Demand
Management
MPC 5th Edition
Chapter 2
Demand Management
Covers how a firm integrates
information from and about its
customers, internal and external to the
firm, into the manufacturing planning
and control systems.
Demand Management
How a firm integrates information from
its customers with information about
the firms goals and capabilities, to
determine what should be produced in
the future.
Demand Management Forecast &
Plans

In DM, FORECASTS of the quantities and
timing of customer demand are developed.
What do we actually plan to deliver to
customers each period is the output of the
process. This is based on marketing quotas,
special sales incentives, etc. These amounts
will be based on inputs from many different
sources and not just quantitative forecasts.
Why Forecast and Plans are
important

A manufacturing manager cannot be
held responsible for not getting a
forecast right,

A manufacturing manager can and
should be held responsible for making
their plans.
Responsibility of the MPC
Providing the means for making as good
a set of executable plans as possible
and then
Providing the information to execute them.

and when conditions change
 The control function should change the
plans and
 The new plans should be executed
faithfully.
Dependent vs Independent
Demand

Customer Demand (la richiesta del cliente) in
most cases are independent demands
(difficult to control and must be forecast).

Demand of components (la richiesta di
componenti) in the assembly of a product is
often dependent demand and can be
calculated (although plans will change).

What is the customer order decoupling
point?
Customer Order Decoupling
Point

Can be looked at as the point at which demand
changes from independent to dependent. It is the
point (nel processo di produzione) at which the firm, as
opposed to the customer, becomes responsible for
determining the timing and quantity of material to be
purchased, made, or finished.
Il cliente ordina in base a:




La fabbrica è responsabile
rispetto a:
Engineered to order catalogo
Suppliers
Made to order materiali disponibili Raw Materials inventory
Assemble to order parti disponibili WIP
Made to stock finiti disponibili
Finished Goods
Decoupling Points e Lead Time
Lead Time
Short
Long
Finished Goods
Make-to-Stock (MTS)
Components/Subassemblies
Assemble to Order (ATO)
Raw Materials
Suppliers
Make to Order (MTO)
Engineer to Order
Demand Uncertainty…
how is it dealt with?

MTS – Safety stocks of end items.

ATO – Forecast product mix and calculate
expected components and sub-assemblies.
Safety stock carried in these items.

MTO – Uncertainty involves the level of
company resources that will be required to
complete the engineering and produce the
product once the requirements are
determined. May carry some raw materials.
Demand Uncertainty…
how is it dealt with?

MTS – Safety stocks of end items.

ATO – Forecast product mix and calculate
expected components and sub-assemblies.
Safety stock carried in these items.

MTO – Uncertainty involves the level of
company resources that will be required to
complete the engineering and produce the
product once the requirements are
determined. May carry some raw materials.
Examples

Give examples of Make-to-Stock
(MTS), Assemble-to-Order (ATO) and
Made-to-Order (MTO) products?

What are the advantages in moving
from MTS, to ATO, to MTO?
Northland Computer Shop
(Q4, p. 55)





Moving from stocking finished computers to
an assemble to order approach.
7 hard disk choices, 6 mother boards, 5
CD/DVD options, 3 operating systems, 4
other options.
How many potential combinations of
finished computers?
Compared to…
@ $10/forecast…
Savings $???
Cumberland Company (Q5,
p. 55) ???

Five identical products


What is the yearly sales distribution of each product?



Expected Demand =
Std Dev =
What is the monthly sales distribution?



Demand 100/month, std. Dev. 10 units.
Expected Demand =
Std Dev =
What is the yearly sales distribution for all products
together?


Expected Demand =
Std Dev =
Polysar International Survey
of managers (Q6, p. 55) ???
1 Month
± 3 in %
Family
SKU
1 Year
Polysar
± 3 in %
Polysar
15%
8%
50%
---
Make-to-Stock Environment
(MTS)




Key focus is MAINTENANCE of FGIfinished goods inv.
TRACKING of demand by locationinseguire la domanda
così come dislocata throughout the supply chain is an
important activity.
Key issue is HOW, WHEN,& HOW MUCH, to
REPLENISH STOCK at a specific location
(physical distribution concern).
Firms employ distribution centers, warehouses,
and even vendor-managed inventory inside their
customer’s location.
Make-to-Stock Environment (Cont)
MTS



Managers require information on the
INVENTORY STATUS in the various locations,
relationships with transportation providers, and
estimates of demand by location and item
(forecasting).
Satisfying customers requires to BALANCE the
level of inventory against the level of service to
the customers. A trade-off between the inventory
costs and the level of service must be made.
IMPROVEMENTS can be made by having better
knowledge of demand, + rapid transportation
alternatives, speedier production, more flexibility
Assemble-to-Order (ATO)



The primary task of Demand Management is
to DEFINE THE CUSTOMER’S ORDER in
terms of alternative components and options.
It is important that they be COMBINED into a
viable (realizzabile) product in a process known as
configuration management.
One of the capabilities required for success is
ENGINEERING DESIGN that enables as
much flexibility as possible in combining
components, options, and modules into the
finished products.
Assemble-to-Order (ATO)
(Cont.)
In this environment the independent demand
for the assembled items is TRANSFORMED
into dependent demand for the parts required
to produce the components needed.
 The inventory that defines customer service is
the inventory of COMPONENTS not finished
products.
 The number of finished products is usually
substantially greater than the number of
components that are combined to produce
the finished product (Example).
Total Combinations = N1 * N2 * N3* . . . *Nm

Make-to-Order (MTO)



MOVING THE CUSTOMER decoupling point
to raw material or even suppliers reduces the
scope of dependent demand information.
The task of demand management in this
environment is to COORDINATE
INFORMATION on customers’ product needs
with engineering.
Demand management now includes
determining HOW MUCH ENGINEERING
CAPACITY will be required to meet future
customer needs.
Make-to-Order (MTO)
(Cont.)



In these environments, suppliers’
capabilities may limit what we are able to
do, so COORDINATION with them is
essential.
This span of involvement from customer
to supplier gives rise to the term supply
chain (or demand chain) and
The coordination of activities along the
supply chain is referred to as supply
chain management.(in effetti la def. di SC può
essere più generale e si applica anche all’ATO)
Providing Appropriate
Forecast Information ???

A Forecasting Framework –
Level of product aggregation (aggregate
forecasts are more accurate)
 Time frame (monthly, quarterly, etc.)
(longer time frame forecasts are more
accurate)… there are limits to this


DM forecasts are short term and tactical
whereas strategic forecasts are long term
and usually more expensive.
Information Use in DM ???

CRM – Individual customer data is
collected by Customer Relationship
Management software.
 In MTS firms, the customer
information at this level can help
discern early demand and mix trends.
 In MTO/ATO, CRM can be used to
develop similar insights into
customers. Data can used to develop
make-to-knowledge plans on an
individual customer basis.
Forecasts for Strategic
Business Planning ???

Are used for long term broad based
forecasts – capital expansion, new
product line, merger or acquisition
decisions.

Usually use causal models and
regression analysis
Forecasting for DM



The forecasts are AGGREGATED to the
product family level and from a few month
horizon to about a year.
If there is domain information such as
customer plans that can be gleaned through
conversations with directly customers, this
information should be used by. These are
CRM (Customer Relationship Management) activities.
Often very precise calculations can be made
of expected demand, based on future events.
E? Forecasting Concepts
(tecniche)
Moving Averages Forecasting
 Exponential Smoothing Forecasting
 Evaluating Forecasts (Bias
&
MAD
)
 Using the forecasts (aggregation)
 Pyramid Forecasts

(pag. 33)
(p. 34)
(mean error)
(Mean Absolute Deviation)
(pag. 36)
(pag. 39)
(pag. 40)
Concluding Principles
Data capture must not be limited to
sales but should include domain info
such as knowledge, trends, systems
performance
 Forecasting models should not be
more complicated than necessary.
Simple models work just as good.
 Forecast from different sources must
be reconciled and made consistent
with firm plans and constraints.

Concluding Principles
Input data and output forecasts should
be routinely monitored for quality and
appropriateness.
 Information on sources of variation
should be incorporated into the
forecasting system.
 Forecast from different sources must
be reconciled and made consistent
with firm plans and constraints.
