UNIT 4

SUPPLY CHAIN MANAGEMENT

 SUPPLY CHAIN
l
In its simplest form a supply chain is the activities required
by the organisation to deliver goods or services to the
consumer. A supply chain is a focus on the core activities
within our organisation required to convert raw materials or
component parts through to finished products or services.
l
A supply chain is a network between a company and its
suppliers to produce and distribute a specific product to the
final buyer.
• Supply chain management focuses on how firms utilize their supplier’s processes, technology,capability to
enhance competitive advantage, and the coordination of the manufacturing, logistics and materials
management functions within an organization
• Supply chain management is concerned with the efficient integration of suppliers, factories, warehouses and
stores so that merchandise is produced and distributed:
– In the right quantities
– To the right locations
– At the right time
• In order to
– Minimize total system cost
– Satisfy customer service requirements
– face global competition
– Improve standardization
Supply chain -Introduction
SUPPLY CHAIN MANAGEMENT
l
Supply chain management is the management of the flow of goods and
services and includes all processes that transform raw materials into final
products.
l
It involves the active streamlining of a business's supply-side activities
to maximize customer value and gain a competitive advantage in the
marketplace.
l
Supply chain management (SCM) is the centralized management of the
flow of goods and services and includes all processes that transform raw
materials into final products.
l
FEATURES OF SUPPLY CHAIN MANAGEMENT
1. Integrated behavior- SCM incorporates integrates integration of stakeholders from supplier to customers.
2. Mutually sharing information- For effective SCM mutually sharing information among channel members is
required, especially for planning and monitoring processes.
3. Mutually sharing channel risk and Rewards- Effective SCM also requires mutually sharing channel risks
and rewards that yield a competitive advantage.
4. Risk and reward sharing should happen over the long term focus and cooperation among the supply chain
members.
5. Co-operation- Co-operation among channel members is required for effective SCM. Co-operation refers to
similar or complimentary co-ordianted activities performed by firm in a business relationship to produce
superior mutual outcomes or singular outcomes that are mutually expected over time.
6. Focus on serving customers – Supply chain succeeds if all the members of supply chain have the same goal
and the same focus serving customers. Establishing the same goal and same focus among Supply chain
members is a form of policy integration.
7. Integration of Processes – The implementation of SCM needs the integration of
processes from sourcing to manufacturing and to distribution across the supply
chain. The integration can be accomplished through cross functional terms, in plant
supplier personnel and third party service provide.
8. Partners to Build and Maintain Long Term Relationship – Successful
relationships aim to integrates channel policy to avoid dismissal and disagreement
while seeking a level of co- operation that allow participants to be more effective at
lower cost levels. Policy integration is possible if there are compatible cultures and
management techniques among the chain members.
Objectives of Supply Chain Management
OBJECTIVES OF SUPPLY CHAIN
MANAGEMENT
1. Minimizing the time-efficient supply chain is an organization that reduces the time required for converting
orders into cash. So there is a minimal time lag and increase in productivity of the organization.
2. Minimizing Work in Progress- supply chain minimizes total work in process in supply chain
3. Improving visibility Demand- Efficient supply chain improves the visibility of demand by each one of the
partners.
4. Improving Quality- Efficient supply chain management helps in improving the quality of operation of the
organization. TQM has become a major commitment throughout all side of the industry. Overall commitment to
TQM is one of the major commitments throughout all sides of the industry.
5. Service Orientation – (i.e services to customers) the very basis of supply chains has been to provide superior
customer service. Service is all about the value that the customer gets, which in turn depends upon his own
perception about what constitutes value. The design, the alignment, the integration of the companies on the
supply chain and the co-ordination between them are all for the customer- the ultimate customer, and these are
performed as such.
•
6. System Orientation- system orientation is at the existence of any
supply chain. Synergy due to co- operation and coordination is the main
gain of a supply chain. This entails that while getting optimal results for
the chain as a whole, results for the partners on the chain may not
necessarily be optimal, these could be less than optimal.
•
7. Competitiveness and Efficiency – Supply chain is a business
organization. It provides value to the customers while being competitive.
Competitiveness is essential for it to healthy sustain itself in order to be
able to provide increasing value to its customer. Efficiency is an important
element of competitiveness
Functions of Supply Chain Management
CONCEPTUAL MODEL OF SUPPLY
CHAIN
• We can say that SCM works in a demand-driven situation, encourages flow-type production with small
batches, reduces idle inventory and idle time in any business by improving overall customer-centric
approach.

• The conceptual model of SCM is based on the five basic elements called Pillars of SCM which include:

Customization Philosophy

Outsourcing of items in which the supplier has competency

Multi-tier supplier partnership

Third or Fourth Party Logistics

Use of modern IT systems

•Primary activities are those that go directly into the creation of a
product or the execution of a service, including:
•Inbound logistics: Activities related to receiving, warehousing, and
inventory management of source materials and components
•Operations: Activities related to turning raw materials and components
into a finished product
•Outbound logistics: Activities related to distribution, including
packaging, sorting, and shipping
•Marketing and sales: Activities related to the marketing and sale of a
product or service, including promotion, advertising, and pricing
strategy
•Secondary activities help primary activities become more efficient—
effectively creating a competitive advantage—and are broken down
into:
•Procurement: Activities related to the sourcing of raw materials,
components, equipment, and services
•Technological development: Activities related to research and
development, including product design, market research, and process
development
•Human resources management: Activities related to the recruitment,
hiring, training, development, retention, and compensation of
employees
•Infrastructure: Activities related to the company’s overhead and
management, including financing and planning.
DRIVERS OF SUPPLY CHAIN MANAGEMENT
• The five drivers are illustrated below

• 1. Production – This driver can be made very responsive by building factories that have a lot of excess
capacity and use flexible manufacturing techniques to produce a wide range of items. To be even more
responsive, a company could do their production in many smaller plants that are close to major groups of
customers so delivery times would be shorter.
• 2. Inventory – Responsiveness can be enhanced by stocking high levels of inventory for a wide range of
products. Additional responsiveness can be gained by stocking products at many locations so as to have the
inventory close to customers and available to them immediately
• 3. Location/Warehousing – A location decision that emphasizes responsiveness would be one where a
company establishes many locations that are close to its customer base. Efficiency can be achieved by
aggregating its inventory to a central location.
• 4. Transportation – Responsiveness can be achieved by a transportation
mode that is fast and flexible such as trucks and airplanes. Efficiency can be
emphasized by transporting products in larger batches and doing it less
often. The use of transportation modes such as ship, railroad, and pipelines
can be very efficient.
• 5. Information – The power of this driver grows stronger each year as the
technology for collecting and sharing information becomes more wide
spread, easier to use, and less expensive. Information, much like money, is a
very useful commodity because it can be applied directly to enhance the
performance of the other four supply chain drivers.
The Reverse Supply Chain
• Reverse supply chain states the evolution of products from customer to
merchant. This is the reverse of the traditional supply chain evolution of
products from merchant to customer.
• Reverse logistics is the process of planning, executing, monitoring and
controlling the efficient and effective inbound flow and storage of secondary
goods and information related to the purpose of recovering value or proper
disposal. Some examples of reverse supply chain are as follows −
• Product returns and handling product displacement.
• Remanufacturing and refurbishing exercises.
• Management and sale of surplus, along with returned equipment and
machines from the hardware leasing business.
• Reverse Supply Chain = It’s the series of activities required to retrieve
a used product from a customer and either dispose of it or reuse it.
• The Reverse Supply Chain
• - Reverse Logistics = Reverse Supply Chain
• In short, you can call "car rental" and "empty container" case a
"reverse logistics/supply chain" if you focus on stuff like Repair,
Repack, Reuse, Refurbish, Resale, Recycle, Return to Vendor, Destroy,
Landfill and Donate. If you don't focus on these things, it's just
inventory management stuff.
• Different types of reverse supply chains occur at different stages of the product
cycle. Basically, the reverse supply chain is designed to perform the following five
main processes:
1.Product purchase - accumulation of used product from the user by an intermediary
or manufacturer due to some manufacturing defect or other reason. This is mainly
seen as the company's growth strategy.
2.Reverse logistics - shipment of products from the final destination for inspection,
sorting and disposal.
3.Inspection and disposal - checking the condition of the returned product and
making the best decision to reuse it in some other way.
4.Restoration or conversion - return the product to the original source from which it
was ordered in the beginning, along with the specifications. This is done mainly in
the presence of defects in the production or configuration of the product.
5.Marketing - creating secondary markets for items that were returned by the seller
from a customer who originally ordered it at the beginning but decided to return it.
WHAT IS GLOBAL SUPPLY CHAIN
MANAGEMENT?
• Global supply chain management generally refers to all
processes regarding a product’s lifecycle, from the concept of
its creation to distribution to endpoints. Global SCM is aimed
to enhance the productivity of each stage of this lifecycle, get
rid of inefficiencies, and deliver the products timely and
seamlessly.
• The traditional global supply chain comprises four critical
stages: supplier, manufacturer, retailer, and end-user.
• Global supply chain management is becoming a very important issue for
most of businesses. The main reasons of this trend are procurement cost
reduction, purchasing risks control, revenues increasing and etc.
• For instance, companies may set up overseas factories to benefit from
tariff and trade concessions, lower labor cost, capital subsidies, and
reduced logistics costs in foreign markets.
• Moreover, easy access to abroad markets and close proximity to
customers result in better organizational learning.
• On the other hand, improved reliability can be obtained as a
consequence of a closer relationship with suppliers.
Global Supply Chain Drivers
• Market Drivers
• When considering the globalization process, the homogenization of
customer needs can be considered on the market side. This frequently
means long production runs and centralized manufacturing and
distribution centers in order to generate and benefit from economies of
scale. On the other hand, building dispersed production facilities that
have a lot of excess capacity and take into account a multitude of local
securities are no longer required and instead replaced by fewer, larger
and central production plants.
• Cost Drivers
• Besides the drivers on the market side there are also variables on the
cost side. The global scale economies are the most apparent of these
drivers. Production processes geographically concentrated for
worldwide delivery require sophisticated logistics operations.
• Government Drivers
• One of important globalization drivers is government regulations.
Favorable trade policies, compatible technical standards, common
marketing regulations, government-owned competitors and customers
and host government concerns are a number of governmental drivers.
• Competitive Drivers
• The last group of drivers is called competitive drivers. High exports
and imports, competitors from different continents, interdependency of
countries and competitors globalized can be considered in this
category.
TOPIC-
Differences Between Global and Domestic Supply Chains
https://www.mbaknol.com/operations-management/global-supply-
chain-management/
Characteristics of Global Supply Chains
• Farness: No need to say, worldwide business are associated with larger
geographic distances and more unpredictable disturbances, implying
longer lead times. Longer lead times in a supply chain cause “the
bullwhip effect”.
• The bullwhip effect is a dynamic in supply chains. This phenomenon
happens when small changes in product demand by the consumer is
translated into wider swings in demand experienced by companies,
going back in the supply chain.
• As a result, companies at different stages in the supply chain will have
different pictures of final-customer’s demand and a breakdown in
supply chain coordination will occur.
• Forecasting complexities: Another feature of global supply chains that
increases the bullwhip effect is forecasting inaccuracy. Increased geographical
distances and communication difficulties result in forecasting complexities.
• Economical and political worries: Global supply chains carry unique risks,
including variability and doubt in currency exchange rates, economic and
political instability, tariffs and duties changeability, non-tariff trade barriers,
individual income tax and etc.
• Infrastructural insufficiency: Infrastructural shortages in developing
countries in transportation and telecommunications, as well as inadequate
worker skills, supplier availability, supplier quality, equipment and
technology provide challenges normally not experienced in developed
countries.
SUPPLY CHAIN OPERATIONS
REFERENCE (SCOR) MODEL
• One of the models used to measure supply chain performance is the Supply
Chain Operations Reference (SCOR) model. It uses 5 supply chain
performance attributes.
1. Reliability: This is measured by order fulfillment.
2. Responsiveness: Often measured by lead time or perfect delivery
fulfillment.
3. Flexibility: This is measured by upstream adaptability and downstream
adaptability.
4. Supply chain management cost: It is measured by how best the chain can
minimize costs
5. Asset management cost/supply chain asset management cost: Calculations
are done to determine these ratios.
Performance Measurement Dimensions
• Supply chain performance measure can be defined as an approach to judge
the performance of supply chain system. Supply chain performance
measures can broadly be classified into two categories:
• Qualitative Measures: For example, customer satisfaction and product
quality.
• Quantitative Measures: For example, order-to-delivery lead time, supply
chain response time, flexibility, resource utilization, delivery performance.
• Here, we will be considering the quantitative performance measures only.
The performance of a supply chain can be improvised by using a multi-
dimensional strategy, which addresses how the company needs to provide
services to diverse customer demands.
• Quantitative Measures
• Mostly the measures taken for measuring the performance may be somewhat similar to each other, but
the objective behind each segment is very different from the other.
• Quantitative measures is the assessments used to measure the performance, and compare or track the
performance or products. We can further divide the quantitative measures of supply chain performance
into two types. They are:
• Non-financial measures
• Financial measures
• Non – Financials Measures
• The metrics of non-financial measures comprise cycle time, customer service level, inventory levels,
resource utilization ability to perform, flexibility, and quality. In this section, we will discuss the first four
dimensions of the metrics:
• Cycle Time
• Cycle time is often called the lead time. It can be simply defined as the end-to-end delay in a business
process. For supply chains, cycle time can be defined as the business processes of interest, supply chain
process and the order-to-delivery process. In the cycle time, we should learn about two types of lead
times. They are as follows:
• Supply chain lead time
• Order-to-delivery lead time
IMPORTANCE OF PERFORMANCE
MEASUREMENT
• Performance measurements help top management to be aware of the
progress that purchasing and supply chain is making in contributing
overall strategic goals of the organization. It will also help the
purchasing department to identify the areas of greatest impact and
focus the effort on it i.e. Identifying products or supplies with the
greatest amount of expenditure incurred and find ways of reducing the
amount.
• The purchasing management unit will be able to intervene and provide
support with the expectation against any particular performance does
not go as planned. It will also ensure that customers are satisfied by
improving the service levels.
LOGISTICS
• According to Phillip Kotler, “Market logistics involve
planning, implementing and controlling physical flow of
material and final (finished) goods from the point of origin
to the point of use to meet customer requirements, at a
profit.”
• Logistics management may be defined as follows:
• Logistics management consists of the process of planning, implementing and controlling
the efficient flow of raw-materials, work-in-progress and finished goods and related
information-from point of origin to point of consumption; with a view to providing
satisfaction to the customer
Classification of Logistical Activities:
Logistics (or Logistical Activities) may be Broadly Classified into Two
Categories:

I. Inbound logistics; which is concerned with the smooth and cost

effective inflow of materials and other inputs (that are needed in
the manufacturing process) from suppliers to the plant. For proper
management of inbound logistics, the management has to
maintain a continuous interface with suppliers (vendors).
II. Outbound logistics (also called physical distribution
management or supply chain management); is concerned with the
flow of finished goods and other related information from the firm to
the customer. For proper management of outbound logistics, the
management has to maintain a continuous interface with transport
operators and channels of distribution.
 Significance (or Objectives) of
Logistics Management:
)Cost Reduction and Profit Maximization:
(i

Logistics management results in cost reduction and profit

maximization, primarily due to:
1. Improved material handling
2. Safe, speedy and economical transportation
3. Optimum number and convenient location of warehouses etc.
(ii) Efficient Flow of Manufacturing Operations:

Inbound logistics helps in the efficient flow of manufacturing

operations, due to on-time delivery of materials, proper utilisation of
materials and semi-finished goods in the production process and so
on.
• iii) Competitive Edge:
• Logistics provide, maintain and sharpen the competitive edge of an enterprise by:
• 1. Increasing sales through providing better customer service
• 2. Arranging for rapid and reliable delivery
• 3. Avoiding errors in order processing; and so on.
• iv) Effective Communication System:
• An efficient information system is a must for sound logistics management. As such, logistics
management helps in developing effective communication system for continuous interface with
suppliers and rapid response to customer enquiries.
• v) Sound Inventory Management:
• Sound inventory management is a by-product of logistics management. A major headache of production
management, financial management etc. is how to ensure sound inventory management; which
headache is cured by logistics management.
 Bullwhip Effect in SCM

• The bullwhip effect on the supply chain occurs

when changes in consumer demand causes the
companies in a supply chain to order more goods to
meet the new demand. The bullwhip effect is a
distribution channel phenomenon, rather problem, in
which demand forecasts yield supply chain
inefficiencies. This mostly happens when retailers
become highly reactive to consumer demand, and in
turn, intensify expectations around it. This results into
inefficient asset allocations and high inventory
fluctuations, moving down in the supply chain.
• The bullwhip effect usually flows up the supply chain, starting with the retailer, wholesaler,
distributor, manufacturer and then the raw materials supplier.

• This effect can be observed through most supply chains across several industries; it occurs
because the demand for goods is based on demand forecasts from companies, rather than actual
consumer demand.

• The bullwhip effect can be explained as an occurrence detected by the supply chain where orders
sent to the manufacturer and supplier create larger variance then the sales to the end customer.
• These irregular orders in the lower part of the supply chain develop to be more distinct higher up
in the supply chain.
• These irregular orders in the lower part of the supply
chain develop to be more distinct higher up in the
supply chain.
How Do we minimize the bullwhip effect?
• Every industry has its own unique supply chain, inventory placements, and complexities. However, after
analyzing the bullwhip effect and implementing improvement steps, inventories in the range of 10 to 30
percent can be reduced and 15 to 35 percent reduction in instances of stock out situations and missed
customer orders can be achieved. Below are some of the methods to minimize the bullwhip effect.
• Accept and understand the bullwhip effect
• The first and the most important step towards improvement is the recognition of the presence of the
bullwhip effect. Many companies fail to acknowledge that high buffer inventories exist throughout their
supply chain. A detailed stock analysis of the inventory points from stores to raw material suppliers will
help uncover idle excess inventories. Supply chain managers can further analyze the reasons for excess
inventories, take corrective action and set norms.
• Improve the inventory planning process
• Inventory planning is a careful mix of historical trends for seasonal demand, forward-looking demand,
new product launches and discontinuation of older products. Safety stock settings and min-max stock
range of each inventory point need to be reviewed and periodically adjusted. Inventories lying in the
entire network need to be balanced based on regional demands. Regular reporting and early warning
system need to be implemented for major deviations from the set inventory norms.
What is a Push System?
• In manufacturing, a push system means that a company produces
goods according to a demand forecast. This is also called
make-to-stock manufacturing and it is often used to produce goods
that have a low chance of unforeseeable demand fluctuations, e.g.
food, pharmaceuticals, household chemicals, electronic devices, etc.
• A push system, therefore, starts production in order to anticipate future
demand that has been estimated according to historical data. In this
supply chain system, goods are “pushed” through the supply chain,
with the demand forecast triggering production, and with finished
goods being dispatched to distributors or retailers that will then market
the products and wait for customers to make the purchase.
• A great example of using a push system would be a bakery where the
decision on which goods and which quantities to bake is done
according to how much is expected to be sold. As people are not
willing to wait an hour for their morning bagel after they put in an
order, a push system is used.
What is a Pull System?
• The pull system is a lean manufacturing strategy where goods are
produced according to actual demand as opposed to forecasts. In this
kind of system, companies only keep as much inventory and produce
as much as is needed to respond to existing customer orders.
• In a pull system, goods are therefore “pulled” through the supply
chain, with a customer order triggering a sequence of events where the
required quantity of products are made, and raw materials used in the
production of said products are replenished.
• A great example of a pull system is just-in-time manufacturing. The
core idea of JIT is to schedule the process so that materials would
reach the facility exactly when production is scheduled to start, and
production is scheduled so that it would be finished just as the goods
should be dispatched to the customer.
Push System vs. Pull System

• https://manufacturing-software-blog.mrpeasy.com/push-system-vs-
pull-system/
Lean Supply Chain Management
What is Lean Manufacturing?
• Lean manufacturing (production) was originally developed at
the Toyota Motor Company and was called the Toyota
Production System (TPS). The word lean is used in the sense
of thin, having no waste and taking out elements of the
production process that do not add overall value to the
finished product. Lean thinking is “lean” because it provides
a way to do more and more on less and less. Wastes can be
put into perspective in seven areas:
• Transportation - Unnecessary movements of vehicles, parts,
or the plant of machinery.
• Inventory - Storing too much inventory or components.
• Motion – Movement of people that adds nothing to the
production process.
• Waiting – Inactivity of people or machinery waiting for
inputs.
• Overproduction – producing more goods than required.
• Over-processing – Having additional unnecessary steps in
the production process.
• Defects – Faults or errors that need re-work or scrapping.
What are the five principles of Lean
Manufacturing?
• The five principles of lean manufacturing are considered a recipe
for improving workplace efficiency.
• Define value: What is the customer willing to pay for the product?
• Map out the value stream: Using the customer value as a
reference point, map out the activities that provide value and the
unnecessary ones.
• Create a flow: After removing waste, ensure the remaining steps
run smoothly.
• Establish a pull: Limit inventory and apply JIT (Just in Time) to
synch with demand.
• Perfect: Continue to fine-tune and perfect processes.
What are the benefits of a Lean
supply chain?
• Core principles in the implementation process of lean
production are:
• Waste elimination
• Pull Scheduling
• Multifunctional teams
WHAT IS AGILE MANUFACTURING?
• Agile manufacturing is a manufacturing methodology that places an
extremely strong focus on rapid response to the customer – turning
speed and agility into a key competitive advantage. It represents a very
interesting approach to developing a competitive advantage in today’s
fast-moving marketplace. An agile company is in a much better
position to take advantage of short windows of opportunity and fast
changes in customer demand.
WHY IS AGILE MANUFACTURING
EFFECTIVE?
• Agile manufacturing is effective because it acknowledges the realities of
the modern marketplace and transforms them into a competitive
advantage.
• Consumers love instant gratification. They are increasingly getting
used to it and they are often willing to pay for it. For example, have you
ever ordered a product with overnight shipping…waiting in eager
anticipation?
• Consumers love choice. They prefer to get a product exactly as they
want it…without compromise.
• Consumers are fickle. Their interests shift and move in unpredictable
ways.
• Agile is of particular value for manufacturers in countries with large,
well-developed local markets and high labor costs (e.g., the United
States). It leverages proximity to the market by delivering products
with an unprecedented level of speed and personalization, which
simply cannot be matched by offshore competitors. It turns local
manufacturing into a competitive advantage.
4 KEY AGILE MANUFACTURING
ELEMENTS
• There are four key elements for agile manufacturing:
1.Modular Product Design: designing products in a modular fashion that
enables them to serve as platforms for fast and easy variation
2.Information Technology: automating the rapid dissemination of
information throughout the company to enable lightning fast response to
orders
3.Corporate Partners: creating virtual short-term alliances with other
companies that enable improved time-to-market for selected product
segments
4.Knowledge Culture: investing in employee training to achieve a culture
that supports rapid change and ongoing adaptation
What is the difference between Lean
and Agile?
7 Key Importance of Information
Technology in Supply Chain
1. Effective Information Management
• Effective information management can help ensure that a firm meets the logistical needs
of its customers.
• Firms need to place priorities on logistical elements such as on-time delivery,
stockout levels, order status, shipment tracking and expediting, order convenience, order
completeness, creation of customer pick up, and backhaul opportunities and product
substitution.
2. Useful Combination of Software and Hardware
• Logistics information systems combine hardware and software to manage, control, and
measure logistics activities that occur within specific firms as well as across the overall
supply chain.
• Hardware includes computers and servers, internet technologies, ancillary technologies
such as barcode and RF devices, communication channels, and storage media.
• 3. Helps in Decisions Support Systems- Companies need better
information on their customers (such as customer service and
sales forecasting), information on their suppliers. (such as
production planning and sourcing and purchasing).
• 4. Digital Order Processing System
• The order processing system is the nerve center of the logistics
and supply chain system.
• A customer order provides the communication message to set the
logistics process in motion.
• The cost and efficiency of the entire communication can result in
loss of customers or excessive transportation, inventory, and
warehousing costs together with possible manufacturing
inefficiencies caused by frequent changes in the production line.
• 5. Computerization of Firm Activities
• Leading-edge organizations are utilizing computers extensively to support logistics activities.
• Computers are used in order entry, order processing, finished goods inventory control, performance
measurement, freight audit/payment, and warehousing.
• 6. Competitive Advantages
• Computer-based decision support systems (DSS) support the executive decision-making process in logistics
and supply chain management.
• To support time-based competition, firms are increasingly using information technologies as a source of
competitive advantages.
• 7. Fast Connectivity through WEB
• Today, companies are restructuring their businesses to function in the new era of electronic commerce.
• Organizations can have a deluge of information on websites, business to business requirements, and online
customer and supplier linkages.
• ERP systems, purchasing databases and data warehouses, electronic data interchange (EDI, business to
business electronic commerce are recent development which applied in logistics and supply chain management.
What is Demand Forecasting?
• Demand forecasting is a means of estimating what customer
demand will look like in the future, and how it will affect a
business' supply chain. It's essential for business health,
continuity, and growth, ensuring that leaders make the right
decisions at the right times.
• Demand forecasting plays an important role in effective supply chain
management, ensuring timely stock replenishment, enhanced capacity
management, and optimal sales and revenue. It also improves
decision-making and management, while accelerating prospective
plans for growth and expansion.
Importance of Demand Forecasting in
Supply Chain
• Boost Customer Satisfaction
• Demand forecasting is especially important for assemble-to-
order and made-to-stock business models. A happy customer is
one who receives the products they have ordered on time
• Better Allocation of Resources and Capacity Planning
• With a more accurate estimate of expected customer orders,
organizations can source and acquire only the necessary raw
materials. It also means that the production schedule will be
more precise thanks to prudent capacity utilization and resource
allocation.
• Streamlining Inventory
• A good demand forecast reduces the Bullwhip effect by providing more
accurate figures for inventory throughout the supply chain. From raw
materials to finished products, the organization will only carry stock
that will move. This reduces the chance of overstocking or stockouts.
• Plan Sales Strategies
• Demand forecasts create a starting point for other strategic planning
activities within the business such as product design and management
for new products and same family products. They also provide crucial
data used to make decisions in purchasing, pricing, and promotion of
current and new products.
• Better Supplier and Purchase Terms
• As mentioned before, demand forecasting guides the push
processes such as raw material planning, purchasing,
manufacturing, and inbound logistics. This means, for the
purchasing managers, prompt purchase plans which can be
shared with suppliers early.
Demand Forecasting Software
• It started with excel sheets and has now evolved into
demand forecasting software which has brought
supply chain management to a whole new level of efficiency and
accuracy. For any medium-sized business with multiple SKUs
and complex distribution channels, it is worthwhile to invest in
demand management solutions.