OTM test 2

z

# of standard deviations corresponding to the desired probability

S & OP maturity model developed by Garter

(1-4 getting stronger) 1. reacting 2. anticipating 3. collaborating 4. orchestrating

capacity planning

matching capacity supply to demand why could this be an issue? there is uncertainty due to demand variability, equipment inconsistency, etc.

centroid method

method used for locating single facilities; considers existing facilities, the distances between them, and the volumes of goods to be shipped between them (or some other measure of relative weight to be given) This methodology involves formulas used to compute the coordinates of the two-dimensional point that meets the distance and volume criteria

orchestrating- Garter maturity model for S & OP

more dynamic, agile process; firm influences operations throughout the supply chain. Highest level; similar to lean production

anticipating-Garter maturity model for S & OP

more formal, structured process; match supply to demand; lack of balance (e.g. sales dominated). We saw this in red wing; supply came up with a plan and then gave it to MFR-didn't include them

reacting-Garter maturity model for S & OP

more of sales review meeting, inconsistent, ineffective. We see what happens with demand and change production schedule accordingly-Sales review; adjusting month by month.

collaborating-Garter maturity model for S & OP

more proactive; work with supply chain partners on planning Coordinate a plan with everyone- After improving the system, Red Wing is at least a 3

what does a larger SD mean?

on average values are larger or more disperse from the mean

what does a smaller SD mean?

on average values are smaller or closer to the mean

trend component method to forecasting-quantitative

persistent, overall upward or downward pattern Due to technology, population, etc Several periods in duration

circle nodes in decision trees

probabilistic events-EV

chase plan

produce exactly what is planned at each time period. Increase/decrease capacity to exactly meet demand in each period. Production is exactly following demand.

point forecasts are almost always wrong-true or false?

true

Slope at the minimum point of the total annual cost function

=0

what approach do you use to generate a normal distribution forecast?

A/F ratio

A/F ratio method

Allows us to combine past data from many forecasting tasks that were similar to the current forecasting task by putting them all on the same scale: Taking past data from items just like it that you think will act the same way with demand. A/F stands for "actual demand" / "forecasted demand"

4 obstacles to an organizational change and improvement

An organization wedded to the status quo Limited resources A demotivated staff Opposition from powerful vested interests

Key Capacity Strategy Factors

Predicted growth & variability of demand Planned new production intros and/or existing product phase-outs Product mix & focus considerations Competitor behavior Sizes and number of facilities - consider economies and diseconomies of scale

who wants change vs who wants to change the organization is very different. T OR F

T-change is a process not an event

Two important characteristics of demand forecasts

1. Point forecasts are almost always wrong; a point forecast is a single answer 2. A good forecast is more than a single number

Red wing shoe article basis

26K footwear & 72K garment/accessories SKUs Major effort began in 2008 to develop a new S&OP process because the old one was ineffective

New process for red wing

Change efforts focused on the 4 primary components of s&op: people, process, and technology Key change: forecasts/plan shared with suppliers and MFR team and they are involved in the creation of the plan-so that you don't make false promises based on an attainable plan technology : data pulled from the ERP (enterprise resource planning) software-reduced errors, quicker data access; new forecasting software. Not manually anymore so everyone is updated constantly and it is more efficient. Process: broken down into several stages, responsibilities assigned to 1-2 people at each stage. People: created a new demand planning position for each brand-more communication with sales, better (updated) sales forecasts, updates related to suppliers & MFR.

Kotter's take on change management

Communicating a vision for change E.g. emails Few channels of communicating change, lost in translation. Dealing with resistance to change The people who are resistant to change are at greater risk to undermine the effort of the change. If they are unsupportive of the change effort they should find somewhere else to go or we should put them on the side. The heart of change You have to win over the hearts and the minds of people when implementing a change. Get people to not only think different, but to feel differently to ultimately change the behavior

setup costs

Direct labor Lost production time

John P. Kotter's eight steps to transforming your organization

Establishing a Sense of Urgency Forming a Powerful Guiding Coalition Creating a Vision Communicating the Vision Empowering Others to Act on the Vision Planning for and Creating Short-Term Wins Consolidating Improvements and Producing Still More Change Institutionalizing New Approaches

Suppose you tracked a group of items over time and their in-stock rate was 95%. Is that good enough?

Every item is different - questions to ask: What is the gross margin on the product? What is the inventory holding cost for the product? What is the likelihood a customer will buy a substitute product if they encounter a stockout? Note: conflicting manufacturer and retailer needs How good are competitors at keeping merchandise in stock?

holding costs

Expenses of managing inventory Warehouse space Theft Spoilage/obsolescence Insurance Handling/counting costs-the more inventory we have the more people we need to control it

what method did Paul Levy-CEO of BIDMC use to persuade his change efforts throughout his company?

Gavin and Roberto's change through persuasion

Honeywell WSJ example from class

Honeywell international supplies business jet MFR with everything Honeywell Forecasts $280 billion for Business Jets, but it was really $30 billion and 200 jets more than predicted-volatile. 2008-big financial crisis; was their peak of 1800 delivered to 672 in 2012 during the recession. What type of factors might influence the actual demand? Fuel costs; recession CEO addressed the sales decline-forecasting was wrong. Forecast did not turn out how they thought in business jets but also hand held scanners Stock dropped 7.6% in 1 day Hurt by slowing growth in emerging regions including middle east, russia and china They are confident they are moving in the right direction.

What is standard deviation?

How much variability there is in a data set

guidelines for selecting a forecasting method

If future demands are expected to conform to past demand patterns, quantitative techniques are most useful The longer time horizon, the more dangerous it is to rely on extrapolation of past patterns through quantitative techniques For longer time horizons, qualitative techniques are more likely to be emphasized Match the method to the types of patterns found in the data-trend, seasonal, cyclical.

Tipping Point Leadership

In any organization, once the beliefs and energies of a critical mass of people are engaged, conversion to a new idea will spread like an epidemic, bringing about fundamental change very quickly How does this happen? Leadership Make unforgettable and inarguable calls for change Concentrate resources on what really matters Mobilize the commitment of the organization's key players Silence the most vocal naysayers

top down method to forecasting- judgemental

Jury of executive opinion Problem: group think-there is a tendency for people to not want to "rock the boat" in a group seating. Group follows assertive person in the group. Delphi methods Physically distributes people & there is a facilitator to combat groupthink & make sure everyone's voices are heard.

which three discount retailers all started in 1962?

K mart, Walmart, Target K mart was the sales leader until 1990 They have had a lot of change, but lack of focus or direction! many CEOs in a short amount of time; they have different objectives and tactics for the company.

Where does S & OP fit on the time scale?

Long term: facilities planning-->medium term: sales: operations planning (decisions at each level constrain options at lower levels, I can not adjust my physical constrains)-->short term: details scheduling (where i will have to work at the SKU level-I have to look at which Jeans and styles)

Locating Service Facilities

Multiple sites close to customers-primary importance Location decision closely tied to the market selection decision Decision more about maximizing profits than minimizing costs

William Bratton

NYC police commissioner Appointed in February 1994, achieved a major turnaround in less than two years with no increase in budget Took over NYPD and the morale was low; citizens were complaining about safety of subways. Required every NYPD employee to take the subway to and from work, so they can see the safety concerns from the public's eye. Used tipping point approach to bring about rapid, dramatic, and lasting change with limited resources Two years later: fast turn-around; changed the culture of this organization

results of a customer encountering a stockout

No sales impact - customer buys a substitute or returns after re-stock Lose the sale - customer buys elsewhere or decides to do without Lose the sales on an entire basket of goods Lose the customer - usually, only after repeated stockouts

Are all items similar in terms of how they are forecasted?

No- if you assume that two items are similar, so their forecast demand errors are also similar than the distribution will not be accurate for the item you are forecasting

opportunity costs-subsection of holding costs

Opportunity cost of money tied up in inventory Typically 20-40% of item value annually What could i be doing with this money if it wasn't in holding costs

ordering costs

Order forms Postage/delivery Order entry costs

continuous review models

Orders are event triggered (Example: running out of stock) Tells you exactly what is going on-what exactly is in inventory. E.g. scanner when products are bought and taken out of inventory.

fixe-time period review models

Orders are time triggered (Example: Monthly sales call by sales representative) Ordering every monday morning even if you have a busy day on Thursday.

why is change so hard?

People are reluctant to change their habits What worked in the past often seems good enough Unless a dire threat is perceived, employees will continue doing what they have always done Change often requires additional work for employees, on top of their usual duties Leading or serving on project teams When an organization has had a succession of leaders or change programs, resistance to change is even stronger "just like all the others" Calls for sacrifice and self-discipline are met with cynicism, skepticism, and knee-jerk resistance

Forecasting

Process of predicting future outcomes based on the available relevant information Key input to the S&OP process Many factors may influence outcomes-very difficult to achieve accuracy and precision. costs/consequences of errors can be significant!- may have to shut down factory

4 types of inventory costs

Production or purchase costs Fixed setup or ordering costs Shortage / stockout costs Holding costs

Facility Location Decisions

Proximity to customers Business climate; different countries are less/more receptive to bringing new businesses in Total costs; construction, labor, transportation costs Infrastructure; e.g. roads leading up to facility Labor pool Supplier locations; are we lean? Then, they should be nearby Locations of existing facilities Government/political factors Environmental regulations

Sales and Operations planning

S & OP is an organizational process from developing a plan to efficiently make supply meet demand: "having the right product, in the right amount, in the right place, at the right time" integrate our sales plan (forecast), supplier requirements, production requirements, distribution requirements Medium-term time frame-thinking at an aggregate level (e.g. product line like "wood screws," ) no SKU (stock keeping unit-the level at which we want to track inventory through our system) like "#8 x 2" flat head Phillips drive E.g. of bad SKU-->400 pairs of jeans-not specifying the types so it is not effective.

bottom up method to forecasting-judgemental

Sales force composite approach Salespeople are out there face to face with the customers. Market survey

Change through persuasion-Gavin and Roberto

Set the stage for acceptance- develop a bold message that provides compelling reasons to do things differently Present your plan - explain in detail its purpose and expected impact; ensure that people interpret your ideas correctly While executing the plan, manage employees' emotions by acknowledging the pain of change, while keeping people focused on the hard work ahead As the turnaround starts generating results, reinforce desired behavioral changes to prevent backsliding - provide opportunities for employees to practice desired behaviors repeatedly and, if necessary, publicly criticize disruptive, divisive behaviors

capacity planning short term vs long term consequences

Short-term? Not such a big deal because we can ride it out Long-term? A big deal because it can persist, may be costly. Too much capacity-we might have to shut down production line or lay people off. Not enough-customers may go and buy something else & sending customers to our competitors

explanatory method to forecasting-quantitative

Simple regression- y= a+bx Multiple regression- multiple x variables Econometric models-key: all try to predict one dependent variable based on levels of other independent variables that are believed to have influence on the variable predicted-trying to understand variables to do a better job forecasting; more sophisticated

In-stock rate ≠ sales capture rate- T or F

T

fixed setup or ordering costs are independent of order size? T or F

T

Finding the Best Q: The Economic Order Quantity Model; Assumptions:

The first time someone look at an inventory problem and looked at it in an economic way. Manages Tradeoffs between annual ordering and annual inventory costs Demand for the product is constant and uniform throughout the period Lead time (time from ordering to receipt) is constant Price per unit of product is constant E.g. No allowances for quantity discounts Inventory holding cost is based on average inventory Ordering or setup costs are constant All demands for the product will be satisfied (No back orders) Not going to have any shortages; follows the first two assumptions

What does it mean if the A/F Ratio is <1?

The forecast is too high if the value is less than 1.

benefits of new red wing process

Time cut from 6 to 3 weeks-still need to adapt Improved data access-reports in minutes for better decision making instead of weeks Users trust the data Clear understanding of ownership/responsibilities across the process In the first 2 years, inventory was cut 27% while customer fill rates improved by 8-10% Cut costs from inventory (holding costs) but increased revenue because they were meeting demand and being more proactive

reasons why firms might maintain a certain level of inventory

To decouple (separate) various parts of the production process; known as buffer or decoupling inventory To make sure that there is never a storage of products; there is always a stash just in case To meet variation in product demand-extra inventory can help To hedge against expected price increases You don't always want to do this; e.g. if a supplier is going to raise prices, stock up now To take advantage of quantity discounts Suppliers may offer specials if you order in bulk.

EOQ formulas - outside vendor

Total annual cost=annual holding cost + annual purchase cost + annual ordering costs Total annual cost is a convex cost function-one minimum point. Annual purchase cost always remains the same regardless of the quantity Annual holding cost constantly increases with an increase in Q Annual ordering cost declines when Q increases-orders more at a time, doesn't need to constantly order.

quantitative forecasting approach

Used when situation is "stable" and historical data exits- existing products & technology Involves mathematical techniques. E.g. forecasting sales of color televisions.

judgemental forecasting approach

Used when situation is vague and little data exist-new products & technology Involves intuition experience. E.g. forecasting sales on the internet

old process of red wing

Was slow! Took 6 weeks to complete, reactive and manual (manually entering in information)l, based on historical data-Things are changing constantly; have to be ready to adjust Little effort to coordinate with suppliers or the manufacturing team to understand their capacities and constraints-sales was responsible for coming up with the plan & then they would hand it over to manufacturing to produce it; they did not consider including MFR in the planning stages & they found out late that something wouldn't work. Changes to forecasts and the reasons for them were not tracked- they should want to learn and study forecasting. No one owned the process or was responsible for outcomes- don't know who to blame or what went wrong.

Fixed-Time Period Review Models

We only order at certain intervals Review period=P The base stock, or "order-up-to" model (P,S Policy) similar to reorder problem.

2 key decisions when there is a multi-period inventory control system

When should we order? How much should we order

stockout

a situation where an item is out of stock

decision trees

a useful approach for decision problems with multiple stages of decision-making and with probabilistic events that can affect the outcome Making a decision under uncertainty Use square nodes for decision points and circle nodes for probabilistic events-EV Construct the decision tree from left to right, starting with the initial decision to be made Solve the decision tree from right to left until the expected payoff for each initial decision is known

John Kotter

author of the article we read, Harvard Business Professor and Change Management Expert

µ

average demand/period

4 approaches to S & OP

chase plan, stable workforce with various hours, stable workforce with subcontracting, level plan

Newsvendor probem

classic example of an inventory issue- too much/little Decision: choice of order quantity, Q Situation: an order must be placed prior to the start of the selling season, and the selling season is short enough (and/or the lead time is long enough) so that no replenishment is possible during the selling season Order 6-9 months ahead E.g. of another inventory problem: clothing-winter stores sell in the store for about 2-3 months in the fall/winter but lead time for orders are 6-9 so you have to order winter clothes in spring/summer

2 approaches to a multi-period inventory control system

continuous review model or fixed-time period review models

correlation

correlations answer how strong is the linear relationship between the variables-in our models we want to find out what has a strong variable wiht our products to better forecast Weak correlation is around a 0; getting closer to positive or negative 1 is a strong correlation. Negative isn't necessarily bad it just means they are moving in different directions (as x increases, y decreases) Correlation does not mean causation!! Sample correlation coefficient denoted r-measures degree of association

produced items

cost is more difficult to calculate How are product costs determined? You have direct costs-energy, labor. You have indirect costs-overhead, tricky to calculate

location decision criteria

cost minimization, profit maximization, geographic criteria (maximize population covered, but minimize the travel distance for a customer)

purchased items

could be affected by order quantity More straightforward if you got from an outside vendor

square nodes in decision trees

decision points

What method do we use for capacity decisions?

decisions trees.

time series method to forecasting-quantitative

evenly space numerical data-mathematical data Obtained by observing response variable at regular time period

What does it mean if the A/F Ratio is >1?

forecast is too low.

what characterizes a good forecast?

if it is more than a single number; gives possibilities with a range of values flexibility, scenario planning

forecasting approaches

judgemental & quantitative

L

leadtime in periods (days, weeks, months)

forecast errors

looking at errors of a similar previous item and building forecast demand for the new item. Forecast error = forecast demand - actual demand *important in this order because the sign could be positive or negative you use forecast error history to develop a normal demand forecast distribution for the new item.

level plan

produce the same amount using a stable work force in each period; set number of workers Infinite number of level plans. E.g. you will always produce more than demand so you will never have a shortage of products. Or, I never want too much inventory (holding costs) so I will produce less than demand and have a shortage of products.

two methods for arriving at an initial point forecast

quantitative and qualitative

Is A/F ratio approach qualitative or quantitative?

quantitative approach

seasonal component method to forecasting-quantitative

regular up & down fluctuations Due to weather, customs, etc Repeats itself annually or more often than that.

cyclical component method to forecasting-quantitative

repeating itself up & down movement Different from seasonality because it takes a number of years to complete & due to overall economy that affects all business not only our market

σ

standard deviation of demand/period

What does the first derivative of a function give you?

the slope

R, Q policy

the timing of orders may vary but the order quantity is fixed Order the same quantity every time, but not always at the same time. R = reorder point Q = order quantity L = lead time

5 types of quantitative methods to forecasting

time series, trend component, seasonal component, cyclical component, explanatory methods

what is the purpose of moving beyond a simple point forecast?

to make better decisions and to be better prepared

2 types of judgemental methods to forecasting

top down and bottom up

shortage costs

what if we run out of inventory? Lost sales or backorders? Goodwill costs How much?

point forecast

when you forecast to a specific number

stable workforce with subcontracting

workforce remains stable and produces at a constant rate; output levels are adjusted through subcontracting. Risks with subcontracting: losing customers due to competition because we have less control over quality since it is made somewhere else

stable workforce with variable hours

workforce remains stable; output levels are adjusted through overtime. When demand picks up we work more overtime and when demand slowdown we work less.

how to chose the reorder point

you set a reorder quantity that will carry you enough time throughout the lead time With no uncertainty, it's simple: R = µ1•L = µL With uncertainty, there are several factors to consider: Stockout cost Holding cost Demand variability Leadtime variability With uncertainty: R = µ1•L + z•σ1•√L