Demand Classification — Analytical designs

Anything or everything that we use in our lives has reached us through the supply chain networks and thorough planning and implementation of supply chain management. Supply chain management and planning is one of the most important, complex, and involving fields of science and technology. Demand planning is considered the driving force for the process of supply planning, production planning, and distribution planning. Demand Planning is the most important process for any industry to manage customer expectations.

Supply chain planning is the process of accurately planning the journey of a material or a product right from the raw material stage to the final consumer. This includes multiple processes such as supply planning, demand planning, production planning, distribution planning, operations, and sales planning. Demand planning is considered the driving force for the process of supply planning, production planning, and distribution planning. Demand Planning is the most important process for any industry to manage customer expectations.

There are two major types of demands: The first one is Continuous demand (also known as traditional demand) which is predictable and can be forecasted easily, and the second one is Intermittent demand (also known as sporadic demand) which is unpredictable and inconsistent and there are time-periods where products experience zero demand.

Figure 1: Illustrating Intermittent demand

Intermittent demand is observed in many industries like Aviation, Automotive, Defence, and Manufacturing. It is also commonly found in spare parts forecast, non-essential grocery items, non-essential clothing (fashion industry), non-essential furniture, and anything else that is not essential and does not have any trend or pattern.

Ever-changing customer expectations, international complexities, fluctuating demands, intermittent demand, pandemics, and more routes to market are significant challenges throughout the supply chain network.

Demand Classification

It has been observed in the supply chain industry that some products never seem to reach the forecast accuracy objective. Forecast accuracy strongly depends on product forecast ability. To determine forecast ability for any produce, two categories are applied:

• The Average Demand Interval (ADI) — It measures the demand regularity in time by computing the average interval between two demands.

ADI = i=1Nti/ N

Where ti is the period between two consecutive demand periods and N represents the number of all demand periods.

• The Square of the Coefficient of Variation (CV²). It measures the variation in quantities.

Figure 2: Illustrating Demand Classification

Based on these 2 dimensions, the literature classifies the demand profiles into 4 different categories:

• Smooth demand (ADI < 1.32 and CV² < 0.49). It is a demand with regularity in time and quantity. Hence, very easy to work with when forecasting and has very low error levels.
• Intermittent demand (ADI >= 1.32 and CV² < 0.49). Demand with a history of no pattern and very little variation in quantity but very high variation in demand intervals. Only a few forecasting methods can handle forecasting for intermittent demand.
• Erratic demand (ADI < 1.32 and CV² >= 0.49). Demand with regular time occurrences and considerable quantity variations. Forecasting this kind of demand is difficult.
• Lumpy demand (ADI >= 1.32 and CV² >= 0.49). Demand with large quantity variation and time variation. Forecasting for Lumpy demand is not possible, no matter which forecasting method is getting used these demands are said to be unforecastable.

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