OMIS 320 Woosley exam 2

Demand Forecasting

-Is an estimate of future demand & provides the basis for planning decisions

-The goal is to minimize forecast error

-the factors that influence demand must be considered when forecasting

-Managing demand requires timely and accurate forecasting

-Good forecasting provides reduced inventories, costs, and stockouts, & improved production plans and customer service.

Qualitative Forecasting

Is based on opinion & intuiton

Quantitative Forecasting

Uses mathematical models & historical data to make forecasts.

Qualitative Forecasting Methods

Generally used when data are limited, unavailable, or not currently relevant. Forecast depends on skill & experience of forecaster(s) & available information

Four Qualitative models used are

1. Jury of executive opinion

2. Delphi method

3. Sales force composite

4. Consumer survey

Jury of executive opinion

- group of senior management executives collectively develop the forecast.

- good for long-range planning and new product introductions

Delphi Method

- A group of internal and external experts are surveyed during several rounds

- Summary of responses is sent out to all the experts; they can modify their responses in next round

- Good for high-risk technology forecasting; large, expensive projects; or major new product introductions

option overplanning

when exact proportion of each option is uncertain the percentage is increased slightly to cover the uncertainty

Sales Force Composite

- based on the sales force's knowledge of the market and estimates of customer needs.

- Tendency for sales force to under-forecast

Consumer Survey

Questionnaire uses inputs from customers on future purchasing needs, new product ideas, and opinions about existing or new products

Quantitative forecasting Methods

1. Time Series Forecasting

2. Cause & Effect Forecasting

Cause & Effect Forecasting

Assumes that one or more factors (independent variables) predict future demand.

Components of time Series

1. Trend variations

2. Cyclical Variations

3. Seasonal Variations

4. Random variations

Time Series Forecasting

Assumes that the future is an extension of the past. Historical data is used to predict future demand.

trend variations

Increasing or decreasing over many years

Cyclical Variations

Wavelike movements that are longer than a year

Seasonal Variations

Show peaks & valleys that repeat over a consistent interval such as hours, days, weeks, months, seasons, or years.

Random variations

Due to unexpected or unpredictable events.

Naive Forecast

The estimate of the next period is equal to the demand in the past period.

Simple Moving Average Forecast

Uses historical data to generate a forecast. Works well when demand is stable over time.

Weighted Moving Average Forecast

Is based on an n-period weighted moving average.

Exponential Smoothing Forecast

A type of weighted moving average where only two data points are needed.

Linear Trend Forecast

Trend can be estimated using simple linear regression to fit a line to a time series

Near Field Communication (NFC)

secure form of data exchange between an NFC tag & Android-powered devices

Cause & Effect Models

One or several external variables are identified that are related to demand.

Simple Regression

Only one explanatory variable is used & is similar to the previous trend model. The difference is that the x variable is no longer time but an explanatory variable.

Multiple Regression

Several explanatory variables are used to make the forecast.

Formula for Forecast Error

the difference between actual quantity & the forecast.

Several measures of forecasting accuracy follow

1. Mean absolute deviation (MAD)

2. Mean absolute percentage error (MAPE)

3. Mean squared error (MSE)

Mean Absolute Deviation (MAD)

A MAD of 0 indicates the forecast exactly predicted demand.

Mean absolute percentage error (MAPE)

Provides a perspective of the true magnitude of the forecast error.

Mean Squared Error (MSE)

Analogous to variance, large forecast errors are heavily penalized.

Running Sum of Forecast Errors (RSFE)

Indicates bias in the forecasts or the tendency of a forecast to be consistently higher or lower than actual demand.

Tracking signal

Determines if forecast is within acceptable control limits. if the tracking signal falls outside the pre-set control limits, there is a bias problem with the forecasting method and an evaluation of the way forecasts are generated is warranted.

Collaborative Planning, Forecasting and Replenishment (CPFR)

A set of business processes that entities in a supply chain can use for collaboration on a number or retailer/manufacturer functions towards overall efficiency in the supply chain.

Opperations Planning

Is usually hierarchical & can be divided into three broad categories :

1.Long-range

2. Intermediate

3.Short-range

Long-range - Aggregate Production Plan (APP)

usually covers a year or more, involves the construction of facilities & major equipment purchase

Lead capacity strategy - proactive approach

adds or subtracts capacity in anticipation of future market conditions and demand

Six Sigma

Near quality perfection (the statistical likelihood of non-defects 99.99966% of the time)

Lean Six Sigma (or Lean Six)

Describes the melding of lean production and Six Sigma quality practices.

*Lean and Six Sigma are complimentary philosophies

Lag capacity strategy - reactive approach

adjusts its capacity in response to demand

Match or tracking capacity strategy

moderate strategy - adjusts capacity in small amounts in response to demand and changing market conditions

Chase Strategy

-Adjusts capacity to match demand

• Firm hires & lays off workers to match demand

• Finished goods inventory remains constant

• Works well for make-to-order firms

• Generally produce one-of-a-kind, specialty products

• Generally require low skilled labor

• Can be problematic when highly skilled workers are needed in a tight labor market

Level Strategy

-Relies on constant output rate varying inventory & backlog according to fluctuating demand

• Firm relies on fluctuating finished goods & backlogs to meet demand

• Works well for make-to-stock firms

• Inventory carrying and stockout costs are major cost concerns

• Works well with highly skilled workers

Mixed Production Strategy

-Maintains stable core workforce using overtime, subcontracting & part time workers to manage short-term demand

• Complementary products (with different demand cycles) may be produced

• Additional shift may be scheduled

• Works well with firms producing multiple products

Intermediate - master production schedule - MPS

plan spans six to eighteen months. Shows the quantity & timing of end items

Short-range - i.e., materials requirement planning - MRP

plan covers few days to few weeks. Detailed planning process for components & parts to support the master production schedule

Closed-loop MRP

Incorporates the aggregate production plan, the master production schedule material requirements plan, & capacity requirements plan.

resource planning

process of determining the production capacity required to meet demand

Manufacturing Resource Planning (MRPII)

Incorporates the business and sales plans with the closed-loop MRP system

Enterprise Resource Planning (ERP)

Is an extension of MRP-II

Distribution Requirement Planning (DRP)

time-phased net requirements from warehouses & distribution centers

Aggregate Production Plan

process that translates annual business plans & demand forecasts into a production plan for a product family

Master Production Schedule (MPS)

detailed disaggregation of the aggregate production plan, listing the exact end items to be produced by a specific period.

-More detailed than APP & easier to plan under stable demand.

-Planning horizon is shorter than APP, but longer than the lead time to produce the item.

- Note: For the service industry, the master production schedule may just be the appointment book

The MPS

The Production quantity to meet demand from all sources & is used for computing the requirements of all time-phased end items.

System Nervousness

Small changes in the upper-level-production plan cause major changes in the lower-level production plan.

Firms use a time fence to deal with nervousness by separating the planning horizon into-

1. Firmed Segment (AKA demand time fence) from current period to several weeks into future. Can only be altered by senior management.

2. Tentative Segment (AKA planning time fence) From end of firmed segment to several weeks into the future.

Available-to-Promise (ATP) Quantity

The difference between confirmed customer orders & the quantity the firm planned to produce

Three basic methods of calculating the available-to-promise quantities

1. Discrete available-to-promise

2. Cumulative available-to-promise without look ahead

3. Cumulative available-to-promise with look ahead

Bill of Materials (BOM)

Document that shows an inclusive listing of all component parts & assemblies making up the final product.

Dependent Demand

all components and subassemblies required for the final assembly of one unit

Independent Demand

Demand for final products affected by trends, seasonal patterns, & general market conditions

Multilevel Bill of Materials

Shows the parent-component relationships & the specific units of components known as the planning factor. Often presented as an indented bill of materials.

Super Bill of Materials (AKA planning BOM, Pseudo BOM, Phantom BOM, or family BOM)

enables the firm to forecast the total demand end products

Material Requirements Planning (MRP)

A computer-based materials management system that calculates the exact quantities, need dates, & planed order releases for subassemblies & materials required to manufacture a final product.

MRP requires:

-The independent demand information

-parent-component relationships from the BOM

-Inventory status of final product & components

-Planned order releases (the output of the MRP system)

Disadvantage of MRP

Loss of visibility, especially acute for products with a deep BOM, & ignores capacity & shop floor conditions

Parent

Item generating demand for lower-level components

Components

Parts demanded by a parent

Net Requirement

The unsatisfied item requirement for a specific time period. Gross requirement for period minus current on-hand inventory

Scheduled Receipt

A committed order awaiting delivery for a specific period

Projected on-hand inventory

Projected closing inventory at end of period. beginning inventory minus gross requirement, plus scheduled receipt & planned receipt & planned receipt from planed order releases.

Planned Order Release

Specific order to be released to the shop or to the supplier.

Planned order receipt

projected receipt based on generation of a planned order release

Time Bucket

Time period used on the MRP. days or weeks

Explosion

Process of converting a parent items planned order releases into components gross requirements

Planning Factor

Number of components needed to produce a unit of the parent item

Firmed planned order

Planned order that the MRP computer logic system does not automatically change when conditions change to prevent system nervousness

Pegging

Relates gross requirements for a part to the planned order releases

Low-level coding

Assigns the lowest level on BOM to all common components to avoid duplicate MRP computations

Lot size

Order size for MRP logic

Safety Stock

Protects against uncertainties in demand supply, quality, and lead time

Scheduled receipts

Open orders scheduled to arrive

Net requirements

Actual amount needed in each time period

Planned-order Receipts

Quantity expected to received at the beginning of the period offset by lead time

Planned-order Releases

Planned amount to order in each time period

Resource Requirement Planning(RRP)

A Long-range capacity planning module, checks whether aggregate resources are capable of satisying the aggregate production. Resources considered include gross labor hours & Machine hours

rough-cut Capacity plan (RCCP)

-medium-range capacity plan that checks feasibility of MPS

• Converts MPS from production needed to capacity required, then compares to capacity available

Capacity requirement Planning (CRP)

a short-range capacity planning technique that is used to check the feasibility of the material requirements plan

Cloud-based forecasting

supplier-hosted or software-as-a-service (SaaS)

advanced forecasting applications that is provided on a subscription basis

Distribution requirements planning (DRP)

A time-phased finished good inventory replenishment plan in a distribution network

-DRP is a logical extension of the MRP system & ties physical distribution to manufacturing planning and control system

Enterprise Resource Planing Systems (ERP)

integrates internal operations with a common software platform & centralized database system

Two types of ERP implementation

1. Best-of-Breed - Pick the best application for each individual function.

2. Single Integrator Solution - Pick all the desired applications from a single vendor.

Advantages and Disadvantages of ERP systems

Advantages:

-Added visibility reduce supply chain inventories

-Helps to standardize manufacturing processes

-Measure performance & communicate via a standardized method

Disadvantages:

-Substantial time & capital investment

-Complexity

-Firms adapt processes to meet ERP system

Inventory Management models

Generally classified as dependent demand and independent demand models

The primary Functions of Inventory are

Buffer- from uncertainty in the marketplace

Decouple- dependencies in the supply chain(e.g., Safety stock)

Raw Materials

Unprocessed purchase inputs.

Work-in-Process(WIP)

Partially processed materials not yet ready for sales

Finished goods

Products completed and ready for shipment

Maintenance, Repair & Operating(MRO)

Materials used in production of products (e.g., cleaners and brooms)

Inventory Cost

Direct Costs - Directly traceable to unit produced(e.g., labor)

Indirect Costs - Cannot be traced directly to the unit produced (e.g., overhead)

Fixed costs- Independent of the output quantity (e.g., buildings, equipment, & plant security)

Variable costs- Vary with output level (e.g., materials)

Order costs- Direct variable costs for making an order. in MFG set up costs are related to machine set up

Holding or Carrying costs - Incurred for holding inventory in storage