Supply Chain Exam 1 (Chapters 1-3)

Forecasting and Demand Planning

where all supply chain planning activities are derived and are crucial to customer satisfaction

Forecasting

where the forecast is developed through data analysis and judgment (must have a formal forecasting process to develop an agreed upon set of numbers)

Demand Planning

combines statistical forecasting techniques and judgment to construct demand estimates for products and services

Demand

the need for a product or component

Independent Demand

demand for an item unrelated to the demand for other items such as a finished product, spare or service part (demand is forecasted)

Dependent Demand

demand for an intel directly related to other items or finished products, such as a component or material in making a finished product (calculated demand)

Forecast

an estimate of future demand

Statistically, forecasting is inaccurate but still useful

True

Forecasting error

Can be minimized by considering what influences demand, if something is farther out in the future, the greater the deviation will be

Forecasting techniques

Qualitative and Quantitative

Qualitative Forecasting

based on opinion and intuition

Quantitative Forecasting

uses mathematical models and historical data to make forecasts

Types of qualitative forecasting

Personal insight
Jury of executive opinion
Delphi Method
Historical Analogy
Customer Survey

Personal Insight

depends on skill and experience of the most senior person

Jury of executive opinion

people who know the most about the product and would like to form a jury

Delphi Method

same as jury but each participants input is collected separately so people are not influenced by one another

Historical Analogy

judgmental forecasting technique based on identifying a sales history comparable to the present situation

Customer Survey

customers directly approached and asked for their opinions about a product

Types of Quantitative Forecasting

Time Series
Cause and Effect

Time Series

based on the assumption that the future is an extension of the past

Cause and Effect

assumed that one or more factors predict future demand

Variations in Quantitative Forecasting

Trend Variations
Random Variations
Seasonal Variations
Cyclical Variations

Trend Variations

movement of a variable over time, can be linear, s-curved, asymptotic, or exponential

Random Variations

Instability in the data caused by random occurrences such as war, weather emergencies, labor strikes, etc.

Seasonal Variations

repeating patterns of demand within one single year such as holiday shopping, swimsuit sales, regional demand, etc.

Cyclical Variations

wavelike patterns that last longer than one year and can extend over multiple years, is not easily predicted, examples include business cycles, china’s gdp, bull/bear markets

Time Series Forecasting

The collection and study of past data of a given time series to generate probable future values for the series, the act of predicting the future by understanding the past

Types of Time Series Forecasting

Naive Forecasting
Simple Moving Average Forecasting
Weighted Moving Average Forecasting

Exponential Smoothing
Linear Trend Forecasting

Naive Forecasting

Sets the demand for the next period to be precisely the same as the demand in the last period

Simple Moving Average Forecasting

uses a calculated average of historical demand during a specified number of the most recent periods to generate the forecast (fails to identify trends or seasonal effects)

Weighted Moving Average Forecasting

Similar to a simple moving average except not all periods are valued/weighted equally
- experience/trial error, best with recent past

Exponential Smoothing

sophisticated version of the weighted moving average, requires three essential elements: weighs past observations with exponentially decreasing weights to forecast values
- the last period’s actual demand
- the previous period’s forecast
- smoothing factor (number greater than 0 less than 1)

Linear Trend Forecasting

Imposing a best fit line across the demand data of an entire time series, this line is extended out into the future while maintaining the slope

Types of Cause and Effect Forecasting

• Simple Linear Regression

• Multiple Linear Regression

Cause and effect reasoning

A statistical measure that determines the strength of the relationship between one dependent variable and a series of independent variables

Simple Linear Regression

models the relationship between a single independent variable and a dependent variable by fitting a linear equation to the observed data

Multiple Linear Regression

models the relationship between two or more independent variables and a dependent variable (demand) by fitting a linear equation to the observed data

Fundamentals of Forecasting

1. Your forecast is most likely wrong

2. The more granular the forecast, the less accurate it is

3. It is easier to forecast next month more accurately than it is to forecast next year

4. Simple forecast methodologies > complex ones

5. A correct forecast does not prove your forecast method is correct

6. If you don’t use the data regularly, trust it less when forecasting

7. All trends eventually end

8. It’s hard to eliminate bias, so more forecasts are biased

9. Technology is not the solution to better forecasting

10. Forecasting is a blend of art of science

Demand planning immaturity

A significant obstacle in meeting their supply chain goals

Social media sentiment can be used to

• Evaluate the health of a brand

• Improve demand prediction

• Address a crisis

• Research the competition

Forecast Error

the difference between the actual demand and the forecast demand, the error is quantified as an absolute value or as a percentage (error value/actual demand)

Error measurement

Critical in tracking forecast accuracy, monitoring for exceptions, and benchmarking the forecasting process

Mean Absolute Deviation (MAD) - only magnitude matters

measures the size of the forecast error in units, average of the unsigned (absolute) errors over a specified period - sum of(|actual demand - forecast demand|)/number of time periods then averages

Measures of Forecasting Accuracy (MAPE) - error and accuracy in percentage

Measures the side of the error in percentage terms, calculated as the average of the unsigned percentage error

Forecast Bias

consistent deviation from the mean in one direction, either high or low
- if the sum of the forecast error is not zero, there is bias in the forecast
- negative means demand was less than the forecast, positive means demand was more

Bullwhip Effect

businesses must be able to forecast demand to position inventory and other resources as customer demand is not perfectly stable

Collaborative Planning, Forecasting, and Replenishment (CPFR)

A business practice that combines the intelligence of multiple trading partners who share their plans, forecasts, and delivery schedules to ensure a good flow of goods and services

Reducing the bullwhip effect means

reduction of the safety stock and associated costs within and across trading partners in a supply chain

Supply Chain Agility

Is an organization’s ability to quickly and efficiently respond to changes without sacrificing quality or cost

Supply Chain

Any organization in that offers a product or service which is created from materials, equipment, labor, time, money, and other resources

Producing and delivering products and services requires..

Suppliers, manufacturers, and customers

The structure of a supply chain is facilitated through the use of…

Logistics

Every link in the supply chain is both a

customers of their suppliers and a supplier to their customers

Supply chain management is based on two ideas..

• Every product that reaches an end user is the cumulative effort of multiple organizations

• Most organizations have only focused on what was happening within their own four walls

• SCM represents the active management of supply chain activities to maximize customer value and achieve a sustainable competitive advantage

Benefits of SCM include…

• Improved customer service

• Lower costs

• Increased revenue

• Better asset utilization

• Reduced inventory and operating expenses

Two main reasons that companies implement supply chain management are to

• Achieve cost savings

• Better coordinate

Intangible products

products that cannot be physically touched, customers are paying for the labor and intellectual property

Services are..

produced and consumed simultaneously and cannot be produced in advance or inventoried

SCOR Model

Plan, Source, Make, and Deliver/Return

Planning

establishes the parameters within which the supply chain will operate

Sourcing

identifying the suppliers that provide the materials and services needed for the supply chain to deliver the finished products desired by the customers, building a solid relationship with those suppliers

Make

converting materials into finished products, manufactured, tested, packaged, and scheduled for delivery

Deliver

Also known as the logistics phase, part of the supply chain that oversees execution of forward flow of goods to meet customer requirements

Return

Reverse logistics, deals with planning and controlling of the process of moving goods from the point of consumption back to the point of origin, goes against the normal outbound flow of products to the market

Enable

Enabling processes facilitates a company’s ability to manage the supply chain and spread throughout every stage

Efficient vs Responsive

An efficient supply chain is configured to maximize output with a minimum input level at the lowest possible cost
A responsive supply chain is configured to be fast and flexible to respond quickly to dynamic market demand and new product launches

Make to stock

Producing finished products based on anticipated demand before receipt of an actual customer

Make to order

Producing finished products in response to actual demand after the actual customer order is received

Sales and Operations Planning (S&OP)

A process that integrates customer focused marketing plans with the management of the supply chain

Just in Time

A philosophy of manufacturing based on the elimination of waste and continuous improvement

Collaborative Planning, Forecasting, and Replenishment (CPFR)

Helps trading partners jointly plan key supply chain activities

Total Quality Management (TQM)

a management approach where all members of an organization take ownership of quality

Supply Chain Planning

is the element of supply chain management responsible for determining how best to satisfy the requirements created by the Demand Plan

Long Range Supply Chain Planning

involved planning for actions such as the construction of facilities and major equipment purchase (Aggregate Product Plan - APP)

Intermediate Range Supply Chain Planning

Shows the quantity and timing of end items (Master Production Schedule - MPS)

Short Range Supply Chain Planning

detailed planning process for components and parts to support the master production schedule (Materials Requirement Planning - MRP)

Aggregate Production Plan (APP)

Hierarchical planning process that translates annual business plans, marketing plans, and demand forecasts into a production plan for a product family in a plant or facility (costs relevant to inventory, setup, machine operation, hiring, firing, training, etc.), done for one year and carried over to the next 3 months

Purpose and goals of APP

establish production rates that will satisfy customer demand while keeping the workforce stable

• meet demand

• use capacity efficiently

• minimize costs

APP Strategies (Demand)

• Influencing demand through advertising, promotional plans, and pricing so it aligns with production capacity

• Backordering during high demand periods, anticipate demand greater than supply capabilities

• Counter seasonal product mixing - Develop a product with seasonal trends that level the cumulative required production capacity (lawnmowers and snow blowers)

APP Strategies (Supply)

• Change inventory levels - increasing to build stock in advance of demand, or reduce inventory below safety stock during peak demand to meet customer requirements

• Change capacity - vary production output through overtime idle time, hiring/layoff, using part time workers, etc.

If capacity and demand are equal..

emphasis should be placed on meeting demand as efficiently as possible

If capacity exceeds demand..

the firm might choose promotion and advertising to increase demand

If capacity is less than demand..

the firm might consider subcontracting a portion of the workload to an outside 3rd party

Master Production Scheduling (MPS)

represents what the company plans to produce, expressed in specific product configurations, quantities, and dates

• the plan that drives the business

• detailed APP

• may be represented by the appointment book

• planning horizon typically 3-18 months

Firmed Time Period

from the current date out several weeks into the future

• a firm time fence is established at the outer limit of the up front immediate time period to signify the point when changes can no longer be made automatically by the planning system

Planned Time Period

from the end of the firmed time period to the end of the planning horizon

• the planning system is free to create or make changes to planned orders in this time period based on the data and planning logic determined by the company

Basic Production Strategies

1. Level Production Strategy

2. Chase Production Strategy

3. Hybrid Production Strategy

Level production strategy

• Maintain a constant production rate and allows inventory and backlog to vary according to fluctuating demand

• No increases or decreases in labor (hiring or layoffs), materials, necessary resources, or associated production costs

• Allows finished goods inventory and backlogs to fluctuate up and down to meet demand

• Used when skill level, trainign required, or cost of hiring/terminating people is high

Chase production strategy

• Adjusts the production rate and capacity to match demand

• Company increases or decreases labor, materials, or necessary resources as needed

• Finished goods remain constant but production costs fluctuate

• Used when the skilll level, training required, and cost of hiring/terminating is low

• Works well for MTO items

Hybrid Production Strategy

• Production is set to match demand as closely as possible

• Company uses a combination of options such as varying production rate, building and temporarily holding inventory, working overtime, etc. to meet the demand plan

• Developed to minimize costs while still meeting demand

• No backlogs, but finished goods inventory and production costs can fluctuate up and down

Material Requirements Planning (MRP)

Computer based materials management tool that calculates the exact quantities, need dates, and planned order releases for all parts and materials for a product

• works well for make to stock but not make to order

Bill of materials

a document that shows an inclusive listing of all raw materials, component parts, and assemblies making up the final product

Single level bill of materials

displays components used directly in a parent item, with the quantity required for each component

Multilevel bill of materials

a display of all components directly or indirectly used in a parent, with the quantity for each from the planning factor, down to purchased parts and raw materials

Independent demand

The external demand for an item unrelated to the demand for other items (finished product)

Dependent demand

The internal demand for items that are assembled or combined to make up the final product (component parts)

Gross requirement

A time phased requirement before netting out on hand inventory and lead time

Net requirement

The unsatisfied item requirement for a specific period (Gross requirement - current on hand inventory)

Projected available inventory

Projected closing inventory at the end of a period (Beginning inventory - gross requirements + scheduled receipts + planned receipts from planned order releases)

Planned order release

A specific order for a particular item and quantity to be released to the shop or the supplier