Chapter 2.3 Flashcards
Forecasting
Decision-making tool used by businesses to help in budgeting, planning and estimating future growth
Delphi method
A structured forecasting technique using a panel of experts and a number of rounds of questioning. Responses are shared after each round and the experts encouraged to reconsider their own responses. It is intended to achieve a consensus view
Mean average deviation (MAD)
A calculation to determine how accurate the forecasting process is
What 6 basic questions did lysons and farrington say forecasting should involve?
- What is the purpose of the forecast?
- What is the time horizon
- What techniques are most appropriate
- On what data must the forecast be based and how shall it be analysed
5.In what form should the completed forecast be presented - How accurate is the forecast
Name two types of forecasting techniques
- Subjective (qualitative)
- Objective (quantitative)
Name a method to determine how accurate the forecasting processes being used are?
Mean average deviation
Name 4 things you can do to get qualitative information for subjective forecasting
- Expert opinion
- Market research
- Surveys
- Structured questionning
Name 4 of the most common subjective techniques
- Market surveys
- Employee surveys
- Expert knowledge
- Test marketing
Name 3 examples of experts who could provide their opinion
- Executives, especially sales and technical
- External consultants
- Professionally qualified engineers, lawyers, medical personnel and other technical experts
What does the delphi method involve?
It tries to refine expert opinion by having several rounds of questionnaires being put to a panel of experts. After each round the responses are aggregated and then shared anonymously with the whole panel who are invited to reconsider their own response in the light of others
What is the theory behind the delphi method?
The range of responses will decrease through this process and converge on a consensus. A subjective prediction based on collective rather than individual knowledge and experience
What can the delphi method be used to predict?
- Sales levels which lead to production rates and stock-need levels
- Likely technical developments which could inform judgements about future redundancy or obsolescent stock already held or likely to be acquired in the short to medium term
Time series
A series of data points indexed (or listed or graphed) in time order
Averaging techniques
These include the simple mean, mode and median averages
What techniques does objective forecasting use?
Quantitative techniques
What are quantitative techniques based on?
Hard data - facts and figures
What are quantitative techniques based on?
A set of observations measured at successive equally spaced points in time which produces a time series data set
What 5 elements are used to allow what happened in the past to predict the future
- Averaging techniques - the average, mean or median point of the observations
- Trends - increase or decrease in the average over time
- Short-term cyclical movements
- Long-term cycles
- Random errors
What are the two main statistical techniques used in inventory forecasting
- Moving average
- Weighted average
Exponentially weighted average method (EWAM)
A statistical methodology which can be used to give more importance to the most recent data
Bullwhip effect
Distorted demand increasing up the supply chain - also known as the Forrestor effect
What is the theory behind the exponentially weighted average method?
More recent data is likely to be a better predictor of future behaviour than older data, on the basis that future conditions are more likely to be similar to current conditions than to those which existed ten or 5 years ago
Are objective forecasts more accurate than subjective ones?
Yes
Name 5 examples of things that can distort demand
- Unplanned sales promotions
- Sales team executive
- Over-ordering by customer - due to historical poor delivery performance
- Cancelling of these over-orders
- Changes in bulk freight volumes, masking the true demand
Explain the bullwhip effect
The effect of demand distortion is amplified as you move up the supply chain from the source of the distortion
Name 3 widely expected reorder methods used for independent demand
- Fixed quantities
- Economic order quantities
- Time or periodic review
name 4 systems used to reorder dependent demand
- MRP
- MRP II
- ERP
- JIT
What are fixed quantity orders?
Those with a predetermined quantity every time
What is the formula used to calculate the fixed reorder level
maximum usage x maximum lead time
How may the reorder level be indicated?
By having a two-bin system - two bins of stock are present, once one has been consumed and is empty, it is the signal to reorder
What is the most expensive part of the acquisition cost?
The cost of the goods or products being purchased
What is the optimum order quantity amount referred to as?
The economic order quantity (EOQ)
What is the economic order quantity?
A decision tool used in cost accounting
Reorder point
The point either in time or in a process when the next order should be placed
Purchase order lead time
The time period from placing an order to delivery of the goods
Name 7 assumptions that the economic order quantity formula makes
- The same quantity is ordered at each reorder point
- Customer/user demand for the stock item is known
- The relevant ordering and holding costs are certain
- The purchase order lead time is known
- The cost per unit is fixed
- Inventory levels and customer/user demand are monitored carefully enough and sufficient inventory is held to ensure no stockouts occur
- There are no quality costs
What 3 variables does the economic order quantity formula use?
- Demand - the number of units of a stock item required for a specific period of time
- Ordering cost - cost per order of raising and issuing the purchase order, receipting and making payment
- Holding cost - the costs of physically storing one unit of stock for the same period of time used in determining demand
What is the formula for the economic order quantity
it is equal to the square root of [(2 x demand x ordering costs) / carrying costs]
What does economic order quantity work best for?
Repeat purchasing and MRO items
What do periodic review systems use?
Time-based stock replenishment triggers rather than specified quantity signals
What does the relative importance if the stock item determine in a periodic review system?
The frequency of the checks possibly through regular cycle counting
Out of stock
A situation where there is no stock available for use. This could be due to poor customer forecast, poor service from the supplier, scarcity of goods, unexpected demand and a lack of raw materials
What is the formula for determining the maximum stock level?
Maximum stock level = average rate of stock usage (review period + stock item order lead time) + safety stock
When does fixed-quantity orders work well?
If the stock item is used at an inconsistent rate, but they require a reliable trigger system and consistent lead times
When are periodic based review systems most appropriate?
Where orders and suppliers have regular delivery intervals, especially if that supplier delivers more than one item in that delivery
Why are more practical order methods preferred over economic order quantities?
They are highly technical to work out, and rely on too many assumptions which mostly do not hold true in the real world
Dependent demand
The requirement for a stock item which is directly related to and therefore dependent upon the rate of production (examples are raw materials, components and energy)
Independent demand
The requirement for a stock item which is not directly related to and is therefore independent of the rate of production (examples are machinery spares, office equipment and consumables)
What is another way of classifying stock?
Based on how frequently it will be needed
What kind of supplies are usually classed as independently demanded
Indirect supplies
Bill of materials (BOM)
A comprehensive list of components, items, materials and parts to create a product, essentially a recipe for the production of an item
Variance
A measure of dispersion of data across a range
Standard deviation
A statistical term to calculate how much the conformance of an item deviates from the mean
MRP
Material requirements planning
MRP II
Manufacturing resource planning
What can be used to help determine variability levels?
Standard deviation
When does it make sense to keep production steady during the year and adjust stock levels?
If the storage costs are relatively low and production capacity is not very flexible
When does it make sense to keep stock levels low and vary production on a seasonal basis?
If production can be varied
What are independent demand stock levels determined by?
Aspects of the business other than sales and production rates
What is the recommended approach for dependent demand stock?
Material requirements planning (MRP) and the wider developed version MRP II
Describe MRP and MRP II
Computerised systems for inventory flows and inventory management and often form part of ERP (enterprise resource planning) or distribution resource planning (DRP)
ERP
Enterprise resource planning
DRP
Distribution resource planning
MPS
master production schedule
BOM
Bill of materials
When was MRP developed?
In the 1960s
What is the aim of MRP
To ensure either purchased or in-house manufacturing assemblies are available just before the required next stage or operation of the production cycle.
What does MRP track?
The work in progress throughout the end-to-end manufacturing processes, assisting the supply chain team to deliver the right supplies at the right time
What 3 questions does an MRP system answer?
- What items are required
- How many of them
- When
What is MRP defined as
A method of provisioning which depends upon a master manufacturing schedule as distinct from statistical predictions
What does an MRP schedule define?
When finished batches and items are needed for production. It is then broken down into components and sub-assemblies and each of these broken back to provision, raw materials or parts
Name the 3 steps of the MRP process
- Using known customer orders and forecast demand, a master production schedule can be created. This should allow for seasonal fluctuations
- Look at what is needed to produce each of those numbers at that rate, how much of that stock is available and how much needs to be created or bought
- MRP software combines the MPS, the BOM and the inventory information to work out the net requirements of what to purchase or produce and when
What is the equation for net requirements
Net requirements = total requirements - available inventory
Where:
Total requirements = gross requirements
Available inventory = Inventory on hand + units on order
Name 3 things MRP software can calculate after finding when each of the stock items will be required
- Place orders with suppliers
- Reschedule instructions (postpone/cancel open orders or adjust inventory coverage)
- Expedite overdue orders or trigger mitigation activity to avoid a stock out
What is a benefit of MRP systems
The capacity to produce exception reports, which show deviations from normal planning and performance. These enable anomalies to be investigated with a view to improving future forecasting
What 4 things does MRP combine?
- known demand
- forecast demand
- bill of materials for the final product
- inventory records
What 3 things is MRP most suitable for?
- Dependent demand items
- Non-uniform or lumpy demand, that is where demand is not continuous
- Job, batch or flow production or where all are used together, because of its flexibility
Why was MRP II developed?
MRP only looks at the ‘materials’ that go into the production process. MRP II was developed to look at all of the resources required
Name 6 additional inputs other than the MPS for MRP II
- Production control
- The supply chain
- Engineering and technical teams
- Finance teams
- HR
- Facilities in terms of building and energy and other utilities requirements
Why was the extension to the original MRP possible?
Because of the expansion of computing capability
‘What if’ analysis
Analysis-based scenarios exploring whether something will happen or not
Silo-working
Restricting information to the department that produced it
What does MRP II software have the ability to run?
Scenarios and ‘what if’ analysis
What does MRP II cover that MRP does not?
Planning for plant and equipment, wider financial implications and HR as well as stock and materials input
Does MRP II look at the business as a whole?
No
Is ERP the latest development of MRP and MRP II
Yes
Describe ERP
Planning of organisation-wide resource requirements by using technology to capture and assist in analysing real-time data from all functional areas across the organisation
Who was ERP first developed by?
Gartner group
When was ERP first developed?
1990s
Name 8 key business links for an ERP system
- Accounts receivable
- Accounts payable
- Human resource
- General ledger
- Work in process
- Sales and distribution
- Inventory
- organisations
Name 8 business functions where ERP allows for capabilities
- HR
- Procurement and supply chain management
- Warehousing, logistics and inventory management
- Finance
- Manufacturing
- Sales
- Project management
- Engineering
What ERP capability links to HR
Recruitment, planning, training, skills matrices, labour utilisation
What ERP capability links to procurement
P2P cycle, form requisition, supplier invoices
What ERP capability links to warehousing
Warehouse locations, delivery tracking plus all MRP II outputs
What ERP capability links to finance
Accounts payable and accounts receivable, cost management, financial reporting and payroll budgeting
What ERP capability links to manufacturing
Tracks and reports all orders through the end-to-end production process
What ERP capability links to sales
Tracks initial demand drivers, quotations and sales orders to ensure demand fulfilment is achieved
What ERP capability links to project management
Project planning, resource planning, project costing, time and expense, performance units and activity management
What ERP capability links to engineering
All drawings, change requests, material specifications stored in one database allowing access from all
What do ERP systems look at?
The resources required across the organisation as a whole
When an who was ERP II launched by?
Gartner in 2000
Name 4 main improvements from ERP to ERP II
- Capability for collaboration across whole supply chains
- Widening of the basic concepts so that they are not just applicable to manufacturing but can be used across all business and sectors
- Functionality has become more user focused
- Move towards open protocol systems that permit integration with other proprietary software so that the benefits can be accessed without having to completely replace all existing business software systems
Name 6 advantages of ERP over MRP II
- Improved customer service levels
- Reduced inventory levels
- Better inventory accuracy
- Improved cash flow and revenue collection
- Increased factory efficiencies
- Rework and scrap in the manufacturing processes are reduced
Name 5 disadvantages of implementing a full ERP system
- Difficult and expensive to implement
- Tendency towards customisation of standard ICT modules and packages which should be avoided
- Hidden costs can be high
- Training requirements for users but may also require a culture change within an organisation
- It can make decisions take hours due to the multiple tasks being performed
What does ERP allow for when properly integrated
Agile and global business relationships
Name the 3 most widely used ERP systems
- SAP
- Oracle
- Microsoft dynamics 365
What is just in time?
A production control and inventory management concept pioneered by Toyota in the early 1980s
Describe just in time
A system for producing and developing the right items at the right time in the right amounts.
Name the 4 key elements of just in time
- Flow
- Pull
- Standard work
- Take time
Muri
Means overburden
SMED
Single minute exchange of die
Jidoka
Automating processes
Mura
Means unevenness
Heijunka (schedule levelling)
Smoothing out production rates
Lean
A management process for reducing waste and thereby creating more value in a set of activtities
Total quality management (TQM)
Organisation-wide efforts, across all departments within an organisation to improve processes, products and services
Name 2 impacts of failed production levelling
Downstream - reputational and financial cost resulting from failure to deliver
Upstream - to avoid a repeat situation safety stock will be increased
What is the aim of just in time
It aims to reduce or eliminate inventory by producing goods or components immediately before they are required
Muda
Means waste
Name a benefit of just in time
Materials are not being held in stores and all the costs associated with stock holding are eliminated
How can the just in time objectives of eliminating waste be summarised?
Into the five zeros
Name the 5 zeros (just in time)
- Zero defects
- Zero set-up times
- Zero inventories
- Zero handling
- Zero lead times
Single-piece flow
Situation in which products proceed, one complete product at a time, through various operations in design, order-taking and production, without interruptions, backflows or scrap
Kanban
A scheduling system that supports lean and just in time manufacturing processes, used to signal when inventory is low and trigger reordering of materials
In the Toyota system there are 6 rules which must be implemented for the Kanban system to function effectively. What are they
- Each process issues request to its suppliers as it consumes its supplies
- Each process produces according to the quantity and sequence of incoming request
- No items are made or transported without a request
- The request associated with an item is always attached to it
- Processes must not send out defective items
- Limiting the number of pending requests makes the process more sensitive and reveals inefficiencies
Name 7 advantages of just in time
- Lower inventory holding costs
- Reduced scrap costs
- Right first time product quality
- Design - fast response to engineering changes
- Back-office costs
- Productivity
- Finance
Name 8 disadvantages of just in time
- Inability of suppliers to move quickly to demand changes
- Where having no safety stock makes the company highly vulnerable to supply failures
- Type C stock items where holding inventory is less of an issue
- Where savings from buying in bulk are at their greatest
- For products which have short life cycles or have rapid design changes
- For jobbing or small batch production
- Culture cooperation between all disciplines fall short
- Closeness of suppliers to their customer
Name 2 things that are essential from the supply chain for just in time to work effectively
- All parts must arrive where and when they are needed in the right quantitie.
- All parts must be usable. There can be no allowance for scrap or defects or buying extras to cover general losses in the production cycle
Evergreen contract
A contract that is renewed automatically from year to year until cancelled by either party
Did just in time evolve
Yes there was the creation of JIT II
What is JIT II
A customer-supplier partnership
Describe JIT II
A supplier representative is paid by the supplier but functions as a member of customer’s procurement team. They raise the customer purchase orders for that supplier and are involved in product design, production planning and value analysis
What kind of contract are you likely to enter into when using JIT II
Evergreen contract
Define lean supply
The use or consumption of materials or parts brings new material into existence, thereby avoiding stocks or unnecessary work. Suppliers are expected to provide defect free materials at the right time to meet customer requirements and employ lean supply themsleves
What is lean thinking aimed at?
Driving value and eliminating waste in a production line
Name 8 types of waste
- Transportation
- Inventory
- Movement
- Waiting
- Over-production
- Over-processing
- Defects
- Skills
Waste
Anything that does not add value to the product, also resources that are surplus to reqirements
Six sigma
A quality management system approach that focuses on improving processes, products or services through the identification and elimination of defects
What are the 5 principles of lean?
- Specify value
- Identify the value stream
- Flow
- Pull
- Perfection
Value stream
A collection of value-bearing activities or actions coordinated to deliver the final output
What three critical management tasks are required for the value stream to work
- Problem solving task
- Information management task
- Physical transformation task
What are the first 3 steps of lean
- Specify the value
- Map the value stream by the lean enterprise
- make the remaining, value-creating steps flow
What are the first visible effects of converting from departments and batches to product team and flow (lean)
The time required to go from concept to launch, sale to delivery and raw material to the customer falls dramatically
Name 6 advantages of lean
- Reduced waste - lower costs
- Removes inventory
- Product lead times to market are shortened
- Customer satisfaction increased
- Increased productivity
- Morale increased
Name 4 disadvantages of lean
- Cannot deal with turbulance
- Needs a stable business
- Difficult to accomodate external changes to the process
- Need to halt production processing to implement the lean changes
Pull
In relation to materials, this is where material is called up to replace material already used
Push
In relation to materials, this is where materials are pushed forward to production areas in readiness for use
Name 7 value stream mapping tools
- Process activity mapping
- Supply chain response matrix
- Production variety funnel
- Quality filter mapping
- Demand amplification mapping
- Decision point analysis
- Physical structure
What is the purpose and application of process activity mapping
Reducing waste by eliminating unnecessary activities, simplifying or changing sequences
What is the purpose and application of supply chain response matrix
Reducing lead times and inventory levels
What is the purpose and application of production variety funnel
Targeting inventory reduction and changes in the processing of products with varying activity patterns
What is the purpose and application of quality filter mapping
Identifying, for improvements, the location of a product and service defects, internal scrap and other inefficiencies
What is the purpose and application of demand amplification mapping
Identifying demand changes along the supply chain within varying time buckets to manage or reduce fluctuations in regular, exceptional and promotional demand
What is the purpose and application of decision point analysis
Involves identifying the point at which products or services stop being made in accordance with actual demand and start to be made against forecasts alone. Indicates whether pull or push processes are used
What is the purpose and application of physical structure
Overviewing a particular supply chain from an industry perspective. This information may result in a redesign along the lines indicated for process activity mapping
What is inventory optimisation
The management of stock levels to ensure that sufficient inventory is available to meet demand requirements, whilst simultaneously minimising the costs and risks associated with holding excess or unnecessary stock
What is the goal of inventory optimisation?
To maximise profit margins whilst minimising waste
Name 6 other costs or risks that are associated with inventory holding
- Storage costs
- Insurance costs
- Risk of stock obsolescence or redundancy
- Opportunity cost
- Spoilage cost
- Wasted resources
Name 9 techniques that can contribute towards inventory optimisation
- Forecasting methods (subjective and objective)
- Set reorder quantities and levels
- periodic reviews to check stock levels and trigger replenishment
- ABC stock classification
- MRP, MRP II & ERP systems
- Implementing just in time inventory management
- Kanban systems whereby stock is rotated and reordered on a two-bin stock management process
- Lean manufacturing concepts
- The use of safety and buffer stocks
What are required to monitor inventory performance and track improvements?
Key Performance Indicators
What are the general rules of setting KPIs?
They must focus on what matters most and they must be associated with targets
What do SMART targets mean?
Specific, measurable, achieveable, relevant and time bound
What should the number of KPIs be?
Limited and focused
On time in full (OTIF)
The complete delivery of the whole order in line with the promised delivery date and time
Time bucket
The period of time specified
Name 7 of the most useful KPIs for measuring the extent to which an undertaking has the right quantity of inventory in the right place at the right time
- Delivery performance - OTIF
- Lead times
- Service level
- Rate of stock turn
- Stockouts
- Stock cover
- Costs
What calculation measures the actual service level attained?
Number of times the items are provided on demand / number of times the item has been demanded
Whats the formula for rate of stock turn
Sales or issues / average inventory
Whats the formula for stock cover
Days of stock coverage = current quantity in stock / anticipated daily rate of usage
