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:

  1. Identify users and decision-making processes that the forecast supports

  2. Determine likely sources of optimal data inputs

  3. Select forecasting techniques for transforming data into accurate forecasts

  4. Document and apply chosen technique to collected data

  5. 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:

  1. Gather actual demand data

  2. Calculate average periodic demand

  3. Determine seasonal index

  4. Calculate average seasonal index

  5. Generate forecast and apply average SI

  6. 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:

  1. Short-term forecasts are typically more accurate than long-term ones

  2. Aggregate forecasts outperform detailed ones

  3. 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:

1. Assess core competencies fit.

2. Evaluate outsourcing suitability.

3. Analyze reasons for outsourcing and associated costs.

4. 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

1. Balances supply and demand

2. Buffers against uncertainties

3. Enables economies of purchasing

4. 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.