Week 4 Forcasting + Inventory Part 1 (1)
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Transcript of Week 4 Forcasting + Inventory Part 1 (1)
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 11 FORECASTING AND DEMAND PLANNING
Copyright © 2014 - Fadi Kotob
Learning Objectives
- Introduce forecasting and describe the importance of forecasting to the value chain.
- Describe the basic principles of forecasting
- Discuss the fundamental components of demand and types of forecasting methods
- Explain how to apply time-series analysis in forecasting
- Explain the qualitative and causal forecasting methods
- Discuss forecast accuracy and how to determine the best forecasting method to use
Copyright © 2014 - Fadi Kotob
Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
Forecasting is the process of projecting the values of one or more variables into the future.
What Is Forecasting?
Types of forecasts:
• Long-range forecasts in total sales dollars (top
management level)
• Aggregate forecasts of sales volume (middle
management level)
• Forecasts of individual units (operational level)
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 11 FORECASTING AND DEMAND PLANNING
Copyright © 2014 - Fadi Kotob
Why We Need to Forecast?
Adapted - Boyer & Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1
• To Plan:
• Facilities
• Production Schedules
• Staffing Allocation
• Capacity Planning
• This forecasting is essential across the value chain as can be seen on the next slide
Copyright © 2014 - Fadi Kotob
Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
Various Value Chain Forecasting
• The goal of a business forecast is not to have a perfect forecast but to have a reasonable forecast that supports planning
THIS BRINGS ME TO THE PRINCIPLES OF FORECASTING SHOWN NEXT
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 11 FORECASTING AND DEMAND PLANNING
Copyright © 2014 - Fadi Kotob
The Principles of Forecasting
Adapted - Boyer & Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1
• Forecasts are wrong
• Forecasts get worse the farther they go into the future
• Aggregated forecasts for product or service groups tend to be more accurate
• Forecasts are not a substitute for derived values
TO UNDERSTAND FORECASTING WELL, IT IS IMPORTANT TO FIRST UNDERSTAND THE BASIC CONCEPTS OF FORECASTING WHICH INCLUDE:
1. FORECAST PLANNING HORIZON
2. DATA PATTERNS IN TIME SERIES
3. FORECAST ERRORS AND ACCURACY
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 11 FORECASTING AND DEMAND PLANNING
Copyright © 2013 - Fadi Kotob
!• Time Buckets: the unit of measure for the time period used in a forecast. • Planning Horizon: is the length of time on which a forecast is based.
➢ This spans from short-range forecasts with a planning horizon of under 3 months to long-range forecasts of 1 to 10 years.
!Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4!!Adapted - Boyer, Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1
Forecast Planning Horizon
Copyright © 2014 - Fadi Kotob
Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
!
• This could be achieved by making and measuring observations at successive points in time or over successive periods of time.
!!!• This helps identify several demand patterns which are:
- Average - Trend - Seasonal - Cyclical - Random (or noise) - Irregular (one time) variation
Data Patterns In Time Series
!!Adapted - Boyer, Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1
THESE PATTERNS WILL BE EXPLAINED NEXT
Copyright © 2014 - Fadi Kotob
Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
!
• Average is a measure of the average demand for a specified time period.
• A trend is the underlying pattern of growth or decline in a time series.
• Seasonal are characterised by repeatable periods of ups and downs over short
periods of time.
• Cyclical are regular patterns in a data series that take place over longer periods
of time.
• Random variation (sometimes called noise) is the unexplained deviation of a
time series from a predictable pattern, such as a trend, seasonal, or cyclical
pattern.
• Irregular variation is a one-time variation that is explainable
!!Adapted - Boyer, Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1
SOME OF THESE PATTERNS ARE OFTEN CONSIDERED WHEN FORECASTING DEMAND
Data Patterns In Time Series Continued
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 11 FORECASTING AND DEMAND PLANNING
Copyright © 2014 - Fadi Kotob
What about errors?
• It is important to recognise that all forecasts are wrong to some extent.
• The forecast error is the difference between the observed value of the time series and the forecast, or At – Ft
SOME OF THESE FORECASTING METHODS WILL BE COVERED NEXT
Forecast Errors And Accuracy
So how do we choose the “best” forecast?
BY EVALUATING THE FORECASTS CREATED USING DIFFERENT METHODS
Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 11 FORECASTING AND DEMAND PLANNING
Copyright © 2014 - Fadi Kotob
Forecasting MethodsForecasting methods are divided into 2 main categories:
!1. Quantitative or Statistical Forecasting
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2. Qualitative or Judgmental Forecasting: a method of forecasting that is based on subjective factors, estimates and opinions
– Time-series Analysis: a technique that utilises past demand data to predict future demand. It is based on the assumption that the future will be an extrapolation of the past.
!– Regression Analysis: a technique for building a statistical model
that defines the relationship between a single dependent variable and one or more independent variables, all of which are numerical
!!Adapted - Boyer, Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1 !Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 11 FORECASTING AND DEMAND PLANNING
Copyright © 2014 - Fadi Kotob
Time-series Analysis
Adapted - Boyer & Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1
• Based on historical data • Assumes that past patterns will continue in the future !
• Goal: • Identifying demand patterns and developing a model to
predict these patterns in the future !
• The following forecasting techniques will be explained: !
– Naïve forecast – Moving averages – Single exponential smoothing – Trend adjusted exponential smoothing – Seasonable patterns
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 11 FORECASTING AND DEMAND PLANNING
Copyright © 2014 - Fadi Kotob
Naïve Forecast
Adapted - Boyer & Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1
• Naïve Forecast:
• Uses demand for the current period as the forecast for the next period
• Simple and low cost to use
• Works best when demand is stable and there is relatively little random
variation
• The naïve approach is the simplest of all the possible forecasting
methods and works particularly well when there is autocorrelation
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 11 FORECASTING AND DEMAND PLANNING
Copyright © 2014 - Fadi Kotob
Moving Average
• Moving Average:
• Estimates the average of a demand series
• Involves computing the average of n previous periods of demand and
then using this as the estimate for the next period of demand
• The average is updated after every period to include the most recent
demand data
!!Adapted - Boyer, Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1 !Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 11 FORECASTING AND DEMAND PLANNING
Copyright © 2014 - Fadi Kotob
Single Exponential Smoothing
• Single Exponential Smoothing:
• Calculates forecasts by giving more weight to recent demand or
forecast rather than to earlier demand or forecast
• Requires less data than the weighted moving average
!!Adapted - Boyer, Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1 !Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 11 FORECASTING AND DEMAND PLANNING
Copyright © 2014 - Fadi Kotob
Trend Adjusted Exponential Smoothing
Adapted - Boyer & Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1
• Trend Adjusted Exponential Smoothing:
• Includes a trend component in the forecast
• Calculates both the average and trend of the series which together
provides the forecast
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 11 FORECASTING AND DEMAND PLANNING
Copyright © 2014 - Fadi Kotob
Seasonable Patterns
Adapted - Boyer & Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1
• Many organisations sell products or services that have a seasonal demand
• Seasonal demand is characterised by regular repetition of increases or decreases
in demand as measured in time periods of less than a year (quarters, months,
weeks, days, or hours)
• Example: Airline travel has substantially higher demand in the summer and
holidays
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 11 FORECASTING AND DEMAND PLANNING
Copyright © 2014 - Fadi Kotob
Multiplicative Seasonal Patterns Method
Adapted - Boyer & Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1
• Multiplicative Seasonal Method:
• Calculates average demand for the year, the season and other times
• Calculates a seasonal index for the season and other times
• Multiply the seasonal index by the average demand for the year
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 11 FORECASTING AND DEMAND PLANNING
Copyright © 2014 - Fadi Kotob
Reducing Seasonality
Adapted - Boyer & Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1
• How to reduce seasonality?
- Advertising during slower-demand periods
- Discounting the product or service in periods of slower demand to increase sales
!– Outcome - Consistent Planning
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 11 FORECASTING AND DEMAND PLANNING
Copyright © 2014 - Fadi Kotob
Additional Forecasting Methods
Adapted - Boyer & Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1
• Qualitative or judgmental forecasting
• Causal Methods
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 11 FORECASTING AND DEMAND PLANNING
Copyright © 2014 - Fadi Kotob
Qualitative Or Judgmental Forecasting Methods
Adapted - Boyer & Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1
• Market Research: - A systematic approach to measuring customer interest in a
service or product through data-gathering surveys - Widely used for forecasting new products - Has a high degree of uncertainty - Must be interpreted with caution !
• Delphi Method: - A forecasting method that uses a team of experts to develop a
consensus forecast - Useful for long-range and technological forecasting !
• Grass Roots Forecasting: - A forecasting method that gathers the opinions of those close to
the end consumer, such as salespeople, about customers purchasing plans
- The direct contact with customers provides insight into future buying intention
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 11 FORECASTING AND DEMAND PLANNING
Copyright © 2014 - Fadi Kotob
Causal Methods
• A method of Regression Analysis used when:
• Historical data is available and there is a relationship between the item to be forecasted and some other factor
• Example: relationship between advertising expenditure, and sales of a product
!• Causal methods employ mathematical techniques to relate
one or more independent variables to the variable being forecast
!!Adapted - Boyer, Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1 !Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
Copyright © 2014 - Fadi Kotob
Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
!
• Managers use a variety of judgmental and quantitative forecasting techniques.
• They will examine a range of forecast types over a period of time and choose the one with the least amount of error.
• Statistical methods alone cannot account for such factors as sales promotions, competitive strategies, unusual economic disturbances, new products, large one-time orders, labor complications, etc.
• Statistical forecasts are often adjusted to account for qualitative factors.
SYSTEMS OFTEN AID IN MAKING AN APPROPRIATE FORECAST!!Adapted - Boyer, Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1 !
Forecasting In Practice
Copyright © 2014 - Fadi Kotob
Learning Objectives
- Define inventory and inventory management
- Explain the reasons for and reasons against having inventory
- Define the different types of inventory and the roles they play in
supply chains
- Explain the considerations required to manage inventory
- Explain the categories of inventory cost and the characteristics of
inventory
- Explain the role of inventory systems
- Explain the continuous and periodic order review systems
Copyright © 2014 - Fadi Kotob
Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
What do you think? !
Can you cite any experiences in which the lack of appropriate inventory at a retail store has caused you to be dissatisfied?
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 12 MANAGING INVENTORIES
Copyright © 2014 - Fadi Kotob
Managing Inventory Support Success
•Having a good inventory management process is essential for organisations to meet their customers needs
!•This process is important for both manufacturing and service (Intangible) environments
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 12 MANAGING INVENTORIES
Copyright © 2014 - Fadi Kotob
What Is Inventory !
!
•Inventory is any asset held for future use or sale to satisfy
customer demand or to support the production of services or goods.
• Objectives:
➢ Maintain sufficient inventory
➢ Incur lowest possible cost
!!Adapted - Krajewski, Malhotra & Ritzman (2013). Operations Management Processes And Supply Chains, Pearson Education Limited, ISBN: 9780273766834
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 12 MANAGING INVENTORIES
Copyright © 2014 - Fadi Kotob
What Is Inventory Management
!
!The planning, coordinating, and controlling the acquisition, storage,
handling, movement, distribution, and possible sale of raw
materials, component parts and subassemblies, supplies and tools,
replacement parts, and other assets that are needed to meet
customer wants and needs and deliver the competitive priorities of
the organisation.
!!Adapted - Krajewski, Malhotra & Ritzman (2013). Operations Management Processes And Supply Chains, Pearson Education Limited, ISBN: 9780273766834
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 12 MANAGING INVENTORIES
Copyright © 2014 - Fadi Kotob
Inventory - The Good & The Bad
Reasons to Carry Inventory •Set-up and ordering costs •Customer service and variation in demand •Labor and equipment utilisation •Transportation cost •Costs of materials/quantity discounts
Reasons Not to Carry Inventory •Storage and Handling •Interest and opportunity cost •Property taxes and insurance premiums •Shrinkage and spoilage
Adapted - Boyer & Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1 !Adapted - Krajewski, Malhotra & Ritzman (2013). Operations Management Processes And Supply Chains, Pearson Education Limited, ISBN: 9780273766834
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 12 MANAGING INVENTORIES
Copyright © 2014 - Fadi Kotob
Inventory Types !Inventory exists in 3 aggregate categories that are useful for accounting purposes:
!–Raw materials, component parts, subassemblies, and supplies are inputs to manufacturing and service-delivery processes.
–Work-in-process (WIP) inventory consists of partially finished products in various stages of completion that are awaiting further processing.
–Finished goods inventory is completed products ready for distribution or sale to customers.
!!Adapted - Krajewski, Malhotra & Ritzman (2013). Operations Management Processes And Supply Chains, Pearson Education Limited, ISBN: 9780273766834
Copyright © 2014 - Fadi Kotob
Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
Inventory Types Supply Chain View
• Many different types of inventory are maintained throughout the value chain before, during and after production to support operations
and meet the demand of customers.
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 12 MANAGING INVENTORIES
Copyright © 2014 - Fadi Kotob
Inventory Types Continued When managing inventory, there is another perspective often used:
– Cycle Inventory: a quantity of inventory that varies in proportion to
order quantity
– Pipeline Inventory: inventory that is in the process of moving from one
location in the supply chain to another
– Safety Stock Inventory: excess Inventory that a company holds to guard
against uncertainty in demand, lead time, and supply
– Anticipation Inventory: inventory that is held for future use at a time
when demand will exceed available capacity
Adapted - Boyer & Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1 !Adapted - Krajewski, Malhotra & Ritzman (2013). Operations Management Processes And Supply Chains, Pearson Education Limited, ISBN: 9780273766834
THESE INVENTORIES MUST BE MANAGED FOR SUCCESS
HOW TO MANAGE INVENTORIES IN A SUPPLY CHAIN TO ACHIEVE SUCCESS?
Copyright © 2014 - Fadi Kotob
Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
!
• Requires good technology, processes, and information technology (IT) support to manage the purchasing, tracking and return.
Managing Inventories In Supply Chains
• Inventory management should: !• Focus on cost, quality, delivery performance, and technical support • Seek new suppliers and products and evaluate their potential to the
company. !
• Nowadays, the concept of Environmentally Preferable Purchasing (EPP), or green purchasing, is becoming more important !• The affirmative selection and acquisition of products and services that
most effectively minimise negative environmental impacts over their life cycle of manufacturing, transportation, use, and recycling or disposal.
Copyright © 2014 - Fadi Kotob
Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
Why Technology, Processes & Support?Important to manage risks
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 12 MANAGING INVENTORIES
Copyright © 2014 - Fadi Kotob
How To Manage Inventory - The Inventory Management Scale !•Inventory managers deal with two fundamental decisions:
!1. When to order items from a supplier or when to initiate
production runs if the firm makes its own items
2. How much to order or produce each time a supplier or production order is placed
!•It is similar to balancing a scale and assessing the benefits of carrying larger amounts of inventory against the drawbacks and the risks of not carrying that inventory.
Adapted - Boyer & Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1 !Adapted - Krajewski, Malhotra & Ritzman (2013). Operations Management Processes And Supply Chains, Pearson Education Limited, ISBN: 9780273766834
THIS PROCESS HELPS MANAGE INVENTORY COST
!THE 4 CATEGORIES OF INVENTORY COST WILL BE COVERED NEXT
Copyright © 2014 - Fadi Kotob
Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
The four categories of inventory costs are:
1. Ordering or setup costs
2. Inventory-holding costs
3. Shortage costs
4. Unit cost of the stock-keeping units (SKUs/
SKNs)
Categories Of Inventory Cost
Copyright © 2014 - Fadi Kotob
Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
!
• Ordering costs or setup costs are incurred as a result
of the work involved in placing purchase orders with
suppliers or configuring tools, equipment, and machines
within a factory to produce an item.
!
• Inventory-holding costs or inventory-carrying
costs are the expenses associated with carrying
inventory.
Categories Of Inventory Cost Continued
Copyright © 2014 - Fadi Kotob
Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
!
• Shortage costs or stockout costs are the costs
associated with a SKU(SKN) being unavailable when
needed to meet demand.
!
• Unit cost is the price paid for purchased goods or the
internal cost of producing them.
Categories Of Inventory Cost Continued
Copyright © 2014 - Fadi Kotob
Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
!
• One of the first steps in analysing an inventory problem should be to
describe the essential characteristics of the inventory to manage.
Inventory Characteristics
!
• The characteristics are divided in the following categories:
• Number of items
• Nature of demand
• Number and duration of time periods
• Lead time
• Stockouts !!
THESE CHARACTERISTICS WILL BE COVERED NEXT
Copyright © 2014 - Fadi Kotob
Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
!
• Number of items: each item is identified by a unique
identifier, called a stock-keeping unit (SKU) or stock-
keeping number (SKN).
➢ A stock-keeping unit (SKU) is a single item or asset
stored at a particular location.
Number Of Items
Copyright © 2014 - Fadi Kotob
Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
!Nature of Demand:
• Independent demand is demand for an SKU that is:
- Unrelated to the demand for another
- Goes directly to a customer
- Influenced by market conditions
• Dependent demand is demand for an SKU that is:
- Related to the demand for other SKUs
- Used to make another item or are considered to be component parts
Nature Of Demand
Adapted - Boyer & Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1
• Demand can either be constant (deterministic) or uncertain (stochastic)
- Static demand is stable demand.
- Dynamic demand varies over time.
Copyright © 2014 - Fadi Kotob
Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
!
• Number and Duration of Time Periods: !
- Single period
- Multiple time periods
Number And Duration Of Time Periods
Copyright © 2014 - Fadi Kotob
Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
!
• Lead Time:
- The lead time is the time between placement of an
order and its receipt.
Lead Time
Copyright © 2014 - Fadi Kotob
Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
!
• Stockouts:
• A stockout is the inability to satisfy demand for an
item.
• A stockout often leads to one of the following
outcomes:
- A backorder occurs when a customer is willing to
wait for an item.
- A lost sale occurs when the customer is unwilling to
wait and purchases the item elsewhere.
Stockouts
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 12 MANAGING INVENTORIES
Copyright © 2014 - Fadi Kotob
The Inventory Management System
Adapted - Boyer & Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1 !Adapted - Krajewski, Malhotra & Ritzman (2013). Operations Management Processes And Supply Chains, Pearson Education Limited, ISBN: 9780273766834
•By considering the Inventory Characteristics and Inventory Costs, an Inventory System provides the structure and operating policies for maintaining and controlling goods to be stocked in inventory
!•The system is responsible for ordering, tracking, and receiving goods.
– 1. How much or what quantity of an item to order?
– 2. When should an order for that item be placed?
There are two essential policies:
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 12 MANAGING INVENTORIES
Copyright © 2014 - Fadi Kotob
Two Main Types of Systems
Adapted - Boyer & Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1
• Fixed Quantity System or Continuous Review System: - Orders same quantity of items - Has differing periods of time between orders
• Fixed Period System or Periodic Review System: - Orders different quantity of items - has a fixed time between orders
Copyright © 2014 - Fadi Kotob
Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
➢ In a fixed quantity system (FQS), the order quantity or lot size is fixed; the same amount, Q, is ordered every time.
• The fixed order (lot) size, Q, can be a box, pallet, container, or truck load.
• Q does not have to be economically determined, as we will do for the EOQ model later.
Fixed Quantity System Or The Continuous Review
Copyright © 2014 - Fadi Kotob
Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
• The process of triggering an order is based on the inventory position.
• Inventory position (IP) is the on-hand quantity (OH) plus any orders placed but which have not arrived (scheduled receipts, or SR), minus any backorders (BO).
IP = OH + SR – BO
Fixed Quantity System Or The Continuous Review Continued
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 12 MANAGING INVENTORIES
Copyright © 2014 - Fadi Kotob
Adapted - Boyer & Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1
• Inventory Position: = on-hand inventory + outstanding orders - backorders
!• Example:
= 60 - 20 = 40 Iphones
• The inventory position is: Total number of Iphones - Backorders
• Customers ordered 20 Iphones which are yet to be delivered (Backorders (BO) - items promised to a customer but not yet delivered))
Total number of Iphones: 20 + 40 = 60
• The organisation currently have 20 Iphones (OH) • They ordered 40 new Iphones (SR)
The Continuous Review Or Fixed Quantity System Example
Copyright © 2014 - Fadi Kotob
Adapted - Collier & Evans (2013). OM4, South-Western, Cengage Learning. ISBN-13: 978-1-133-37242-4
!!
▪ When inventory falls at or below a certain value, r, called the reorder point, a new order is placed.
➢ The reorder point is the value of the inventory position that triggers a new order.
➢ The quantity depends on the lead time.
The Continuous Review Or Fixed Quantity System Continued
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 12 MANAGING INVENTORIES
Copyright © 2014 - Fadi Kotob
Setting the Reorder Point With Stable Demand
Adapted - Boyer & Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 12 MANAGING INVENTORIES
Copyright © 2014 - Fadi Kotob
Stability Ordering Impact
Adapted - Boyer & Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1
• To setup the appropriate reorder point, the following should be
considered:
- Demand is unstable
- Lead time is unstable
- Supply is unstable
- Data on the system is not accurate
© 2 0 1 3 O M 4 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .
CHAPTER 12 MANAGING INVENTORIES
Copyright © 2014 - Fadi Kotob
Reorder Point when Considering Instability
Adapted - Boyer & Verma (2010). Operations and Supply Chain Management for the 21st Century, South-Western, Cengage Learning. ISBN-13: 978-0-618-74933-1
Final Notes - Your Tasks For This Week
!– Review the lecture slides and the notes you have taken
!– Read chapters 12 and 14
!– Attempt the “Chapter 8 Calculations Home Exercises” loaded on the tutorial 5 Moodle folder
!– Start working on assignment 2, part 2
!– Read the “Assessment 2, Part 2, Briefing Document” loaded on the Moodle site
Copyright © 2014 - Fadi Kotob