Test Study Guide:
Chapter 12:
Understanding Demand Planning
Definition:
Demand Planning involves both forecasting and managing customer demand to achieve operational and financial goals
Key Concepts:
Demand Forecasting: Predicting future customer demand
Demand Management: Influencing the pattern or consistency of demand
Importance of Accurate Demand Forecasts
Need for Good Predictions:
Managers must predict product quantities demanded at specific times or locations
Costs of Inaccurate Forecasts:
Too high: Loss in holding unsold inventory, wasted capacity, increased unnecessary wages
Too low: Lost sales opportunities, overused capacity, stressed workforce, lower product availability
Components of Demand
Components: Patterns of demand over time
Key Terms:
Autocorrelation: Relationship between past and current demand
Forecast Error: Unexplained component of demand; inherently random
Types of Demand Patterns:
Stable
Seasonal
Trend
Step Change
The Forecasting Process
Steps in Forecasting:
Identify users and decision-making processes that the forecast supports
Determine likely sources of optimal data inputs
Select forecasting techniques for transforming data into accurate forecasts
Document and apply chosen technique to collected data
Monitor performance for continuous improvement
Judgement-based Forecasting
Characteristics: Based on estimates and opinions
Methods:
Grassroots: Input from those close to the product/customers
Executive Judgment: Experienced individuals contribute insights
Historical Analogy: Assumes past demand reflects future trends
Marketing Research: Analyzes current customer patterns
Delphi Method: Input gathered from a group of experts
Advanced Forecasting Techniques
Time Series Analysis: Utilizes historical data chronologically
Causal Studies: Analyzes cause-and-effect relationships among variables
Simulation Models: Evaluate various business scenarios
Focused Forecasting: Combines computer simulation and expert input
Artificial Intelligence: Employs learning algorithms for decision making
Internet of Things (IoT): Devices with sensors that enable data exchange and analysis
Time Series Analysis Fundamentals
Moving Average: Simple average of demand over a specified number of past periods
Note: Equation not provided on the exam
Pros and Cons of Moving Averages
Advantages:
Straightforward method
Effective for short-term forecasts
Smooths out short-term demand fluctuations
Disadvantages:
Fails to capture complex patterns like seasonality
Requires stable historical data
Note: Equation not provided on the exam
Practical Example of Moving Average
Example Scenario: If actual Friday sales are 135.0 lbs, larger averages reduce overreaction to fluctuations, while smaller ones reflect recent observations when critical.
Weighted Moving Average
Definition: Assigns different weights to each period’s demand based on importance
Note: Equation not provided on the exam
Example of Weighted Moving Average Calculation
Sales Data and Weights:
Sunday: 137.1
Monday: 123.6 (Weight 0.1)
Tuesday: 134.9 (Weight 0.2)
Wednesday: 160 (Weight 0.2)
Thursday: 140.4 (Weight 0.5)
Total Weight = 1.0
Calculation for Friday and Saturday sales provided
Exponential Smoothing Method
Mechanism: Applies less weight on older data, more on recent demand
Pros: Quickly adapts to changes in trends or seasonality and captures complex patterns
Cons: Challenging to determine the ideal smoothing coefficient
Forecasting Example: Forecast calculation illustrated with specific values
Determining Trend Factors
Equation:
dt = demand value for period t
t = number of periods since origin
a = y-axis intercept
b = slope of the line
Simple Linear Regression Model
Definition: Causal statistical technique predicting dependent variable outcomes (e.g., sales) based on independent variables (e.g., rain)
Usage: Estimates future values based on historical data
Adjusting for Seasonality in Forecasts
Seasonal Index: Adjustment factor for seasonal demand changes
Average Seasonal Index: Calculated based on seasonal data averages
Steps for Computing Seasonality
Methodology:
Gather actual demand data
Calculate average periodic demand
Determine seasonal index
Calculate average seasonal index
Generate forecast and apply average SI
Calculate seasonally adjusted forecast
Evaluating Forecast Process Performance
Forecast Accuracy Definition: Measurement of forecast alignment with actual demand
Forecast Errors:
Positive: Overly pessimistic, sold more than forecasted
Negative: Overly optimistic, sold less than forecasted
Bias: Persistent over or under predictions
Key Metrics for Forecast Performance
Mean Forecast Error (MFE): Average forecast error over multiple periods
Mean Absolute Deviation (MAD): Average of forecast errors disregarding direction
Mean Absolute Percentage Error (MAPE): MAD adjusted for comparative size relative to actual demand
Example of MFE, MAD, MAPE Calculation
Case Scenario: Actual demand, forecast, errors, absolute values, and percentage errors outlined across five periods
Continued MFE, MAD, MAPE Example
Tabulated Results: Ongoing calculation examples illustrating errors and percentages
General Observations on Forecast Accuracy
Trends:
Short-term forecasts are typically more accurate than long-term ones
Aggregate forecasts outperform detailed ones
Diverse information sources enhance forecast reliability
Challenges from Fluctuating Customer Demand
Reactive Nature of Forecasting: Operational inefficiencies resulting from fluctuating demand
Issues Arising:
Need for extra resources
Service backlogs
Customer dissatisfaction
System buffering
Strategies for Demand Management
Coordination: Integrating diverse demand information sources
Tactics to Influence Demand:
Pricing adjustments
Promotions or sales incentives
Manage order fulfillment timing
Encourage product alternatives
Page 26: Improving Planning Management
Focus on collaboration, information accuracy, and redesigning products
Role of Social Media and IoT in Planning Management
Benefits: Enhanced data quality and reduced lead times enabling improved forecast accuracy
Product Redesign Impact on Planning Improvements
Postponable Product Concept: Configured to final form quickly once customer demand is confirmed
Importance of Big Data in Planning
Big Data Defined: Leveraged from social media and IoT to improve planning efficacy
Advantages:
Expanded data sets
Real-time sensor integration
Automated data capture
Summary of Planning Management Enhancements
Constructs a framework for improved demand planning and response
Collaborative Planning, Forecasting, and Replenishment (CPFR)
Holistic Approach: Collaboration across supply chain partners in demand fulfillment planning
Key Components:
Links planning and execution through shared forecasts and resource strategies
Involves market planning and demand execution analysis
Chapter 10:
Supply Management Definition
Concept of Supply Management
Definition: Identification, acquisition, and management of inputs and supplier relationships
Also known as purchasing or procurement
Importance of Cost Management
Cost Distribution:
Purchase = 80% of sales
Marketing (Sales) = 10% of sales
Transportation = 10% of sales
Effective Supply Management
Strategic Objectives of Supply Management
Key Roles:
Ensures timely resource availability
Identifies, assesses, and mitigates supply chain risks
Reduces total costs beyond just purchase prices
Enhances quality and access to technology
Achieves environmental, social, and governance goals
Understanding Supply Risk
Definition and Impact of Supply Risk
Supply Risk: Probability of unplanned negative events impacting supply
Examples:
Supplier issues (technical, operational, quality)
Financial problems of suppliers
Demand fluctuations, labor disputes, natural disasters
Transparency and regulatory challenges
Building Supply Chain Resilience
Strategies for Resilience
Practices to Enhance Resilience:
Maintain higher inventory levels
Engage multiple suppliers
Collaborate with suppliers to enhance capabilities
Design sourcing strategies across geographical locations
Increase visibility across the supply chain
Total Cost of Ownership (TCO)
Breakdown of TCO
TCO Components:
Before: Costs associated with identifying and assessing suppliers
During: Purchase price, ordering, transportation, etc.
After: Costs related to inventory, risk, downtime, defects, recalls, etc.
Key Takeaway
Understanding TCO is crucial for determining the true cost of acquiring and using a product
Goals Addressed by Sustainability
Objectives of Sustainable Supply Management
Goals to Support:
Value creation for communities
Promotion of social diversity and ethical behavior
Environmental responsibility
Fair engagement with suppliers and compliance with laws
Effects of Sustainability
Impact of Sustainability Practices
Benefits include improved financial performance, quality enhancement, and customer loyalty
Financial Performance & Sustainability
Results of Sustainable Practices
Positive Outcomes:
Improves financial performance
Builds customer loyalty
Enhances overall reputation
Lowers total costs
Sustainable Procurement
Value Creation Through Sustainability
Adoption of sustainable practices leads to additional revenue through innovative product lines and recycling initiatives
Aligning Products with Sustainability Goals
Business Model Innovations
Companies are designing products that align with sustainability objectives involving marketing and R&D strategies
Corporate Social Responsibility and Sustainability
Importance for Companies
Sustainable procurement influences market perception and can enhance access to capital
Whole Life Costing Approach
Comprehensive Costing Methodology
Evaluates all costs throughout product lifetimes, including environmental metrics
Sustainability Outcomes Continued
Continued Positive Effects
Sustained improvements in financial performance and resource efficiency
ESG Goals
Understanding ESG
Definition: Maintenance of sustainability concerning planet, people, and profit
Community value addition and social diversity
Quality and Innovation in Supply Management
Importance of Quality Inputs
Finished product quality is directly influenced by input quality and supplier innovation capabilities
Insourcing vs Outsourcing
Core Competencies Analysis
Definitions:
Insourcing: Sourcing inputs internally
Outsourcing: Sourcing inputs externally
Consideration of core competencies necessary for making sourcing decisions
Advantages and Risks of Outsourcing
Benefits and Risks
Advantages: Cost savings and flexibility
Risks: Loss of control and exposure to sensitive information
Decision-Making Process in Sourcing
Step-by-Step Assessment:
Assess core competencies fit.
Evaluate outsourcing suitability.
Analyze reasons for outsourcing and associated costs.
Make informed decisions and revise when necessary.
Further Assessment Steps
Evaluating Outsourcing Decisions
Assess savings, risk factors, and supplier capabilities in strengthening decision making
Cost Comparison Analysis
Financial Considerations
Assess both quantitative and qualitative cost aspects to inform outsourcing discussions
Qualitative Factors in Sourcing Decisions
Key Elements
Factors include loss of control, supplier capabilities, and cultural compatibility
Implementation and Monitoring
Decision Tracking
Continuously compare actual results with estimates and adjust sourcing strategies as needed
Developing Sourcing Strategies
Strategic Approaches
Different strategies based on supplier risk and category value to firm
Supplier Optimization Strategies
Supplier Base Optimization
Balancing too few versus too many suppliers for effective supply management
Importance of Supplier Location
Factors Influencing Supplier Selection
Proximity, trade barriers, and market access capabilities are critical
Supplier Relationship Management
Two Relationships Defined
Transaction-Oriented vs. Collaborative relationships outlined with goals and focus areas
Strategic Sourcing Process
Key Steps in Sourcing Strategy
Analyze market needs, identify potential suppliers, and manage relationships effectively
Identifying Needs and Specifications
Processes Involved
Use of purchase requisitions and specifications to communicate needs before selecting suppliers
Assessing Suppliers with Weighted Points
Supplier Evaluation Methods
Employing performance categories with a weighted point model for supplier assessment
Managing Relationships with Suppliers
Monitoring and Assessment
Tools: Information sharing, EDI, and supplier scorecards to evaluate supplier performance
Certification and Performance Measurement
Assessing Supplier Capabilities
Supplier Scorecards for performance tracking and certification processes explained
Benefits of Supplier Certification
Purpose and Process
Ensures quality standards, reduces delays, and enhances procurement processes
Recap on Supplier Management
Key Takeaways
Efficient management practices that incorporate supplier scorecards and certifications for ongoing improvements
Chapter 9:
Customer Service Impact on Lifetime Value
Customer service significantly affects revenue; key findings include:
Rated as the #1 factor impacting vendor trust.
66% B2B and 52% B2C cease purchases after bad CS interactions.
69% attribute good CS to timely problem resolution.
39% avoid vendors for over 2 years post-bad experience.
95% share bad experiences; 54% share with five or more people.
45% utilize social media for sharing bad customer service experiences.
Focus on Customer Management
Importance of understanding and fulfilling customer desires.
Key areas in customer service:
Product availability
Lead time performance
Service reliability
Customer satisfaction: meeting or exceeding expectations.
Focus on customer success:
Ensure proper product and service timing, quality, and cost.
Product Availability Metrics
Fill rate measures impact of stockouts.
Fill Rate Calculations:
Unit Fill Rate = 19,500 / 20,000 = 97.5%
Line Fill Rate = 4,800 / 5,000 = 96%
Order Fill Rate = 910 / 1,000 = 91%
Understanding Lead Time
Definition: Time between activity start and end.
In customer management, critical areas of lead time include:
Product Design, Order Lead Time, Procurement, Production, Delivery.
Market Orientations in Lead Time
Different Order-to-Delivery (OTD) lead times by market orientation:
Engineer to Order (ETO): Custom design.
Make to Order (MTO): Produce from raw materials and components.
Assemble to Order (ATO): Assemble from generic subassemblies.
Make to Stock (MTS): Produce in anticipation of demand.
Service Reliability
Concept of Service Reliability relates to the "Perfect Order":
Characteristics of the perfect order: Complete, On time, Damage-free, Correct documentation.
Reliability probability calculation example:
97% reliability across four attributes results in an overall order reliability of 88.5%.
Importance of Service Information
Real-time information critical for:
Order status tracking (location, condition, estimated arrival).
Advance Shipment Notices (ASNs) for pending deliveries.
Leveraging Technology in Customer Service
Omni-Channel approaches allow diverse customer interaction methods.
Service Platforms enhance the range of customizable services.
Crowdsourcing for acquiring ideas or services from a broad audience.
Points in Omni-Channel Business
Multiple customer touchpoints for orders and deliveries, including:
Direct Sales, Text, Social Media, Web, E-mail, Call Center, Retail Store, etc.
Customer Service Limitations
Customer service must specify commitments to availability, operational performance, and reliability.
Often viewed as order qualifier, impacting satisfaction but may not achieve customer delight.
Customer Satisfaction Criteria
Factors influencing customer satisfaction:
Reliability, Responsiveness, Access, Communication, Credibility.
Understanding Customer Satisfaction
Elements contributing to satisfaction include:
Security, Courtesy, Competence, Tangibles, Knowing the customer.
Importance of individual attention rather than viewing customers as a group.
Customer Satisfaction Model
Identify gaps in satisfaction levels:
Knowledge, Standards, Performance, Communication, Perception, Satisfaction gaps.
Influencing Customer Service Expectations
Factors that define customer service expectations:
Past supplier performance, Word-of-mouth, Supplier communications.
Limitations in Customer Satisfaction
Happy customers may still be dissatisfied with service.
Previous experiences affect expectations.
Principles of Customer Success
Suppliers should:
Maintain long-term relationships, Understand customer needs, Adapt strategies accordingly.
Balancing Service and Satisfaction
High basic service vs. customer satisfaction influences profitability and revenue.
Customer Relationship Management (CRM)
CRM leverages technology to gather customer data and foster long-term relationships.
Enabling Service with Technology
Implementation of CRM systems for effective data gathering.
Chapter 7
Importance of Inventory
Inventory Overview
Definition: Inventory is one of the most expensive assets for companies.
Financial Implications: It can account for up to 60% of total invested capital.
Inventory Management Questions
Key Considerations
Where to keep inventory?
How much inventory to keep?
When to order inventory?
Variability Factors: Supply and demand fluctuations and process lead times affect inventory management decisions.
Types of Inventory
Classification of Inventory
General Inventory Types:
Customers
Suppliers
Raw Material
Components
Maintenance, Repair, and Operating Supplies (MRO)
Work in Process (WIP)
Finished Goods (FG)
Stock Types
Categories of Stock
Cycle Stocks: Inventory repeatedly produced/ordered to meet ongoing demands.
Seasonal Stock: Extra inventory produced pre-season or post-season to meet peak demand.
Buffer (Safety) Stock: Additional stock held to guard against uncertainty in supply and demand.
Speculative Stock: Inventory bought to protect against future price increases or potential shortages.
Transit Stock: Inventory in motion from one location to another.
Roles of Inventory
Key Functions
Inventory balances supply and demand discrepancies.
Helps mitigate differences in requirements.
Balancing Supply and Demand
Role of Inventory
Inventory serves to decouple supply and demand variations.
Managing Uncertainties
Inventory's Role
Acts as a buffer against uncertainties present in supply and demand dynamics.
Economies of Buying
Financial Benefits
Inventory allows for price discounts or reduced shipping costs due to bulk buying.
Geographic Specialization
Inventory Distribution
Inventory enables specialization by addressing geographic differences between supply and demand locations.
Summary of Inventory Roles
Key Functions of Inventory
Balances supply and demand
Buffers against uncertainties
Enables economies of purchasing
Facilitates geographic specialization
Financial Impact of Inventory
Cost Factors
Carrying (Holding) Costs
Ordering Costs
Stockout Costs
Carrying Costs Breakdown
Components
Includes opportunity costs, storage, taxes, insurance, obsolescence, and handling costs.
Ordering and Setup Costs
Understanding Costs
Costs incurred when placing and receiving orders.
Stockout Costs
Consequences
Results in lost sales, customer loyalty issues, disruptions, and backorders.
Total Financial Impact of Inventory
Summary of Costs
Carrying costs, ordering/setup costs, and stockout costs collectively affect financial outcomes.
: Inventory Performance Measures
Inventory Turnover
Defined as the ratio of average inventory to level of sales (asset productivity).
Formula: Cost of Goods Sold / Average Inventory
Indicator of inventory management efficiency and sales strength.
Advantages and Disadvantages of Inventory Turnover
Pros and Cons
Advantages: Fresh inventory, reduced obsolescence risk, lower carry costs.
Dangers: Risk of stockouts leading to lost sales and higher costs.
Advantages of High Turnover
Benefits
Maintains fresh inventory, mitigates obsolescence, reduces carrying costs, and boosts productivity.
Dangers of High Turnover
Risks
Possible stockouts, increased costs from unmet product quantity needs, and higher ordering costs.
Additional Measures of Inventory Performance
Key Metrics
Days of Supply: Time operations supported by existing inventory calculated by Inventory/Daily demand.
Service Level: Meeting customer demand without stockouts.
Demand Types
Demand Classifications
Independent Demand: Demand is out of the organization's control.
Dependent Demand: Driven by the demand of another item.
Continuous Review Model
Inventory Management
Constantly monitors inventory levels to optimize replenishment orders.
Methods include LIFO, FIFO, JIT.
Advantages include accuracy; disadvantages involve higher costs.
Common Inventory Problems
Issues
Video reference on common problems encountered in inventory management.
Total Acquisition Costs Overview
Cost Components
Comprised of ordering, holding, and associated costs.
Total Acquisition Costs Calculation
Formula Breakdown
TAC = Total Annual Ordering Costs + Total Annual Carrying Costs
Components include number of orders per year, average inventory level, annual demand, and other relevant factors.
TAC Calculation Example
Example Analysis
Calculation for a scenario involving 3,000 units per year and ordering costs with calculations shown.
: TAC Comparison Example
Calculation Comparison
Alternative scenario with different order quantity (200 units) showing impact on TAC.
Economic Order Quantity (EOQ)
EOQ Importance
Minimize total acquisition costs by equalizing holding costs with ordering costs.
EOQ Graph Analysis
Budgeting Considerations
Evaluating carrying and order costs through a graphical representation.
EOQ Numerical Example
Specific Calculation
Complete scenario analysis on determining lowest total acquisition costs for given parameters.
EOQ Parameters
Key Assumptions
No discounts, no size restrictions, no variability, etc. impacting EOQ models.
Total Acquisition Costs with Discounts
Cost Analysis
Evaluating impact of discounts on total acquisition costs.
TAC with Discounts Example
Cost Efficiency
Detailed example of total acquisition cost after applying a unit price discount.
Price Discounts and Lot Sizes
Price Break Calculations
Identifying and evaluating price breaks with associated calculations.
Determining Service Levels
Service Level Policy
Establishes acceptable levels of stock out risk, leading to safety stock calculations.
Safety Stock Calculations
Example Evaluation
Analysis of safety stock requirements under specified service levels.
Implications of Stockouts
Cost Considerations
Weighing costs associated with stockouts against investment in inventory solutions.
Reorder Point and Average Inventory
Utilizing Safety Stock
Safety Stock included in the reorder point calculations.
Periodic Review Model
Inventory Review Process
Fixed time intervals for inventory assessment and comparison of demand.
Location Impact on Inventory
Square Root Rule
Estimating how altering the number of inventory locations impacts stock levels and safety stock calculations.
Example of Inventory Location Impact
Calculation Example
Specific example demonstrating the safety stock needs when location count doubles.
Inventory Management Strategies
Inventory Analysis Techniques
ABC analysis for ranking inventory based on importance.
Pareto’s Law application in inventory impact assessment.
Inventory Information Systems
Identification Systems
GTIN for consumer goods and cycle counting for inventory accuracy.
Managing Inventory Strategies
Effective Management Tips
Strategies include reducing lot sizes and balancing inventory with service levels.
Supply Chain Inventory Management
Bullwhip Effect
Increasing variation upstream in the supply chain and its implications.
Supplier-Managed Inventory (SMI)
Inventory Relationships
Supplier takes over inventory management for better efficiency and visibility.
Blockchain Technology
Innovations in Inventory Management
Blockchain's role in transaction transparency and data visibility.