2.4 Managing Unpredictable Variability

Question 1

Demand Forecast

Answer 1

Basic assessment of future demand based on
statistical methods
▪ Based on historical numbers/data (on demand)
▪ Statistical or causal models

Question 2

Demand Plan

Answer 2

Complementing the demand forecast by expert knowledge and confirmation
▪ Based on demand forecast
▪ Complemented by expert knowledge from other corporate divisions

Question 3

Fig. Production Management

Answer 3

Question 4

Forecasting in the Supply Chain Context

Answer 4

▪ Coordinated forecast by all members of the supply chain
▪ Use point-of-sales data

Question 5

Value of Improved Forecasts

Answer 5

▪ Decisions regarding ordering quantities are based on a demand forecast
▪ If demand exceeds supply → Stockouts result from the actual demand (lost sales)
▪ If supply exceeds demand → Overstocks increase the supply chain costs
→ Precise forecasts reduce costs of overstocks and understocks

Question 6

Forecast Quality

Answer 6

▪ Normally distributed demand:
Mean value µ and standard deviation / forecast error 𝜎
▪ Measures:
Reduction of forecast error, for instance by improving market research leads to higher supply chain profits
→ Reach the same CSL with a lower safety inventory

Question 7

Conclusion – Characteristics of Forecasts

Answer 7

▪ Forecast are always inaccurate
→ Include both the expected value of the forecast and a measure of forecast error
▪ The farther up the supply chain a company is (distance to the consumer), the greater the distortion of information it receives
▪ Collaborative / coordinated forecasts of demand along the supply chain
▪ Aggregate forecasts are more accurate than disaggregate forecasts
→ Aggregation over regions, products, components, etc.
▪ Accuracy of forecasts decreases with the length of the forecasting period
→ Reducing supply lead time allows using accurate short-term forecasts

Question 8

Aggregation to Reduce Variability

Answer 8

Aggregating (safety) inventory for various customers / regions in centralized storage facilities in order to take
advantage of compensatory effects.

Question 9

Comparison of Aggregated and Separate Orders

Answer 9

→ Lower values for the demand correlation 𝝆𝒂𝒃 imply higher potential savings from aggregation of orders.

Question 10

Impact of Aggregation on Safety Inventory

Answer 10

Square-root Law: Reducing the number of independent stocking locations by a factor of 𝑛, the average safety inventory can be reduced by a factor of sqrt(𝑛).
→ However, response time and transportation cost to customers increase!
→ Alternative types of aggregation, which enable taking advantage of reduced safety inventories without having to physically centralize all inventories in one location.

Question 11

Types of Aggregation

Answer 11

• Information centralization – aggregation of information
• Specialization – aggregation of inventory
• Product substitution – aggregation of demand
• Component commonality – aggregation of components
• Postponement – aggregation of products

Question 12

Aggregation of Information

Answer 12

▪ Inventory of every stocking location is globally visible through information systems
▪ Orders are fulfilled by the closest location with stock
▪ In case of delivery problems, another stocking location fulfils the order
▪ Advantages:
– Higher responsiveness
– Lower transportation costs
– Higher product availability
– Lower safety inventory

Question 13

Aggregation of Inventory

Answer 13

▪ Stocking certain products only in specialized locations
▪ Advisable if:
– Products have different demands depending on the region (e.g., snow shovels)
– Reduction of variety
– Reduction of safety inventory
– Small increase in transportation costs and response time
▪ Products suitable for specialization should have:
– High value
– Low demand
→ Only keep decentralized stock of slow moving products with unpredictable demand if customer is willing to pay a premium!

Question 14

Aggregation of Demand

Answer 14

▪ Use of one product to satisfy demand for a different product
▪ Manufacturer-Driven Substitution (One-Way-Substitution): Substitution of a lower-value product that is not in stock with a higher-value product
▪ Customer-Driven Substitution (Two-Way-Substitution): Customer substitutes a product that is not in stock with a similar product that is in stock
→ Product substitution enables aggregation and therefore reduces safety inventory

Question 15

Aggregation of Components

Answer 15

▪ Using a common technological platform for various products
- Advantages:
▪ Lower number of variants for parts → lower development and testing costs
▪ Component Commonality → Economies of scale
▪ Reducing inventory
- Disadvantages:
▪ Greater effort in product design, as common component needs to fit with every product
▪ Changing the common components causes changes in every product
▪ Potentially increased difficulty of product differentiation
▪ Quality issues affect all products which contain common component

Question 16

Aggregation of Products

Answer 16

▪ Delay product differentiation until closer to the time the product is sold
→ Common components in the push phase, product differentiation as close as possible to the pull phase
▪ Aggregate planning for activities before product differentiation
→ Higher forecast accuracy
▪ Shifting disaggregate forecasts closer to the time of sale
→ More information available
→ Better alignment of supply and demand

Question 17

Fig. Postponement – Aggregation of Products

Answer 17

Question 18

Requirements for Postponement

Answer 18

1. Modular product design
   → Simple and low-cost assembly of different product variants
2. Modular manufacturing process
   → Supporting the reorganization of the distribution process
3. Capabilities of the supply chain
   – Efficiently providing the base products
   – Flexible and responsive processing of individual customer orders

Question 19

Enablers of Postponement

Answer 19

1. Process Postponement:
   →e.g., dye:
   Stocking white dye at the retailer, mixing the desired color in the store
2. Process Resequencing
   → e.g., Benetton:
   Dying clothes after the sewing process, that way colors can be changed according to the current trends
3. Process Standardization
   → e.g., HP drives:
   Performing customer specific tests only on receiving a customer order, tests are divided into customer specific and generic (standardized) tests

Question 20

Potentials and Limitations of Postponement

Answer 20

▪ Increase in profit and better alignment of supply and demand in case of high product variant variability as well as comparable and independent demand for product variants.
▪ If there is a significantly higher demand for a product variant, profits decrease as higher production costs outweigh the advantages of aggregation.
▪ Tailored postponement: Deterministic share of demand is produced cost efficiently without postponement and uncertain share is produced using postponement

Question 21

Quick response

Answer 21

refers to actions which reduce supply lead time.
▪ Improving Forecast Accuracy with shorter forecasting periods
– Higher number of orders is possible
– Better match supply and demand
– Higher supply chain profitability
▪ However,
– Increased uncertainty for manufacturer, need for flexible production systems
– Manufacturer needs to produce more lots or keep larger inventories
– High costs for setting-up and ordering