Operations Management: Inventory, Bottlenecks, and Forecasting Techniques

Throughput

The rate at which units or tasks are completed in a given time period.

Process Efficiency

A measure of how effectively a process converts inputs into outputs, often related to throughput.

Bottleneck

A stage in a process that reduces the overall speed of the entire system, limiting throughput.

Cycle Time

The total time from the beginning to the end of a process, which inversely affects throughput.

Capacity

The maximum amount of work that an organization or process can handle in a given time frame.

What is the typical queueing system used by banks and airline ticket counters?

One or more parallel servers fed by a single queue.

What is flow time?

Flow time is the average time it takes to complete one cycle of a process.

Static Demand

A type of demand that remains constant regardless of price changes, often seen in essential goods.

Dynamic Demand

A type of demand that fluctuates based on changes in price, consumer preferences, or market conditions.

Category A

Items that represent a significant portion of the inventory value but a small percentage of the total items, typically requiring tight control. (requires the closest scrutiny by its operations manager)

Category B

Items that fall between A and C categories, representing moderate value and requiring moderate control.

Category C

Items that constitute a large number of items but contribute a small percentage to the overall inventory value, requiring less control.

Pareto Principle

A principle stating that roughly 80% of effects come from 20% of causes, often applied in ABC analysis to prioritize inventory management.

Stock Keeping Unit (SKU)

A unique identifier for each distinct product and service that can be purchased, used in ABC analysis to categorize inventory.

Value Analysis

A technique used to assess the value of inventory items, often influencing their categorization in ABC analysis.

Demand Forecasting

The process of estimating future customer demand for products, which can affect how items are categorized in ABC analysis.

What technique is used to solve the single-period inventory problem?

Marginal economic analysis

What does marginal economic analysis compare in the context of inventory?

The cost or loss of ordering one additional item versus the cost or loss of not ordering it.

What costs reflect backorders or service interruptions for external customers?

Stockout costs

What are setup costs in the context of inventory?

Costs incurred as a result of configuring tools, equipment, and machines within a factory to produce an item.

Do ordering and setup costs depend on the number of items purchased?

No, they do not depend on the number of items purchased or manufactured, but on the number of orders placed.

What is a physical constraint?

A constraint associated with the capacity of a resource that results in process bottlenecks.

What happens at a bottleneck?

The input exceeds the capacity, restricting the total output that can be produced.

Why should bottleneck workstations be scheduled first?

They are critical to achieving process and factory objectives.

What is the impact of losing an hour at a bottleneck resource?

It results in an hour lost for the entire process or factory output.

Where should Work-In-Process buffer inventory be placed?

In front of bottlenecks to maximize resource utilization.

What strategy should be used at bottleneck workstations to minimize setup time?

Use large order sizes.

What is the goal of keeping bottleneck workstations operational all the time?

To maximize throughput and resource utilization, generating cash from sales.

What is the overall objective of managing bottleneck workstations?

To achieve the company's goal.

What are the dual challenges managers face in inventory management?

Managers must maintain sufficient inventory to meet demand while keeping costs as low as possible.

What is the primary responsibility of the Purchasing or Procurement function?

To acquire raw materials, component parts, tools, and other items from outside suppliers.

What are the 4 main inventory cost categories?

1. Ordering or Setup Costs incurred when placing orders with suppliers

2. Inventory Holding Costs associated with carrying inventory

3. Shortage or Stockout Costs associated with inventory being

unavailable to meet demand

4. Unit Cost of the purchased goods or the internal cost of producing them

Lead Time

The total time taken from placing an order to receiving the goods.

Order Processing Time

The duration required to process an order before it is shipped.

Safety Stock

Extra inventory held to mitigate the risk of stockouts due to lead time variability.

In what types of situations are single-period models typically applied?

They are used for seasonal or perishable items that cannot be carried in inventory for future sales.

What does marginal economic analysis compare in the context of inventory?

It compares the cost or loss of ordering one additional item with the cost or loss of not ordering that item.

What is a time series?

A set of observations measured at points in time or over periods of time.

What does a time series provide data for?

Understanding how the forecasted variable has changed.

Name the five characteristics that can explain a time series pattern.

Trend, seasonal, cyclical, random variation, and irregular (onetime) variation.

What is 'cyclical' variation in a time series?

Long-term fluctuations that occur over several years, often related to economic cycles.

What is 'random variation' in a time series?

Unpredictable fluctuations that cannot be attributed to trend, seasonal, or cyclical factors.

What does the 'trend' characteristic in a time series indicate?

The long-term movement or direction in the data over time.

What does 'seasonal' variation in a time series refer to?

Regular patterns that repeat at specific intervals, such as monthly or quarterly.

What is 'irregular (one-time) variation' in a time series?

Unusual events that cause significant changes in the data but do not repeat.

What are the two main classifications of forecasting methods?

Statistical and judgmental

What is the basis of statistical forecasting?

It is based on the assumption that the future will be an extrapolation of the past.

What are the two categories of statistical forecasting methods?

Time-series methods and regression methods.

What do time-series methods do?

They extrapolate historical time-series data.

What do regression methods do in statistical forecasting?

They extrapolate historical time-series data and can include causal factors.

What is a disadvantage of exponential smoothing when a time series exhibits a positive trend?

The forecast will lag actual values and overshoot actual values if the time series exhibits a negative trend

Judgmental forecasting

A forecasting method that relies upon the opinions and expertise of people in developing forecasts when no historical data are available.

Grassroots forecasting

An approach that involves asking those close to the end-user, such as salespeople, about the customers' purchasing plans.

Delphi method

A forecasting approach that gathers individual judgments and opinions of key personnel based on their experience and knowledge.

What is single exponential smoothing (SES)?

A forecasting technique that uses a weighted average of past time-series values to predict the next period's value.

What is regression analysis?

A method for building a statistical model that defines a relationship between a single dependent variable and one or more independent variables.