Subject :

Assignment:

SUBMITTED TO:

SUBMITTED BY:

1

TABLE OF CONTENTS

INTRODUCTION TO SUPPLYCHAIN MANAGEMENT ...…….……. 1ST CHAPTER INVENTORY MANAGEMENT ……………………………………… 2ND CHAPTER LEAN MANUFACTURING ……………………………………… 3RD CHAPTER PLANNING FOR INVENTORY (ROP) .…………………………………… 4TH CHAPTER PLANNING FOR INVENTORY (EOQ) ………….……….………………… 5TH CHAPTER FORECASTING METHODS ....…………………………………. 6TH CHAPTER PROCUREMENT ……………………………………. 7TH CHAPTER

2

BREIFING OF CONTENTS

1) Introduction to supply chain management a) Definition & scope

2) Inventory management a) Understanding of inventories b) Classificationsc) Inventory related cost conceptsd) Selective inventory controls

I. A.B.C analysisII. Criticality analysis

III. Usage frequency analysise) Sku & Articlesf) Inco terms 2016 (updated)

3) Lean manufacturing concepts a) Definitionb) Agilec) Pull strategyd) Push strategye) Dependent demandf) Independent demand

4) Planning : Replenish Order Point a) R factorb) 3 bin approachc) Formulation of R.O.Pd) Conclusion

5) Planning :Economic Order Quantity a) Simple EOQ modelb) Formulationsc) Adjustment EOQ model(Case study)d) Conclusion

6) Forecasting Methods a) Qualitative methods

I. Executive judgmentII. Sales force composite

III. Market research / surveyIV. Delphi method

b) Quantitative methodsI. Time series model

II. Regression modelc) Common measure of errors (Mean Absolute Deviation)

7) Procurement I. Introduction & phases

3

CHAPTER # 1

INTRODUCTION TO SUPPLY CHAIN MANGEMENT

Supply chain management refers to “the means by which firms engaged in creating, distributing & selling products can join forces to establish a supply network with an increased competitive advantage”.

ELEMENTS OF SUPPLY CHAIN MANAGEMENT

A simple supply chain is made up of several elements that are linked by the movement of products along it.

The supply chain starts and ends with the customer.

Customer: The customer starts the chain of events when they decide to purchase a product that has been offered for sale by a company. The customer contacts the sales department of the company, which enters the sales order for a specific quantity to be delivered on a specific date.

Planning: The requirement triggered by the customer’s sales order will be combined with other orders. The planning department will create a production plan to produce the products to fulfill the customer’s orders. To manufacture the products the company will then have to purchase the raw materials needed.

Purchasing: The purchasing department receives a list of raw materials and services required by the production department to complete the customer’s orders. The purchasing department sends purchase orders to selected suppliers to deliver the necessary raw materials to the manufacturing site on the required date.

Inventory: The raw materials are received from the suppliers, checked for quality and accuracy and moved into the warehouse. The supplier will then send an invoice to the company for the items they delivered.

Production: Based on a production plan, the raw materials are moved inventory to the production area. The finished products ordered by the customer are manufactured using the raw materials purchased from suppliers. After the items have been completed and tested, they are stored back in the warehouse prior to delivery to the customer.

Transportation: When the finished product arrives in the warehouse, the shipping department determines the most efficient method to ship the products so that they are delivered on or before the date specified by the customer. When the goods are received by the customer, the company will send an invoice for the delivered products.

4

CHAPTER # 2

Inventory management is a science primarily about specifying the shape and placement of stocked goods. “Properly maintaining adequate supplies to ensure uninterrupted service”.

The objective of inventory management is to strike a balance between inventory investment and customer service.

Effective Inventory Management

A system to keep track of inventory A reliable forecast of demand Knowledge of lead times Reasonable estimates of

Holding costs Ordering costs Shortage costs

A classification system

INVENTORY“Inventory is the raw materials, component parts, work-in-process, or finished products that are held at a location in the supply chain.”

SIGNIFICANCE Sales growth: right inventory at the right place at the right time. Cost reduction: less money tied up in inventory, inventory management, obsolescence. One of the most expensive assets of many companies representing as much as 50% of

total invested capital. Operations managers must balance inventory investment and customer service.

Functions of inventory (why we manage inventory or supply chain?)1. To decouple or separate various parts of the production process.2. To decouple the firm from fluctuations in demand and provide a stock of goods that will

provide a selection for customers.3. To take advantage of quantity discounts.4. To hedge against inflation.5. To meet anticipated demand.6. To smooth production requirements.7. To decouple operations.8. To protect against stock-outs.9. To take advantage of order cycles.10. To help hedge against price increases.11. To permit operations.

5

Types of inventory Raw material.

o Purchased but not processed. Work-in-process.

o Undergone some change but not completed.o A function of cycle time for a product.

Finished goods.o Completed product awaiting shipment.

Other stocks (Maintenance/repair/operating (MRO) Necessary to keep machinery and processes productive.

Categories of stocks (topologies)or reasons for holding stocks

1. Pipeline stock (Goods still in transit or in the process of distribution - have left the factory but not arrived at the customer yet).

(Average Daily/Weekly usage quantity X Lead time in days + Safety stock)

2. Cycle stock (Used in batch processes, it is the available inventory, excluding buffer stock).

3. Anticipation /seasonal stock (Building up extra stock for periods of increased demand e.g. ice cream for summer, time varying requirements of an item).

4. Buffer/safety stock (safety for unplanned stock out or uncertainties).5. De-coupling (Buffer stock held between the machines in a single process which serves as

a buffer for the next one allowing smooth flow of work instead of waiting the previous or next machine in the same process).

6

The Material Flow Cycle

Input Wait for Wait to Move Wait in queue Setup Run Outputinspection be moved time for operator time time

Cycle time95%

5%

A lead time is the latency between the initiation and execution of a process. For example, the lead time between the placement of an order and delivery of a new car from a manufacturer may be anywhere from 2 weeks to 6 months. In industry, lead time reduction is an important part of lean manufacturing. The longer the lead time, the larger the quantity of goods the firm must carry in inventory. A just-in-time (JIT) manufacturing firm, such as some automobile manufacturing firms, can maintain extremely low levels of inventory. Some of these companies take delivery of some goods as many as 18 times per day.

INVENTORY PLANNING MODULES

1. Multi-period OR Fixed order quantity module.• Repeat business, multiple orders; want to maintain an item “in stock”.

2. Single period models.• Single selling season, single order.

3. Fixed time period model(E.O.Q).

HOW TO TRACK INVENTORY

We track inventory through their SKU# & UPc or Article# because we have to be efficient in time and wants to prevents ambiguity in stocks, we also keep stock physical audited in order to reconcile paper & physical stocks.

STOCK KEEPING UNITS (SKU & UPC)

A stock keeping unit (SKU) is a product and service identification code for a store or product, often portrayed as a machine-readable bar code that helps track the item for inventory. It is always unique for each category of product.

In contrast; universal product codes (UPCs) are identical regardless of which business sells the items. UPCs track only basic information about a product. Retailers must add UPCs to their databases of inventory and assign SKUs to the products.RIFD is an advance tracking system, it works like a sim card.

INVENTORY COUNTING SYSTEM

1) Periodic (Physical count of items made at periodic intervals).2) Perpetual Inventory System.

(System that keeps track of removals from inventory continuously, thus monitoring current levels of each item).

7

INVENTORY RELATED COSTS

1) Procurement cost Cost of goods Ordering cost

The costs of placing an order and receiving goods generally fixed not dependent on order quantity, it includes.

1. Administrative components.2. Handling.3. Transportation.4. Inspection on arrivals.

2) Existence of inventory/holding /carrying cost The costs of holding or “carrying” inventory over time or when supply exceeds demand, it includes,

I. Storage & handling.II. Interest on tired up capital.

III. Property tax.IV. Insurance.V. Spoilage.

3) Setup costs Cost to prepare a machine or process for manufacturing an order.4) Shortage cost Cost when demand exceeds supply OR stock out.

SELECTIVE INVENTORY CONTROLS

1) 80/20 RULE (Pareto’s law)2) ABC ANALYSIS (SIGINIFICANT FEW & INSIGNIFICANT MANY)3) CRITICALITY ANALYSIS(V.E.D)4) USAGE FREQUENCY ANALYSIS (F.S.N)

1- 80/ 20 RULE It is based on pareto’s concept, that is 20% of overall stocks provide 80% contributions in turnover.

2- ABC Analysis (Always Better Control)On the basis of pareto’s principle we rated to stocks as per their importance or contributions and, Classifying inventory according to some measure of importance and annual consumptions.

A – Very Important (> = 6 times annual usage)B - Moderate Important (between A & C class)C - Least Important (< = 0.5 times annual usage)

8

3- CRITICALITY ANALYSIS (V E D ANALYSIS)

IT is based on maintaining stocks as per importance of goods according to their need or intrinsic value; we have to carry some stocks because they are,

VITAL (to the process of production OR without it we can’t perform function). ESSENTIAL (to the process of production OR without it we can perform function

but quality must be affected). DESIRABLE (to the process of production OR without it we can perform

function).

4- USAGE FREQUENCY ANALYSIS

We have to carry some stocks on the basis of turnover frequency,(Annual demand/ Average inventory),& categorized them as,

FAST SLOW NON-MOVERS

INVENTORY COSTING/VALUATION SYSTEMS

1. FIFO (utilize on basis of first in-first out).2. LIFO (utilize on basis of last in-first out).3. MOVING/WEIGHTED AVERAGE METHOD (total cogafs/total qty of goods).4. SPECIFIC COST METHOD (A.B.C analysis base costing).5. STANDARD COST METHOD (estimated process cost + fluctuation in prices).

9

AS AN ASSET (BALANCE SHEET APPROACH)After costing of consumption remaining in hand stocks are reported in balance sheet as an asset.

AS AN EXPENSE (INCOME STATEMENT APPROACH)The cost of goods sold in the item of the income statement that reflects the cost of inventory flowing out of a business.

CONCLUSION:

HOW TO MAKE CHIOCE? IN MANAGING STOCKS:WE SHOULD;

A. Cut (cut sku/article because less is more)B. Categorized (segregate them according to sku#/article# order)C. Concretize (use image building techniques, statements must be realistic/visualize your

customer (e.g., a hill station document v/s its image and people’s decision about to going there).

D. Compact complexities (highlight specification first by providing limited number of choices to customer because less is more)

INCOTERMS 2016

INTERNATIONAL RULES FOR TRADE (DUTIES OF SELLER & BUYER)

INCOTERMS 2016

INCOTERM INSURANCEEXW BUYER BUYER BUYER BUYER BUYER BUYER BUYER BUYER BUYER BUYERFCA SELLER SELLER SELLER BUYER BUYER BUYER BUYER BUYER BUYER BUYERFAS SELLER SELLER SELLER SELLER BUYER BUYER BUYER BUYER BUYER BUYERFOB SELLER SELLER SELLER SELLER SELLER BUYER BUYER BUYER BUYER BUYER

LOADING ON TRUCK

EXPORT CUSTOM DECLARATION

CARRIGE TO PORT OF EXPORT

UNLOADING OF TRUCK IN PORT

OF EXPORT

LOADING CHARGES

IN PORT OF EXPORT

CARRIGE TO PORT OF IMPORT

UNLOADING CHAGRES IN

PORT OF IMPORT

LOADING ON

TRUCK IN PORT OF IMPORT

CARRIGE TO PLACE OF

DESTINATION

CHAPTER # 3

10

LEAN MANUFACTURING

We use lean management technique in mass production, as re-organized process in order to,

Minimize cost Minimize wastages/duplications Minimize risk Ensures continuous flow of process Meet technological advancement Make effective process flow Create more efficiency for organization

AGILE

World is changing also customer requirements as well so in order to meet customer’s fluctuating demands we redesign process flow according to their demand, cost minimization objective is secondary in this case we have to fulfill demand without looking at the cost. We redesign process as;

Quick response Just in time (J.I.T) inventory approach Special terms of price & credit Taylor made process

PULL STRATEGY

We know our requirements of productions based on historical demand.

PUSH STRATEGY

Forecast base manufacturing, as we create needs as demand if orders are not sufficient we plan forecasted demand

INDEPENDENT DEMANDThe demand for item is independent of the demand for any other item in inventory (EG.CHAIRS,

FINISHED GOODS, it calls for replenish approach).Need to determine when and how much to order,

Basic economic order quantity Production order quantity Quantity discount model

DEPENDENT DEMANDThe demand for item is dependent upon the demand for some other item in the inventory, we make EOQ model (it calls for requirement approach). CHAPTER#4

11

REPLANISH ORDER POINTIn order to maintain balance between R FACTOR & K FACTOR we compute ROP FORMULA= (USAGE @ LEAD TIME) +SAFETY STOCKWhereas,K FACTOR = inventory carrying cost,Multiple smaller quantity purchases of the same item certainly hold down carrying cost, but it hurts your cost of replenishment, expense associated with buying things.

R FACTOR = inventory ordering cost,If the per line P/O cost is 5$ then your cost to but all one million widgets at one time would be 5$,If you were to buy the same million widgets 250,000 at a time, then R factor would be (5$ x 4= 20$)Order size versus frequency of purchasing shifts the cost burden from the K factor to R factor or vice versa in other words,

If you buy smaller quantities more often, the purchasing cost R-factor goes up. If you buy larger quantities less often, you have a higher level of inventory for a long

period of time, results in carrying cost goes up.

Calculating the R-factorTotal annual cost / total times stock items were ordered,Total cost = (annual cost of purchasing dept labour+overheads) 424000 (Assumed)Average number of different stocks items per order = 8 itemsNumber of p/o created per year = 10000R-factor = 424000/(8x10000) = 5.30$

ORDER POINT FORMULA (R.O.P)We used R.O.P to determine how much of a given item needs to be ordered where there is independent demand .R.O.P is set for each item, the R.O.P is the lowest amount of an item you will have on hand and on order before you reorder.

A SIMPLE MIN – MAX APPROACH (3 bin approach)A true order point system is a 3 bin systemBIN 1 = CONTAINING WORKING STOCKS OR USAGEBIN 2 = CONTAINING WORKING RESRVES OR BUFFER STOCKSBIN 3 = CONTAINING SAFETY STOCKS (50% OF BUFFER STOCK)FORMULA = (USAGE X LEAD TIME) +SAFETY STOCKS = R.O.P

In above formula lead time is shown as a percentage of a month, as follows,

1 week = 0.25 = 25%2 week = 0.50 = 50%3 week = 0.75 = 75%

Example;

12

Assume: Usage rate of 1200 items per month Lead time of 3 weeks

Step n step calculation: Calculate weekly usage. Assume a 4-week month(1200 items/4 weeks = 300

items per week, therefore BIN-1 or working stocks should contain at least 300 items.

Calculate working reserves (Buffer stock) given 3 weeks of lead time, working reserves should be 1200 items x 0.75 = 900 items.

Calculate safety stock, use 50% of working reserves as a guideline (900 items x 50% = 450 items).

Calculate R.O.P: (1200 items x 0.75) +450 items = R.O.P 1350 items.

In order to compute the maximum, we must first determine how often we will place orders; this time period is called the “review cycle”.

REVIEW CYCLE

The review cycle is the length of time between reviews of when we wish to order product.Formula = total purchases from vendor for a year / discount quantityDiscount quantity = the minimum amount we have to order of that unit of measure in order to be granted discount.

Assume:200,000 purchases5,000 units minimum order quantity in order to get discountReview cycle = 200,000 / 5000 = 40 reviews per yearAnd, by dividing 40 reviews by 52 weeks equals to a review of every 1.3 weeks.So review cycle = 1200 items/ 4 weeks = 300 items used per week = 300 items x 1.3 = 390 items used during review cycleFormula = MIN R.O.P + REVIEW CYCLE = MAX R.O.P = 1350 ITEMS + 390 ITEMS = 1740 ITEMS MAX.

By setting a MIN-MAX for each item in inventory, we can create a simple method of ordering products having independent demand.

CHAPTER # 5

13

ECONOMIC ORDER QUANTITY (EOQ)(Best Ordering policy)

Idle level of inventory be ordered and optimal utility of resources can be derived by balancing the K factor and R factor is called EOQ.

Assumptions: Demand is uniform & known e.g 50 units per week, no fluctuations Delivery is predictable with no lapses Holding cost & ordering cost are constant Min stock is zero

Demand or D = 4000Ch = 5Co = 100

idle case is QTY # 4 because holding & carrying both costs are aqual at this pointparticulars QTY 1 QTY 2 QTY 3 QTY 4 QTY 5 QTY 6 QTY 7Q 50 100 200 400 500 1000 2000avg inv 25 50 100 200 250 500 1000

125 250 500 1000 1250 2500 5000total # of orders ( 80 40 20 10 8 4 2

8000 4000 2000 1000 800 400 200total cost 8125 4250 2500 2000 2050 2900 5200

Ch (K factor)

Co (R factor)

We can also drive it through formula:EOQ = √2 .Co . D /Ch= √2 .¿100)(4000)/1000= 400 ITEMS

EXAMPLE # 2A company makes bicycles 450 per month, buys tyre from vendor at cost 20rs per tyreHolding cost = 15% of purchase valueOrdering cost = 50 rs per orderRequired: compute EOQ, # of orders, avg annual holding cost, avg annual ordering cost & total costSolution:A-Compute demand in first step then EOQD= 2 tyres per cycle x 450 x 12 = 10800 tyres annual demandHolding cost = 20 x 15% = 3 per tyre EOQ = √2 .Co . D /Ch = 2x50x10800 / 3 = 600 tyresB- Total # of orders

14

= D/ EOQ= 10800 / 600= 18 ordersC- Average annual ordering cost= 18 Orders x 50 (ordering cost)= 900 per yearD- Average annual holding cost= AVG INV X Ch= 600+0/2 = 300= 300 X 3 =900 Per yearE-TOTAL COST= 900 + 900=1800 PER YEAR

ADJUSTED EOQ MODEL (DISCOUNTING)

This approach based on assumptions of “discounting”, when demand is constant but supplies changes due to change in price of materials, resulting more material available for consumption and we create new demand for it in order to meet both demand and supply requirements,

If 400 units available @.90 500 units available @.80

First we apply EOQ techniqueSecond compute variance in costThird we made an adjusted EOQ modelFor example,A company sells a product A through internet (online/e-commerce), company has been offered a quantity discount by a supplier, company largest product is Louisiana and its main ingredient is brown sugar.Company wants to determine optimal order size of brown sugar,Annual demand = 10400Holding cost = 20%Ordering cost = 200 $

In order to analyze offer & determine the best strategy of brown sugar we compare lower purchasing cost by increasing inventory cost,

Discount offer:For 0 – to 1499 units = 10 $For 1500 – to 4499 units = 9.9 $For 4500 – & above units = 9.8 $First step

15

EOQ AT 10 $ RATEEOQ 10 = √2 .Co . D /Ch.C

EOQ = √2 . 200.10400.20∗10

EOQ 10 = 1442.22EOQ AT 9.9$ RATE

EOQ (9.9) = √2 . 200.10400.20∗9.9

EOQ (9.9) = 4,160,000 / 1.98 EOQ (9.9) = 1449.48EOQ AT 9.8$ RATE

EOQ (9.8) = √2 . 200.10400.20∗9.8

EOQ (9.8) = 1456.86IF demand is constant EOQ 9.9 & 9.8 are invalid.

Second step: compute total cost TC (10) = Ch + Co + cost of inventory (10)= (D/Q10*Co) + (Q/2) Ch + D*C= TC = 10400/1442.22 * 200 + 1442.22/2 *(10* 0.20) + 10400 * 10= 1442.22 + 1442.22 + 104000 = 106884 $ = IDLE CONDITION Holding = ordering

TC (9.9) = Ch + Co + cost of inventory (9.9)= (D/Q9.9*Co) + (Q/2) Ch + D*C= TC = 10400/1500 * 200 + 1500/2 *(9.9* 0.20) + 10400 * 9.9= 1387 + 1485 + 102960 = 105832 $TC (9.8) = Ch + Co + cost of inventory (9.8)= (D/Q9.8*Co) + (Q/2) Ch + D*C= TC = 10400/4500 * 200 + 4500/2 *(9.8* 0.20) + 10400 * 9.8= 462 + 4410 + 101920 = 106792 $ Third step:Adjusted EOQ MODEL (9.9 PRICE)Q = 2.R.D/Ch + (1-R) Q (VALID EOQ)R = VARIATION IN COST PRICEFORMULA = STD PRICE – REVISED PRICE X 100 / STD PRICER= 10 -9.9 * 100 /10 = 0.01 OR 1.Q = 2(0.01) (10400)/20% + (1-.01)1442.22Q = 1040 + 1427.79 = 2467.79 OR 2468

Adjusted EOQ MODEL (9.8 PRICE)Q = 2.R.D/Ch + (1-R) Q (VALID EOQ)R = VARIATION IN COST PRICEFORMULA = STD PRICE – REVISED PRICE X 100 / STD PRICER= 10 -9.8 * 100 /10 = 0.02 OR 2.Q = 2(0.02) (10400)/20% + (1-.02)1442.22

16

Q = 2080 + 1427.79 = 3493.37 OR 3493IF TOTAL COST =Q (9.9) = 105832, WE ORDERED 2468 UNITSIF TOTAL COST =Q (9.8) = 106792, WE ORDERED 3493 UNITS

SO, Q (9.9) will be the best opportunity of discount.

2ND Scenario: (if demand changes as, 10400 to 11200 & 12600)

CALCULATE EOQ:

1- EOQ 10 @ 10400 D = √2 . 200.10400.20∗10

EOQ 10 @ 10400 D = 1442.22

2- EOQ 10 @ 11200 D = √2 . 200.11200.20∗10

EOQ 10 @ 11200 D = 1496.66

3- EOQ 10 @ 12600 D = √2 . 200.12600.20∗10

EOQ 10 @ 12600 D = 1587.45

17

CHAPTER#6

FORECASTING METHODS

A demand forecast is a central piece of the operations of a modern firm. It is a decision making tool which considers different factors and justifies decisions. The main idea is to make the prediction and estimations of the future demand and consequently determinate the potential markets for the product or services for the following period. A demand forecast states the needed inventory that helps to overcome the fluctuations in demand. According to the information, a firm can start to plan its upcoming activities in a way that they can most efficiently transform their inputs into outputs. Additionally, a demand forecast enables a corporation to provide its customer higher value. It distributes the operations the information including the needed products and stock keeping units (SKU), their quantities and the facilities required to fulfil the future needs. This way, the firm can gain better profit as forecast offers them a chance to lower their costs.-(Keath & Young, 1996, 217-219)

CATEGORY GRID OF METHODS

18

QUALITATIVE FORECASTING

Briefly, the qualitative methods are:Executive Judgment: Opinion of a group of high level experts or managers is pooled

Sales Force Composite: Each regional salesperson provides his/her sales estimates. Those Forecasts are then reviewed to make sure they are realistic. All regional forecasts are then pooled at the district and national levels to obtain an overall forecast.

19

Short-range forecast Usually < 3 monthsJob scheduling, worker assignments

Medium-range forecast3 months to 2 yearsSales/production planning

Long-range forecast> 2 yearsNew product planning

Types of Forecasts by Time Horizon

Designof system

Detailed use ofsystem

Quantitative

methods

QualitativeMethods

MARKET RESEARCH

SURVEY

SALES FORCE COMPOSITE

DELPHI MODELEXECUTIVE JUDGEMENT

Market Research/Survey: Solicits input from customers pertaining to their future purchasing plans. It involves the use of questionnaires, consumer panels and tests of new products and services.

Delphi Method: As opposed to regular panels where the individuals involved are in direct communication, this method eliminates the effects of group potential dominance of the most vocal members. The group involves individuals from inside as well as outside the organization. Typically, the procedure consists of the following steps:Each expert in the group makes his/her own forecasts in form of statements

The coordinator collects all group statements and summarizes them The coordinator provides this summary and gives another set of questions

to each

Group member including feedback as to the input of other experts.

The above steps are repeated until a consensus is reached.

Time Series Models

Try to predict the future based on past data

20

Quantitative Forecasting Methods Quantitative

Forecasting

RegressionModels

2. MovingAverage1. Naive

Time SeriesModels

3. ExponentialSmoothinga) simple

b) weighteda) levelb) trendc) seasonality

Assume that factors influencing the past will continue to influence the future

21

Random

Seasonal

TrendCompos

ite

Product Demand over Time

Year1

Year2

Year3

Year4

Dem

and

for p

rodu

ct o

r ser

vice

1- NAÏVE APPROACH

“Demand in next period is the same as the demand in most recent period”.

MAY-16 SALE = 48 UNITS JUNE-16 FORECAST = 48 UNITS

2- MOVING AVERAGE (SIMPLE)

Assumes an average is a good estimator of future behavior

Used if little or no trend Used for smoothing

F t+1 = A t + A t-1 + At-2+. .. +At-n+1

n

Ft+1 = Forecast for the upcoming period, t+1

n = Number of periods to be averaged

A t = Actual occurrence in period t

22

Product Demand over Time

Year1

Year2

Year3

Year4De

man

d fo

r pro

duct

or s

ervi

ce

Trend component

Actual demand line

Seasonal peaks

Random variationNow let’s look at some time series approaches to forecasting…

Borrowed from Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e

Example,

You’re manager in Amazon’s electronics department. You want to forecast iPod sales for months 4-6 using a 3-period moving average

3-WEIGHTED AVERAGE METHOD

“Give additional weight to a specific month or number or volume as standard”

Leverage for extra weight,

“When demand assumed to be more than actual on basis of predictions we use weighted average method to forecasting demand” it reflects seasonality effects on demand.

Example,

You’re manager in Amazon’s electronics department. You want to forecast iPod sales for months 4-6 using a 3-period weighted rate as,

For first month = 1/6

For second month = 2/6

For third month = 3/6

N = 3MONTH ACTUAL SALE MOVING AVERAGE SALE

1 4 N/A2 6 N/A

23

F t+1 = w1 A t + w2 A t-1 +w3 A t-2+ .. .+wn A t-n+1

FORMULATION

N = 3MONTH ACTUAL S MOVING AVERAGE SALE

1 4 N/A2 6 N/A3 5 N/A4 3 5.00 5 7 4.67

4-EXPONENTIAL SMOOTHING METHOD

Exponential smoothing is a rule of thumb technique for smoothing time series data,  It is an easily learned and easily applied procedure for approximately calculating or recalling some value, or for making some determination based on prior assumptions, such as seasonality, the simplest way to smooth a time series is to calculate a simple, or unweighted, moving average,

We use α in order to normalize extra weigthage,

“α can’t be > 1 OR < 0 “

Given the weekly demand data what are the exponential smoothing forecasts for periods 2-10 using α = 0.10 & 0.6?

WEEK DEMAND 1 8202 7753 6804 6555 7506 8027 7988 6899 77510  

Ft +1 = Forecast value for time t+1

24

At = Actual value at time t

a = Smoothing constant

EXPONENTIAL SMOOTING MODULE

Atα 0.1

Week Demand 0.11 820 820.002 775 820.003 680 815.504 655 801.955 750 787.26

5-CORRELATION & REGRESSION

Correlation examines if there is an association between 2 variables if so to what extent.

Regression establishes an appropriate relationship between the variables or degree of association.

Scatter diagram

COMMON MEASURES OF ERRORS

25

MAD = Mean Absolute Deviation = Є (ACTUAL-FORECAST)/N

It is also called MAD for short, and it is the average of the absolute value, or the difference between actual values and their average value, and is used for the calculation of demand variability.

MEAN ABSOLUTE DEVIATION

QTY ACTUAL DEMAND FORE CASTED WITH α = 0.10 FORE CASTED WITH α = 0.501 180 175.00 175.00 2 168 175.50 177.50 3 159 174.75 172.75 4 175 173.18 165.88 5 190 173.36 170.44 6 205 175.02 180.22

1077 1,046.80 1,041.78

Є(ACTUAL - FORECAST) 5.03 5.87 N

FORMULA = (ACTUAL-FORECAST)*α(0.10 OR 0.50)+FORECAST)

CHAPTER # 7

26

Preliminary phase Establish needs for purchase Formulation of team

Market research Identify potential suppliers Determine selection criteria

Screen & select Contact potential suppliers Evaluate & choose

Establish relationship Documentation of contracts Give high attention & feedback

Evaluate relationship Maintain current level & expand relationship Reduce discrepancies or decision for alternate

PROCUREMENT

“The act of obtaining or buying goods and services, the process includes preparation and processing of a demand as well as the end receipt and approval of payment”.

FIVE PHASES OF SELECTION & DEVOLOPMENT (MANAGEMENT)

*____________________________ T H E E N D _____________________________*

27