Demand and Supply in Supply Chain

Table of Contents

Course Covered

-Characteristics and role of forecasting

-Role of IT in forecasting

-Role of aggregate planning with problems in supply chain

-Role of IT in aggregate Planning

-Inventory Planning with known and uncertain demand

Characteristics and Role of Forecasting

Demand forecasts form the basis of all supply chain planning.
All push processes in the supply chain are performed in anticipation of customer demand, where as pull process are performed in response to customer demand.
In both case, manager has to plan the level of activity like production, inventory, transportation etc. the only difference in push or pull is demand is known in advance in pull but manager still has to forecast what will customer demand be in push

Forecasts are always inaccurate and should thus include both the expected value of the forecast and a measure of forecast error.
Long term forecast are less accurate than short term forecast; i.e. long-term forecast has larger standard deviation.
Aggregate forecasts are usually more accurate than disaggregate forecasts, as they tend to have smaller standard deviation of error relative to mean.

Huge amount of data are involved while forecasting.
Needs IT System for getting the highest quality results possible and often called demand planning module.
Commercial demand planning module come with a variety of forecasting algorithm, which can be quite advanced and sometimes proprietary.
A good forecasting packages provide forecasts across a wide rage of products that are updated in real time by incorporating any new demand information.
No system is full proof in forecasting and are virtually inaccurate. A good IT system should help track historical forecast errors so they can be incorporated into improve decision making.

Aggregate planning is a process by which a company determines ideal levels of capacity, production, subcontracting, inventory, stock outs and even pricing over a specified time horizon.
The goal of aggregate planning is to satisfy demand while maximizing profit.
Aggregate planning solves problems involving aggregate decisions rather than stock-keeping unit(SKU)-level decisions.

Aggregate planning is done for a specific time horizon may be for a month, quarter, semi annual and annual (3- 18 months)
Aggregate planning requires information like demand forecast, production costs, labor/machine hours required per unit, inventory holding cost, stock out cost and other constraints (OT, layoffs, capital available etc.)
Quality of an aggregate plan has significant impact on the profitability of a firm,
A poor aggregate plan can result in lost sales and lost profits if the available inventory and capacity are unable to meet demand.

Aggregate planning is arguably the supply chain area in which IT has been used the most.
Previously the aggregate planning module is used to plan production or manufacturing planning and inventory planning.
There are no. of dimensions along which IT can add value in the aggregate planning:
- The ability to handle large problems
- The ability to handle complex problems ( through either nonlinear optimization or linear approximations)
- The ability to interact with other core IT systems such as Inventory Management and Sourcing

Inventory Planning becomes easy if we know the exact demand of the product.
But it is still necessary to plan the inventory as there incurs a cost in maintaining inventory.
It is the job of a manager to reduce those cost even if the demand is know. There are lots of cost involved in managing inventory. Such as:
- Unit Cost of Inventory.
- Ordering Cost
- Holding Cost or carrying cost
- Shortage cost or Stock out cost.
The job of the inventory manager is to reduce those cost so that the cost of inventory is minimal and the demand of the customer is also met.
One of the solution for reducing the cost is EOQ(Economic Order Quantity).

Inventory Planning becomes challenging when the demand of the product is not know or uncertain.
In reality, the demand of the product can not be determined exactly but can be predicted but it is not necessary that the reality of the demand may be accurate.
The inventory is maintained for the uncertainty of the demand we face in the market.
There may be different reason for the uncertainty of the demand, but it is the responsibility of the manager to handle the uncertainty. In supply chain, it is the job of the supply chain manager to handle the uncertainty with minimal cost of inventory.
To handle the uncertainty of demand and maintain optimum level of inventory there can be two ways of managing the inventory.
EOQ (Economic Order Quantity)
Fixation of Inventory levels.
Lead Time
Minimum Level.
Reorder Level
Safety Inventory.
Just In Time Inventory.