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