Supply Chain MGMT Exam 1

Bill of Resources

shows quantity of critical resources needed to make one average unit of each product within a product family

•Production planning faces the following typical situation:

-Approximately a 12 to 36-month horizon -A monthly rate -Demand fluctuates or is seasonal -Plan is made for product families -Plant and equipment usually are fixed -A variety of management objectives

•Four basic production strategies:

-Chase (demand matching) -Level -Subcontracting -Hybrid (combination)

Lower cycle inventory

-Decreases vulnerability to demand changes -Lowers working capital requirements -Lowers inventory holding costs

Three factors drive lot sizing decisions

-Fixed costs associated with production or purchasing -Quantity discounts offered by suppliers -Short-term price discounts offered by suppliers

Cycle inventory is held to

-Take advantage of economies of scale -Reduce costs in the supply chain

CRM plays a major role in operations efficiency and customer service through

-fast and accurate order entry and tracking -meeting promised delivery dates and quantities -handling customer inquiries and service complaints, returns, and repair -accurate and timely shipping documentation, invoicing, and recording of sales history.

•Production planning is a major output of S&OP and is concerned with:

-planning for each product family -maintaining desired inventory levels -determining resources required -comparing load with available resources.

If the average quarterly demand is 200 units and the first quarter demand is 350 units, what is the seasonal index for the quarter?

1.75

Economies of scale exploited in three typical situations

1.A fixed cost is incurred each time an order is placed or produced 2.The supplier offers price discounts based on the quantity purchased per lot 3.The supplier offers short-term price discounts or holds trade promotions

Basic Capacity Approach

1.Determine capacity available at each work center in each time period 2.Determine load at each work center ▪Translate priority plan into hours of work for each work center/time period ▪Sum up capacities required to find the load on each center 3.Resolve difference between capacity required and capacity available

•Quantity discounts can increase the supply chain surplus for the following two main reasons

1.Improved coordination to increase total supply chain profits 2.Extraction of surplus through price discrimination

Determine the EOQ based on annual demand. Month demand, D=500 Order cost per lot, S = $2000 Unit cost per, C = $300 Holding cost per year as a fraction of unit cost, h = 0.2

200

The old forecast was for 200 units and last month's sales were 225 units. If a (alpha) is 0.2 what is the forecast for next month?

205

Demand over the past three months has been 700, 750, and 900. Using a three-month moving average, what is the forecast for month four?

783

Select the one best answer(s) from the following: A. demand fluctuations that depend on the time of the year, week or day are called seasonality B. The seasonal index is an estimate of how much the demand during the season will be above or below the average demand C. seasonality ALWAYS occurs in summer, winter, spring and fall

A and B are best

Select the the best answer(s) from the following: A. deseasonalized data should be used for forecasting B. seasonalize the base forecast to predict actual demand for future periods c. actual sales should only be compared on a month-to-month basis

A and B are best

Level Strategy

A strategy that keeps the workforce constant, but varies its utilization via overtime, undertime, and vacation planning to match the demand forecast •Advantages: -Avoids labor and capacity costs of demand matching -Avoids changeover costs and lowers the average production cost per item •Disadvantages: -Buildup of inventory -Requires a very accurate forecast

Following costs considered in lot sizing decisions

Average price per unit purchased, $C/unit Fixed ordering cost incurred per lot, $S/Lot Holding cost incurred per unit per year, $H/unit/year=hC

Lot Sizing for a Single Product (Economic Order Quantity)

Basic Assumptions: 1.Demand is steady at D units per unit time. 2.No shortages are allowed—that is, all demand must be supplied from stock 3.Replenishment lead time is fixed (initially assumed to be zero) •Minimize -Annual material cost -Annual ordering cost -Annual holding cost

Ending Inventory

Beginning Inventory + Production- demand

Average flow time resulting from cycle inventory is equal to

Cycle Inventory/Demand = Q/2D.

Lot sizing for a single product (E O Q)

D = Annual demand of the product S = Fixed cost incurred per order C = Cost per unit h = Holding cost per year as a fraction of product cost •Basic assumptions -Demand is steady at D units per unit time -No shortages are allowed -Replenishment lead time is fixed

Quantitative Forecasting Techniques: Extrinsic

Extrinsic •is based on correlation and causality •relies on external indicators •is useful in forecasting total company demand or demand for families of products •has two types of leading indicators -economic -demographic. •examples -Statistical Regression Analysis (multiples inputs)

A reduction in supply can help dramatically reduce safety inventory required without hurting product availability.

False

As the desired level of product availability increases, the required level of safety inventory decreases.

False

Customer Relationship Management

Help customers achieve better business results through: •design assistance: helping in the design of new products or improvement of existing ones •customer needs: assessing the customer's business and creating or expanding product offerings •information and communications: collecting and analyzing customer data to support marketing, sales, and customer service.

Managing Supply

Managing capacity: -Time flexibility from workforce -Use of seasonal workforce -Use of dual facilities - specialized and flexible -Use of subcontracting -Designing product flexibility into production processes Managing inventory: -Using common components across multiple products -Build inventory of high-demand or predictable-demand products

Which of the following statements is best statement about forecasting? 1. It must be done by all who wish to meet the demands of the future. 2. Companies who make to order do NOT have to forecast.

Only 1 is true

According to the EOQ formula, if the ordering costs for an item are greatly reduced, what is the likely impact on the quantity ordered

Order quantities will decrease

Marketing Mix

Product, Price, Place, Promotion

Sales forecasting and resource capacity planning are two components of which of the following?

Production Plan

For lot sizes of 1,000 pairs of jeans and daily demand of 100 pairs of jeans

Q/2D=1,000/2x100

Forecasts are far more accurate for which of the following?

Short Term

Which of the following is NOT a component of a demand pattern?

Standard deviation

Which of the following is NOT a source of demand?

Stockholder

The EOQ formula for a purchased item would try to balance which of the following?

The ordering cost and the inventory carrying cost

Ordering Cost -Buyer time -Transportation costs -Receiving costs -Other costs

The ordering cost is estimated as the sum of all its component costs.

Optimal order quantity (Qopt)

This order size minimizes total annual cost.

Economic Order Quantity (EOQ) Model Key Point

Total ordering and holding costs are relatively stable around the economic order quantity. A firm is often better served by ordering a convenient lot size close to the E O Q rather than the precise E O Q.

For the same safety inventory, an increase in lot size increases the fill rate but not the cycle service level.

True

Periodic review policies require more safety inventory than continuous review policies for the same level of product availability.

True

Raising the level of safety inventory increases product availability and thus the margin captured from customer purchases.

True

Safety inventory is inventory carried for the purpose of satisfying demand that exceeds the amount forecasted for a given period.

True

Lot or batch size

is the quantity that a stage of a supply chain either produces or purchases at a time

Lot size-based discount

discounts based on quantity ordered in a single lot

Subcontracting

an agreement in which a corporation contracts with other (usually smaller) firms to provide specialized components, products, or services to the larger corporation •Advantages: -No excess capacity -Level production •Disadvantages: -Costs of subcontracting -Proprietary production technology

trade promotions

are price discounts for a limited period of time Key goals: 1.Induce retailers to use price discounts, displays, or advertising to spur sales 2.Shift inventory from the manufacturer to the retailer and the customer 3.Defend a brand against competition

Average Flow Time

average inventory/average flow rate

Fixed ordering cost

includes all costs that do not vary with the size of the order but are incurred each time an order is placed Fixed ordering cost = S

The trade-off that a supply chain manager must consider when planning safety inventory is

increasing product availability versus increasing inventory holding costs.

Average price paid per unit purchased

is a key cost in the lot-sizing decision Material cost = C

Cycle inventory

is the average inventory in a supply chain due to either production or purchases in lot sizes that are larger than those demanded by the customer Q: Quantity in a lot or batch size D: Demand per unit time

Holding cost

is the cost of carrying one unit in inventory for a specified period of time Holding cost = H = hC

Cycle inventory

lot size/2=Q/2

Chase Strategy

the production rate is changed in each period to match the amount of expected demand •Advantages: -Stable inventory -Varied production to meet sales requirements •Disadvantages: -Costs of hiring, training, overtime, and extra shifts -Costs of layoffs and impact on employee morale -Possible unavailability of needed work skills -Capacity must match maximum demand

Inventory Holding Cost

the sum of the cost of capital and the variable costs of keeping items on hand; Obsolescence (or spoilage) cost -Handling cost -Occupancy cost -Miscellaneous costs §Theft, security, damage, tax, insurance E = amount of equity D = amount of debt Rf = risk-free rate of return β = the firm's beta M R P = market risk premium Rb = rate at which the firm can borrow money t = tax rate

forward buy

when buyers stock up to take advantage of low price offers

Back Scheduling Example

•An order for 150 of a component is due on day 135 •An order starts at the beginning of a day and finished at the end of a day •Operation times for the 150 ordered •Operation 10 - 4 days in work center 12 •Operation 20 - 5 days in work center 14 •Operation 30 - 1 day in work center 17 •Operation 40 - 2 days in work center 03

Planning Bill of Material

•Artificial grouping of components for planning purposes •Used to simplify ▪Forecasting ▪Planning ▪Master Scheduling •Represents an average, not buildable product

Scheduling Orders

•Back scheduling -Typical approach -Start with the due date -Use lead time to find proper start date for each operation •Forward scheduling -Launch the order into the first (gateway) work center -Use lead times to find when the order will be completed at each work center

Basic Capacity Definitions

•Capacity - Amount of work to be done •Capacity Available - Capacity of a resource to product a quantity in a given time period •Capacity Required - Capacity needed to produce a desired output in a given time period (load) •Capacity Management - Determining capacity needed as well as providing, monitoring, and controlling the capacity •Capacity Planning - Determining the resources and methods needed to meet the priority plan •Capacity Control - Monitoring production, comparing with the capacity plan, and taking appropriate corrective actions

Productivity

•Comparison of the production output to the input of all resources •A productivity formula that can be applied to a work center Productivity = (Utilization)x(Efficiency)x(100%)

Points About the MRP Record

•Current time - beginning of first period (often called time buckets) •Items considered available at beginning of period •Quantity in Projected Available row considered at end of period •Current period often called action bucket - action should be taken to avoid a future problem

Major Uses for Bills of Material

•Defines the product •Provides method for design change control •Planning - What is needed and when •Order entry - order configuration and pricing •Production - Parts needed to assemble a product •Costing - material cost of goods sold

Principles of Forecasting

•Forecasts -are rarely 100 percent accurate over time -should include an estimate of error -are more accurate for product groups and families -are more accurate for nearer periods of time.

Sources of Demand

•Forecasts •Customer orders •Replenishment orders from distribution centers •Interplant transfers •Other sources of demand

Make-to-Stock Production

•Goods are made to forecast and sold from inventory. •MTS is used when -demand is constant and predictable -only a few product options exist -order fulfillment lead time requirements are shorter than manufacturing lead time. Information needed: Forecast by time period for the planning horizon Opening inventory Desired ending inventory

Lot Sizing with Capacity Constraint

•If order size is constrained to K units and Q > K, -Compare the cost of ordering K units and the E O Q -Optimal order size is the minimum of E O Q and capacity K

Capacity Available

•Impacted by ▪Product specification ▪Product mix ▪Plant and equipment - Methods used to make product ▪Work effort - Pace of work ▪Measuring capacity ▪Units of output ▪Standard time

Independent versus Dependent Demand

•Independent Demand ▪Not related to demand for other assemblies or products ▪From outside sources ▪Generally forecasted demand •Dependent Demand ▪Generally related to production of an end product (as defined on the MPS) ▪Can be calculated instead of forecasted

Quantitative Forecasting Techniques: Intrinsic

•Intrinsic is based on several assumptions: -The past helps you understand the future. -Time series are available. -The past pattern of demand predicts the future pattern of demand. •Examples: -moving averages -exponential smoothing

Planner Responsibilities for MRP

•Launch Orders - Production or Purchasing •Reschedule orders as required •Reconcile errors and search for causes •Solve critical material shortages ▪Replan ▪Expedite •Coordinate with other functions to resolve problems

Capacity Terms

•Theoretical capacity - Maximum capacity ideally available •Rated capacity - Capacity available taking into account utilization and efficiency of the work center •Rated Capacity = (available time) x (utilization) x (efficiency) •Demonstrated capacity - The historical output of a work center •Safety capacity - Extra capacity to protect against unexpected events

Conclusions on Promotion

•When faced with seasonal demand, use combination of pricing and production and inventory to improve profitability •Entire supply chain must work toward one goal of maximizing profitability •High-level support within an organization is necessary •Early warning alerts should be built into the S & O P process

Where-Used and Pegging

•Where-used reports ▪Shows the parents for a component (contrast with a bill of material that shows the components for a parent) •Pegging report ▪Shows the parents for a component, but only those parents where there is an existing requirement

Key Capacity Terms

•Lead time - Span of time for a process •Exploding - Process of multiplying requirements by usage to get BOM requirements •Offsetting - Placing requirements in the proper period based on lead time •Planned orders - Orders planned during the explosion, but not yet released for processing •Low-level code - Lowest level on which a part resides on the bill of material •Scheduled receipts - Open orders released for processing (production or purchase) scheduled to be received at a defined time •Gross Requirements - Total of a component needed to meet requirements not taking any existing inventory into account •Net Requirements - Actual amount of a component needed after existing requirements taken into account •Projected available - The expected inventory position at the end of the period •Planned order release - The amount that should be ordered (using the lot size) to prevent a negative projected available balance •Planned order receipt - When the order should be available for use, offset by lead time from the planned order release •Firm Planned orders - Orders not yet released, but "frozen" in quantity and time to reduce system "nervousness" •Exception messages - Messages generated by the computer signaling planner action needed •Bottom-up replanning - Actions to correct for changed conditions made as low as possible in the product structure

Inventory/Capacity Trade-Off

•Leveling capacity forces inventory to build up in anticipation of seasonal variation in demand •Carrying low levels of inventory requires capacity to vary with seasonal variation in demand or enough capacity to cover peak demand during season

Dependent Demand Approach - Material Requirement Planning (MRP)

•Major Objectives of MRP ▪Determine requirements - Calculated to meet product requirements defined in the MPS •What to order •How much to order •When to order •When to schedule delivery ▪Keep priorities current

Major Inputs to MRP

•Master Production Schedule quantities and times •Inventory records of all items to be planned ▪Planning factors such as lead times, order quantities, and safety stock ▪Current status of each item •Bills of material for MPS items

Moving Averages: Principles

•Moving averages are best used when demand is stable, there is little trend or seasonality, and demand variations are random. •When past demand shows random variation -do not second-guess what the effect of random variation will be -it is better to forecast based on average demand.

Independent Versus Dependent Demand

•Only independent demand needs to be forecasted. •Dependent demand should not be forecasted; it should be calculated.

Capacity Requirements Planning Inputs

•Open Orders -Scheduled receipts from MRP •Planned order releases from MRP -Potential future orders •Work Center master ▪Information on capacity in the work center Lead time - Move, wait, and queue time information •Routing - The path the work will follow ▪Operations to be performed ▪Operation sequence ▪Work centers used ▪Potential alternative work centers ▪Tooling needed ▪Standard setup times and run times ▪Shop calendar ▪Working days available at a work center

Order Qualifiers and Winners

•Order qualifiers—Competitive characteristics that a firm's products and services must exhibit in order for the firm to be a viable competitor in the marketplace •Order winners—Competitive characteristics that cause customers to prefer a firm's products and services over those of its competitors

Responding to Predictable Variability in a Supply Chain

•Predictable variability is change in demand that can be forecasted •Can cause increased costs and decreased responsiveness in the supply chain •Two broad options: 1.Manage supply using capacity, inventory, subcontracting, and backlogs 2.Manage demand using short-term price discounts and promotions

Role of Cycle Inventory in a Supply Chain

•Primary role of cycle inventory is to allow different stages to purchase product in lot sizes that minimize the sum of material, ordering, and holding costs •Ideally, cycle inventory decisions should consider costs across the entire supply chain •In practice, each stage generally makes its own supply chain decisions •Increases total cycle inventory and total costs in the supply chain

Hybrid Strategy: Characteristics

•Production is at or close to full capacity for at least part of the cycle. •Production is at a lower rate during the other part of the cycle. •Production is level during both parts of the cycle. •Workforce adjustment costs are less than in the chase strategy. •Inventory buildup is less than it is in a level strategy. •Hybrid strategy requires an accurate forecast as in the level strategy.

Demand Planning

•Recognition of customer requirements through -forecasts -management of orders from •internal customers •external customers.

Data Collection and Preparation

•Record data in terms needed for the forecast. •Record circumstances relating to the data. •Record demand separately for different customer groups.

Capacity Planning Levels

•Resource Planning - Long range resource requirements linked to the production plan •Rough-cut Capacity Planning - Used to check feasibility of MPS •Capacity Requirements Planning - Detailed work center capacity plans linked to MRP

Managing the Plan - Adjusting Capacity

•Schedule overtime or undertime •Adjust the number of workers •Shift workers from other work centers •Use alternative work centers to shift load •Subcontract work

Stable Versus Dynamic Demand

•Stable demand retains same general shape over time. •Dynamic demand tends to be erratic.

Bill of Material Points

•The BOM shows all parts to make one of the item •Each part has one, and only one, part number •A part is defined by form, fit, and function •Any change requires a new part number

Production Lot Sizing

•The entire lot does not arrive at the same time •Production occurs at a specified rate P •Inventory builds up at a rate of P−D •Inventory depleted at a rate of D

Resource Planning ALA resource requirements planning

•The production plan must be compared with existing resources. -Determine availability of required resources. -Reconcile differences through changing resources or altering priorities.

Managing Demand

•With promotion, three factors lead to increased demand: 1.Market growth 2.Stealing share 3.Forward buying •Factors influencing timing of a promotion -Impact of promotion on demand -Cost of holding inventory -Cost of changing the level of capacity -Product margins

Qualitative Techniques in Forecasting

•are based on intuition and informed opinion •tend to be subjective •are used for business planning and forecasting for new products •are used for medium-term to long-term forecasting.

Volume based discount

•discount is based on total quantity purchased over a given period •Two common schemes -All-unit quantity discounts Marginal unit quantity discount or multi-block tariffs

Sales and Operations Planning (S&OP)

•translates the strategic business plan into production rates that meet business goals •continually updates the production, financial, and sales plan •seeks input from various functions •requires regular (for example, monthly) meetings with senior executives to resolve tradeoffs •checks availability of resources to validate the production plan.

Determining Capacity Available

▪Available time = Number of hours a work center can be used ▪Utilization = Maximum hours = [(hours worked)/(available hours)] x 100% ▪Efficiency = Output compared to standard = [(actual production rate)/ (standard production rate)] x 100%