Demand Planning and Fulfillment Exam 2

Firmed planned order

a planned order that can be frozen in quantity and time so that the MRP computer logic cannot automatically change when conditions change. establish by the planner or supply chain manager to prevent system nervousness. this can aid planners working with MRP systems to respond to material and capacity problems by firming up selected planned orders

Inventory costs

-cost of money -storage space -losses -handling -admin -insurance

Pull based replenishment

-position inventory at location -drive replenishment based on consumption, not forecast (but with some estimation of demand, usually historical view) -common examples: re-order point, min max, kanban) often under specific conditions -demand is hard to forecast -lead times are short caveat: requirements still need to be passed to other areas of the supply chain (ex production, materials)

Scheduled receipt

a committed order awaiting delivery for a specific period

Working capital

current assets (AR and inventory)-current liabilities inventory is a controllable part of working capital

Projected on hand inventory

projected closing inventory at end of a period, beginning inventory minus gross requirements plus scheduled receipts plus planned receipts from planned order releases

Factors in supplier sourcing

cost, location which drives lead time, minimum order quantities

Supply planning

element of supply chain management responsible for determining how best to satisfy the requirement created by the demand plan

Make to stock strategy

finished goods inventory is places at the warehouse based on a forecast. this supports immediate customer fulfillment. inventory may be placed in other stages as well to support overall operation. most but not all use this

DRP basic calculations

for each future period 1. review the demand 2. subtract the demand from the projected inventory 3. add the confirmed supply to the project inventory 4. compare the projected inventory to the target inventory 5. plan to bring in supply to bring the projected inventory up to the target inventory level

Inventory is good

key decision is how much inventory to keep on hand -maintaining adequate finished product inventory allows a company to fill customer orders immediately and support manufacturing operations and the production plan while avoiding delays -helps companies use economies of scale -failing to manage inventory adequately can lead to significant issues and inefficiencies throughout the supply chain, including dissatisfied` customers, lost sales and revenue and higher costs

Inventory can be reduced by lowering

lead time of an order replenishment uncertainty of demand over the lead time uncertainty of supply required service (material availability)

Reorder point

lowest inventory level at which a new order must be placed to avoid a stockout

EOQ explanation

make it economical to order very small lot sizes

Components

parts demanded by a parent

Factors set during operation

planning and communication, updates to planning parameters, prioritization

Net requirement

the unsatisfied item requirement for a specific time period, gross requirement for period minus current on hand inventory

Supply chain tensions

max customer service, min inventory, min operating costs sweet spot has all three of these

Level loading and requirements smoothing

-followed a smoothed version of the requirements signal -often done at production stage of supply chain best used when-short term volatility is high -long term volatility is low caveat: planning needs to be vigilant when not following the true demand signal (control limit monitoring)

Why cash flow is important

-key indicator of a company's quality earnings -over time, cash flow is the most important factor driving value -cash can be used for acquisitions, developing new products, funding capital, paying dividends and buying back shares

Cost of not holding inventory

-lost sales -lost customers -expediting and rush costs in transportation -production delays waiting for part -unplanned overtime -uneconomical batch sizes

Lot size constraints

-minimum ship quantities -forward pull in quantities aka periodic lot size

Categories of inventory

-raw materials -WIP -finished goods

Supply planning variability

-schedule variations: change in requirements, execution different from actuals -lead times: time between supply chain steps, delaying response -capacity: resource that may be more or less than what is required -batch size: quantities above what is required -cost/price breaks: excess inventory to reduce unit cost -technical ability: limitations in what we can buy, make or move

Inventory is bad

-too much inventory ties up capital which could otherwise be used for purposes such as research and development, marketing and sales, stockholder dividends, salary increases, etc -the more inventory a company holds, the more space is needed and space costs money -in addition to storage costs, a company may also have to pay for security, insurance, taxed, etc to hold inventory -inventory can become a liability if it becomes unusable due to expiration, obsolescence, damage, or spoilage

Multilevel bill of materials

a display of all the components directly or indirectly used in a parent, together with the quantity required of each component (ie planning factor). if a component is a subassembly, blend, intermediate, etc, all its components and all their components also will be exhibited, down to purchased parts and raw materials

DRP

goal is to provide time phased distribution requirements plan how much product to move from one location to another, positioning inventory ahead of time to meet demand

Production planning

has to assess 1) if the site has the capacity to make the product 2) how to schedule the different products effectively operations managers have to deal with -people: labor planning, costs, training, safety -facilities: buildings, resources, storage -equipment: conveyor lines, robotics, packaging -materials: receiving and preparation for use

Order quantity-practical considerations

order quantities are often sub-optimal -supplier MOQs may be set at beginning, based on assumptions, or supplier preference -other MOQs may be driven by packaging (case, pallet, bag) quantities -order quantities can be driven by order frequency order quantity analysis is a key part of inventory management -MOQ coverage: what is the MOQ in terms of demand coverage? -highlight exceptions where MOQ> 3-6 months of future demand order quantities can be changed to support business -sometimes we just have to ask and a change will be made -order times we need to understand tradeoffs (cost, inventory) smaller more frequent deliveries has a lot of benefits

Why do we need inventory

organizations create inventory so that they can compensate for the differences in timing between supply and demand -common analogy is water tank, water tank is your inventory level and we have the supply of water feeding the tank, and at the same time the flow of water out of the tank to meet customer demand

Forecast consumption

policy and rules governing how orders and forecasts are combined to create total demand (because forecast and customer orders need to be combined to create on single demand stream) some options: -use the greater of orders or forecast in each period -use orders for a certain number of days, then use forecast after -use only forecast, or only orders

Raw materials

purchased items or extracted materials that are converted via the manufacturing process into components and products -every company that produces generally starts with some type of raw material, component part or starting material -there are strategies around the question of how much raw material a company should hold in inventory: --buy from a supplier and have it delivered to the operation just in time for when it is needed --buy and hold a larger quantity for strategic reasons -companies might be willing to increases costs by storing excess raw material inventory is they fear there may be a potential shortage of the material or if they suspect that there is an upcoming price increase and want to buy at the current lower price

Physical pipeline stock (aka in transit stock)

represents the inventory in between locations includes all steps including transportation and waiting manage lead times increase factory yield

Safety stock calculation

safety stock= std dev demand * sqrt lead time * z[target service level multiplier] depends on variability of demand for the product, lead time it takes to get more product, the service level we are trying to achieve excel calculations on slide 42 of module 9 and on excel doc module 9

Four drivers of inventory

service -customers expect that some portion of their demand will be met within a time period --on time in full --unit fill rate --order fill rate time -customer expected lead time is shorter than lead time it takes to respond to the demand --procurement time --production time --fulfillment time --transit time --customer requested lead time uncertainty -unanticipated changes in supply and demand jeopardizes desired service levels --demand (quantities, timing) --supply (quantities, timing) economics -economic replenishment quantities & asset utilization offset inventory costs --purchase quantity discounts --economic lost sizes (manufacturing) --handling quantities ---transportation quantities --capacity balancing --customer opportunity costs a businesses' ability to understand and influence these drivers is critical to maintaining efficient levels of inventory

Min max

similar to other pull based replenishment -wait for certain threshold to order -ensure that enough inventory will last compared to demand over lead time unique attribute is to order up to a max level -most clear example is a liquid tank -tank is filled regardless of level -order quantity may be different

Bullwhip effect

small changes in the front of the supply chain cause larger and larger distortions upstream

Suppliers are critical to good performance

suppliers play a huge role in determining the effectiveness of overall performance

Prebuild stock

the additional inventory kept to manage future capacity constraints the on hand stock above the cycle stock in the absence of uncertainty and minimum stock requirements increase factory flexibility plan for seasonality

independent demand

the external demand for an item that is unrelated to the demand for other items (eg finished product) the demand for these items is forecasted and can be affected by trends, seasonal patterns, and market conditions

Economic order quantity

the idea is to find the optimal order quantity that balances order host and holding cost

dependent demand

the internal demand for items that are assembled or combined to make up the final product (eg component parts) demand for these items is calculated based on the demand of the final product in which the parts are used by using the planning factor

Planning factor

the number/quantity of each component or material needed to produce a single unit of the parent item

When to order

the rop is set at a level that provides enough inventory so demand (D) is covered during the lead time (L) needed to replenish inventory. therefore the demand over the lead time helps set the reorder point then, when we need to order, we will order the EOQ or a minimum order quantity (MOQ)

Risk pooling vs other factors

there are many reasons why companies often want more distribution centers, not less -customer lead times -overall risk management -regulations in specific countries -transportation costs

Frozen periods

-committed to ship periods -slush periods (only manual adjustments)

Parent

item generating demand for lower level components

Lot size

order size for MRP logic

MRP explosion

the process of converting a parent items planned order released into component gross requirements

Time bucket

unit of time/ time period used in MRP

Deployment parameters- developing the distribution order

-horizon- how far out to lock in shipment -committed supply- use inventory or production -load planning- determining container impact

EOQ equation

EOQ=sqrt (2 x order cost x annual demand volume/annual carrying cost % x unit cost)` excel on slide 27 of module 10

Holding cost increases as

Q increases Q/2*h

Ordering cost per year decreases as

Q increases R/Q * K

Demand planning variability

in a traditional planning environment, demand plan drives all other plans in the supply chain what if its off or biased?

Order costs

incurred each time an order is placed -order prep costs -order transportation costs -order receipt costs -material handling costs

Pegging

relates the gross requirements for a component part to the planned order releases of a parent item, so as to identify the sources of the items gross requirements, can be thought of as active where-used information

Work in process

a good or goods in various stages of completion throughout the plant, spanning from raw material that has been released for initial processing up to fully processed material awaiting final inspection and acceptance as finished goods -with this inventory continuously being changed and converted to finished products, many companies view WIP as the black hole as they may not have very good or very timely visibility into this part of their inventory -best practice generally suggests minimizing the amount of WIP inventory in the manufacturing area since too much WIP may clutter up the physical space and impeded the process flow -synchronization of manufacturing between steps will reduce queue time and helps manage WIP effectively

Economic order quantity model

a quantitative decision model based on the trade off between annual inventory carrying costs and annual order costs (EOQ is a fixed order quantity model) seeks to determine an optimal order quantity where the sum of the annual order costs and the annual inventory carrying costs is minimized -order costs are costs that are incurred each time an order is placed -carrying costs are costs that are incurred for holding inventory in storage total cost= purchase cost + order cost + carrying cost

Planned order release

a specific order for a specific item and quantity to be released to the shop or to the supplier

Gross requirement

a time phased requirement prior to netting out on hand inventory and lead time

Traditional supply chain planning pros

all functions follow the same plan, demand driven

Planning bill of materials

an artificial grouping of items (eg a product family) in BOM format, used to facilitate master scheduling and material planning

Lot size, Q, and average inventory level

as the order quantity doubles so does cycle stock (average cycle stock=Q/2)

Objective of supply planning

balance supply and demand in a way that realizes the financial and service objectives of a company (get the product to the customer with the lowest cost and inventory)

Materials requirements planning (MRP)

bill of materials (BOM)- what goes into a product or subassembly -raw materials -WIP materials -multiple levels in BOM a structured bill of materials follows the production process -uses production routing for calculations -helps track material useage -accounts for scrap inventory management is key to planning success, especially in materials. when do we recognize that amterials are used? -recorded at time of consumption -recorded when assemblt is complete (backflushing)

Inventory vs service tradeoff

businesses want to have good service in their supply chain, but more and more inventory is needed to achieve higher levels organizations need to evaluate the tradeoffs of service level vs inventory investment to find the best point on the curve that satisfies their business objective not all products will have the same service target

Materials planning

calculates the need for additional materials based on the quantities needed for production think of it as a recipe to make something in the kitchen 1) what ingredients you need 2) what you already have and what you need to get 3) the sequence of the activities to make the product

Distribution planning

calculates the right amount of the right product to go to the right place at the right time uses a straightforward calculation bring enough in to maintain an inventory level

Traditional supply chain planning cons

can be slow to react as each group must follow the previous, reactive nature can bring disruptive change (bullwhip)`

Kanban to support supply chain partnerships

can be used when all the following conditions exist -there is a stable production schedule -items are to be produced on a regular basis -standard containers are used, each holding a fixed quantity of a particular item -output capacity is flexible- that is it can be increased rapidly if required -production flow is carefully planned with clearly defined storage locations (or buffers) for each work center -the range of components manufactured at each center is low

Supply chain planning

combination of all the planning processes that are used across the supply chain -distribution requirements planning (DRP) -production planning and master production scheduling (MPS) -inventory management (across all stages)

Merchandising stock

cushion kept to maintain retail appearance often a minimum quantity marketing coordination inventory planning that trades off safety and merchandising stock

Service level

demand will be met with probability ____ during the lead time probability of a stock out is _____ (1-service level) orders will be filled __% of the time

Forecast proration

determines how the forecast is spread through the period -equal spread from month to weeks, or weighted based on historical spread -policy during the month about retaining forecast or letting it run out

Single level bill of materials

display of components that are directly used in a parent item, together with the quantity required of each component (ie the planning factor) shows only the relationships one level down

Bill of materials (BOM)

document that shows an inclusive listing of all component parts and assemblies making up the final product

Safety stock

held to guard against variations in demand and supply to prevent stockouts and maintain customer service levels the additional 'cushion' of inventory kept to deal with uncertainties due to demand and supply the on hand stock above the cycle and prebuild stocks in the absence of minimum stock requirements improve forecast accuracy and/or use calculation that accounts for error and bias manage vendors to decrease lead time and variability improve factory yield when both demand and supply are constant, you know exactly when to order to bring your safety stock down to zero things to consider in determining safety stock: -level of demand -frequency of purchase -variability in demand -order full and line fill rates -lead times -order and production quantities -forecast accuracy -location of stock within the supply chain -product lifecycle (new product, end of life)

Kanban- a pull system

in a push system of production planning and control, such as an MRP system, we look at the schedule to determine what to produce next in a pull system such as kanban we look only at the next stage of production and determine what is needed there and then we product that only signals come in many forms other than cards including: -an empty crate -an empty designated location on the floor

Quantity discounts for EOQ model

in the EOQ model, the unit purchase price P has been assumed to be independent of the size of the order quantity discounts are commonly offered for larger order sizes: -all units discount schedule: discount applies to all the units in the order -incremental discount schedule: discount applies to the additional units beyond each breakpoint

Carrying costs

incurred for holding inventory -cost of capital-specified by senior management -taxes- on inventory held in warehouses -insurance- based on estimated risk or loss over time and facility characteristics obsolescence- deterioration of product during storage and shelf life storage- facility expense related to product holding

Cycle stock

inventory driven by order quantities can be in materials, production, or transportation as the order quantity doubles, so does cycle stock average cycle stock=q/2 is kept on hand to satisfy the predicted demand until the next shipment arrives the on hand stock in the absence of uncertainty, minimum stock requirements, and capacity constraints decreases batch sizes more frequent orders with smaller quantities improve factory efficiency vendor integration

Rocks in the stream concept

inventory hides what's really happening- get rid of it, identify your problems and set about solving them

Inventory as part of the supply chain

inventory is placed throughout at different stages to support smooth operations throughout the supply chain -quick fulfillment of customer orders -support of inventory distribution to warehouses -uninterrupted supply of materials manufacturing there are different reasons to hold inventory -cycle stock -safety stock inventory can provide benefit to an organization but too much can be a drag on efficiency

What is the role of inventory

inventory is what we buy, make, move and sell- our products part of assets lifeblood of the supply chain, the "oil" that lubricates the engine

Excess and obsolete inventory

inventory items that have met the obsolescence criteria established by the company obsolete inventory will never be used or sold at full value -writing off obsolete inventory off of the books and disposing of it may be a difficult decision to make as all or part of obsolete product's value may be lost and it may reduce a company's profit -unusable inventory takes up space and costs money to maintain so it may be better to absorb the loss if the product is known to be obsolete -there may be a cost associated with the actual disposal of the inventory -some companies may donate this inventory to a non profit org if it has any remaining value, which not only helps the non profit but also avoids disposal costs and may result in a tax break

Bin system (AKA kanban)

inventory system that uses either one or two bins to hold a quantity of the item being inventoried -mainly used for small or low value items -when the inventory in the first bin has been depleted, an order is placed to refill or replace the inventory -the second bin is set up to hold enough inventory to cover demand during the replenishment lead time so as to last until the replacement order arrives

Capacity is finite

many of the supply problems are related to the fact that capacity is finite this affects our supply output and what to order to supply

MRP functionality

materials requirements planning is a systematic way to calculate the time phased requirements of materials. it uses the planned production requirements as an input to understand what is needed by: -exploding the bill of material (how much to order) -backward scheduling (when to order) this is known as a push method because materials are ordered in expectation o f a future need. other materials planning systems use a consumption based or pull methodology

Visibility allows for

measurement and actions

Traditional supply chain planning

most companies follow a traditional planning process -forecast customer demand -plan distribution, manufacturing, and materials sequentially -adjust to changes in plan through system -often known as a chase strategy

Risk pooling

moving from two distribution centers to one (of equal size with normal distribution of demand) will reduce safety stock inventory by about 30%: (1/2)^.5 as well as cycle stock

What happens if demand is more than expected?

often the probability of demand during the replenishment time follows a near normal distribution we develop safety stock to support service even if the demand is higher (slope is steeper) than expected we can use statistical methods to set safety stock to a level that meets our service target

Finished goods

those items on which all manufacturing operations, including final testing, have been completed. these products are available for sale and/or shipment to the customer -from a cost perspective, finished goods are usually worth much more than RM or WIP since all of the material, labor, and overhead costs are fully applied to finished goods -the amount of finished goods inventory that a company decides to maintain is a strategic decision: --companies can operate a make to order supply chain where the finished goods are not produced until a customer order is received, and the raw materials may not even be ordered from the suppliers in advance. little to no finished goods inventory is maintained --companies can operate a make to stock supply chain where product is produced prior to receipt of a customer. a forecast and demand plan are created and the finished goods are produced and held in inventory until a customer order is received. significant amounts of finished goods inventory can sometimes be maintained

Why is inventory needed?

time drives our responsiveness (and our inventory)

Distribution planning methods

time phased planning methods use future requirements to order and place inventory in time of demand -distribution requirements planning -material requirements planning consumption based planning methods place inventory up front, then use actual demand to trigger order for replenishment -kanban -reorder point -min max planning

Supply planning overall

unlike demand planning, supply planning has less grey area -more calculations, less guessing -scenario planning can help with input uncertainty but supply planning must synchronize and check activities between different stages -distribution -production -outside supply normally there is an iterative process to propagate and manage constraints (ex material shortage affecting production decisions)

Supply chain agility

what is the time it takes to respond to change in demand? how much inventory is needed to support the enterprise?

Planning vs reacting

when service is at stake, supply chain managers often throw plans out the window planning is not always right. we need to re-plan and react to new info in an organized manner

What can we do to make the EOQ smaller

work on the order (setup) cost