows trading partners to agree on a single forecast for an item. Then each trading partner can translate this forecast into a single execution plan.
CPFR (collaboration, planning, forecasts)
4 Steps of the CPFR Process:
1. Trading partners share marketing plans
2. Develop periodic forecast for each SKU
3. Forecasts are entered into a system accessible to the trading partners by the internet
4. Trading partners translate forecasts into production and replenishment schedules
Benefits of CPFR:
1. Reduced supply chain inventories and out-of-stock
2. 70 of the top suppliers are loading order forecast directly into production planning systems
3. Store in stock rates are close to 96%
4. Forecast accuracy is 85%
5. On time shipments are >80%