Supply Chain Final Exam

Roles of Inventory

1. Balancing supply and demand 2. Buffering uncertainty in demand or supply 3. Enabling economies of buying 4. Enabling geographic specialization.

Statistical model based forecasting

1. Time series analysis 2. Causal studies which look for relationships between leading variables and forecasted variables. 3. Simulations models which try to represent past phenomena in mathematical relationships and evaluate future outcomes.

Mean absolute percentage error MAPE

The MAD represented as a percentage of demand. The MAPE indicates how large errors are relative to the actual demand quantities. MAD and MAPE are sometimes inadequate. They do not recognize that forecasts really off the mark are more harmful than smaller amounts.

Product cost

The amount paid to suppliers for products that are purchased.

Mean absolute deviation (MAD)

The average size of forecast errors, irrespective of their directions. Also called mean absolute error. MAD = sum of the absolute value of demand - forecast / n Measure of forecast accuracy that seeks to indicate the overall errors. Provides the average size of forecast errors. For normally distributed forecast errors 1 MAD = .80 standard deviation (or 1.25 MAD = 1 standard deviation)

Make or buy decision

The choice between making a product internally or purchasing it from a supplier.

Demand planning

The combined process of forecasting and managing customer demands to create a planned pattern of demand that meets the firm's operational and financial goals.

Autocorrelation

The correlations of current demand values and past demand values.

Economy of distance

The cost per unit of distance decreases as the distance moved increases. One of the fundamental economic principles underlying efficiency and cost of transportation. The principle holds true because the fixed cost is spread out over longer distance.

Economy of scale

The cost per unit of weight decreases as the size of the shipment increases. One of the fundamental economic principles underlying efficiency and cost of transportation. The principle holds true because the fixed cost is spread out over larger weight (quantity) .

Supply base optimization

The determination of the number of suppliers to use.

Aggregate production strategies

Level production planning Chase production planning

Fixed costs per contract

Costs incurred at the start of production or the beginning of a new contract.

Fixed costs per order

Costs incurred each time an order is placed regardless of the size of the order.

Variable costs

Costs that change in proportion to the quantity of units produced or service delivered.

Distribution center

Term used to describe the strategic role of warehouses in storage and creating assortments that meed customer requirements. Market presence by customers seeing DC and quicker product fulfillment.

Common carriers

Transportation companies that provide service to the public.

Average days in inventory

365 / Inventory Turnover

Negotiation

A bargaining process involving a buyer and seller seeking to reach a mutual agreement. Preferred method for strategic purchases requiring full partnership relationship. Use when high degree of uncertainty with requirements,need for early supplier effort in product development, complex startup.

Acceptance of mutual goals relationship

A collaborative relationship that lacks the commitment of a full partnership. Also called strategic alliances.

Intermodal transportation

A combo of 2 or more transportation modes to take advantage of the economies and service characteristics of each. Most common is piggyback service - combo of trailer and rail. Also known as trailer on flatcar TOFC or container on flatcar COFC

Stable demand pattern

A consistent horizontal stream of demands. Mature consumer products as example - shampoo, milk

Demand forecasting

A decision process in which managers predict demand patterns.

Transshipment point

A facility where products are received, sorted, sequenced, and selected into loads consistent with customer needs.

Weighted moving average

A forecasting model that assigns a different weight to each period's demand according to its importance. Used with stable demand patterns. Typically more weight is given to more recent demand - thought to capture market effects. Forecast of the next period = (weight)*(demand) + n number of demands you want to use. The weights should add up to 1.

Moving average model

A forecasting model that computes a forecast as the average of demands over a number of immediate past periods. Used when demand is relatively stable - without season, trend. Forecast for the next period = demand from most recent period + n number of additional periods / n Increasing the number of periods used reduces the impact of random or atypical demands in isolated time periods, but also reduces sensitivity to actual shifts in demand.

Marketing research

A forecasting technique that bases forecasts on the purchasing patterns and attitudes of current or potential customers.

Historical analyogy

A forecasting technique that uses data and experience from similar products to forecast the demand for a new product.

Transportation mode

A form or method of transporting items. 5 main methods: rail, truck, water, air, pipeline

Role of logistics in supply chain management 3

Inventory management: Inventory linked to all critical logistics decisions. Need to decide how much, where to hold, what form, how often to replenish. Goal is to lower. Inventories are generally lower in centralized systems and when a firm lowers its service level.

Service Level

A measure of how well the objective of meeting customer demand is met. Stockouts can be used to measure service level. Common to measure stock outs in terms of the number or percentage of inventory items for which there is no inventory. Stockouts can affect finished goods, MRO, or raw and component.

Mean square error MSE

A more sensitive measure of forecast errors that approximates the error variance. MSE = sum of demand - forecast squared / n - 1 Because it is squared, MSE gives exponentially more weight to larger errors.

Exponential smoothing

A moving average approach that applies exponentially decreasing weights to each demand that occurred farther back in time. Used for stable demand patterns. Forecast for next period = (smoothing coefficient)*(demand in most recent period) + ( 1 - the smoothing coefficient)(forecast of the most recent period) Forecast of the next period = (forecast of most recent period) + (smoothing coefficient)*(demand of the most recent period - forecast for the current period) Sophisticated form of weighted average model because each new forecast is implicitly built on many past demands. Reactive - model does not anticipate effects of a trend or season.

Shift or step change pattern

A one time change in demand, usually due to some external influence on demand. Major promotional campaign as example of external influence.

Smoothing coefficient

A parameter indicating the weight given to the most recent demand. It is a constant between zero and one.

Demand management

A proactive approach in which managers attempt to influence the pattern of demand.

Spend analysis

A process that identifies what purchases are being made in a firm. Should consider all purchases in a firm, not just those being made by a supply manager.

Work in process inventory

Inventory that is in the production process

Sales and operations planning S&OP

A process to develop tactical plans by integrating customer focused marketing plans for new and existing products with the operational management of the supply chain. Intermediate range planning, 3 - 18 months. Planning occurs at aggregated product family level, process brings together all the plans for business - sales, marketing new products, logistics, manufacturing, supply, finance. Fundamental challenge for every firm is balancing supply and demand.

Competitive bidding

A selection process in which suppliers submit bids to win the buyer's business. Used when price is the most important factor, specifications are clear, the spend is large enough and there are a number of equally qualified suppliers. Mature, standard products often sourced for bidding. Arm's length or adversarial relationships

Naive model

A simple forecasting approach that assumes that recent history is a good predictor of the near future.

Bullwhip effect

A small disturbance generated by a customer produces successively larger disturbances at each upstream stage in the supply chain.

Hybrid strategies

A strategy that includes some elements of level production and some elements of chase production.

Inventory

A supply of items held by a firm to meet demand. Critical desire of organizations to minimize inventory of all kinds as long as the firm can effectively meet its objectives.

Grassroots forecasting

A technique that seeks inputs from people who are in close contact with customers and products. Limitations - estimates based on recent experiences, motivation to adjust forecast

Production support warehouse

A warehouse dedicated to storing parts and components needed to support a plant's operations.

Outsourcing

Acquiring inputs from operational processes done by suppliers. Firms must focus on their core competencies. Advantages: avoid capital investment, supplier has economies of scale and lower facility/labor costs. Higher quality, increased flexibility, greater capacity. Disadvantages: Supplier may not perform well quality or delivery, total costs may increase, buyer has to manage suppliers. IP sharing concerns.

Insourcing

Acquiring inputs from operational processes done within the firm

Setup cost

Administrative expenses and the expenses of rearranging a work center to produce an item. Fixed cost.

Types of supplier relationships

Adversarial Arm's length Acceptance of mutual goals Full partnership

Total cost of ownership TCO

All costs incurred before, during, and after a purchase.

Aggregate production plan

Also known as aggregate capacity planning. Specifies the production rates, inventory, employment levels, backlogs, possible subcontracting and other resources needed to meet the sales plan. Goal is to set targets for inventory and capacity so that supply will match demand over the intermediate time frame.

Saw tooth diagram

An illustration of the pattern of ordering and inventory levels.

Strategic sourcing process

Analyze spend and markets Develop sourcing strategy Identify potential suppliers Assess and select suppliers Manage relationship

Value added services

Any work that creates greater value for customers. example - warehouse puts final label on canned vegetables.

Cost to service trade off

As service levels increase, typically so do costs. Example -Improved lead times with quicker more expensive transportation

Insourcing/Outsourcing decision steps

Assess fit with firm's core competencies Evaluate suitability of outsourcing Evaluate reason for outsourcing Assess all relevant quantitative costs Assess all qualitative factors Review the capabilities of suppliers Make and implement decision. Monitor decision and revise as necessary

Transit inventory

Items being transported from one location to another.

Raw materials and component parts

Items that are bought from suppliers to use in the production of a product

Mean percent error (MPE)

Average error represented as a percentage of demand. MPE = sum of (demand - forecast ) / demand * 100 / n

Judgment based forecasting

Built upon estimates and opinions of experts. Helpful when statistical data is not available or when past demand does not match current situation - new product launch.

Sustainability

Business practices designed to positively affect people, society, the planet, as well as profits.

Finished goods inventory

Items that are ready for sale to customers

Contract carriers

Carriers that have specific contracts with limited number of shippers.

Arm's length relationships

Characterized by limited to simple purchasing transactions, lacks distrust associated with adversarial. Minimize dependency by having multiple suppliers, price is focus, do not share info.

Cross docking

Combines break bulk and consolidation warehouse activities. Provides tremendous efficiency in transportation, avoids the need for product storage and provides sizable service benefit to customer by providing one shipment containing their requirements for many different products. Large shipments from many sources scheduled at one time and assortments are broken up and loaded right there for shipments to individual customers.

Pooled delivery consolidation

Combines small shipments from different shippers that are going to the same market area. Like FedEx, UPS

Market area consolidation

Combining several small shipments from one shipper that are going to the same market area into one shipment.

Warehouse consolidation

Combining shipments from a number of sources into one larger shipment going to a single location. Customer can receive assortment of items in one shipment and take advantage of economies of scale.

Consolidation

Combining small orders or shipments into one larger shipment to take advantage of transportation economies. Three basic strategies: market area consolidation, pooled delivery consolidation, scheduled delivery consolidation.

Private carriers

Companies that own and operate transportation equipment to transport their own products.

Online reverse auction

Competition bidding systems that allows suppliers to submit multiple bids within a fixed time. Benefit is decision can be made quickly.

Stockout (shortage) cost

Cost incurred when inventory is not available to meet demand. Cost of a lost sale, difficult to estimate. Cost of future sales due to customer dissatisfaction, cost of backordering and expedited costs.

Role of logistics in supply chain management 2

Cost minimization: 25-30% estimate cost of logistics. Need to deal with trade offs to meet every higher service requirements without additional cost.

Capabilities and locations

Do you need to be close to supplier? Is it important to source nationally/regionally? Should supplier have a global presence? Is low cost primary objective?

Managing location

Driving force behind consolidation of warehouses and DCs is substantial reduction in inventory.

S&OP process

Each company is unique - involves marketing plan, resource plan to a balanced plan, financial review, executive meeting, implementation and follow up, create functional inputs for next round.

Government's role in transportation management

Economic regulation: Government controls of entry, rates and services provided by transportation carriers. The go is to ensure that transportation services are available to everyone at a reasonable cost. Safety regulation: Regulation designed to ensure that transportation carriers conduct their activities in a safe and responsible manner.

Supply management goals

Ensure timely availability of resources Reduce total cost Enhance quality Access technology and innovation Foster sustainability

Weighted point model

Establishes performance categories that are weighted according to importance. Used to evaluate suppliers

Scheduled delivery consolidation

Establishing specific times when deliveries to customers will be made.

Access to technology and innovation

Firms look to suppliers as sources of innovation and new technology to aid the design of new products and the improvement of existing ones. Suppliers often provide skills and knowledge that buyer may not possess.

Analyze spend and markets

First step is to understand what your firm is buying and how much it costs. Spend analysis Market analysis: gathers data on market's structure including the number of suppliers, number of buyers, nature of competition. Provides info to assess supply risk

Demand planning activities

Forecasting activities Demand management incorporates forecasting activities Plans passed on to material, capacity planning, scheduling systems - used to manage resources and operating processes.

Time series analysis model

Forecasting models that compute forecasts using historical data arranged in the order of occurrence.

Executive judgment

Forecasting techniques that use input from high level experienced managers.

Delphi method

Forecasts developed by asking a panel of experts to individually and repeatedly respond to a series of questions. Collect responses then given a chance to revise after they have heard the panel feedback. Continued until consensus.

Root mean squared error RMSE

Gives an approximation of the forecast error standard deviation. RMSE = square root of MSE

Full partnership

Have close working relations, trust, mutual respect, and highly integrated operations. Acknowledge inter dependencies and work together to reduce cost for both to benefit.

Buffering uncertainty in demand and supply

Hold extra inventory to guard against potential demand and replenishment uncertainties. Referred to as buffer or safety stock.

Balancing supply and demand

Holding inventory allows firms to intermittently produce batches of products. Important to hold some to meet demand as a firm may be switching between producing different products. Helps firms deal with seasonality.

Foster sustainability

How decision made within the firm and throughout the supply chain affect people, planet, and company profits.

S&OP Benefits

Improved forecast accuracy Higher customer service with lower finished goods inventory levels due to better forecasts and coordination of supply and demand. More stable supply rates resulting in higher productivity Faster and more controlled new product info Enhance teamwork, greater accountability Better decisions with less effort and time, window into future to see potential problems.

Managing inventory - info systems and accuracy

Inaccurate inventory records create uncertainty - usually requires firms to hold additional safety stock because you can't trust your info

Benefits of higher inventory turnover rates

Increased sales volume due to having rapid flow of new or fresh items Less risk of obsolescence or need to mark down or discount prices. Decreased expenses related to holding inventory Lower asset investment and increased asset productivity

Cost to cost trade off

Increasing the cost of one logistics activity reduces the cost of another Example - higher number of warehouses reduces transportation costs

Potential issues associated with carrying large amounts of inventory

Inefficient receiving processes or inefficient production process. Holding the inventory leads to failure to identify potential improvements in the company such as lean or JIT initiatives.

Aggregate planning costs

Inventory holding costs Regular production cost Overtime Hiring cost Firing / layoff Back order/lost sales Subcontracting cost

Balance sheet considerations of inventory

Inventory is an asset but - Purchasing inventory requires investment in it or debt to acquire it. Goal is to keep inventory low to keep need for investment or debt low. Reduction in inventory frees up cash.

Continuous review model

Inventory is constantly monitored to decide when a replenishment order needs to be placed. Decisions are how much and when with the goal of minimizing inventory related cost.

Enabling geographic specialization

Inventory is held in distribution centers near major customer demand zones because production facilities cannot be everywhere.

Independent demand inventory system

Inventory management system used when the demand for an item is beyond the control of the firm. End items and repair parts.

Less than Truckload LTL

Less than truckload carriers usually move loads of less than 15,000 pounds.

Krajlic matrix

Leverage: High value, Low supply risk, standard purchases, use competition to select and consolidate if you can Noncritical: Low value, low supply risk, low impact on performance, vendor manage inventory way to go Strategic: High value, high supply risk, core to firm performance, one or two suppliers - build relationship Bottleneck: Low value, high supply risk, not core but could cause delays, use at least two suppliers, explore different material.

Demand planning activities - time horizons

Long term: 1 -5 years, supply chain design, technology investments Intermediate: 6 - 18 months, sales and operation planning Short term: 1 - 12 weeks, inventory planning, purchasing, labor scheduling

MRO inventory

Maintenance, repair, and operating supplies

Logistic management

Management of the movement and storage of materials at lowest cost while still meeting customer requirements.

Dependent demand inventory system

Management systems used when the demand for an items is derived from the demand for some other item. Components to build a product

Enabling economies of buying

Managers may buy more inventory than they immediately need to take advantage of price discounts. Also, may find savings in larger quantity purchase transportation costs. Or, may be guarding against future disruptions.

Sourcing strategy must consider

Number of suppliers to use Capabilities and locations of suppliers Type of relationship and contract length

Activities of integrated logistics management

Order processing, inventory management, transportation management, network design, material handling and packaging, warehouse management.

Role of logistics in supply chain management 4

Order processing: Failures and errors in order processing impact cost of logistics as well as speed of order cycle.

Request for proposal RFP

Otherwise known as Request for quotation RFQ First step in competitive bidding. Documents that describe the purchase requirements as specifically as possible.

Dangers of inventory turnover that is too high

Possible lower sales due to running out of needed items Increased cost of goods sold due to inability to produce or purchase in quantity Increased purchasing, ordering, and receiving time effort and cost.

Managing cycle stock

Primary driver of cycle stock is order quantity - how can you find ways to reduce this quantity to lower average inventory.

Reduce total costs

Purchases are often firm's largest expense. Effective supply management reduces expenses and frees up cash flows.

Rolling planning horizons

Re plan each period for a given number of periods into the future.

Seasonality and cycles

Regular demand patterns of repeating highs and lows.

Adversarial relationships

Relationships characterized by distrust and limited communication. Short term business transactions. Minimize dependency by having multiple suppliers, price is focus, do not share info

Ensure timely availability of resources

Right purchases available at the right time is key. If not, can halt operations causing customers late delivery or create problems if a service is not rendered when scheduled. Necessary to gather info and carefully evaluate supplier capabilities to assess supply risk.

Managing safety stock

Safety stock is required because of uncertainty due to variability in demand and supplier lead time. Can use an ABC analysis

Role of logistics in supply chain management 1

Service benefits: Availability, lead time, performance, and service reliability. Failure of a supplier to deliver a needed component on time could result in shutdown. Need to be consistent, deliver without damage, limited lead time - all logistics responsibility.

Carrying (holding) cost

Several expenses that are incurred due to the fact that inventory is held. Includes opportunity cost, cost of storage space, taxes, insurance, cost of obsolescence, loss, disposal, cost of materials handling, tracking, management. Most companies state carrying cost as a percentage of the value of the inventory. Could be 25-30% Average inventory * percentage of carrying cost

Specialty carriers

Specialty carriers include package haulers such as FedEx and UPS.

Service characteristics of modes

Speed Availability Dependability Capability Frequency

Break-bulk

Splitting a large shipment into individual orders and arranging for local delivery to customers. Used when suppliers are employing a market area consolidation strategy.

Components of demand

Stable pattern Seasonality and cycles Trend Shift or step change Autocorrelation Forecast error

Develop a sourcing strategy

Strategy developed from using the spend and market analysis. Classic framework is by Kraljic. It categorizes sourcing strategies based on supply risk and value of the total spent by the firm.

Enhance quality

Supplier quality is an order qualifier with a specified level of quality required to do business with a buyer.

Collaborative planning, forecasting, and replenishment CPFR

Supply chain partner firms share info and insights in order to generate better forecasts and plans.

Forecast error

The difference between a forecast and the actual demand. Primary measure of forecasting performance. Positive forecast error indicates an overly pessimistic forecast, a negative value indicates an overly optimistic forecast. Forecast errors can be examined to determine 2 primary aspects of forecast performance over time: forecast accuracy and forecast bias.

Order cost

The expenses incurred in placing and receiving orders from suppliers. Order prep, transmittal, receiving, and accounts payable. Fixed cost, but quantity of orders could change overall total cost.

Level production planning

The firm produces at a constant rate over the year. Build inventory in periods of low demand and depleting the inventory in periods of high demand. Used when costs of ramping up production are high and inventory costs are relatively low. If processes require highly skilled works. Requires no overtime, no changes in workforce levels, no subcontracting. Level production rate = sum of demand in period + ending inventory - beginning inventory / number of planning periods. Total level plan costs = Regular production + Inventory cost + hiring/firing cost.

Trend demand pattern

The general sloping tendency of demand either upward or downward. In a linear or nonlinear fashion. New products - upward sloping trend

Supply management

The identification, acquisition, and management of inputs and supplier relationships. Also known as, purchasing or procurement.

Sourcing

The identification, evaluation, and selection of suppliers.

Periodic review model

The management system is built around checking and ordering inventory at some regular interval.

Forecast accuracy

The measurement of how closely the forecast aligns with the observations over time. Every forecast error reduces accuracy - high or low.

Reorder point ROP

The minimum level of inventory that triggers the need to order more. ROP = (average demand per time period)*(average supplier lead time)

Days of supply

The number of days of business operations that can be supported with the inventory on hand. Current inventory / Expected rate of daily demand Forward looking measure. More meaningful to measure performance for specific items rather than overall inventory - different demand for different items.

Economic Order Quantity EOQ

The order quantity that minimizes the sum of annual inventory carrying cost and annual ordering cost. The EOQ formula trades off the annual ordering cost and the annual inventory carrying cost and finds the quantity that yields the lowest combination. EOQ = the square root of (2)(Annual Demand)(Order cost) / (Unit cost)(Carrying cost %)

Cycle stock

The portion of average inventory determined as order quantity divided by two. Average inventory = Q/2 (cycle stock) + Safety stock

Supply risk

The probability an unplanned event that negatively affects firm's ability to serve customers. Besides supply delays or disruptions, risk is also theft of ip, increased prices, product safety problems or reputation issues.

Chase strategy

The production rate is changed in each period to match the amount of expected demand. Most firms use a mixed strategy. Used by firms that have high per unit inventory holding cost relative to cost of production rate. May use part time workers, lower skills and training, goods that are perishable. Most service businesses use chase because you cannot hold inventory.

ABC analysis

The ranking of all items of inventory according to importance. Allows firm to better manage inventory levels on most important products to the firm. Usually find Pareto's law in ABC analysis - rule that a small percentage of items account for a large percentage of sales, profit, importance.

Inventory turnover

The ratio between average inventory and the level of sales. Cost of good sold / Average inventory @ cost (most common) Net sales / Average inventory @ selling price (used by retailers) Unit sales / Average inventory in units (price varies like gasoline) Backward looking measure.

Value density

The ratio of a product's value to its weight. Because of relationship between total transportation cost, product value, and weight, key determinant of the mode used is value density.

Stockpiling

The storage of inventory in warehouses to protect against seasonality either in supply or demand. Cover demand when there is no production.

Total landed cost

The sum of all product and logistics related costs. Strategic decisions should be made on this cost.

Total acquisition cost TAC

The sum of all relevant inventory costs incurred each year. Annual carrying cost + annual ordering cost (no variability) Number of orders placed = Demand / Order Quantity Average inventory = Order quantity / 2 (when no safety stock is held. TAC = (Order cost)(Orders per year) + (Unit cost)(Carrying cost %)(Average inventory)

Forecast bias

The tendency of a forecasting technique to continually over predict or under predict demand. Simply - average error. Average forecast error over a number of periods: Bias (mean forecast error MFE) = sum of difference of actual demand - forecast / n periods you are using. Positive forecast bias = forecast tend to be too low over time Negative forecast bias = forecast tend to be too high over time.

Number of suppliers

Too few increases risk of supply disruption, too many increases complexity and admin costs, communication an issue. Can standardize purchases to reduce suppliers, or use modular designs. Use single sourcing to increase cooperation

Truckload TL

Truckload carriers generally carry only full trailers of freight with shipments in excess of 15,000 pounds

Reverse logistics support

Warehouses becoming increasingly points of support for product returns.