SCM 301 - Exam 4

Demand Planning

the combined process of forecasting and managing customer demands to create a planned pattern of demand that meets the firm’s operational and financial goals

demand forecasting

decision process in which managers use data to predict demand patterns

demand management

proactive approach to influence patterns of demand using pricing, advertising, merchandising, and other tactics

Costs of Inaccurate Forecasts

• Too High - Overestimate: money lost in holding inventory that is never sold, lost capacity, lost wages spent paying workers

• Too Low - Underestimate: lost sales, overused capacity, overworked employees, lower product availability

Two Important Aspects of Forecasts

1. Expected Level of Demand

   1. the level of demand may be a function of some structural variation such as trend or seasonal variation

2. Accuracy

   1. related to the potential size of forecast error

Forecasts used to Plan the System

• types of products and services to offer

• facility and equipment levels

• facility location

LONG RANGE

Forecasts used to Plan the use of the System

• inventory management

• workforce levels

• purchasing

• production

• budgeting

• scheduling

SHORT AND MEDIUM RANGE

Features Common to All Forecasts

1. techniques assume some underlying causal system that existed in the past will persist into the future

2. forecasts are not perfect

3. forecasts for groups of items are more accurate than those for individual items

4. forecast accuracy decreases as the forecasting horizon increases

Elements of a Good Forecast

It should be:

• timely

• accurate

• reliable

• expressed in meaningful units

• in writing

• simple to understand and use

• cost effective

Autocorrelation

relationship of past and current demand

Forecast Error

“Unexplained” component of demand

5 Steps of Forecasting Process

1. identify the users and decision making processes that the forecast will support

2. identify likely sources of the best data inputs

3. select forecasting techniques that will most effectively transform data into timely, accurate forecasts over the appropriate planning horizon

4. document and apply the proposed technique to the data gathered for the appropriate business process

5. monitor the performance of the forecasting process for continuous improvement

Judgement Based Forecasting

• relies on expert opinions

• captures hard to model demand factors

• ideal when historical data is limited or unreliable

Common Approach Types

1. grassroots: inputs from employees close to products or customers

2. executive judgment: input from high level managers with experience

3. historical analogy: assume past demand is a good predictor of future demand

4. marketing research: examine patterns of current customers from surveys, interviews, etc

5. Delphi method: repeated inputs from a panel of experts

Time Series Analysis

uses historical data arranged in order of occurrence

Causal studies

search for cause and effect relationships among variables

Moving Average

simple average of demand from some number of past periods

Moving Average and Number of Data Points

• fewer data points used → more responsive

• more data points used → less responsive

  • smoother forecasts

Weighted Moving Average

assigns different weights to each period’s demand based upon its importance

Exponential Smoothing

a moving average approach that put less weight on further back in time data

• a weighted averaging method that is based on the prior forecast plus a percentage of the forecast error

Smoothing Coefficient

weight given to most recent demand

Alpha

• a number between 0 and 1 that controls how much weight the model gives to the most recent data

• High Alpha: close to 1; means the forecast reacts quickly to recent changes → trusts recent data a lot

• Low Alpha: close to 0; means the forecast reacts slowly → smooths out fluctuations and relies more on pasts data

Simple Linear Regression

• identifies the best-fit relationship between an independent variable (t) and a dependent variable (d_t)

• determines optimal parameters a and b in equation

• parameters are chosen to minimize the difference between actual and predicted values across all data points

Least Squares Regression

• linear regression minimizes the sum of squared forecast errors

• because it minimized squared errors, it is called least squared regression

• produces optimal parameters a and b that best fit the straight-line relationship between variables

Forecast Error

actual demand - forecasted demand for each time period

• Positive Error: forecast was too low (overly pessimistic)

• Negative Error: forecast was too high (overly optimistic)

Forecast Accuracy

• measures how closely forecasts track actual demand

• any deviation - whether too high or too low - reduces accuracy

Mean Forecast Error: Forecast Bias

• tendency to over or under predict future demand (forecast error)

• the average of all forecast errors

• indicates whether a method consistently over predicts or under predicts demand

• Positive Bias: indicates that over time forecasts tend to be too low

• Negative Bias: indicates that forecasts tend to be too high

Mean Percent Error (MPE)

average error represented as a percentage of demand

Mean Absolute Deviation (MAD)

the average size of forecast errors, irrespective of their directions. AKA mean absolute error

Mean Absolute Percentage Error (MAPE)

indicates how large errors are relative to the actual demand quantities

• relationship of error with demand

• a percent

Mean Squared Error (MSE)

a more sensitive measure of forecast errors that approximates the error variance

Tracking Signal

the ratio of a running total of forecast error to MAD that indicates when the pattern of forecast error is changing significantly

• compares forecast bias to forecast accuracy over n periods

• control limits fall between ± 3 and ± 8

• smaller limits → more sensitivity; used for high-volume or high-revenue items

Adaptive Forecasting

• technique that automatically adjusts forecast model parameters in accordance with changes in the tracking signal

Rule 1 of Forecast Accuracy: Short Term Forecasts are more accurate than long-term forecasts

• easier to predict near-future outcomes than distant ones

• longer horizons increase exposure to unknown factors affecting demand

Rule 2 of Forecasted Accuracy: Aggregated Forecasts are more accurate than detailed forecasts

• aggregation cancels out individual forecast errors

• applies to both product aggregation and geographic aggregation

• aggregate demand is generally more stable and predictable than individual items

• ex: forecasts for multiple products are less likely to all be wrong in the same direction

Rule 3 of Forecast Accuracy: Using Multiple Information sources improves forecast accuracy

• different market forces affect demand; single resources may be biased or incomplete

• combining historical data, expert judgment, sales estimates, etc produces a more complete and unbiased forecast

• multiple sources reduce the likelihood of consistent directional errors

Forecasting (vs demand management)

• reactive approach: assumes demand fluctuations are mostly outside the firm’s control

• focuses on predicting and reacting to changes in demand

Demand Management (vs Forecasting)

• proactive approach: aims to influence timing, pattern, and certainty of demand

• adjusts product characteristics such as price, promotion, and availability

• Goal: achieve sales objective while aligning with supply chain capacity

4 Basic Tactics to Manage Demand

1. Influence timing or quantity through pricing and promotions

2. Manage timing of order fulfillment

3. Substitute Products or Providers

4. Provide Information to Customers

Reducing Lead Time

shorter lead times → shorter forecast horizons → more accurate forecasts

Collaborative Planning, Forecasting, and Replenishment (CPFR)

• Market Planning: discuss new products, store changes, promotions

• Demand + Resource Planning: forecast customer demand + shipping requirements

• Execution: place and deliver orders, track sales

• Analysis: monitor performance, identify improvements

• Goal: meet demand with minimal inventory, lead time, and cost

Sales and Operations Planning (S&OP)

process for integrating marketing and operations plan to develop a tactical plan

• attempt to balance supply and demand

Aggregate Operations plan

translates annual and quarterly business plans into broad labor and output plans for the intermediate term

Benefits of Sales & Operations Planning

• improved forecast accuracy

• higher customer service

• more stable supply

• better new product introduction

• better organizational teamwork

• faster and better aligned decision making

• greater accountability for performance

• better business visibility

Long Range planning

• planning focusing on a horizon greater than 1 year

• usually performed annually

Intermediate-Range planning

• planning focusing on a period from 3 to 18 months

• time increments are weekly, monthly, or quarterly

Short-Range planning

• planning covering a period from a day to 6 months

• daily or weekly time increments

Production Rate: Aggregate specifies combo of

units completed per unit of time

Workforce Level: Aggregate specifies combo of

number of workers needed in a period

Inventory On Hand: Aggregate specifies combo of

inventory carried from previous period

Tradeoffs involved in production planning strategies

• workers employed

• work hours

• inventory

• shortages

Chase strategy

• match the production rate by hiring and laying off employees

• must have a pool of easily trained applicants to draw on

Stable Workforce strategy - variable work hours

• vary the number of hours worked through flexible work schedules or overtime

Level Strategy

• demand changes are absorbed by fluctuating inventory levels, order backlogs, and lost sales

Subcontracting

• similar to chase, but hiring + laying off are translated into subcontracting and not subcontracting

• outsource

• decrease cost, but increase supervising, transportation, etc

Budgets

• operations managers are generally required to submit annual budget requests (sometimes quarterly)

Accurate medium-range planning increases the likelihood of:

• receiving the requested budget

• operating within the limits of the budget

Aggregate Production Planning

• balances production, inventory, resources and demand

• specifies production rates, inventory, employment levels, backlogs, possible subcontracting, and other resources needed to meet the sales plan

Holding Inventory: Aggregate Production Planning costs

having inventory on hand

Regular Production: Aggregate Production Planning costs

average labor and benefits

Overtime: Aggregate Production Planning costs

working more hours than standard

Hiring: Aggregate Production Planning costs

finding, acquiring, and training new employees

Fire/Layoff: Aggregate Production Planning costs

separation packages

Backorder/Lost Sales: Aggregate Production Planning costs

expediting supply, lost goodwill

Level Planning Strategy

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

• “This extra inventory will supply me for the future”

• cyclical demand

• extra level of inventory over demand

Chase planning strategy

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

• Hire + Fire, Use overtime, Subcontract

Hybrid Planning Strategy

• combination of level and chase strategies

• production follows demand but isn’t exactly on it

• inventory can supply in the future

• MOST USED

Materials Requirement Planning (MRP)

• calculates when and how much of RM, parts, and subassemblies are needed for production

• computes demand for dependent items

• matches supply with demand so the right materials are available exactly when needed

• is a push system

• What is needed? How much is needed? When is it needed?

Distribution Requirements Planning (DRP)

• plans when and how to supply FG at the right time to the right places in the distribution system

• computes demand for FG in the distribution system

Capacity Requirements Planning (CRP)

• determines if sufficient resources (labor, equipment, space, suppliers) are available when needed for production

independent demand

is created by customers; includes the demand for finished products and replacement parts

dependent demand

is dependent on decisions made by internal operations managers and is usually derived from demand for other items

MRP uses three key information inputs:

1. master production schedule (MPS)

2. bill of materials (BOM)

3. inventory records

Master Production Schedule (MPS)

DEF: schedule for building finished products

• forecast, actual orders, other demand, end item inventory

• time bucket: time period used for planning

• cumulative lead time: total time to plan, order, receive materials, and produce the product

• planning horizon: the full time span covered by the MPS

Available to Promise (ATP)

• the portion of the MPS quantity not yet committed to customer orders

• used by sales and marketing to demand when can be promised to new customers

• Units planned for week x - units committed

Rough Cut Capacity Planning (RCCP)

• checks whether critical resources are available to support the MPS

• MPS does not consider availability of key resources (labor, materials, equipment)

• if resources are insufficient, adjustments have to be made

Bill of Materials (BOM)

DEF: a detailed recipe for an end item, listing all required RM, parts, and subassemblies

• specifies quantities needed to make one unit and the sequence of assembly

• created during product development and updated by product engineering when changes occur

inventory records

contains information about inventory including amount on hand

inventory status file

file that contains detailed inventory and procurement records

Lot for Lot (L4L) - Lot Sizing Strategies

• order exactly what is needed for each period

• minimizes carrying cost; maximizes ordering/setup cost

Fixed Order Quantity (FOQ) - Lot Sizing Strategies

• same order size each time

• may require ordering multiples

Periodic Order Quantity (POQ) - Lot Sizing Strategies

• order enough to cover demand for a set number of future periods

Gross Requirements

• total amount needed for each period

• MPS for the end item drives gross requirements

Scheduled Receipts

• quantities ordered previously but not yet received, arriving at the start of a period

Requirements Explosion

• Net requirements = Gross Requirements - (Scheduled Receipts + Beginning Inventory)

• If available supply is greater than or equal to gross requirements, net requirements = 0

Available Inventory

End of Period inventory = BI + Scheduled Receipts + Planned Order Receipts - Gross Requirements

Planned Order Receipts

• quantities planned to arrive in a future period

• under Lot for Lot, planned order receipts = net requirements

Planned Order Releases

• orders scheduled backward from planned receipts by lead time

• when released, they become future scheduled receipts

Primary outputs

planned order release schedules that initiate purchasing and production at the correct time

secondary outputs

• reports on cost, inventory levels, and schedule attainment to evaluate performance

• exception reports highlight when actual performance deviates from the MRP plan

A load (in CRP)

amount of work assigned to a machine, worker, or work center in a time period

Project

DEF: infrequent set of activities with cost and schedule constraints

• unique, discrete beginning and end

• multidisciplinary

• staffed with people pulled fro other tasks

• compete for resources

A successful project meets objectives of:

1. within budget (costs - cheapest)

2. on time (Schedule)

3. customer expectations (better or same quality as competition)

Project Life Stages

1. definition

2. planning

3. execution

4. completion

Project Definition (Stage 1)

• begins with the initial idea and low/zero resources

• developing a business case

• evaluating the project

• selecting and funding it

• identify project’s clients or customers

Project Objective Statement should include

• scope and major deliverables (desired results, milestones, products, documents)

• schedule (start and end dates)

• resources required (budget, person-months, special needs)

Functional Project

a project that is housed and controlled with in a single functional department during each project stage

Pure (autonomous) Project

a project that is housed outside normal functional departments, with all stages managed by a single leader

Matrix Project

a project in which a full-time project manager works together with functional managers to control budgets and to supervise functional workers who are loaned to the project time to time

Project Charter

DEF: establishes initial plan for the project, deliverables, schedule, and budget

• defines purpose, role, and priority of project

• describes customers, team members, and other key stakeholders

• presents the budget, high level schedule, and major deliverables

Work Breakdown Schedule (WBS)

detailed hierarchical list of project activities

• lists all activities involved in the project

Critical Path Method (CPM)

• emphasis on most important activites

• tasks have well-defined start and end

• tasks are independent

• task sequence can be established