Class 5: (Feb 7): Chap 11 (Inventory Management , Forecasting, Chapter 10

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New Syllabus

• Class 5 (Feb 7) Chap 11 (Inventory Management ,
  Forecasting, Chapter 10 Just in Time/Lean/TOC)
• Class 6 (Feb 14) Research for Presentations
• February 21 No Class
• Class 7 (Feb 28) Supplemental Readings (Reverse
  Logistics need The Forklifts Have Nothing To
  Do! Available in the Lewis and Clark Bookstore)
  Supply Chain Security, Take home final exam
• Class 8 (Mar 7) Group presentations Final Due

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• Forecasting

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Forecasting Survey

• How far into the future do you typically project
  when trying to forecast the health of your
  industry?
• less than 4 months 3
• 4-6 months 12
• 7-12 months 28
• gt 12 months 57

Fortune Council survey, Nov 2005
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Indices to forecast health of industry

• Consumer price index 51
• Consumer Confidence index 44
• Durable goods orders 20
• Gross Domestic Product 35
• Manufacturing and trade inventories and
  sales 27
• Price of oil/barrel 34
• Strength of US 46
• Unemployment rate 53
• Interest rates/fed funds 59

Fortune Council survey, Nov 2005
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Forecasting Importance

• Improving customer demand forecasting and sharing
  the information downstream will allow more
  efficient scheduling and inventory management
• Boeing, 1987 2.6 billion write down due to raw
  material shortages, internal and supplier parts
  shortages Wall Street Journal, Oct 23, 1987

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Forecasting Importance

• Second Quarter sales at US Surgical Corporation
  decline 25, resulting in a 22 mil
  lossattributed to larger than anticipated
  inventories on shelves of hospitals. US Surgical
  Quarterly, Jul 1993
• IBM sells out new Aetna PC shortage may cost
  millions in potential revenue. Wall Street
  Journal, Oct 7, 1994

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Principles of Forecasting

• Forecasts are usually wrong
• every forecast should include an estimate of
  error
• Forecasts are more accurate for families or
  groups
• Forecasts are more accurate for nearer periods.

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Important Factors to Improve Forecasting

• Record Data in the same terms as needed in the
  forecast production data for production
  forecasts time periods
• Record circumstances related to the data
• Record the demand separately for different
  customer groups

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Forecast Techniques

• Extrinsic Techniques projections based on
  indicators that relate to products examples
• Intrinsic historical data used to forecast
  (most common)

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Forecasting

• Forecasting errors can increase the total cost of
  ownership for a product - inventory carrying
  costs
• - obsolete inventory
• - lack of sufficient inventory
• - quality of products due to accepting
  marginal products to prevent stockout

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Forecasting

• Essential for smooth operations of business
  organizations
• Estimates of the occurrence, timing, or magnitude
  of uncertain future events
• Costs of forecasting excess labor excess
  materials expediting costs lost revenues

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Forecasting

• Predicting future events
• Usually demand behavior over a time frame
• Qualitative methods
• Based on subjective methods
• Quantitative methods
• Based on mathematical formulas

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Time Frame

• Short-range to medium-range
• Daily, weekly monthly forecasts of sales data
• Up to 2 years into the future
• Long-range
• Strategic planning of goals, products, markets
• Planning beyond 2 years into the future

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Demand Behavior

• Trend
• gradual, long-term up or down movement
• Cycle
• up down movement repeating over long time frame
• Seasonal pattern
• periodic oscillation in demand which repeats
• Random movements follow no pattern

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Forms of Forecast Movement
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Forecasting Methods

• Time series
• Regression or causal modeling
• Qualitative methods
• Management judgment, expertise, opinion
• Use management, marketing, purchasing,
  engineering
• Delphi method
• Solicit forecasts from experts

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Time Series Methods

• Statistical methods using historical data
• Moving average
• Exponential smoothing
• Linear trend line
• Assume patterns will repeat
• Naive forecasts
• Forecast data from last period

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Moving Average

• Average several periods of data
• Dampen, smooth out changes
• Use when demand is stable with no trend or
  seasonal pattern

Sum of Demand In n Periods n
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Simple Moving Average
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Simple Moving Average
DaugDsepDoct
MAnov
110 orders for Nov
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Simple Moving Average
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Simple Moving Average
91 orders for Nov
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Simple Moving Average
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Weighted Moving Average
Adjusts moving average method to more closely
reflect data fluctuations
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Weighted Moving Average
Adjusts moving average method to more closely
reflect data fluctuations
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Weighted Moving Average Example
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Weighted Moving Average Example
3 Month 110 5 month 91
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Exponential Smoothing

• Averaging method
• Weights most recent data more strongly
• Reacts more to recent changes
• Widely used, accurate method

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Exponential Smoothing
Ft 1 ??Dt (1 - ?)Ft where Ft 1 forecast
for next period Dt actual demand for present
period Ft previously determined forecast for
present period ?? weighting factor, smoothing
constant

• Averaging method
• Weights most recent data more strongly
• Reacts more to recent changes
• Widely used, accurate method

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Forecast for Next Period

• Forecast (weighting factor)x(actual demand for
  period)(1-weighting factor)x(previously
  determined forecast for present period)

0 gt ? lt 1
Lesser reaction to recent demand
Greater reaction to recent demand
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Forecast Accuracy

• Find a method which minimizes error
• Error Actual - Forecast

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Forecast Control

• Reasons for out-of-control forecasts
• Change in trend
• Appearance of cycle
• Weather changes
• Promotions
• Competition
• Politics

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• Just-In-Time and Lean Production

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JIT In Services

• Competition on speed quality
• Multifunctional department store workers
• Work cells at fast-food restaurants
• Just-in-time publishing for textbooks - on demand
  publishing a growing industry
• Construction firms receiving material just as
  needed

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What is JIT ?

• Producing only what is needed, when it is needed
• A philosophy
• An integrated management system
• JITs mandate Eliminate all waste

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Lean Operations Best Implementation is Toyota
Production System

• TPS is a production management system that aims
  for the ideal through continuous improvement
• Includes, but goes way beyond JIT. Pillars
• Synchronization
• Reduce transfer batch sizes
• Level load production
• Pull production control systems (vs. push)
  Kanban
• Quality at source
• Layout Cellular operations
• Continuous Improvement (Kaizen) through
  visibility empowerment

....
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Toyotas waste elimination in Operations

• 1. Overproduction
• 2. Waiting
• 3. Inessential handling
• 4. Non-value adding processing
• 5. Inventory in excess of immediate needs
• 6. Inessential motion
• 7. Correction necessitated by defects

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Waste in Operations
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Waste in Operations
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Waste in Operations
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Flexible Resources

• Multifunctional workers
• General purpose machines
• Study operators improve operations

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The Push System

• Pre-planned issues of supplies/merchandise
  regardless of customer demand criteria
• Creates excess and shortages
• not efficient over the long run

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The Pull System

• Material is pulled through the system when needed
• Reversal of traditional push system where
  material is pushed according to a schedule
• Forces cooperation
• Prevent over and underproduction

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Kanban Production Control System

• Kanban card indicates standard quantity of
  production
• Derived from two-bin inventory system
• Kanban maintains discipline of pull production
• Production kanban authorizes production
• Withdrawal kanban authorizes movement of goods

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A Sample Kanban
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Types of Kanbans

• Bin Kanban - when bin is empty replenish
• Kanban Square
• Marked area designed to hold items
• Signal Kanban
• Triangular kanban used to signal production at
  the previous workstation
• Material Kanban
• Used to order material in advance of a process
• Supplier Kanbans
• Rotate between the factory and suppliers

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Components of Lead Time

• Processing time
• Reduce number of items or improve efficiency
• Move time
• Reduce distances, simplify movements, standardize
  routings
• Waiting time
• Better scheduling, sufficient capacity
• Setup time
• Generally the biggest bottleneck

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Common Techniques for Reducing Setup Time

• Preset Buttons/settings
• Quick fasteners
• Reduce tool requirements
• Locator pins
• Guides to prevent misalignment
• Standardization
• Easier movement

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Uniform Production

• Results from smoothing production requirements
• Kanban systems can handle /- 10 demand changes
• Smooths demand across planning horizon
• Mixed-model assembly steadies component production

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Quality at the Source

• Jidoka is authority to stop production line
• Andon lights signal quality problems
• Undercapacity scheduling allows for planning,
  problem solving maintenance
• Visual control makes problems visible
• Poka-yoke prevents defects (mistake proof the
  system)

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Kaizen

• Continuous improvement
• Requires total employment involvement
• Essence of JIT is willingness of workers to
• Spot quality problems
• Halt production when necessary
• Generate ideas for improvement
• Analyze problems
• Perform different functions

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Goals of JIT

1. Reduced inventory - where?
2. Improved quality
3. Lower costs
4. Reduced space requirements
5. Shorter lead time
6. Increased productivity
7. Greater flexibility

1. Better relations with suppliers
2. Simplified scheduling and control activities
3. Increased capacity
4. Better use of human resources
5. More product variety
6. Continuous Process Improvement

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JIT Implementation

• Use JIT to finely tune an operating system
• Somewhat different in USA than Japan
• JIT is still evolving
• JIT as an inventory reduction program isnt for
  everyone - JIT as a CPI program is!
• Some systems need Just-in-Case inventory

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Chapter 12

• Inventory Management

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Why is Inventory Important to Operations
Management?

• The average manufacturing organization spends
  53.2 of every sales dollar on raw materials,
  components, and maintenance repair parts
• Inventory Control how many parts, pieces,
  components, raw materials and finished goods

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Inventory Conflict

• Accounting zero inventory
• Production surplus inventory or just in case
  safety stocks
• Marketing full warehouses of finished product
• Purchasing caught in the middle trying to
  please 3 masters

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Inventory

• Stock of items held to meet future demand
• Insurance against stock out
• Coverage for inefficiencies in systems
• Inventory management answers two questions
• How much to order
• When to order

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Types of Inventory

• Raw materials
• Purchased parts and supplies
• In-process (partially completed) products
• Component parts
• Working capital
• Tools, machinery, and equipment
• Safety stock
• Just-in-case

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Inventory Hides Problems
Policies
Inventory Accuracy
Transportation Problems
Poor Quality
Training
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Aggregate Inventory Management

• How much do we have now?
• How much do we want?
• What will be the output?
• What input must we get?
• Correctly answering the question about when to
  order is far more important than determining how
  much to order.

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Inventory Costs

• Carrying Cost
• Cost of holding an item in inventory
• As high as 25-35 of value
• Insurance, maintenance, physical inventory,
  pilferage, obsolete, damaged, lost
• Ordering Cost
• Cost of replenishing inventory
• Shortage Cost
• Temporary or permanent loss of sales when demand
  cannot be met

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ABC Classification System

• Demand volume and value of items vary
• Classify inventory into 3 categories, typically
  on the basis of the dollar value to the firm

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Why ABC?

• Inventory controls
• Security controls
• Monetary constraints
• Storage locations

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Economic OrderQuantity
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Assumptions of Basic EOQ Model

• Demand is known with certainty and is constant
  over time
• No shortages are allowed
• Lead time for the receipt of orders is constant
• The order quantity is received all at once

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No reason to use EOQ if

• Customer specifies quantity
• Production run is not limited by equipment
  constraints
• Product shelf life is short
• Tool/die life limits production runs
• Raw material batches limit order quantity

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EOQ Formula
EOQ
Co Ordering costs D Annual Demand Cc
Carrying Costs
Cost per order can increase if size of orders
decreases Most companies have no idea of actual
carrying costs
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When to Order
Reorder Point is the level of inventory at which
a new order is placed
R dL
where d demand rate per period L lead time
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Forms of Reorder Points

• Fixed
• Variable
• Two Bin
• Card
• Judgmental
• Projected shortfall

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Why Safety Stock

• Accurate Demand Forecast
• Length of Lead Time
• Size of order quantities
• Service level

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Inventory Control

• Cyclic Inventory
• Annual Inventory
• Periodic Inventory
• Sensitive Item Inventory

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Vendor-Managed Inventory

• Not a new concept same process used by bread
  deliveries to stores for decades
• Reduces need for warehousing
• Increased speed, reduced errors, and improved
  service
• Onus is on the supplier to keep the shelves full
  or assembly lines running
• variation of JIT
• ProctorGamble - Wal-Mart
• DLA moving from a manager of supplies to a
  manager of suppliers
• Direct Vendor Deliveries loss of visibility

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Inventory Management Special Concerns

• Defining stock-keeping units (SKUs)
• Increase in number of SKUs 15 over past 3
  years
• Dead inventory
• Deals
• Substitute items
• Complementary items
• Informal arrangements outside the distribution
  channel
• Repair/replacement parts
• Reverse logistics

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Whats Next

• No class until 28 Feb
• Group presentations 7 Mar
• Final Exam due 8 Mar