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Desired end result
greater value for the end user or consumer
Demand Management
To estimate and manage customer demand and use this
information to make operating decisions.
To further the ability of firms throughout the supply chain to
collaborate on activities related to the flow of products, services,
information, and capital
Demand forecasting
foundation of many SC manager decisions
how to balance supply and demand
all forecasts will be wrong
select the forecasting technique with the lowest forecast error
forecasts
serve as a plan for both marketing and operations to set goals and develop execution strategies
two typs of demand forecasting
independent
dependent
independent demand
demand for the primary item, known as base demand
dependent demand
demand directly influenced by demand for an independent item
fluctuation types
random
trend
seasonal
random fluctuation
cannot be anticipated and is usually the cause to hold safety stocks to avoid stockout
trend fluctuation
gradual increase or decrease in demand over time for an organization
seasonal fluctuation
patterns will normally repeat themselves during the year
weighted moving average
assigns a weight to each previous period with higher weights usually given to the more recent demand
adds more weight to the recent months
pros of weighted moving average
allows emphasis on more recent demand as a predictor of future demand
cons of weighted moving average
not easily accommodate seasonal demand patterns
simple moving average
make forecasts based on recent demand history and allows for the removal of random effects
distributes the weight equally throughout the past months
pros of simple moving average
quick and easy to use
cons of simple moving average
old demand dropped quickly; not accommodate seasonal, trend, or business cycle influences
common qualitative methods
executive judgement
sales force composite
market research/survey
delphi method
executive judgement
expert opinions from different departments is averaged
sales force composite
forecast based on the opinions of salespeople
market research/survey
directly collecting information from consumers about purchases
Delphi method
panels of experts individually questioned (not as a group); effective for long range forecasting
sales and operations planning (S&OP)
it is necessary for an organization to arrive at a forecast internally that all functional areas agree upon and can execute, this process can be used to arrive at this consensus forecast.
CPFR
collaborative, planning, forecasting, & replenishment
CPFR
Trading partners (retailers, distributors, and manufacturers) use available internet-based technologies to collaborate on operational planning, allowing them to agree to a single forecast for an item where each partner translates this forecast into a single execution plan
order management
defines and sets in motion the logistics infrastructure of the organization
two phases of order management
influence and order
execute the order
Phase 1: influence and order
organization attempts to change the manner by which customer place orders
phase 2: execute the order
order receipt: electronic vs. manual
order fulfillment: inventory policy, number location of warehouses
order shipments: transportation mode choice
customer service
Anything that touches the customer, including all activities that impact information flow, product flow, and cash flow between the organization and its customers
customer service as a philosophy
elevated to an organization-wide commitment
customer service as a performance measure
assess performance through measures like on-time delivery and percentage of orders filled complete
customer service as an activity
a task that an organization must perform to satisfy customers
customer relationship management (CRM)
align the supplier’s resources with its customers in a manner that increases both customer satisfaction and supplier profits
how much, how, when, what in CRM
maximize efficiencies of the shipping organizations logistics network
4 basic steps in the implementation of the CRM process
segment the customer base by profitability
identify the product/service package for each customer segment
develop and execute the best processes
measure performance and continuously improve
what is activity based costing- principle behind why companies use this
A methodology that measures the cost and performance of activities, resources, and cost objects. Resources are assigned to activities, then activities are assigned to cost objects based on their use. ABC recognizes the causal relationships of cost drivers to activities
customer segmentation
danger zone
build segment
cost engineer segment
protect segment
Danger Zone segment strategies
change the manner in which the customer interacts with the shipper to move the customer to another segment
charge the customer the actual cost of doing so
or switch the customer to an alternative distribution channel
which customer is the least profitable
danger zone customers
which customer is the most profitable
Protect customers
strategies aim to maintain the cost to serve but build net sales value to help drive the customer into the “Protect” segment
build segment
strategies aim to find more efficient ways for the customer to interact with the shipper
cost engineer segment
Protect segmant
most profitable, provide shipper with the most cost efficiencies
Order to cash cycle
refers to outbound-to-customer shipments
all of the activities that occur when an order is received by a seller until the product is received by the buyer, plus the flow of funds back to the seller based on the invoice.
replenishment cycle
term is used more frequently when referring to the acquisition of additional inventor as in materials management
marketing objective
allocate resources to the marketing mix to maximize long-term profitability of the firm
logistics objective
minimize total costs, given customer service objectives where: total cost= transportation cost+ warehousing costs+ order processing and information costs + lot quantity costs + inventory carrying costs
stockout
occurs when desired quantities of finished goods are not available when or where a customer needs them
Item
a case, an inner-pack, or an “each” on an order
line
a single product on a multiple product order
item fill rate
the percentage of items in stock available to fill an order
line fill rate
the percentage of total lines filled complete on an order
four elements of customer service
time
dependability
communications
convivence
time
absolute length of lead time
sellers
order to cash
buyers
order cycle, lead time, replenishment time
dependability
consistent lead time, safe delivery, correct orders
communications
pre-transaction, transaction, post-transaction
convience
flexible logistics service level
the buyer waits until the product is available
theoretically, that will cost the company $0 more than likely when the product substitutability is low
the buyer back-orders the product
increase in variable costs for the seller
the seller loses current revenue
buyer cancels order (or portion of) negative impact on sellers’ revenue
the seller loses a buyer and future revenue
worst situation for seller- difficult to calculate
break even point
where the cash flow lost and inventory investment cross
inventory on the balance sheet is an
asset
variable expense on the income statement, direct impact on COGS
Direct impact on service levels
Part of corporate strategy
Constant balancing of too much vs. too little
Major logistics cost tradeoff is between transportation and inventory
inventory
COGS
cost of goods sold
basic inventory management
A set of techniques used to manage the inventory levels within different companies in a supply chain
• Goal is to reduce cost (efficiency) while maintaining service levels customers require (effectiveness)
• Forecast + product price = inputs that IM needs to balance
3 types of inventories
cycle stock
safety stock
seasonal
cycle stock
needed to meet demand between normally scheduled orders
safety stock
necessary to compensate for demand uncertainty and order lead times
seasonal stock
produced and stockpiled in anticipation of future demand
rationale behind different types of inventories
1. Procurement (purchase discounts), production (long production run), and
transportation (freight rate discounts)
2. Demand- and supply-side uncertainties
3. Inventory costs associated with goods in motion during transportation time
period.
4. Inventory costs associated with goods in process during manufacture or
assembly of a complex product.
5. Seasonality in raw materials supply (e.g. production, transportation), in
demand for finished product, or in both
6. Inventory held in anticipation of an unusual event (e.g. strikes, significant price
increase, extreme weather)
inventory carrying costs
Incurred by inventory at rest and waiting to be used. Four major components: Capital cost, Storage space cost, Inventory service cost, & Inventory risk cost.
ordering and setup costs
Refers to the expense of placing an order, excluding the cost of the product itself. Setup cost refers to the expense of changing/modifying a production/assembly process to facilitate line changeovers.
expected stockout cost
Cost associated with not having a product/materials available to meet customer/production demand. Most organizations hold safety stock or buffer stock, to minimize the possibility of a stockout and costs of lost sales
in transit inventory carrying cost
Generally, carrying inventory in transit costs less than in warehouses. However, in-transit inventory carrying cost becomes especially important on global moves since both distance & time increase
what is different between ordering and inventory carrying costs
Ordering cost and carrying cost respond in opposite ways to changes in the number of orders or size of individual orders
economic order quality
most cost effective amount to purchase at a time
order a fixed amount each time reordering takes place
limitation- assumes consumer demand is constant
fixed order quantity EOQ model
inventory is reordered when the amount on hand reaches the reorder point. The reorder point quantity depends on the time it takes to get the new order and on the demand for the item during this lead time
JIT or just in time
an operating concept based on delivering materials in exact amounts and at the precise times that organizations need them—thus minimizing inventory costs.
facts about JIT
Designed to manage lead times and eliminate waste
Ideally, product should arrive exactly when an organization needs it, with no tolerance for late or early deliveries
High priority on short, consistent lead times but reliability is also important
4 major elements of JIT concept
zero inventories
short, consistent lead times
small, frequent replenishment quantities
high quality (zero defects)
Materials requirement planning (MRP)
designed to translate a master production schedule into time-phased net inventory requirements and the planned coverage of such requirements for each component item needed to implement this schedule
Begins by determining how much end products (independent demand items) customers desire and when they are needed
Timing and component needs based on end-product demand are disaggregated
what planning has similar objectives to just in time
Materials requirement planning
MRP
materials requirement planning
advantages to MRP
Attempt to maintain reasonable safety stock levels and to minimize or eliminate inventories whenever possible.
Can identify process problems and potential supply chain disruptions long before they occur and take the necessary corrective actions.
Production schedules are based on actual demand as well as on forecasts of independent demand items.
They coordinate materials ordering across multiple points in an organization’s logistics network
disadvantages to MRP
• Application is computer intensive, and making changes is sometimes difficult once the system is in operation.
• Both ordering and transportation costs might rise as an organization reduces inventory levels and possibly moves toward a more coordinated system of ordering product in smaller amounts to arrive when the organization needs it.
• Not usually as sensitive to short-term fluctuations in demand as are order point approaches (although they are not as inventory intensive, either).
• Frequently become quite complex and sometimes do not work exactly as intended.
VMI
Vendor management inventory
DRP
distribution requirements planning
distribution requirements planning
systems accomplish for outbound shipments what MRP accomplishes for inbound shipments.
Determines replenishment schedules between a firm’s manufacturing facilities and its distribution centers.
Usually coupled with MRP systems to manage the flow and timing of both inbound materials and outbound finished goods.
Underlying rationale is to more accurately forecast demand and the share that information for use in developing production schedules
Vendor management inventory
manages inventories OUTSIDE a firm’s logistics network, specifically inventories held in its customer’s distribution centers.
How does VMI work
1. The supplier and its customer agree on which products are to be managed using VMI in the customer’s distribution centers.
2. An agreement is made on reorder points and economic order quantities for each of these products.
3. As these products are shipped from the customer’s distribution center, the customer notifies the supplier, by SKU, of the volumes shipped on a real- time basis.
4. The supplier monitors on-hand inventories in the customer’s distribution center, and when the on-hand inventory reaches the agreed-upon reorder point, the supplier creates an order for replenishment, notifies the customer’s distribution center of the quantity and time of arrival, and ships the order to replenish the distribution center.
advantages to VMI
The knowledge gained by the supplier of real-time inventory levels of its products at its customer locations allows the shipper more time to react to sudden swings in demand to assure that stockouts do not occur.
disadvantages to VMI
Suppliers’ uses of VMI to push excess inventory to a customer distribution center at the end of the month in order to meet monthly sales quotas, resulting in the customer holding extra inventory, adding costs to its operations.
inventory classification techniques
Multiple product lines and inventory control require organizations to focus on more important inventory items and use more sophisticated and effective approaches to inventory management
ABC classification technique
assigns inventory items to one of three groups according to the relative impact or value of the items that make up the group. the first group of items are considered to be the most important, the next group of items lesser importance, and the next group of items least important.
Quadrant model classification technique
finished goods inventories using value and risk to the firm as the criteria. Value is measured as the value contribution to profit; risk is the negative impact of not having the product available when it is needed
distinctives
o high safety stocks
o more than one stocking location
o produce to inventory
