Variability and Inventory Management Flashcards
1
Q
How does the demand “Build-up” work?
A
- Consumer Sales at Retailer
- Retailer’s Order to Wholesaler
- Wholesaler’s Orders to Manufacturer
- Manufacturer’s Orders with Supplier
2
Q
What is the bullwhip effect?
A
- Orders to suppliers tend to have a larger variability than sales to buyers, which results in an amplified demand variability upstream
- E.g.: Orders for machine tools fluctuate more than the manufacturing of the main customer
3
Q
What are the impacts of the bullwhip effect?
A
- Manufacturing cost↑
- Inventory cost ↑
- Replenishment lead time ↑
- Transportation cost ↑
- Shipping and receiving cost ↑
- Level of product availability ↓
-> Profit of the SC decreases, as the higher level of product availability causes costs to increase
-> (Growing) lack of communication between supplier and manufacturer
4
Q
What are cause-effect relationships?
A
- Demand fluctuations are increasing when each stage of the SC plans individually (sequential/uncoordinated planning)
5
Q
What are different types of obstacles in a supply chain?
A
- Incentive Obstacles
- Information-Processing Obstacles
- Operational Obstacles
- Pricing Obstacles
- Behavioral Obstacles
6
Q
What are incentive obstacles?
A
- Local optimization: Decisions based on maximizing profits of only a single stage, without considering overall SC profits
- Sales Force Incentives: Incentive systems, which reward sell-in, not sell-through, lead to order variability being larger than customer demand variability
7
Q
What are information-processing obstacles?
A
- Forecasting based on orders and not customer demand
- Lack of information sharing
Short-term sales promotions can cause retailers to increase their order quantity
Manufacturers may interpret this as a permanent increase in demand
The lack of information results in a high inventory level
8
Q
What are operational obstacles?
A
- Ordering in large lots: e.g. due to high fixed costs or quantity discounts for the batch size
- Large replenishment lead times: demand is overestimated, this translates into a higher forecast and order quantity. Distortion is magnified if replenishment lead times are long
- Rationing and shortage gaming
Limited capacity, production quantities are allocated to retailers in proportion to their order quantities → Incentive for retailers to increase their order quantity to receive more supply
manufacturer interprets this as increase in demand
9
Q
What are pricing obstacles?
A
- Lot-size-based quantity discounts: Discounts based on lot size increase lot size of orders
→ magnify the bullwhip effect - Price fluctuations: Trade discounts by the manufacturer result in retailers order large lots during the discounting period to cover future demand
10
Q
What are behavioral obstacles?
A
- Different stages blame another for fluctuations (enemies rather than partners in SC)
- No stage of the SC learns from its actions
- A lack of trust leads to opportunistic behavior
11
Q
Name different types of inventory management
A
- Deterministic Inventory Management
- Inventory Management under Uncertainty
12
Q
What is a deterministic inventory management?
A
- Demand, replenishment times and costs are known
- Fixed costs incurred per order
- Inventory holding costs
-> Determine the optimal cycle inventory
-> Determine optimal lot sizes
13
Q
What is inventory management under uncertainty?
A
- Demand, replenishment times, revenues, costs are uncertain
- Overstock results in costs
- Understock results in costs
-> Identify the inventory / service level to maximize profit
-> Identify the safety inventory to minimize cost
14
Q
What is cycle inventory?
A
Cycle inventory is the average inventory in a supply chain due to either production or purchases in lot sizes that are larger than those demanded by the customer (D)
15
Q
How is the cycle inventory calculated?
A
Cycle Inventory=(lot size)⁄2=Q⁄2
Lot size (Q): Lot or batch size is the quantity that a stage of a supply chain either produces or purchases at a time
16
Q
How is the average flow time resulting from cycle inventory calculated?
A
Average time that a product is in the SC in addition to the production-related lead time
Average flow time_CI = (Cycle Inventory) ⁄ Demand = CI ⁄ D = Q ⁄ 2D
17
Q
What are the assumptions for cycle inventory?
A
- Lot size dependent costs:
Material cost (average price per unit purchased) 𝐶
Holding cost 𝐻 = ℎ𝐶 (with inventory cost rate ℎ as fraction of unit cost of product)
Fixed ordering cost incurred per lot S - Ordering in large lot sizes decreases ordering costs, but increases holding costs
18
Q
What is the objective of cycle inventory?
A
- Minimizing the sum of material costs, ordering costs and inventory holding costs
- Determining the optimal lot size
19
Q
Name insights into cycle inventory
A
- CI are caused by deviations between lot sizes and demand, due to economies of scale
- High cycle inventories lead to a high capital commitment / bound assets
- Cycle inventories lead to an increase of the average flow time
- When demand fluctuates, high flow times may be problematic
- Larger lot sizes cause an increase in variability in subsequent stages
- Aggregating orders of multiple products to reduce fixed costs, despite small lot sizes of the individual products
20
Q
What are collective orders?
A
- Aggregation of orders over products or suppliers causes the total lot size to decrease due to the allocation of fixed ordering costs and transportation costs
- Cycle inventory and average flow time decrease as well
- Some types of costs might increase with an increase in product variety, others are independent of product variety
21
Q
Name three approaches for collective orders
A
- Separate order for each product
- Collective order across all products
- Collective order, not every order contains every product; each lot selected subset of products
22
Q
What are cycle inventory related costs?
A
- Inventory Holding Costs: Cost of capital, Obsolescence cost, Handling cost, Holding cost, Energy costs, Insurance, Tax, Miscellaneous costs
- Ordering Costs: Personnel Costs, Transportation costs, Receiving costs / quality control, Other costs
23
Q
What is safety invetory?
A
- Safety Inventory is carried to satisfy demand that exceeds the amount forecasted
- Trade-off between:
High product availability and high levels of service
High inventory holding costs and risk of obsolescnces
24
Q
What are factors affecting the level of safety inventory
A
- Uncertainty of demand
- Uncertainty of supply
- Uncertain delivery quantities
- Product availability: Cycle service level, Product fill rate, Order fill rate
25
What is important about product availiability?
* Achieving a balance between product availability and cost of inventory
* The optimal level of product availability maximizes the expected SC profits
* Consideration only makes sense if uncertainty is explicitly included in the decision
26
What are the product availiability factor types?
* Cycle service level: Fraction of replenishment cycles with all customer demand being met
* Product fill rate: Fraction of product demand satisfied from product in inventory
* Order fil rate: Fractions of orders filled from available inventory
27
Name insights into safety inventory
* Higher safety inventory leads to a higher CSL and product fill rate
* Required safety inventory increases with higher standard deviation of lead time and demand
* Required safety inventory increases with an increase in the desired product availability
* Reduction of supply uncertainty allows for reduction of the safety inventory while maintaining the same product availability
28
What are factors affecting the optimal level of product availiability (CSL)
* Cost of uncertainty
Cost of overstocking
Cost of understocking
* High cost for understocking → high product availability / high CSL
* High cost for overstocking → low product availability / low CSL
SL* = c_U ⁄ (c_U+c_O )
29
What are managerial levers to improve supply chain profitability?
* Increase the salvage value of unsold units
* Decrease the margin lost from a stockout
30
What is the synchronization of production and demand?
* Production quantity = demand quantity
* Reactive strategy: Execute orders upon receipt
* Requirements: Available personnel and technical production capacities correspond to the maximal demand
* Contra: Utilization fluctuates strongly
* Pro: No inventory costs
31
What is the emanzipation of production and demand?
* Keep production quantity constant
* Meet demand by build-up and reduction of inventory
* Contra: Inventory costs, shortages
* Pro: Uniform production quantity
32
What is predictable variability?
* All temporal and structural changes in demand that can be forecast and influenced.
* Influencing factors can be seasonal as well as non-seasonal
33
What are effects of variability?
* Reduced efficiency (higher production costs)
* Decreased responsiveness (lower service level)
34
What are conceptual starting points to manage seasonal inventory?
* Managing supply: adjusting capacities, inventory and subcontracting
* Managing demand: using short-term price discounts and promotions
35
How can the supply be managed?
* Time flexibility from workforce
* Dual facilities (specialized and flexible)
* Subcontracting
* Seasonal workforce for peak season
* Demand hedging through product flexibility
36
How can the demand be managed?
* Market growth
* Shift in demand
* Instruments: Marketing campaigns (promotion), pricing
37
What is a demand forecast?
* Basic assessment of future demand based on statistical methods
* Based on historical numbers/data (on demand)
* Statistical or causal models
38
What is a demand plan?
* Completing the demand forecast by expert knowledge and confirmation
* Based on demand forecast
* Complemented by expert knowledge from other corporate divisions
39
How does forecasting in supply chains work?
* Coordinated forecast by all members of the supply chain
* Use point-of-sales data
40
What is the value of improved forecast?
* 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
41
How is the forecast quality characterized?
* 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
42
What are characteristics of forecasts?
* Forecast inaccurate → Include expected value of the forecast and a measure of forecast error
* The farther up the SC 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 more accurate → 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
43
What is the impact of aggregation on safety inventory?
* 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 √n
* 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.
44
What are different types of aggregation?
* Information centralization – aggregation of information
* Specialization – aggregation of inventory
* Product substitution – aggregation of demand
* Component commonality – aggregation of components
* Postponement – aggregation of products
45
What is information centralization?
* 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
46
What is specialization and when is it advisable?
* 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 and Low demand
47
What is product substitution?
* 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
48
What is component commonality?
Use of common components in a variety of products
49
What are advantages of component commonality?
* Lower number of variants for parts → lower development and testing costs
* Component Commonality → Economies of scale
* Reducing inventory
50
What are disandvantages of component commonality?
* 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
51
What is postponement in the context of supply chains?
* Delay product differentiation until closer to the time the product is sold
* Aggregate planning for activities before product differentiation
* Shifting disaggregate forecast closer to the time of sale
52
What are the requirements for postponements in supply chains?
1. Modular product design
2. Modular manufacturing process
3. Capabilities of the supply chain
53
What are enablers of postponements in supply chains?
1. Process Postponement
2. Process Resequencing
3. Process Standardization
54
What are potentials and limitations of postponements in supply chains?
* 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 costsoutweigh the advantages of aggregation
* Tailored postponement: Deterministic share of demand is produced cost efficiently without postponement anduncertain share is produced using postponement
55
What are quick responses?
Refers to actions which reduce supply lead time
56
What is the impact of profitability and inventories?
* Improving forecast accuracy with shorter forecasting periods
* 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
