SUPPLY CHAIN MANAGEMENT

PROFESSIONAL DIPLOMA
MODULE-2
DEMAND MANAGEMENT

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What Will We Learn
INTRODUCTION
• What is Demand Management(DM)?
• Understanding DM
• Demand Disaggregation
SYNDICATE DISCUSSION
• Demand Aggregation
• Standardisation GROUP DISCUSSION
DEMAND FORECASTING
• Importance of Demand Forecasting
• Types of Demand Forecasting GROUP EXERCISE
• Demand Forecasting Methods
MATCHING DEMAND WITH SUPPLY
• Porter’s 5 Forces Model (P5F) COLLECTIVE EXERCISE

• Day One Analysis DISCUSSION

• Kraljic Portfolio Analysis GROUP EXERCISE

END OF MODULE ASSIGNMENT

What is Demand Management

• Procurement is the process of how best to place demand in the

market to achieve best performance, cost and value
• First step in procurement supply chain management process is
need identification
• Demand is simply defined as the amount of goods or services to
achieve the above
• Demand Management (DM) is about verifying, influencing and
optimising the need

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Demand Management-Definition

“Demand management is the supply chain management process that balances

the customers’ requirements with the capabilities of the supply chain. With the
right process in place, management can match supply with demand
proactively and execute the plan with minimal disruptions. The process is not
limited to forecasting. It includes synchronizing supply and demand, increasing
flexibility, and reducing variability.” (Uni of Nevada)

“Demand management is a process within an organisation which "enables that

organisation to tailor its capacity ... to meet variations in demand or ... to
manage the level of demand using marketing or supply chain management
strategies" (CIPS: Demand planning).

4
Why Demand Management

Demand Management is a critical element of PSCM delivery. By

managing demand, we:

• Reduce Total Cost of Ownership (TCO) while maintaining or

improving performance
• Maximise contestation and buying power
• Drive supplier performance
Conditions Necessary for Demand Management

Effective Demand Management can only occur when:

• Cooperation not confrontation-between user and PSCM

• Full leadership endorsement
• PSCM competence in Line
• Right behaviours
• Stakeholders understand the direct linkage between Demand
and Supply to influence best terms for Buyer
Understanding Demand

Key to understanding demand is:

• Disaggregating it and evaluating it in discrete components

• Understanding what drives each component
• Recognising how this may change in the future.
Understanding Demand By Disaggregation

Asking a few simple questions early can help identify the optimal
approach:
• What is the demand?
• Why do we have this demand? Is it unique? Is it simple or
complex?
• When do we actually need these goods and/or services?
• Is the market capable of supplying it?
• Will it require multiple suppliers or markets?
• Are we buying this in the best way?

OPTION 1 OPTION 2
I want to get a house built by a I want to get a house built by contracting
contractor on lump sum basis separate parties to undertake
Design Tile work
Plumbing Ceiling work
Electricafication Plater work
Brickwork Shuttering
Specifying Demand

Detailed Description

“I need 4000 gallons of white ICI brand enamel paint from Al Asif
Hardware in Islamabad.”

Functional Specification

“I need an anti-corrosive coating to cover 136,000 square feet of surface

area in a dusty environment. Ease of application is a critical
characteristic.
SYNDICATE DISCUSSION

Please split into two equal group:

• Describe what works better: functional or detailed description

• List the advantages and disadvantages of each
• One person from each group to present using flip chart/board
• Time allotted:
• Discussion 10 minutes
• Presentation 5 minutes
Demand Aggregation

• Aggregation is the leveraging and consolidation of like-demand

to drive efficiencies and lower costs.
• By increasing the volume of demand through aggregation, buyer
becomes more attractive for supply market
• This entices suppliers to offer us more benefits, higher levels of
customer service, lower prices, and best terms.
Standardisation

• Standardisation is the most useful strategy to aggregate

• Standardisation is specifying demand for similar items/services in a
consistent manner
• Common specifications and Standardisation encourage
aggregation of like products/services
• Leveraging demand by aggregating in large quantities drives
better price, quality and performance from market
GROUP DISCUSSION

In a group format, please name at least 10 standardised

products/services. Be creative

Time Allotted: 15 minutes

What Have We Learnt-RECAP
INTRODUCTION
• What is Demand Management(DM)?
• Understanding DM
• Demand Disaggregation
SYNDICATE DISCUSSION
• Demand Aggregation
• Standardisation GROUP DISCUSSION
DEMAND FORECASTING
• Importance of Demand Forecasting
• Types of Demand Forecasting GROUP EXERCISE
• Demand Forecasting Methods
MATCHING DEMAND WITH SUPPLY
• Porter’s 5 Forces Model (P5F) COLLECTIVE EXERCISE

• Day One Analysis DISCUSSION

• Kraljic Portfolio Analysis GROUP EXERCISE

END OF MODULE ASSIGNMENT

Demand Forecasting

• Demand Forecasting is the process in which historical

sales/purchase data is used to develop an estimate of an expected
forecast of demand.
• Demand Forecasting provides an estimate of the amount of goods
and services that customers will purchase in the foreseeable future.
• Critical business assumptions like turnover, profit margins, cash
flow, capital expenditure, risk assessment and mitigation plans,
capacity planning, etc. are dependent on Demand Forecasting.
Importance of Demand Forecasting

• Demand Forecasting is the pivotal business process around which

strategic and operational plans of a company are devised.
• Demand Forecast provides critical input to strategic and long-
range plans of a business, like budgeting, financial planning, sales
and marketing plans, capacity planning, risk assessment and
mitigation
• Additionally, short to medium term tactical plans like pre-building,
make-to-stock, make-to-order, contract manufacturing, supply
planning, network balancing, etc.
Types of Demand Forecasting
Demand Forecasting can be broadly classified based on the level of
detailing, time span considered and the scope of market.

• Passive Demand Forecasting: Passive Demand Forecasting is

carried out for stable businesses with very conservative growth
plans. Simple extrapolations of historical data is carried out with
minimal assumptions. This type of forecasting is limited to small
and local businesses.

• Active Demand Forecasting: Active Demand Forecasting is carried

out for scaling and diversifying businesses with aggressive growth
plans in terms of marketing activities, product portfolio expansion
and consideration of competitor activities and external economic
environment.
Types of Demand Forecasting (cont’d)
• Short-term Demand Forecasting: Short-term Demand Forecasting
is carried out for a shorter-term period of 3 months to 12 months.
In the short term, the seasonal pattern of demand and the effect of
tactical decisions on the customer demand are taken into
consideration

• Medium to long-term Demand Forecasting: Medium to long-term

Demand Forecasting is typically carried out for more than 12
months to 24 months in advance (36-48 months in certain
businesses). Long-term Forecasting drives the business strategy
planning, sales and marketing planning, financial planning,
capacity planning, capital expenditure, etc.
Types of Demand Forecasting (cont’d)
• External macro level Demand Forecasting: This type of Forecasting
deals with the broader market movements which depend on the
macroeconomic environment. External Forecasting is carried out
for evaluating the strategic objectives of a business-like product
portfolio expansion, entering new customer segments,
technological disruptions, a paradigm shift in consumer behavior
and risk mitigation strategies.

• Internal business level Demand Forecasting: As the name

suggests, this type of Forecasting deals with internal operations of
the business such as product category, sales division, financial
division, and manufacturing group. This includes annual sales
forecast, estimation of COGS, net profit margin, cash flow, etc.
GROUP EXERCISE

In a group form, suggest the possible Demand

Forecasting type used by the following
organisations:
Organisation Possible DF Type
Pakistan Railways
Fresco Sweets
Sana Safinaz
Shifa International
Ufone
Toyota Indus

Time Allotted: 15 minutes

Important Considerations in Demand Forecasting

Every forecast is wrong: some are more wrong than others. Some
important considerations while forecasting demand

Type of product Local Events Regional/Global

Events
Manufacturing Religious festivals War
Service Elections Fuel price
Fashion Weather Recession
Commodity Crop harvesting Government Policy
Transport Interest rate
Luxury item Forex value
Essential Pandemics
services
Demand Forecasting Methods

Selection of the appropriate method is the most important steps of the

Demand Forecasting process using

• Qualitative methods or
• Quantitative methods
Qualitative Demand Forecasting Methods

Some basic qualitative Demand Forecasting Methods are

The Delphi Technique: A consensus-based method where a panel of

experts are appointed to produce a Demand Forecast. Each expert is
asked to generate a forecast of their assigned specific segment. After
the initial forecasting round, each expert reads out their forecast and,
in the process,, each expert is influenced by other experts. A
consequent forecast is again made by all experts and the process is
repeated until all experts reach a near consensus scenario.

Sales Force Opinion: The Sales Manager asks for inputs of expected
demand from each Salesperson in their team. Each Salesperson
evaluates their respective region and product categories and provides
their individual customer demand. Eventually, the Sales Manager
aggregates all the demands and generates the final version of
Demand Forecast after management’s judgment.
Qualitative Demand Forecasting Methods (cont’d)

Market Research: In market research technique, customer-specific

surveys are deployed to generate potential demand. Such surveys are
generally in the form of questionnaires that directly seeks personal,
demographic, preference and economic information from end
customers. Since this type of research is on a random sampling basis,
care needs to be exercised in terms of the survey regions, locations,
and demographics of the end customer. This type of method could be
beneficial for products that have little to no demand history.
Quantitative Demand Forecasting Methods

Some basic quantitative Demand Forecasting Methods are

Trend projection method: Trend projection method can be effectively

deployed for businesses with a large sales data history of typically
more than 18 to 24 months. This historical data generates a “time
series” which represents the past sales and projected demand for a
specific product category under normal conditions

Barometric technique: Barometric technique of Demand Forecasting is

based on the principle of recording events in the present to predict the
future. In the Demand Forecasting process, this is accomplished by
analyzing the statistical and economic indicators. Generally, forecasters
deploy statistical analysis like Leading series, Concurrent series or
Lagging series to generate the Demand Forecast.
Quantitative Demand Forecasting Methods (cont’d)

Econometric forecasting technique: Econometric forecasting utilizes

autoregressive integrated moving-average and complex mathematical
equations, to establish relationships between demand and factors that
influence the demand. An equation is derived and fine-tuned to ensure
a reliable historical representation. Finally, the projected values of the
influencing variables are inserted into the equation to generate a
forecast.
What Have We Learnt-RECAP
INTRODUCTION
• What is Demand Management(DM)?
• Understanding DM
• Demand Disaggregation
• Demand Aggregation SYNDICATE DISCUSSION
• Standardisation GROUP DISCUSSION
DEMAND FORECASTING
• Importance of Demand Forecasting
• Types of Demand Forecasting GROUP EXERCISE
• Demand Forecasting Methods
MATCHING DEMAND WITH SUPPLY
• Porter’s 5 Forces Model (P5F) COLLECTIVE EXERCISE

• Day One Analysis DISCUSSION

• Kraljic Portfolio Analysis GROUP EXERCISE

END OF MODULE ASSIGNMENT

Matching Supply With Demand

• Objective of Demand Management is to balance organisation’s

requirement with the capabilities of market (see DM Definition)

• Achieve a balance between requirements and market

• Many tools available to achieve this.

• Detailed description of these tools will be dealt in Module 6-

Contracting Strategy Development

• Some basic tools are covered in this module

Matching Supply With Demand

Some common tools used to match supply with demand

• Porter’s 5 Forces Model (P5F)

• Day One Analysis
• Kraljic Portfolio Analysis
 Porter’s 5 Forces Model

• P5F model of Competitive Position Analysis was developed in 1979 by

Michael Porter of HBS
• Simple framework for assessing/ evaluating the competitive strength
and position of a business organisation.
• Simply stated: there are five forces that determine the competitive
intensity and attractiveness of a market.
• P5F helps to identify where power lies in a business situation. This is
useful both in understanding the strength of an organisation’s current
competitive position, and the strength of a position that an
organisation may look to move into.
• Helpful in understanding whether new products or services are
potentially profitable. By understanding where power lies, the theory
can also be used to identify areas of strength, to improve weaknesses
and to avoid mistakes.
Porter’s 5 Forces Model
P5F Model: Threats of New Entrants

• Ease or Difficulty for new companies to enter a market

• Higher profits and low entry barriers intensifies rivalry/competition:
reducing profit margins
• Threat of new entrants is high when:
• Low amount of capital for entering a market
• Existing companies can do little to retaliate
• Lack of patents, trademarks, brand reputation;
• Unregulated, unlicensed
• Customer switching costs are low
• Low customer loyalty;
• Products are nearly identical;
• Economies of scale can be easily achieved.
P5F Model: Supplier Power

Strong bargaining power allows suppliers to sell higher priced or low-

quality raw materials to their buyers.
Suppliers have strong bargaining power when:

• Few suppliers but many buyers

• Suppliers are large
• Few substitute raw materials exist
• Suppliers hold scarce resources
• High switching cost
P5F Model: Buyer Power

Buyers exert strong bargaining power when:

• Buyers procure in large quantities

• Only few buyers exist
• Low switching costs
• There are many substitutes
• Buyers are price sensitive
P5F Model: Threat of Substitutes

• When buyers can easily find substitute products with attractive

prices or better quality and
• When buyers can switch from one product or service to another
with little cost.
• For example, to switch from coffee to tea doesn’t cost anything,
unlike switching from car to bicycle
P5F Model: Industry Rivalry

• A competitive industry triggers intense competitions and hence

low profits.
• Rivalry among competitors is intense when:
• There are many competitors
• Exit barriers are high
• Industry growth is slow or negative
• Products are not differentiated and can be easily
substituted
• Competitors are of equal size
• Low customer loyalty
P5F Model: COLLECTIVE EXERCISE

• Let's brainstorm to list well known local/global examples of

situations where:
• Supplier power is more than buyer power
• Buyer power is more than supplier power
• Lowe entry barriers
• Threat of substitutes
• Industry rivalry
 Day One Analysis

• Day One Analysis is a powerful tool

• Helps buyers understand their negotiating stance and also helps

determine the type of negotiation that could maximise
outcomes.

• Simple to understand and simple to apply, but can make a world

of difference
What Have We Learnt-RECAP
INTRODUCTION
• What is Demand Management(DM)?
• Understanding DM
• Demand Disaggregation
• Demand Aggregation SYNDICATE DISCUSSION
• Standardisation
GROUP DISCUSSION
DEMAND FORECASTING
• Importance of Demand Forecasting
• Types of Demand Forecasting GROUP EXERCISE
• Demand Forecasting Methods
MATCHING DEMAND WITH SUPPLY
• Porter’s 5 Forces Model (P5F) COLLECTIVE EXERCISE

• Day One Analysis DISCUSSION

• Kraljic Portfolio Analysis GROUP EXERCISE

END OF MODULE ASSIGNMENT

 Day One Analysis

Tailored Generic

• One Buyer-many suppliers • Many Supplier-many buyers

Many

• Products made to a unique • Choice/ability to switch

specification
Tailored Generic
• Negotiated approach to
• Supplier focus on selling • market is appropriate
Number of Suppliers

• capability

Custom
• One supplier-many buyers • One supplier-many buyers
• Either buyer or supplier • Supplier power and control
have a unique requirement • Strategies:
/patent • Differentiation
One

• Buyer dependence on • Added value

supplier • Bundling

Custom Proprietary

One Many
Number of Buyers
DISCUSSION

Using the matrix in Day One Analysis

• Where’d you want to be if you are a buyer

• Where’d you want to be if you are a supplier

Time Allotted: 10 Minutes

SYNDICATE DISCUSSION

Please split into two equal group:

• Give examples from Pakistan market (public/big private

corporations) that fall in the following quadrants
• Generic
• Custom
• Tailored
• Proprietary
• One person from each group to present using flip chart/board
• Time allotted: discussion 10 minutes/Presentation 5 minutes
 KRALJIC PORTFOLIO ANALYSIS

• One of the most widely used tools in procurement; developed by

Peter Kraljic in 1983, in the HBR (‘Purchasing must become supply
management’
• Revolutionised modern procurement.
• Organisations should move away from 3 bids and a buy practice
• Segment suppliers by mapping them against risk and profitability
• Sourcing strategies must consider two key factors
• strategic importance of the category in terms of the value added
by the category, the percentage of total spend and the impact on
profitability.
• the complexity of the supply market gauged by supply scarcity,
the pace of technology, the availability of alternatives or
substitutes, the barriers to entry, and market structures such as
oligopoly or monopoly
KRALJIC PORTFOLIO ANALYSIS

Risk:
• Probability of something unexpected happening in the supply
chains that can disrupt operations.
• Risks depend on various factors, including geographic location,
supply chain length, business model, buyer size.

Profitability
• The affect a supply item has on the company’s bottom line.
• Certain areas of spend, such as business cards and letterhead, have
a negligible effect on profit.
• However, in other categories, a single source of supply has the
potential to make or break your business..
 KRALJIC PORTFOLIO ANALYSIS(cont'd)

• Procurement managers should develop category-specific categories

based upon understanding the balance between risk and
opportunity. Routine categories should be subject to lower level
effort, as they are unimportant categories sourced from simple
markets
• Leverage categories represented an opportunity to use competition
to generate profit for the buyer, though he suggested that, leverage
should not be a universal strategy
• Bottleneck categories involved lower value acquisitions that were
sourced from complex markets and strategic categories required
careful management and longer-term agreements.
KRALJIC PORTFOLIO ANALYSIS(cont'd)
LOW

LOW
PORTFOLIO or KRALJIC ANALYSIS (cont'd)

Category Characteristics
Non-Critical • Items in abundant supply: example paper, pens, tape, .
• Associated costs like shipping, transporting, and receiving
are often more than the cost of the items.
• Sourcing should focus on
• minimising usage like moving to paperless
environment
• eliminating associated costs like moving to Daraz,
Amazon
Leverage • Items that pose a high financial risk, but a low supply risk.
• High financial impact on the business
• Ability to explore options/experiment
• Competitive bidding strategy often works best
PORTFOLIO or KRALJIC ANALYSIS (cont'd)

Category Characteristics
Strategic • Items critical to business
• difficult to find, expensive, difficult to deliver
• directly affecting the company’s profit.
• greatest impact on cash flow and profits
• Deserve time going in-depth on first.
Bottleneck • Items with low control over the suppliers
• No or little ability to substitute and replace products.
• Items having production-based scarcity
• Greater supply risk
• one or two vendors to choose from.
• Ability experiment/explore options because of reduced
financial impact
GROUP EXERCISE

Using Kraljic Portfolio Matrix use the following products/services in the

relevant quadrant
• Medical Education service • Solar panels
• Gold • Car Insurance
• Natural gas for home • Bullet proof car
• Dentistry service • Catering for home parties
• Construction Steel • Moving household effects from
• Car Loan abroad
• Lawn (fabric) • Savour Pulao
• Wheat flour • Bowling (game)
• Internet service for home • Rail travel
• MRI diagnostic test

Time Allotted 20 minutes

What Have We Learnt-RECAP
INTRODUCTION
• What is Demand Management(DM)?
• Understanding DM
• Demand Disaggregation
• Demand Aggregation SYNDICATE DISCUSSION
• Standardisation
GROUP DISCUSSION
DEMAND FORECASTING
• Importance of Demand Forecasting
• Types of Demand Forecasting GROUP EXERCISE
• Demand Forecasting Methods
MATCHING DEMAND WITH SUPPLY
• Porter’s 5 Forces Model (P5F) COLLECTIVE EXERCISE

• Day One Analysis DISCUSSION

• Kraljic Portfolio Analysis GROUP EXERCISE

END OF MODULE ASSIGNMENT

ASSESMENT

Please complete the enclosed assignment

Time Allotted 3 Days