SCHM 2301 Exam 2

demand planning

- why is forecasting important?
- what can/should be forecast? (besides sales)
- which departments use forecasting?
- how often is forecasting done?

types of forecasts

point forecasts and range forecasts

which forecast is more accurate?

range forecast, but point is still used because as a manager, you have to act on a certain number

forecasting method chart

grassroots

input from those close to products or customers

executive judgment

input from those with experience (and power!)

historical analogy

assume past demand is a good predictor of future demand

delphi method

input from panel of experts

marketing research

examine patterns of current customers (focus groups, customer surveys)

qualitative forecast methods

- grassroots
- executive judgment
- historical analogy
- delphi method
- marketing research

quantitative forecasting methods

- time series analysis
- causal modeling
- simulation models

time series analysis

- forecasts are based solely on past historical demand
- identifies and measures patterns in data
- assumes that patterns will continue int he future
- "black box" approach

causal modeling

- assumes demand is influenced by one or more factors
- identified important factors and measures their effects

simulation models

- sophisticated techniques that allow for the evaluation of multiple business scenarios

qualitative vs quantitative forecasting methods

qualitative
- subjective and judgmental
- can integrate "soft" data
- can be used for new products
- better w one-off events

quantitative
- objective and statistical
- can handle large data sets
- consistent
- efficient
- requires "hard" data

advantages of causal modeling

- better fro long-range forecasting
- typically better for predicting shifts (or turning points) in data patterns
- can generate a better understanding of the mechanisms influencing sales/demands

disadvantages of causal modeling

- requires more data
- requires special expertise that many managers don't have

time series analysis

- multiple identifiable patterns in demand
- random fluctuations
- trend
- seasonality
- cyclicality
- typically multiple patterns coexist but can be separated and identified
- goal: extrapolate

simple moving average

- simple average places same weight/emphasis on all past demand periods
- method works well when demand is fairly stable over time
- decreasing the number of periods in forecast, creates a more responsive forecast
- forecast lags demand because of averaging effect
- as such, this method doesn't do a good job of forecasting when trends are present in the data

weighted moving average

- weighted moving average allows greater emphasis to be placed on more recent data points to reflect changes in the demand
- weights used can be used based on forecaster's experience
- decreasing the numbers of periods in forecast and/or increasing the size of the weights, creates a more responsive forecast
- forecast still lags the demand because of averaging effect
- as such, this method doesn't do a good job of forecasting when trends are present in the data

evaluating forecasts

- quality of a forecast depends on:
- accuracy (how close is the foercast to actual/observed demand?
- bias (are there systematic deviations from actual demand)
- evaluation of forecasting models- forecast errors are used to evaluate a forecasting model
- measures of forecasting errors
- absolute
- relative

formula for forecast error

𝑒𝑡=𝑑𝑡−𝐹𝑡

mean forecast error (MFE)

- average of forecast errors from period 1 to t (current period)
- measure of bias, but not accuracy
- smaller MFE = relatively unbiased forecasts
- larger MFE = biased forecasts, which indicates overestimation or underestimation

mean absolute deviation (MAD)

- average of absolute values of forecast errors
- measures the dispersion (variance) of forecasting errors
- positive and negative forecast errors do not cancel out each other
- smaller MAD = relatively more accurate forecasts
- larger MAD = relatively less accurate forecasts

mean squared error (MSE)

- average of squared values of forecast errors
- MSE is similar to MAD in that
- another measure of dispersion (variance) of the forecasting errors
- positive and negative forecast errors do not cancel out each other
- smaller MAD = relatively more accurate forecasts
- larger MAD = relatively less accurate forecasts

what are the differences between MSE and MAD?

- MSE penalizes larger forecasts errors to a greater degree
- MSE is sensitive to extreme forecast errors (outliers)

mean absolute percent error (MAPE)

- standardizes the forecast errors w respect to the actual demand
- measures the average relative magnitude of the forecasts errors
- express as a percentage of the actual demand
- very popular!

sales and operations planning (S&OP)

- process for integrating marketing and operations plan to develop a tactical plan
- attempt to balance supply and demand

problems with sales and operations planning

- independent planning can lead to strategic misalignment
- sales and operations blame each other for problems, changing schedules, plans, etc
- big differences between budget and actual results
- low service levels or high cost of servicing customers
- capacity utilization, forecast accuracy, obsolete inventory, product-to-market time and transportation costs are not understood/measured, and corrective action plans are not developed
- new products regularly miss their launch dates
- product phase-outs are costly and generally involve inventory excess
- SKU proliferation
- promotional campaigns and activities cause major swings in inventory and service levels resulting in higher operational costs than budgeted

quantitative benefits of S&OP planning

- improved forecast accuracy
- higher customer service
- more stable supply
- better new product intro

qualitative benefits of S&OP planning

- better org teamwork
- faster and better aligned decision making
- greater accountability for performance
- better business visibility

sales & operations planning

- each firm has a slightly different S&OP process customized for industry and firm characteristics
- aggregate level
- product lines instead of individual SKUs
- ongoing planning process, monthly rolling horizon (12-24 months)
- structured meetings, standardized
- disciplined and repeatable
- cross-functional participation, acceptance
- continuity, updating, fine-tuning
- forecast, unconstrained demand plan
- draft supply plan and constrained demand plan
- demand and supply plans properly aligned, fine-tuned
- proper preparation for meetings
- participants empowered to make decisions
- executive support

sales and operations planning steps

aggregate production planning

- schedule of production to meet demand
- focuses on finished goods inventory only
- raw material and WIP inventories are ignored
- capacity and labor can vary
- products are viewed aggregately at product line level (instead of individual SKU level)

aggregate production planning balances the following costs

- inventory carrying (holding) cost
- regular production cost
- overtime cost (under current capacity)
- cost of increasing production (capacity)
- cost of decreasing production (capacity)
- backorder/lost sales
- subcontracting (outsourcing)

aggregate production planning level

produce at a constant rate, use changing inventory levels to buffer supply and demand

aggregate production planning chase

change production to match demand, inventory remains relatively stable and low

what is MRP?

- material: raw materials and WIP inventories
- requirement: what do you need when, how much?
- planning: schedule

goals of a MRP

- ensure availability of materials, components, products for planned production
- maintain lowest possible inventory level
- plan manufacturing activities, delivery schedules, purchasing activities

MRP overview

bill of materials

detailed listing of all materials needed to make an end item

principal advantages of MRP

- maintain reasonable safety stock
- minimize/eliminate inventories
- identification of process probs
- production schedules based on actual demand
- coordination of materials ordering
- most suitable for batch or intermittent production schedules

principal shortcomings of MRP

- computer intensive
- difficult to make changes once operating
- ordering and transportation costs may rise
- not usually as sensitive to short-term fluctuations in demand
- frequently become quite complex
- may not work exactly as intended

types of inventory

- raw materials (RM)
- work in progress (WIP)
- finished goods (FG)

by function

- cycle stock (working stock)- expect to sell
- safety stock (buffer stock)- not expect to sell
- seasonal stock (anticipation stock)
- in-transit stock (pipeline stock)
- decoupling stock- extra raw materials or work in progress items for all or some stages in a production line

reasons for carrying inventory

uncertainty
- demand
- supply
- production
- transportation

economies of scale
- purchasing
- production
- transportation

2 types of uncertainty

uncertainty in demand and uncertainty in supply

uncertainty in demand

- customer demand is usually unknown
- maintain target customer service levels
- stock-out cost vs inventory carrying cost

uncertainty in supply

- availability, prices may vary
- maintain uninterrupted flow of raw materials
- stock out costs vs inventory carrying costs

uncertainty in production

- process times, sequences may vary
- minimize idle time, maximize utilization
- stock out costs vs inventory carrying costs

uncertainty in transportation

- transit times may vary
- avoid stock-outs due to delays
- transportation costs vs inventory costs

purchasing in economies of scale

- price discounts based on quantity
- purchase cost vs inventory carrying cost
- items w low storage costs tend to be bought in bulk to qualify for volume discounts
- raw materials are generally bought in bulk
- finished goods?

production in economies of scale

- unit production cost decreases w size of production run
- production cost has 2 components
- variable cost (cost of producing each additional unit)
- fixed cost (cost of starting a production run)
- lot-sizing costs vs inventory carrying costs

transportation in economies of scale

- discounts based on quantity
- less than truckload (LTL) rates are normally higher than truck load (TL) or CL (carload) rates
- largest shipments may qualify for even lower multiple truckload, carload, or trainload rates
- lower freight rates are often reflected in lower consumer prices
- transportation costs vs inventory carrying costs

inventory models are either _____________ or ______________

deterministic or stochastic

deterministic

(under certainty)
- everything is known w certainty
- demand rate, lead time, price

stochastic

(under certainty but random)
- some variables are random so not known w certainty

economic order quantity

minimizes the sum of
- inventory carrying cost
- ordering cost

costs considered in the EOQ model

- inventory carrying cost (C)
- ordering cost (P)
- unit purchase cost (V)

safety stock

aka buffer stock
- inventory level at the time of replenishment

factors affecting safety stock levels

- variability in demand (forecast error)
- variability in lead time
- cost of stock-out
- service level requirement

ABC analysis

ranking system
- developed in 1951 by H. Ford Dicky of General Electric
- suggested that GE classify items according to relative sales volume, cash flows, lead time, or stockout cost
- most important inventory put in Group A
- lesser impact goods put in Groups B and C respectively

Pareto's Rule (80-20 rule)

- based on 19th century mathematician's observation that many situations were dominated by a very few elements
- conversely, most elements had very little influence in most situations
- separates the "trivial many" from the "vital few"
- 80% of sales will come from 20% of the inventory SKUs
- 20% of sales will come from 80% of the inventory SKUs
- found to explain many phenomena that interest managers like 80% of sales come from 20% of customers and vice versa

financial impact of inventory

profitability- inventory carrying costs
financial ratios like:
- return on assets
- return on investment
- profitability ratios

inventory carrying cost

- cost associated w amount of inventory stored
- easier to calculate as percentages
- has multiple cost components
- capital costs
- inventory service costs
- storage costs
- inventory risk costs

capital cost

- opportunity cost associated w investing in inventory or any asset
- what is the implicit value of having capital tied up in inventory, instead of some other worthwhile project?
- minimum ROR expected from any asset
- debate on inventory valuation at fully allocated or variable costs only

storage space cost

- handling costs, rents, utilities
- logistics develop a cost formula for storage space costs based on cost behaviors
- public space mostly variable
- private space a mix of fixed and variable

inventory service cost

- insurance and taxes on stored goods
- varies according to the value of goods

inventory risk cost

- largely beyond the control of the firm
- due to obsolescence, damage, theft, employee pilferage

inventory turns

- VERY VERY VERY important
- inventory turns measure inventory levels w respect to sales
- turns = (annual demand) / (average inventory level)

all else being equal, lower inventory levels imply ___________ inventory turns

higher

all else being equal, higher inventory turns imply ___________ inventory levels

lower

inventory turns affect

- inventory carrying costs
- rate of return

inventory turns and inventory carrying cost

- annual ICC = ave inv level x unit value x PICC
- ave inv level = (annual demand)/(turns)

as turns increases

ave inv level decreases

as ave inv level decreases

annual inventory carrying cost decreases as well

dependent demand

- just in time (JIT)
- materials requirement planning (MRP)

independent demand

- fixed order quantity (ex. EOQ)
- fixed order interval

pulls system

- pull approach- reactive system relying on customer demand to pull product through a logistics system
- respond quickly to sudden or abrupt changes in demand, involve one way communications, apply more to independent demand situations

push systems

- push approach- proactive system and uses inventory replenishment to anticipate future demand
- use an orderly and disciplined master plan for inventory management and apply more to dependent demand situations

fixed order quantity approach

- condition of certainty: inventory cycle
ex. each cycle starts w 4,000 units
- demand is constant at the rate of 800 units/day
- when inventory falls below 1,500 units, an order is placed for an additional 4,000 units
- after 5 days, the inventory is completely used
- just as the 4000th unit is sold, the next order of 4000 units arrives and a new cycle begins

fixed order quantity model under uncertainty

fixed order interval approach

- second basic approach
- involves ordering at fixed intervals and varying Q depending upon the remaining stock at the time the order is placed
- less monitoring than the basic model
- amount ordered over each five weeks in the example varies each week

fixed order quantity model

fixed order interval approach model

just in time

- designed to manage lead times and eliminate waste
- JIT operations: kanban cards and light warning system communicate possible production interruptions
- JIT can substantially reduce inventory and related costs
- similar to the 2 bin system (one bin fills demand for part and other is used when the first is empty)
- reduces lead times through requiring small and frequent replenishment

kanban

- refers to the informative signboards on cart in a Toyota system of delivering parts to the production line
- each signboard details the exact quantities and necessary time of replenishment

goal of JIT

zero inventory and zero defects

JIT

- widely used and effective strategy for managing the movement of parts, materials, semi-finished production from points of supply to production facilities
- product should arrive exactly when a firm needs it, with no tolerance for early or late deliveries
- place a high priority on short, consistent lead times

6 major differences for JIT

1. JIT attempts to eliminate excess inventories for both buyer and seller
2. JIT involves short production runs w frequent changeovers
3. JIT minimizes waiting lines by delivering goods when and where needed
4. JIT uses short, consistent lead times to satisfy inventory needs in a timely manner
5. JIT relies on high-quality incoming products and on exceptionally high-quality inbound logistics operations
6. JIT requires a strong, mutual commitment between buyer and seller, emphasizing quality and win-win outcomes for both partners

managing to learn

by John Shook

two of the most popular books about lean production

- Lean Thinking by Womack and Jones
- The Machine that Changed the World by Womack and Ross

lean can mean different things to different people

- downsizing
- thinking systematic
- entire enterprise business system

in the 1950s, Toyota could not take advantage of economies of scale due to 2 things

lower volume and high variety

Toyota was on the brink of bankruptcy because

banks refused to loan them money

Toyota's workers were on strike because

they weren't getting paid

job security refers to

life time employment

lean production was developed in ______ years by ______________

20-30 by trial and error

NUUMI

New United Motor Manufacturing Inc- automobile manufacturing plant in Fremont, CA jointly owned by General Motors and Toyota that opened in 1984 and closed in 2010

in the Toyota Production System, the job of a manager is to

develop their people