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Demand

Management: -Exponential smoothing: sophisticated -Profit: money (margin) you would have made if
-Demand patterns: spatial (location) vs. temporal weighted moving average model you had had more products, understocking
(time)- short term results tend to be more Current: Ft+1 = Lt and Ft+n = Lt -Cost: cost associated with product (production
accurate, planning horizon and lead time Revised forecast using smoothing constant cost, inv. cost-SV), overstocking
important. 0<a<1 -Co: overstocking, cost per unit of positive inv.
Lumpy (no pattern) vs. regular Lt = Lt-1 + a (Dt - Lt-1) remaining at end of period (a loss for adding one
Independent (consumer)**focus vs. derived = a Dt + (1 - a) Lt-1 more product)
(based off independent) Lt-1 is the consistent part from history (previous -Cu: understocking, cost per unit of unsatisfied
Aggregate (more accurate but less useful) vs. period demand) demand (a gain for adding one more product
disaggregate a (Dt - Lt-1) is the adjustment from the foregone profit)
-Observed demand(O)= systematic is a weighing factor, commonly called the EOQ OR Q = lot or batch size
component(S) + Random component(R) exponential smoothing constant; is between 0 ---Quantity that a supply chain stage either
-Systematic component: expected value of and 1; compromise values for typically range produces or orders at a given time
demand (level=L, trend= T, seasonal factor= SF) from 0.01 to 0.3 --Cycle inventory: average inventory that builds
-multiplicative S = L x T x SF alpha is higher for new products, lower for up in the supply chain b/c a supply chain stage
-additive S= L + T + SF existing products either produces or purchases in lots
-mixed S= (L + T) x SF -Bottom up: more useful information at lower --Objective is to minimize the sum of material,
-R deviates from S level (store/product level), lowered efficiency at ordering, and holding costs.
Low MFE & MAD top level -total cost is relatively insensitive to order
o The forecast errors are small & -Top down: Accuracy and effectiveness are quantities.
unbiased lowered at lower level, useful info at upper level,
LOW MFE, high MAD better overall, good for manufacturer, forecast at Bullwhip effect
o On average, the arrows hit the aggregate levels breakdown by store/SKU, -information distortion along a supply chain
bullseye (so much for averages) companies prefer b/c it forecasts error at the (during collaborative demand mgmt)
High MFE & High MAD beginning, consumer it depends whichever has -coined by Proctor and Gamble- had stable
o The forecasts are inaccurate & biased the lowest aggregate error market demand at consumer level, but
Qualitative: variability in orders placed on suppliers
-Low cost and less time consuming to develop -Seasonal index= period avg demand/avg -sources: Demand forecast update, retailer
-Rely on management insights demand for all periods gaming, order batching, price variations
-Biased toward user group -Calculate: Deseasonalize= actual (promotions)
-Not consistently accurate demand/seasonal index, then use ES to project -how to reduce: info sharing, supply chain
Time series: deseasonalized data one period ahead, alignment, marketing & promotions
-Work great for products with stable sales reseasonalize for desired month
-Smooth out small random fluctuations =deseasonalized forecast x seasonal factor Oracle plans
-Simple to understand and use (seasonal pattern does not change, but average -Unconstrained plan: assume infinite material
-Easily systematized (a lot of software products might) and production resource availability
available) -Some indices have to be above 1, some have be (demand=prod)
-Generally good for short-term forecasting below 1 -Constraint based plan(CBP): creates a feasible,
-Require a large amount of historical data but not necessarily optimal plan (production is
-Sometimes adjust slowly to changes in sales Inventory in Supply Chain stopped by any constraint whether soft or hard-
-Searching for the right parameters can be -Hold inv b/c: encourages economies of scale, have to make up for it in next period)
difficult increase cost & service, better for smooth ops, -Optimization: satisfying objective criteria (with
-Inconsistent with long term forecasting balance time diff b/w manufacturing & feasible solutions) weigh benefits vs. penalties
Causal: consumption (example: can go over soft labor constraint, but
-Work well with both short- and medium-term -Inv. turnover= annual sales/avg inv. have to pay overtime)
forecasting =COGS/avg inv. -optimization plan depends on the objective (ex:
-Capable of supporting what-if analysis -EOQ: tradeoff between fixed order cost and on-time delivery or maximum inventory turns)
-Inexpensive to run with many software variable holding cost, take advantages of CBP vs. Optimization
packages available economies of scale, demand is known -Constrained plans are feasible, but not optimal
-Depend on consistent relationships between -Calculations (see other side) due to the constraints
variables -Newsvendor model: allow for demand -Optimization seeks the production plan that
-Need other methods to generate accurate values uncertainty, tradeoff between 1. Stock-outs and best meets the objective criteria with all the
for independent variables 2. Overstock; 2 mutually exclusive possibilities, constraints considered.
-Require large data sets salvage costs are a consideration
-Difficult to maintain (Cu)Profit=price-cost
(Co)Loss=cost-salvage Demand Planning Process
F(Q)=profit/(profit+cost) Cu/(Co+Cu) 1.Determine the purpose
Seasonal Indices Q*=mean demand+(z x std dev) 2.Establish the Time Horizon
-Pattern in past, apply pattern to future, major 3.Select a forecasting technique
assumptions Managing Inventory in Supply Chains (maximize 4.Prepare the forecast
-Categories of demand management: qualitative, profit) 5.Monitor, modify, and revise
historical (time-series, seasonal), causal Newsvendor model
approaches (models, regression) Inventory holding costs vs. out-of-stock costs: Governance
-Time series methods: Moving average, Example: SnowTime Sporting Goods Supply Chain Governance use of hierarchical
exponential smoothing, regression Production cost per unit: $80 type controls to coordinate supply chain
-Moving average: used when demand has no Selling price per unit: $125 activities.
observable trend or seasonality; level only; the Salvage value per unit $20 -Market based (commodities) : short term
level in period t is the avg demand over the last Q is production quantity, D is demand exchange
N periods Profit=125-80=$45 selling price-cost per unit - Administered (promotions): incentives,
Lt = (Dt + Dt-1 + + Dt-N+1) / N Cost= 80-20= $60 expertise, and power
Current forecast for all future periods is the --Contractual (franchising): long term contracts
same and is based on the current estimate of the Critical Ratio (CR) for the optimal order quantity -Vertical integration: ownership
level is given by CR=F(Q*)=Cu/(Cu+Co) Supply Chain coordination Strategies:
Ft+1 = Lt and Ft+n = Lt -CR=Profit/(Profit+cost) third party mechanisms
-courts
-arbitration panels, professional mediators etc. Streamline the supply chain production, $250/order in shipping and
Contract management -Risk sharing in the supply chain handling, and 20% holding the inventory
--Explicit contract conditions -Revenue/cost sharing What is the retailer EOQ
--Incomplete contracts -Improve SC planning processes EOQr = Sqrt(2DSr/ICr)
Supply chain performance evaluation -Responsive, real time I=% of product value as holding cost
-prevention of channel free riding behavior planning Cr=product value for retailer (cost to retailer)
Degree of control varies across governance -Limit automated planning EOQr = Sqrt[(2*12*10000*100)/(.2*3)] =
modes decisions ~6,000
the exercise of control forces Hamptonshire What is the manufacturer EOQ
cooperation, limits uncertainty and -Buy back when Anna offered to buy back unsold EOQm = Sqrt[(2*12*10000*250)/(.2*2)] =
inhibits partner opportunism. newspapers, Ralphs risk was lower and he ~10,000
Cooperation is valued when there are bought more What about the joint EOQ
TRANSACTION SPECIFIC COSTS -VMI: manufacturer responsible for retailer EOQj = Sqrt[(2*12*10000*350)/(.2*5)] =
which are costs incurred when either inventory and makes replenishment decisions, somewhere in middle of two EOQs
party retrieves its investment. retailer shares demand info w/ manufacturer Different holding cost percentage (.2*2)+(.3*3)
o Retailers building a stake who can increase totally supply chain profits by
in supplier brand and reducing effects of double materialization?
technology Variables
o Suppliers: invest in retailer o Prize
training and support o Avg demand
Sources of supply chain conflict o St. deviation
1.competing goals o Salvage value
Quality/service vs. efficiency o Risk sharing
2.differing perceptions of reality
Level and fairness of profit Beautiful Bags
distribution -Blue jeans: stable & predictable EOQ inv
3.clashes over domains policy, larger batch, long lead time
Use of multiple distribution channels -High fashion: seasonal &unpredictable
4.Changes in power balance, environment, newsvendor, easy access to market, location
policies, and norms. close to major markets, smaller batches and
higher costs
Categories of supply chain conflict - conflict -Whats next: in the middle
arises when goals, perceptions and domains are continuous/periodic review with buffer stock
not aligned. -require different supply chains & sourcing
Incentive conflict policies
Info processing conflict -Hybrid solution
Supply chain operational conflict -Take advantage of economies of scale, but keep
Supply chain pricing conflict inventory as buffer
Supply chain behavioral conflict
How conflict is resolved? Hugo Boss
- Should the pilot be extended to other product
Insitutional mechanisms designed to contain
conflict early lines? it depends
----Information intensive mechanisms -20% produced IN hugo & 80% independent
----Joint decision making bodies for marketing, suppliers
operating, and other related decisions. -proposal goal: improve availability & reduce inv.
Effective incentive management cost by increasing order frequency from monthly
-optimizing member overlap to weeklyshorter lead times, lower order Qs &
-reducing decision discretion inv levels, higher forecast accuracies & product
-coordinate operations using programs such as availability
volume discount, VMI -Tradeoffs: product avail vs. cost efficiency, order
setup cost vs. holding cost, downstream vs.
upstream risk
JIT for the Holidays case
Demand forecasting
-Highly unreliable
-Qualitative approaches
-Market insights and market research
-Ineffective quantitative approaches
-Limited value of planning tools
On the supply side,
-Quick response (JIT)
-Minimize lead times
-Postponement
-Flexible production
-Extra production capacity
-Keep safety stock
-All of above will increase supply chain costs
Reacting to fads vs. creating them Problems
-By educating customers An online drug store (ODS) sells 10,000 bottles
-Creating scarcity of vitamins per month. It incurs a fixed order
-Combine with variety cost of $100 per order, and an annual holding
-Rolling mixed strategy to create controlled cost of 20%. The manufacturer charges
seasonality $3.0/bottle, and incurs $2.00/bottle in
-Generate longer trends and less seasonal
products