Supply Chain
Common problems of demand management
-Lack of coordination between departments -Too much emphasis placed on forecasts of demand, with less attention on the collaborative efforts and plans needed to be developed from the forecasts -Non-strategic uses of demand information
The essence of demand management is
-to further the ability of firms throughout the supply chain to collaborate on activities related to the flow of products, services, information, and capital -to estimate and manage customer demand and use this information to make operating decisions
6 Types of Inventory and Rationales
1. Cycle stocks 2. Safety stocks 3. Time/In-Transit 4. Work-in-Process stocks 5. Seasonal stocks 6. Anticipatory stocks
EOQ Approach
1. Fixed Order Quantity (Two-Bin Model): ordering a fixed amount of product each time reordering takes place 2. Fixed Order Interval (Fixed Review Period): inventory at fixed and regular intervals, amount ordered depends on how much is in stock and available at the time of review
Inventory Management Approaches
1. How much should inventory be ordered? 2. When should inventory be ordered? 3. Where should inventory be held? 4. What specific line items should be available at specific location s?
Choosing appropriate inventory model
1. Is the demand for the product independent or dependent? 2. Is the distribution system based on pull or push? (pull: rely customer orders to move product, push: rely inventory replenishment in anticipation of demand) 3. Does the inventory decision apply to one or multiple facilities (system-wide vs. specific facility decisions)?
5 Major Outputs of Order Management
1. Product Availability 2. Order Cycle Time 3. Postsale Logistics Support 4. Logistics System Information 5. Logistics Operations Responsiveness
A stockout results in
1. The buyer waits until the product is available 2. The buyer back-orders the product 3. The seller loses current revenue 4. The seller loses a buyer and future revenue
4 Elements of Customer Service
1. Time: absolute length of lead time 2. Dependability: consistent lead time, safe delivery, correct orders 3. Communications: pre/post transaction 4. Convenience: flexible logistics service level
Effective demand management unifies channel members with the common goals of satisfying customers and solving customer problems
1.Gather & analyze knowledge about consumers, their problems, and their unmet needs. 2.Identify partners to perform functions needed in demand chain. 3.Move functions to the channel member that can perform them most effectively and efficiently. 4.Share with other supply chain members knowledge about customers, technology, and logistics challenges and opportunities. 5.Developing products and services that solve customers' problems. 6.Develop & execute best methods to deliver products & services to consumers in the desired format.
Which of the following order cycle lengths would require the buyer to hold the most total inventory during lead time?
10 days, +/- 4 days
The weighted moving average method assigns
A weight to each previous period with higher weights usually given to more recent demand Pros: allows emphasis on more recent demand as a predictor of future demand. Cons: not easily accommodate seasonal demand patterns.
Per unit Inventory Cost
Annual Inventory Cost/ Annual inventory turns
Inventory turns
COGS/ Inventory
Types of Forecast Error Measures
Cumulative sum of forecast errors (CFE) calculates the total forecast error for a set of data, taking into consideration both negative and positive errors. Mean squared error (MSE) squares each period error so the negative and positive errors do not cancel each other out. Mean absolute deviation (MAD) takes absolute value of each error, so the negative and positive signs are removed. mean absolute percentage error (MAPE) measures the prediction accuracy of a forecasting method in statistics such as trend estimation
EOQ can only be used for "push" inventory.
False; many EOQ-based systems effectively blend both push and pull concepts
Demand management includes
Flows of Capital Flows of Products Flows of Services Flows of Information
Little's Law
Inventory $$ = Rate(COGS) x Time(years)
4 Types of Costs
Inventory Carrying Cost, Ordering and Setup Cost, Expected Stockout Cost, In-transit Inventory Carrying Cost
"Order to cash" is also known as
"order cycle"
Danger zone strategies
(1) Change the manner in which the customer interacts with the shipper to move the customer to another segment (2) Charge the customer the actual cost of doing (3) Switch the customer to an alternative distribution channel
4 Factors Affecting Reduction in Inventory
-Greater expertise in managing Inventory -Innovation in Info technology -Greater competitiveness for transportation services -Reducing cost by eliminating non value added activities.
Cost engineer segment strategies
aim to find more efficient ways for the customer to interact with the shipper (high cost, high sale)
Customer Relationship Management (CRM)
align the supplier's resources with its customers in a manner that increases both customer satisfaction and supplier profits
Marketing Objective
allocate resources to the marketing mix to maximize long-term profitability of the firm.
A reason to hold inventory arises when
an organization anticipates that an unusual event might occur that will negatively impact its source of supply
Customer service is
anything that touches the customer including all activities that impact information flow, product flow, and cash flow between the organization and its customers
WIP inventories
are associated with manufacturing.
Order management and customer service
are not mutually exclusive (direct& critical relationship)
The delivery and installation of spare parts
availability and time are relatively more critical for spare parts logistics.
Exponential smoothing can use constants
between 0 and 1
External Supply-Demand Balancing Methods
change the manner in which the customer orders: Price or Lead time
CWT
customer wait time includes order cycle time and maintenance time
As Q decreases for EOQ, the cost per order:
decreases
A stockout occurs when
desired quantities of finished goods are not available when or where a customer needs them 1. buyer waits until product is available 2. buyer back-orders the product 3. seller loses current revenue 4. seller loses a buyer and future revenue
Random fluctuation
development that cannot be anticipated and is usually the cause to hold safety stocks to avoid stockouts
Increasing fill rates has a ___ effect on a seller's inventories
direct
Customer service as a philosophy
elevates customer service as an organization-wide commitment
Customer service as performance measures
emphasizes customer service as specific performance measures; responsiveness, agility, costs, asset management, reliability
In-transit Inventory Carrying Cost
especially important on global moves since both distance & time increase
The essence of demand management is 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
Ordering and Setup Cost
expense of placing an order, excluding the cost of the product itself;the expense of changing/modifying a production/assembly process to facilitate line changeovers
All demand is subject to
fluctation
Trend fluctuation
gradual increase or decrease in demand over time for an organization
Improvement in order fill results in
improvement in cash flow, but might require some type of investment in inventories and/or technology
As the level of substitutability for a product increases, its stockout costs to the manufacturer:
increase
Dependent demand is directly influenced by
independent demand
There are two parts to the order management process. The first is ________ and the second is _________.
influencing how the customer orders, managing the order after it is received
Capital cost is also called
interest or opportunity cost
Capital cost focuses on the cost of capital tied up in ________and the resulting lost opportunity from investing that capital elsewhere.
inventory
Inventory Carrying Cost
inventory at rest and waiting to be used Factors: Capital costs, Storage space costs, Inventory service costs, Inventory risk costs
Fixed Order Quantity EOQ model
inventory is reordered when the amount on hand reaches the reorder point; depends on the time it takes to get the new order and on the demand for the item during this lead time
Inventory classification
is vital initial step toward efficient inventory management
LOR
logistics operations responsiveness; examines: -how well a seller can customize its service offerings to the unique requirements of a buyer -how quickly a seller can respond to a sudden change in a buyer's demand pattern
LSI
logistics system information is critical to successful order management and customer service; address how accurate and timely the data are to allow a decision to be made or an activity to be performed -pretransaction info: used for planning -transacction info: used for execution -posttransaction info: used for evaluation
Build segment strategies
maintain the cost to serve but build net sales value to help drive the customer into the "Protect" segment (low cost, low sale)
The simple moving average method
makes forecasts based on recent demand history and allows for the removal of random effects Pros: quick and easy to use Cons: old demand dropped quickly; not accommodate seasonal, trend, or business cycle influences
VMI is used to
manage a firm's inventories in its customers' distribution centers
Forecast accuracy
measure accuracy of data on past consumption and predictions on future consumption
Inventory accuracy
measure accuracy of inventory counts in a distribution center
EDI compliance
measure how well trading partners are complying with EDI standards when sharing data
Data integrity
measure the quality/accuracy of inputs to an LSI
Logistics Objective
minimize total costs, given customer service objective, where: Total costs = Transportation costs + Warehousing costs + Order processing & Information costs + Lot quantity costs + Inventory carrying costs
Those customers who are in the "Protect" segment are
most profitable. (high sales, low cost to serve)
Expected Stockout Cost
not having a product/materials available to meet customer/production demand
Phantom demand is created by
over-ordering during peak demand
There are four strategies that firms can use to balance supply and demand
price, lead time, inventory, and production flexibility
One organization's order cycle is another's
replenishment cycle
Service recovery
requires an organization to realize that mistakes will occur and to have plans in place to fix them 1.Measuring the costs of poor service 2.Anticipating the needs for recovery 3.Developing employee training and empowerment
The management of product returns from the customer to the supplier
returns is measured by the ease with which a customer can return a product
The term replenishment cycle refers to
the acquisition of additional inventory as in materials management
Inventory decisions must consider
the basic tradeoff between cost and service
Independent demand is
the demand for the primary item (base demand)
Ordering cost refers to
the expense of placing an order for additional inventory and does not include the cost or expense of the product itself.
The higher the service level requirement and lower the stockout rate,
the higher the inventory level requirement
Those customers who are in the "Danger Zone" segment are
the least profitable. (high cost to serve, low net sales)
Order to cash cycle
the time and all the activities that elapses from when a company receives an order until it gets paid for delivering the order, plus the flow of funds back to the seller based on the invoice
Customization Metrics
time it takes the seller to offer a new package for sale in the retailers' stores
The desired end result of demand management is
to create greater value for the end user or consumer
Customer service as an activity
treats customer service as a particular task that an organization must perform
Tracking signal
used to measure forecast error, especially good at identifying if a "bias" exists in the forecast errors
The exponential smoothing method
Pros: simplicity and limited requirements for data, good for relatively constant demand Cons: forecasts will lag actual demand; Not appropriate for highly seasonal demand patterns or patterns with trends
Seasonal fluctuation
Seasonal patterns that will normally repeat themselves during a year for most organizations
JIT
Just-in-Time systems designed to manage lead times and eliminate waste -aims to minimize inventory levels, emphasizing frequent deliveries of smaller quantities and alliances with suppliers or customers -committed to short consistent lead times and minimizing inventories -saves money by placing greater reliance on improved responsiveness and flexibility
Internal Supply-Demand Balancing Methods
Manage gap using internal processes: Inventory or Production flexibility
MRP
Materials Requirements Planning; deals with supplying materials and component parts whose demand depends on the demand for a specific end product 1. Ensure the availability of materials, components, and products for planned production and for customer delivery 2. Maintain the lowest possible inventory levels that support service objectives 3. Plan manufacturing activities, delivery schedules, and purchasing activities
Two Phases of Order Management
Phase 1: Influence the Customer's Order Phase 2: Execute the Customer's Order