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Properties of Responsive Supply Chain

Focus on responding speedily to changes
When: High Demand Uncertainty
Difficult to forecast demand
Short product life
High inventory cost
High profit margins
High product variety and lower volume
High stockout & obsolescence cost


Properties of Efficient Supply Chain

Focus on cost reduction and efficiency
When: Low Demand Uncertainty
Predictable/stable demand
Long product life
Low inventory cost
Low profit margins
Low product variety and lower volume
Low stockout & obsolescence cost


Appropriate Conditions of Centralized Strategy Supply Chain

Stable/predictable demand
Low velocity of moving product
Need Higher product availability
Few points of sale (locations)
Low distribution cost per weight
High volume per shipment
Low distribution complexity


Appropriate Conditions of Decentralized Strategy Supply Chain

High demand uncertainty/unpredictability
High velocity of moving product
Need to reduce delivery lead times
Need higher delivery responsiveness
Many points of sale (locations)
High distribution cost per weight
More delivery customization (complexity)


Push System

Every worker maximizes own output, making as many products as possible
Pros and cons:
-Focuses on keeping individual operators and workstations busy rather than effective use of materials
-Volumes of defective work may be produced
-Throughput time will increase as work-in-progress increases
Line bottlenecks and inventories of unfinished products will occur
-Hard to respond to special orders and order changes due to long throughput time


Pull System

Production line is controlled by the last operation (Kanban cards control WIP)
Pros and cons:
-Controls maximum WIP and eliminates WIP accumulating at bottlenecks
-Keeps materials busy, not operators. Operators only work when signaled to produce
-If a problem arises, there is no slack in the system
-Throughput time and WIP are decreased, faster reaction to defects, and less opportunity to create defects


What is the main goal of Sales & Operations Planning (S&OP)?

Minimize cost incurred to company to provide or supply products or services.


What are examples of External information in Productions Planning?

-External Capacity
-Competitor's Behavior
-Raw Material Availability
-Market Demand
-Economic Conditions


What are examples of Internal information in Productions Planning?

-Current Physical Capacity
-Current Workforce
-Inventory Levels
-Activities required for Production


Common Internal Strategies (S&OP)

-Hire and Fire
-Temporary Workers
-Overtime/reduced hours
-Excess Inventory
-Large Backlogs
-Change production rates


Common External Strategies (S&OP)

-Price change (increase in price may drop demand)
-Promotions (increase demand)
-Advertising (increase demand)
-"Bundled" or "Packaged" offerings (increase demand)
-Turn down orders


Economic Ordering Quantity (EOQ)

- D -> demand is known and constant (units/yr)
- S -> ordering cost (assumes immediate replenishment)
- H -> holding cost (cost/unit)

EOQ = sqrt( 2* S* D/ H)

*When ordering costs are equal to holding costs


Reorder Point (ROP)

- d_bar -> Average daily demand (slope of Order quantity vs time)
- L -> Lead time

ROP = d_bar x L


What is the Bullwhip Effect?

Small changes in demand from retailer cause wholesaler to order and less frequent large order and that caused suppliers to have even larger fluctuations.


What are some causes of the Bullwhip Effect?

-Price Fluctuations (on sale items can cause sell out due to "artificial demand", upstream perceives as actual demand and ramps up production)
-Order Batching (upstream doesn't distinguish change in order size from change in demand)
-Shortage Gaming (suppliers ration orders, buyers overcompensate to ensure they have product)
-Forecast inaccuracies


How can you mitigate the Bullwhip Effect?

-Increase information sharing of data through the supply chain
-Reduce order costs (reduces desire to order in larger batches)
-Eliminate discounts and promotions (to reduce "artificial" demand


What is the goal of the Newsvendor model and when is it used?

GOAL: Maximize expected profit
Used for: Perishable goods (cafeteria, dairy products)
Short selling seasons (Christmas tress, flowers, fashion, newspapers, event related goods)


What is the critical fractile in the Newsvendor model and how do you calculate?

The critical fractile is the point where the probability of demand is less than or equal to the order quantity. (where the costs of the probability of having too much inventory outweigh the probability of demand).

P(D<=Q) <= cu/(cu-co)

cu -> Underage cost -> price - cost (marginal profit)
co -> overage cost -> cost -salvage value (marginal loss)


Once you know the Critical Fractile, how do you determine how much to order (have in inventory)?

Q = mu + z*sigma

use z-table to find the z that corresponds to critical fractile.
mean and sigma are determine from past orders or expertise


What is Forecasting and what is it used for?

prediction of future events used for planning purposes
Used for:
-Strategic planning
-Finance and Accounting
-Production and Operations


What are some characteristics of Forecasting?

-Almost always wrong
-more accurate from groups or families of items
-more accurate for shorter periods of time
-should always include an error estimate
-no substitute for actual demand


What are some example patterns of demand?

-Trend (upward, downward)
-Seasonality (weekly, monthly, yearly patterns)
-Cyclical (event based increases/decreases)
-Random Variation
-Auto-correlation (where past effects the future)


What are the types of forecasting methods?

Qualitative (long term)
-Rely on subjective opinions from one or more experts

Quantitative (medium to short term)
-rely on data and analytical techniques


What are some examples of Quantitative forecasting methods?

Time series
-models that predict future demand based on past history trends

Casual Relationships
-models that use statistical techniques to establish relationships between various items and demand (Ex. linear regression)

-models that can incorporate some randomness and non-linear effects


What is the Weighted Moving Average (WMA) model and why is it used?

F_t+1 = w1*A1 + w_t-1*A_t-1 + ... + w_t-n*A_t-n
where the sum of weights (w) = 1

note: first given weight goes to the most recent demand data (A)

WMA models have the ability to give more importance to more recent data without losing the impact of the past


Why use exponential smoothing model?

-Uses less storage space for data
-Extremely accurate
-Easy to understand
-Little calculation complexity


Exponential Smoothing

F_t+1 = Ft + alpha* (A_t-F_t)
where alpha is between 0 and 1

If alpha is low, there is little reaction to observed differences in forecast and demand

If alpha is high, there is a larger reaction to differences


What is Bias? (in regards to model evaluation)

When a consistent mistake is made


What is Random? (in regards to model evaluation)

errors that are not explained by the model being used


What is a Tracking Signal?

Measure of how often our estimations have been above or below the actual value. It is used to decide when to re-evaluate the model.

IF TS< -4 or > 4, investigate the model!