supply chain
Test 1-S
Chapter 1-What is supply chain?
Supply Chain Management-management of the process and relationships in a supply chain, integrates supply and demand management within and across companies
A supply chain is 3 or more companies directly linked by the upstream and downstream flows of materials, energy, money, people, and information from a source to a customer.
v Supply Chain: Global network of organizations and activities involved in
v Operations: Management of process used to design, supply, produce, and deliver goods and services to customers, Integral part of supply chain management
Operations Management- is a process-orientated discipline
process is a system of activities that transforms inputs (raw materials) into valuable outputs (finished goods)
Operations Management partners
v Customers use or consume output
v Suppliers provide inputs
v Stakeholders have an interest in organizational wellbeing and performance
From OM to SCM
v Changes in the following have moved us from an OM to a SCM focus:
v Technology and Infrastructure: especially in communications and transportation-growth of supply chain partnerships,
v Barriers to trade: shifting economies, governmental control, and societal expectations-allowed for global supply chain networks
v Core capabilities: organizations focusing on their unique skills that create competitive advantage
v Collaborative networks: greater influence of, and reliance upon, business partners-allows for problems to be avoided
Definitions
Operations Management (OM): is the management of processes used to design, supply, produce, and deliver valuable goods and services to customers-important part of supply chain
Supply Chain (SC): the global network of organizations and activities involved in designing, transforming, consuming, and disposing of goods and services.
Supply Chain Management (SCM): is management of the processes and relationships in a supply chain- design/execution of relationships and flows connect parties/processes across a supply chain-way of viewing operations management
OM relationships
Customer Management: interfaces with customers and order processing and fulfillment
Supply Management: processes to identify, acquire and administer inputs
Logistics Management: movement of materials and information within, into and out of the firm
Supply chain strategy (chapter 2)
Supply chain strategy-Broad policies and plans for using the resources of a firm to best support its long-term strategy, Companies who have strategic supply chains-Walmart, Dell, Ikea
Levels 1: Corporate Strategic Planning
Corporate Strategy: overall mission and target businesses (types of businesses that the firm wants to be in)-Sets overall values, direction, and goal. As well as Long time horizon, Acquisitions and divestitures, Performance metrics, Risk management.
Level 2: Business Unit Strategic Planning
Strategic Business Unit (SBU): semi-independent organization for different products or markets-Identification of customer or market segments, Appropriate competitive priorities, Constrained by corporate strategy, more detailed, Shorter time horizon
Level 3: Functional Strategic Planning
Functional strategy: determines how functions support business unit strategies-Most detailed, Most constrained, Determines specific focus, Management of critical resources, Key metrics, Identification of capabilities, Coordination of activities
Developing a Value and operations strategy-
defined by choices made in 3 primary areas-
Critical Customer: critical to firm’s success and receives firm’s focus
Value Proposition: tangible and intangibles that customers expect from a firm/different than competitors offerings
Capabilities: what a firm does well, defines types of problems a firm can proficiently address
Critical customers
¨ Assessing Customers wants and needs:
¡ Order Winners: why customers choose your firm over a competitor
¡ Order Qualifiers: minimum standards to be met, traits that must be met at a certain level
¡ Order Losers: why customers avoid your firm, traits that if not met loss mean loss of current or future order
Competitive priorities
v How customer’s problem is ‘solved’
v Quality: fitness for consumption in terms of meeting customer needs & desires
v Timeliness: delivery or availability when customer wants
v Cost: expenses incurred is acquiring or using the product
Core capabilities: enable firm to meet customer expectations and are difficult for competitors to imitate, organizations focusing on their unique skills that create competitive advantages
Fit: alignment with capabilities, value proposition and critical customer
Supply chain Operations reference models
¨ SCOR identifies basic management practices at different operations levels, for benchmarking and strategy deployment
External
¡ Delivery reliability: correct items, place, time, condition, quantity, documentation and customer
¡ Responsiveness: supply chain velocity to customer
¡ Flexibility: agility to respond to change
Internal
¡ Costs: operational costs of the supply chain
¡ Asset management: effectiveness of assets in supporting demand satisfaction
Chapter 6-Quality
Quality Defined as conformance to customer specifications and expectations,As quality goes up, all else being equal, value goes up
-If quality surpasses customer needs, they may not value it… or pay for it
Product quality is defined as
• Product Quality: fitness for consumption in meeting customers’ needs and desires-determined by both a products design quality and its conformance quality
• Design Quality: match between designed features and customer requirements, aka how well a products design features match up to the requirements of a given customer
• Conformance Quality: meeting design specifications
• Quality Management: organization wide quality focus
TQM:
Total Quality Management- “Integrated business management strategy aimed at embedding awareness of quality in all organizational processes.”-process/philosophy for continuous improvement
Ways of improving Quality
n PDCA…. Plan-Do-Check-Act Cycle
– Circular, never ending problem solving process
n TQM – Total Quality Management
– Process/philosophy for continuous improvement
n Six Sigma
– Reduce variability to 3.4 defects/million opportunities
n Lean System-produces max levels of efficiency and effectiveness using minimal amount of resources
– Used in manufacturing
– Based on Just in Time (JIT) philosophy
PDCA-Deming wheel
n Plan
1. Problem identification & validation
2. Problem understanding
3. Problem cause(s)
n Do
1. Implement corrective action on trial basis
n Check
1. Collect data and evaluate against objectives
2. Is cause fixed and processes improved?
n Act
1. If successful, communicate results from trial
2. Implement standardized process system wide
Six Sigma Quality-
only 3.4 defects per million opportunities would occur –99.99999% confident
n A philosophy and set of methods companies use to eliminate defects in their products and processes
n Seeks to reduce variation in the processes that lead to product defects
n The name, “six sigma” refers to the variation that exists within plus or minus six standard deviations of the process outputs
DMAIC Cycle: a standard approach to 6 Sigma
n Define, Measure, Analyze, Improve, and Control (DMAIC)
n Developed by General Electric as a means of focusing effort on quality using a methodological approach
n Overall focus of the methodology is to understand and achieve what the customer wants
n A six-sigma program seeks to reduce the variation in the processes that lead to these defects
DMAIC – improving existing processes
Ø Define, Measure, Analyze, Improve, Control
DMADV – developing new product/services
Ø Define, Measure, Analyze, Design, Verify.
7 Analytical tools to improve quality
Flowcharts (define)-documents detailed steps in a process, often the first step in process reengineering
Run Chart (measure)-a chart that shows trends over time, thereby help to understand the magnitude of the problem at the define stage. Typically plot the median of a process
Pareto Charts(measure)-bar chart used to categorize data, and establish priorities for action
Check sheets (measure)-simple data check-off sheet designed to identify type of quality problems at each workstation
Histograms (measure)-shows the frequency distribution of observed values of a variable like service time at a bank window
Cause-and-Effect Diagrams-fishbone diagrams (analyze)
7. Process Control Charts-used in statistical process control-determines if variability over time is random or if it is due to an assignable cause, checks if range of variability is within the customer’s range of expectation.
Types of Process Control Charts
X-bar and R chart
• Measurable/continuous data
• X-bar: Chart based on the process average in a sample; measures sample means over time
• R: Chart based on the amount of dispersion in a sample
• Always use them together, they reveal different problems
P chart
n Attribute data
n Control chart based on proportion defective of samples taken
C chart
n Attribute data
n Control chart based on the number of defects in a sample
A type of statistical Process control (SPC)
n Used to monitor a variable that results from a particular process
n Plots the mean of a group of samples to determine the tendencies of the samples
n Does not indicate the distribution of the samples (they could all still be outside the customer’s acceptance range!)
Sources of variation
Ø Common causes of variation
– Random causes that we cannot identify
– Unavoidable
– e.g. slight differences in process variables like diameter, weight, service time, temperature
Ø Assignable causes of variation
– Causes can be identified and eliminated
– e.g. poor employee training, worn tool, machine needing repair
Managing uncertainty
The bullwhip effect –
The increasing variability of demand as one move upstream in a supply chain-also unexpected distortion of supply chain caused by repetitive variation in demand -communication can lower bullwhip effect
Causes and solutions
-price fluctuation-fixed by everyday low prices
-order batching-frequent ordering
-shortage gaming-forecast on sales history
-forecast inaccurate-information sharing
Demand variability amplified through supply chain by: Distorted and/or delayed information, Long lead times, Order batching, Over-reactions, Game-playing
Fundamental objectives of Supply Chain Management
Companies need a strategy to deal with the speed of change, high levels of uncertainty, ever changing tech, complex interdependent networks, outsourcing, and intense competition in todays global markets
3 decision phases in supply chain
SC Strategy or Design (several years)
– How to structure supply chain to support strategy
– Location production and warehouse facilities
SC Planning (3 months to 1 year)
– Yearly forecast
• Demand in different markets
– Flexibility in SC
SC Operations (weekly or daily)
- Focusing on filling orders
Two different ways to view the processes performed in a supply chain
1. Cycle view-useful when considering operational decisions because of clearly specific roles of each member of the SC/process in supply chain divided into a series of cycles each preformed at interface between 2 successive stages of a supply chain
2. Push/pull view-divided into 2 categories based on if they are executed in response to a customer order or in anticipation of a customer order
3 differences in the cycles
1. In customer order cycle the demand is unknown, other cycles the demand is uncertain but can be projected based on processes followed by the particular supply chain stage
2. Size of order-customer usually 1, retailer-100s or 1000s
3. As you move from customer to supplier the number of orders goes down but the size of the orders go up
Pull-initiated by customer order
Push-initiated in anticipation of customer order
Summary-minimize the bullwhip effect, set up your supply chain to support your company’s strategy
Supply chain Test 2 2
Chapter 7-Inventory management
Types of Inventories
Inventory: supply of items held to meet demand
Raw materials-anything you need to make final product
MRO-cleaning, stuff to run equipment
WIP-Work in Progress-how many on the assembly line
Roles of inventory
Balancing supply and demand:
Buffers against uncertainties: variation in supply and demand are managed with buffer (safety) stock-want to have a little bit extra incase demand goes up
Economies: price discounts or reduced shipping costs-talked more about in part two of
Geographic Specialization: supply and demand locations vary-supply and demand going to be different in each location
Financial Impact of Inventory
1. Carrying (Holding) Costs-what is inventory costing you financially to hold onto it
a. Opportunity cost of $ invested in inventory-money you could spend elsewhere
b. Storage (shelving, racks) & warehouse management-putting inventory accessed most often in easily accessible places
c. Taxes and Insurance-need if something happened to inventory
d. Obsolescence, spoilage and shrinkage
e. Material handling, tracking and management
2. Ordering and Setup Costs
a. Purchased items: placing and receiving orders-have to pay someone to manage those orders
b. Make items: change-over between items-when downtime on production line can’t make money because nothing is being made
3. Stockout Costs
a. Lost sale…Lost customer!-don’t have inventory in something can’t make money
b. Expediting-costly
c. Schedule disruption-
Measures of Inventory Performance
Days of Supply: length of time operations can be supported with inventory on-hand (forecasted)
Days of supply = Inventory/Daily demand
Service Level: ability to meet customer demand without a stock out
Stock out: no inventory is available
Managing Inventory -ABC Analysis
• ABC analysis: ranking inventory by importance
• Pareto’s Law: small percentage of items have a large impact on sales, profit or costs-20% of items will make up of 80% of your revenue
Inventory Information Systems and Accuracy
• Inventory Record Accuracy
– Cycle Counting: inventory is physically counted on a routine schedule (way to count inventory, tends to be more electronic now)
• Identification Systems:
– Global Trade Item Number (GTIN): identification system for finished goods sold to consumers
– RFID-started out in cattle
-Part Number: unique identifier used by a specific firm, can name whatever you want
Managing Inventory Across the Supply chain
• Vendor-managed Inventory (VMI): the vendor is responsible for managing inventory for the customer
– Vendor monitors and replenishes inventory balances
– Customer saves on costs
– Vendor has higher visibility of inventory usage
• Collaborative planning, forecasting and replenishment (CPFR): supply chain partners sharing information-creates streamlined supply chain process
Total Acquisition Costs
• Total Acquisition Costs: sum of all relevant annual inventory costs-all holding and order costs
– Holding costs: associated with storing and assuming risk of having inventory
– Ordering costs: associated with placing orders and receiving supply
TAC = annual ordering cost + annual carrying cost
Mathematical Models for determining order quantity
Economic Order Quantity (EOQ or Q system)
– An optimizing method used for determining order quantity and reorder points
– Part of continuous review system which tracks on-hand inventory each time a withdrawal is made
Why holding costs increase -More units must be stored if more are ordered
Why order costs decrease -Cost is spread over more units
EOQ model -when to model
In a perfect world get store would get new shipment when last item in stock is sold-obviously not going to happen because events that we cannot control happen (trucks break down, suppliers don’t have product in stock, ect)
Reorder Point
Reorder Point: minimum level of on-hand inventory that triggers a replenishment
Order Quantity
• Economic Order Quantity (EOQ): minimizes total acquisition costs; point at which holding and orders costs are equal
Customer Management Chapter 9
Customer management-intense focus on understanding and providing customers with products and services they desire
Customer Service: Lead Time performance
Lead time: time between start and end of an activity
– Design: conceptualize, design & test
– Order: place and schedule for production
– Procurement: source and arrive
– Production: start to end of production
– Delivery: warehousing & transportation to customer
Differing market orientations have different elements of Order-to-Delivery (OTD) lead time
– Engineer to Order (ETO): design and make to customer specifications
– Make to Order (MTO): make to customer demand from raw materials and components
– Assemble to Order (ATO): assemble to customer demand from generic subassemblies
– Make to Stock (MTS): build and stock in anticipation of customer demand
Customer Service: Service Reliability & the perfect order
Service Reliability: performance of all order related activities error-free
The Perfect Order: delivered without failure in any order attribute
– Complete
– On time
– Damage free
– Documentation correct
Customer Satisfaction: meeting or exceeding customer expectations, including:
Customer Satisfaction model gaps
Gaps occur at differences between
Knowledge: understanding of customer needs
Standards: internal performance and customer expectations
Performance: standard and actual performance
Communication: actual performance and communications about performance
Perception: customer’s view of performance and actual performance
Satisfaction: customer’s perceptions and expectations of performance
Limitations of Customer Satisfaction
• Beyond basic service to relationship building
• ‘Happy’ customer ≠ satisfied, loyal customer
• Customers are individual in their expectations
– Adapt product production and distribution
Customer Relationship management
Customer Relationship Management (CRM): technology enabled data gathering about customers to develop strategic relationships
Customer Management Summary
Basic customer service includes availability, lead-time performance and service reliability
Order-to-Delivery lead time is important
Satisfaction is achieved by meeting or exceeding customer expectations
Customer success focuses on strategic objectives and individual customer requirements
CRM involved data gathering and responding to the needs of specific customers
Multiple types of relationships and levels of commitment
Chapter 10-Supply Management
Supply management
• Identification, acquisition and management of inputs and supplier relationships
• Also called purchasing or procurement
Total Cost of Ownership
(Before, during and after)
v Purchase Price:
Ø Amount paid to the supplier
v Acquisition Costs:
Ø Bringing it to customer’s location
v Usage Costs:
Ø Warranty, training, downtime, maintenance
v End-of-Life Costs:
Ø Disposal, clean-up, obsolescence
Insourcing/Outsoucing
• Insourcing: inputs from within the firm-research and development-core competencies (not going to outsource those)
• Outsourcing: inputs from outside the firm-getting people from outside the firm to help
• Make or Buy Decision: choosing between insourcing or outsourcing
Sourcing Strategies
Supply Base Optimization: number of suppliers to use
– Too few increases shortage and price risks, innovation may be limited
– Too many increases complexity and makes supply management difficult
Capabilities and location are important:
– Proximity impacts ease of communication, transportation costs and community perceptions-close to supplier-communication easy, transportation cost lower, community perceptions if close together want to better community
– Consideration of trade barriers and incentives -inside vs outside US-might be cheaper to work with suppliers in Asia
– Global presence may impact access to markets
Supplier relationships
Asses and Select Suppliers
Competitive bidding: price is most important factor, specifications are clear, high value, several equally qualified sources
– Request for Proposal (RFP) or Quote (RFQ): describes what customer wants; supplier responds with cost and other data for consideration
Weighted Point Model: establishes performance categories that are weighted by importance
Online Reverse Auctions: suppliers bid in real time for buyer’s business
– Supplier can make multiple bids
– Usually price focused
Negotiation: bargaining process of planning, reviewing, analyzing, compromising to reach agreement
Managing Supplier Relationships-
Information sharing: buyers and suppliers need to share timely data about demand, supply and
Delivery-without data supplier cannot tell how they are doing and company can’t see how supplier is doing
– Electronic Data Interchange (EDI): structured, secure mode of transmitting data
• Supplier Scorecard: track and report supplier performance in key areas
• Supplier Certification: assessment of supplier’s ability to meet buyer’s needs
• Supplier Relationship Management (SRM): technology enabled data gathering about suppliers to manage strategic relationships
Logistics Management Chapter 11
Logistics management
Logistics Management: movement and storage of materials to meet customer needs and organizational objectives
- Includes forward and reverse flow (upstream, and downstream)
- Includes flow of materials and information
- Load, offload, move, sort and select material
Transportation Economics
- Economy of Scale: cost per unit of weight decreases as shipment size increases (first graph)
- Economy of Distance: cost per unit traveled decreases as distance moved increases (second graph)
Consolidation
• Consolidation: one large shipment made of many smaller shipments
- By Market Area: combine small shipments from one shipper going to the same area
- Pooled Delivery: combine small shipments from different shippers going to the same area
- Scheduled Delivery: delivery at specific times
5 basic modes of transportation
1. Motor
2. Rail
3. Air
4. Water
5. Pipeline
What is Intermodal Transportation?
¡ Use of two or more modes of transportation cooperating on the movement of a shipment by publishing a through rate.
¡ Logistics managers are looking for the best way to move shipments and often attempt to take advantage of multiple modes of transportation, each of which has certain useful characteristics.
Distribution Network Configuration
A Distribution Network includes warehouses, production facilities, retailers, and the inventory that flows between them.
Facility location
Three most important factors in real estate:
Location!
Location!
Location!
¡ Facility location - the process of identifying the best geographic location for a service or production facility
Primary Location factors
Ø Proximity to suppliers:
l Reduce transportation costs of perishable or bulky raw materials
Ø Proximity to customers:
l E.g.: high population areas, close to JIT partners
Ø Proximity to labor:
l Local wage rates, attitude toward unions, availability of special skills (e.g.: silicon valley)
Secondary location factors
¡ Community considerations:
l Local community’s attitude toward facility (e.g.: prisons, utility plants, etc.)
¡ Site considerations:
l Local zoning & taxes, access to utilities…
¡ Quality-of-life issues:
l Climate, cultural attractions, commute time..
¡ Other considerations:
l Options for future expansion, local competition…
Location Analysis methods
¡ Analysis should follow 3 step process:
l Step 1: Identify dominant location factors
l Step 2: Develop location alternatives
l Step 3: Evaluate locations alternatives
¡ Method for determining location:
l Factor-Rating Analysis-companies figure out factors most important to them, then assign weight to those (adds up to 100) then assign score to them of 1-5. Multiple factor weight and score to get weighted score-higher weighted score better
l Center of Gravity/Centroid Method
Distribution Strategies
Different approaches to moving products:
Warehousing
Ø Risk Pooling
Direct Shipment
Cross-Docking
1. Warehousing
Warehousing – Holding inventory received from suppliers in warehouses until it is needed by retailers
¡ Advantage:
Reduced inbound costs because all shipments are going to the same place.
¡ Disadvantage:
Likely to ship full truckloads (FTL) inbound but may ship less than full truckload (LFTL) outbound. Obviously, shipping FTL is cheaper!
One of the advantages of warehousing strategy is Risk Pooling:
l Inventory is held in one warehouse to service a large number of retailers
l This requires less inventory than if it was held at each individual retailer
2. Direct Shipment
Direct shipments from supplier to retailers
l Advantages
¡ Eliminates warehousing costs
l Disadvantages
l Less likely to ship FTL
l Each retail store will require higher levels of inventory and safety stock
3. Cross Decking
Continuous shipment from suppliers to warehouses where goods are redirected and delivered to retailers in continuous shipments
l Advantages
¡ Very cost effective
¡ Typically used in high-volume supply chains that have sophisticated information systems (Wal-Mart)
l Disadvantages
¡ Requires…
l excellent communication links
l very reliable transportation system
l accurate demand forecasts are critical
Supply chain Test 3
Chapter 13-Sales and Operational planning and demand planning
Sales and operations Planning
• Sales and Operations Planning (S&OP): process for integrating marketing and operations plan to develop a tactical plan-everyone uses same info to make decisions faster and better
• Attempt to balance supply and demand
Benefits of Sakes and operations planning
• Quantitative (hard) benefits:
– Improved forecast accuracy
– Higher customer service
– More stable supply
– Better new product introduction
• Qualitative (soft) benefits
– Better organizational teamwork
– Faster and better aligned decision making
– Greater accountability for performance
– Better business visibility
Aggregate Production Planning Costs
Aggregate Production Planning: balances production, inventory, resources and demand
– Holding Inventory: having inventory on hand
– Regular Production: average labor and benefits
– Overtime: working more hours than standard
– Hiring: finding, acquiring and training new employees
– Fire/Layoff: separation packages
– Backorder/lost sales: expediting supply, lost good-will
– Subcontracting: unit cost and loss of control
Demand Planning
• How do we meet demand?
• Services – A little tricky as “product” can not be inventoried.
• Manufacturing
– Make to order
– Make to stock
– Assemble to order
Matching Recourse Availability to market demand
Capacity
-The ability to produce at a given volume in a specified amount of time.
-Being able to do “enough” of something to meet demand
When capacity can’t meet demand, customers may choose to go elsewhere rather than wait
– A capacity shortage creates waiting lines and impacts response time, dependability of delivery, and flexibility.
– A backlog is a queue of orders waiting to be processed. Another term for a waiting line.
CAPACITY MATTERS
Demand-Capacity Match in Manufacturing
Aggregate Demand = total demand for all products and services
Two Alternatives for Demand Planning:
Demand Chase: Adjusting capacity to meet varying demand; hiring and firing workers
v Primary cost is hiring and firing costs
v Loss of labor quality
Level Production: Building up and using from inventory, while keeping workforce level-producing at a constant rate-building inventory up when demand is low and depleting inventory when demand is high
v Primary cost is inventory carrying cost
Aggregate Planning Strategies
Chase: change production to match demand, inventory remains relatively stable and low
Creating a chase Aggregate Plan
• Chase: change production to match demand, inventory remains relatively stable and low
• Three options to consider:
1. Produce everything in house, vary the workforce level
2. Produce everything in house, workforce level to meet lowest demand period, use overtime for higher demand
3. Produce everything in house, workforce level to meet lowest demand period, use subcontractor to produce higher demand
Aggregate Planning strategies
Level: produce at a constant rate, use changing inventory levels to buffer supply and demand
Demand-Capacity Match in Manufacturing
• It is unlikely that either the demand chase or level production aggregate plan will be totally acceptable.
• Best solution is some hybrid of using inventory and adjusting the level of the workforce.
– Adjust workforce levels periodically and level the production between adjustments
Aggregate Planning Strategies
Hybrid: combination of level and chase strategies
Total Plan Cost = Regular Production Cost + Inventory Cost + Hiring/Firing Cost
Demand-Capacity Match in Services
• For services, the load on capacity can’t be leveled by inventory. Need to smooth demand to smooth the load on capacity.
– If the constraint is time, appointments can be used (legal, medical services)
– If the constraint is space, reservations can be used
– Pricing strategies to level demand (weekday specials, early-bird specials)
Services that have high fixed costs and little marginal cost for additional customers have developed more sophisticated approaches, such as yield management
Yield Management
• Yield Management: An approach used in capital-intensive services that attempts to obtain maximum revenues through differential pricing, reservation systems, and overbooking.
– Used in services with high fixed costs, low variable costs.
– Requires segmenting the customer base, using multiple price levels
Overbooking
• Overbooking: Taking more reservations than you have capacity.
– Minimizing costs associated with “no-shows” when reservations are used
• Balance these costs with costs of not being able to serve a customer (or having to serve them differently) when too many show up
– Common issue in high fixed cost service businesses and where “no-shows” are a problem
• Airlines
• Hotels
Chapter 12-Supply Chain Management Demand
Demand Planning. Forecasting and management
Demand Planning – The combined process of forecasting and managing customer demands to create a pattern of demand
Demand Forecasting – a decision process where managers predict demand and tailor operations around that prediction
Demand Management – Proactive approach where managers try to influence either the pattern or consistency of demand
Demand Forecasting
n Qualitative Forecasts
n Do not use past data. Usually used when such data is not available (such as planning for a new product).
n Customer surveys, expert opinions, etc.
n Statistical Model-Based (Quantitative Forecasts)
Three techniques:
1. Causal forecasting – uses extrinsic data as predictor of demand
2. Time series forecasting – uses past demand to forecast future demand
3. Simulation-don’t need to worry about
Demand Forecasting
Components of Demand: patterns of demand over time
Stable-think toothpaste, things used contasntly
Seasonal-bathing suits, Christmas trees
Trend-cant tell when trend ends
Step change-company takes active role to change demand
Forecast error: “unexplained” component of demand
Judgment Based Forecasting
Grassroots: input from those close to products or customers (EX-Lululemon, bring market managers to one store and they pick what their customers would want)
Executive Judgment: input from those with experience (C suite people)
Historical Analogy: assume past demand is a good predictor of future demand
Marketing Research: examine patterns of current customers (getting info from current customers, that’s why companies also want people to fill out surveys)
Delphi Method: input from panel of experts (question answer feedback, think lego-panel of experts will be 8 year olds)
Forecast Process Performance
Short term forecasts are more accurate than long term forecasts
Aggregate forecasts are more accurate than detailed forecasts
Information from more sources yields a more accurate forecast
Quantitative Forecasts
Three Techniques:
Causal
n Uses external data to predict future demand
n Looking for the factors that “cause” demand
n Linear Regression
Time Series
n Use past demand to predict future demand
Simulation-Don’t need do anything with this
Causal Forecasting
n Recognized relationship between demand and some other variable
n Some other variable is the leading indicator of the value you want to predict
n Example – the demand for refinancing and home mortgage interest rates
n A good “sample” has many observations and potential “predictor” variables
n Example will use temperature as the independent variable, but you could use…
n e.g., exam schedule, promotions, sporting events, day of the week, etc.
Times Series
n Time Series models try to predict the future based on past data.
n Select forecasting model based on
n Time horizon to forecast
n Data availability
n Accuracy required
n Size of forecasting budget
n Another issue is the degree of flexibility of the firm (ability to react quickly to changes)
6 Components of a Time Series Forecast
Cycles
v A pattern that repeats over a long period of time (such as 20 years).
v Less important for demand forecasting, since we rarely have 20 years’ worth of data.
Trends-seasonality, random fluctuation, trend
Seasonality
Randomness
Autocorrelation
Average demand for the period
Trend- Component of a time series that causes demand to increase or decrease.
Seasonality – A pattern in a time series that repeats itself at least once a year.
Random Fluctuation – Unpredictable variation in demand that is not due to trend, seasonality, or cycle.
3 period moving average-leaves some of randomness but stable out
Times Series Forecasting
Demand Management
“Purpose is to coordinate and control all sources of demand so that the supply chain runs efficiently, and product is delivered on time.”
n Dependent Demand
n Independent Demand
n Active Role-putting something on sale, BOGO, new packaging, subscription services
n Passive Role-do nothing, let market drive demand naturally
Dependent VS Independent Demand
Independent-not directly derived by another product, demand derived by people
Dependent-demand dependent on other product-items that go into detergent
Try to manage demand by:
Use pricing, promotions, or incentives to influence timing or quantity of demand
Manage timing of order fulfillment
Encourage shifting to alternate products
Improving Planning Management
• Improving information accuracy and timeliness
• Reducing lead time
• Redesigning the product
• Collaborating and sharing information…
Improving Demand Planning
Collaborative, planning, forecasting and replenishment (CPFR): supply chain partners share forecast & demand & resource plans to reduce risk
- Market Planning: changes to products, locations, pricing and promotions
- Demand and resource planning: forecasting
- Execution: order fulfillment
- Analysis: data on key performance metrics
MRP and ERP-Chapter 14
Requirements planning
• MRP (Material Requirements Planning): computes demand for dependent items
-planning system used to ensure the right qualities of materials are available when needed
• DRP (Distribution Requirements Planning): computes demand for finished goods in the distribution system
• CRP (Capacity Requirements Planning): determines if sufficient resources are available
Material Requirements planning -focuses on dependent demand
• Materials requirements planning (MRP) is a means for determining the number of parts, components, and materials needed to produce a product
• MRP provides time scheduling information specifying when each of the materials, parts, and components should be ordered or produced
• Dependent demand drives MRP
• MRP is a software system
Input 1:
Master Production Schedule (MPS)-how many you need and when you need it
-quantities of each finished product to be completed each period
• Time-phased plan specifying how many and when the firm plans to build each end item
Types of Time Fences
• Frozen-No schedule changes allowed within this window
• Moderately Firm-Specific changes allowed within product groups as long as parts are available
• Flexible-Significant variation allowed as long as overall capacity requirements remain at the same levels
Input 2:
Bill of Materials (BOM) File-A Complete Product Description-recipe for product (all parts that go into it)
• Materials
• Parts
• Components
• Production sequence
• Modular BOM
– Subassemblies
• Super BOM
– Fractional options
Bill of Materials (BOM): detailed listing of all materials needed to make an end item
Input 3:
Inventory Records File
• Each inventory item carried as a separate file
– Status according to “time buckets” (how readily available it is)
– Time bucket-individual period for planning
• Pegging
-Identify each parent item that created demand
The time-phase information contained in the inventory record consists of:
Gross requirements
Scheduled receipts
Projected on-hand inventory
Planned receipts
Planned order releases
Planning Factors
Lot-sizing rules
Fixed order quantity (FOQ): the same order quantity is ordered each time
Lot for lot (L4L): order what is necessary
Periodic order quantity (POQ): order what is necessary to handle a certain number of periods
POQ
• Periodic order quantity (POQ), order what is necessary to handle P periods
• Component C, lead time 1 week, 8 week horizon
• Period, P=3 weeks (planning horizon)
bill of material on test in words draw diagram above (go to power point to find better picture
Integrated Resource Planning Systems
Enterprise Resource Planning (ERP) Systems-Planning for resources done from common database
• Allows decisions to be made from enterprise perspective
• Everyone uses the same numbers!
• ERP solutions are typically “off the shelf” – not customized to business
• Major providers: SAP, JD Edwards, PeopleSoft/Oracle
MRP
• Netting and backward scheduling in MRP require information that comes from master production schedules (MPS), bills of material, and inventory master files.
Lead Times
MRP takes individual component lead times into account to make sure that required components arrive on time
Chapter 16-Sustainable Operations management
Sustainable Operations Management
Sustainable operations management is focused on reducing any potentially negative impacts of a firm’s processes and products on the environment and society.
Sustainable Operations Management: The Triple Bottom Line
• Triple Bottom Line (3BL): full impact of activities on planet, people, and profit
-basically, want to low negative impacts of firms processes and products on the environment (planet) and society (people) while pursing sustainable business models (profits)
• Instead of seeking only profits, managers today are developing balanced sustainable strategic visions
The first P: Planet
Sustainability: meeting today’s needs without compromising the ability to meet tomorrow’s
Emphasis on Environmental Sustainability
Emphasis on environmental sustainability is growing
– Customer expectations
– Economic factors
– Diminishing natural resources
– Increased business demand for scarce resources
– New initiatives
- Global climate change
A broader view of waste
Life Cycle Assessment:-analysis tool that helps managers assess the full impact of environmentally consequential waste in 5 product stages
• Extraction
• Production
• Packaging and Transportation
• Usage
• Disposal/Recycling
ISO 14000 Standard for Environmental Management Systems
ISO 14000: international standard and certification for environmental management
• Identifying & controlling the impact of activities, products, and services
• Improving environmental performance continuously
• Implementing a systematic approach to setting and achieving goals
Environmental Sustainability Challenges-tradeoffs not always clear
The second P: People
• Sustainable operations management also focuses attention on people
• The operations of a business directly or indirectly affect:
– customers
– workers
– suppliers
– investors
Each of these stakeholder groups has its own needs and priorities
People and Culture
• Organizational Culture: behavior of individuals within a firm influenced by organizational goals, structure, training, coworkers’ attitudes, and corporate successes and failures
• National Culture: behavior of individuals within a firm influenced by the norms and values from the home or host culture, or a combination of both.
The Third P: Profit
• Profit is equally important for the sustainability of an enterprise
• Business models evolve due to:
– Changes in economic conditions
– Changes in competitor’s actions
– Changes in income levels
– Changes in educational levels
• Value propositions are dynamic