Lecture 03: Serving market demand Flashcards
7. Capacity management 8. Forecasting 9. Inventory management 10. EOQ model
Explain Economic Order Quantity (EOQ) mode (3)
EOQ is a basic reorder level system
- where one orders a set number of materials or parts when the reorder point is met.
What are the different components in understanding a demand pattern? (4)
- What are the types of methods used for forecasting?
Understanding a demand pattern:
- Cyclical components,
- Seasonal peaks components,
- Trend components,
- Random variation (or residual variation)
Methods: Quantitative / Qualitative forecasting
Why do we carry inventory? (4)
- Flexibility
- Protection against stock-outs
- Process constraints (e.g., minimum order or shipment levels, minimum processing levels)
- Financial reasons (e.g., bulk discounts or seasonal price variation)
Problems related to holding inventory (5)
Covers up errors in the system
- Ties up working capital
- Needs space
- Must be managed
- Is prone (Anfällig für..) to damage, theft, and obsolescence
Two basic inventory reorder systems (2)
Reorder Level System
- Economic Order Quantity (EOQ) models
- Two-bin system
Cyclical Review system
“Order up-to” at set intervals
What is the Customer Order Decoupling Point (CODP)? (2)
separates
- order-driven activities
- forecast-driven activities
Four distinct production strategies are defined by the position of the CODP (4)
-
Design / Engineer-to-Order (ETO)
Products and services are created from the drawing board meeting customer requirements. -
Manufacturing / Make-to-Order (MTO)
Individual customers are identified during production; each order is made to a particular customer specification. -
Final Assembly / Assembly-to-Order (ATO)
Builds sub-assemblies in advance of demand, and then puts them together to make the final product when a specific customer order is received. -
Finished Goods / Make-to-Stock (MTS)
Making standard items that are put into inventory, which can be used immediately to fulfil customer demand
The position of the CODP is a strategic decision affecting effectiveness and efficiency … (2)
Speculation:
- moved downstream towards the customer
- because of process constraints or delivery service requirements.
Postponement:
- moved upstream towards raw materials
- because of product-market constraints or inventory cost considerations.
Explain T-point! (2)
Where the product goes from one or a few variants to many. It is also known as the variation explosion point.
It is a good candidate for placing the CODP.
Define capacity!
- How is it expressed?
- Show an example for the way it is expressed! (2)
- the rate at which the operation can transform inputs into outputs
- usually expressed as the quantity of a product or service delivered within a given period (e.g., 100 trucks a day)
Define demand!
Represents how much the market can buy, in the future.
What are the three types of capacity? (Definition)
capacity = expected output of an operation or system.
The maximum amount or level of something that can be produced, held, or accommodated by a system, person, or organization.
Types
- Design capacity - no stoppages
- Effective capacity - less planned stoppages (e.g., for maintenance)
- Actual capacity - less both planned and unplanned stoppages
How is capacity and efficiency calculated? (2)
- Capacity = total time available / Time needed for task
- Efficiency = Actual capacity / Effective capacity in %
How is utilization (Nutzung) calculated?
Utilization = Actual capacity / Design capacity in %
How can capacities be adjusted? (7)
Improving P roduction capacity
- Introducing new machines, lines, factories
- Increasing workforce
- Sourcing capacity from suppliers or competitors
Enhancing O perational efficiency
- Increasing throughput speed in processes
- Reducing quality errors and other wastes in processes and products
Adjusting W ork schedules
- Adding shifts
- Increasing working hours or overtime
What is forecasting?
Forecasting is the prediction of demand based on qualitative and quantitative measures
What forecasting methods do you know? Explain both of them!
Demand forecasting
how much do we believe the market will require in the future.
Capacity forecasting
how much capacity do we believe we will have in the future
Why does the market demand dynamically vary? (3)
Market dynamics
- Changing customer taste
- Competitors’ offerings, substitutes
- Seasonality
- Economic changes, sales and marketing campaigns
Special Events / External shocks
Name 5 demand patterns!
- Cyclical components: repeating patterns of growth/decline in sales or price volatilities
- Seasonal peak components: shifting demand patterns across time periods
- Residual variation: if no other types apply
- Managed demand from sales tactics to influence demand
- Trend components: general direction of a market
Add these demand patterns in the corresponding drawing! (4)
Name 4 ways how companies can manipulate their demand! (5)
- Long-term contracts
- Price
- Advertising
- Incentives like loyalty programs or Promotional giveaways
What are quantitative forecasting methods based on? (2)
- assumption that the past predicts the future
- past values, no other variables important
Name quantitative forecasting methods and explain! (4)
-
Causality model
linear regression: Predicts next value as a linear combination of past values with coefficients based on correlations between past values and calculated so as to minimize the mean square residuals. -
Exponential smoothing
Uses a decreasing exponential function to assign the weights to past values -
Näive approach
Assumption: future demand = past demand -
Trend projection
Let you look beyond just the next period
__ -
Moving averages
(weighted moving average) Next value will be the mean of the past n values
5 Qualitative Forecasting Methods!
-
M arket Surveys
Asking people about their opinions towards product services or buying intentions - I ntuition of forecasters
-
D elphi Methods
Detailed interviews and studies of the opinions of a panel of experts in a particular area - I nput from sales and customer service
-
S cenario Planning
Considers the potential scenarios that an organization might face, and then analyzes the demand pattern that might result from each scenario
Name 4 general principles for forecasting!
Sorted by priority:
- Forecasts are no substitute for actual demand
- Never underestimate the effect of human behavior in forecasting.
- Good forecasts include an error estimate (assumption summary)
- Forecasts are always wrong
___
- Forecasts are more accurate for families of products than for single products
- Forecasts are more accurate for shorter horizons than for longer
Name two planning strategies and explain them! Explain both strategies also with help of a drawing!
Chase demand
Target production equals the forecasted demand
Level production
Target production is the average of the monthly forecasted demand for the year
Economic Order Quantity (EOQ) assumption are:
(6)
- Instantaneous receipt of material (unmittelbarer Empfang des Materials)
- Order setup cost and inventory holding cost
- Known and constant lead time
- Known and constant demand
___ - No quantity discounts
- No stock-out (kein Leerbestand)
