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GSMPR627 – Operations Final

Process design
Use in operations decisions when:
Long time horizon
Medium accuracy
Single or few forecasts
Top-level management
Qualitative or causal forecasting method
Capacity planning
Use in operations decisions when:
Long time horizon
Medium accuracy
Single or few forecasts
Top-level management
Qualitative or causal forecasting method
Aggregate planning
Use in operations decisions when:
Medium time horizon
High accuracy
Few forecasts
Middle level management
Causal and time series forecasting method
Use in operations decisions when:
Short time horizon
Highest accuracy
Many forecasts
Lower-level management
Time series forecasting method
Inventory management
Use in operations decisions when:
Short time horizon
Highest accuracy
Many forecasts
Lower-level management
Time series forecasting method
Long-range marketing programs
Use in marketing, finance, and HR when:
Long time horizon
Medium accuracy
Single or few number of forecasts
Top-level management
Qualitative forecasting method
Pricing decisions
Use in marketing, finance, and HR when:
Short time horizon
High accuracy
Many forecasts
Middle management
Time series forecasting method
New product introduction
Use in marketing, finance, and HR when:
Medium time horizon
Medium accuracy
Single forecast
Top-level management
Qualitative and causal forecasting method
Cost estimating
Use in marketing, finance, and HR when:
Short time horizon
High accuracy
Many forecasts
Lower-level management
Time series forecasting method
Capital budgeting
Use in marketing, finance, and HR when:
Medium time horizon
Highest accuracy
Few number of forecasts
Top-level management
Causal and time series forecasting method
Labor planning
Use in marketing, finance, and HR when:
Medium time horizon
Medium accuracy
Few number of forecasts
Lower-level management
Qualitative and time series forecasting methods
Qualitative forecasting methods
Based on managerial judgment when there is a lack of data. No specific model.

Major methods: Delphi technique, market surveys, life-cycles analogy, informed judgment

Moving average
Forecasting method
Assumes no trend, seasonality, or cycle


Exponential smothing
Based on the idea that a new average can be computed from an old average along with the most recent observed demand
Simple exponential smoothing
Assume time series is level with no cycles and that there are no seasonal or trend components
Forecast error
Used to monitor outliers and erratic demand observations, to determine when the forecasting method is no longer tracking actual demand, to determine the parameter values that provide the forecast with the least error, and to set safety stocks or safety capacity
Forecast accuracy
Causal forecasting methods
Cause-and-effect model, using other data sets to predict demand

Ex: Use population to forecast newspaper sales, use supply chain data on inventory levels to forecast flat screen TV sales

Considerations in selecting a forecasting model
User and system sophistication
Time and resources available
Use or decision characteristics
Data availability
Data pattern
Collaborative Planning, Forecasting, and Replenishment (CPFR)
Aim is to achieve more accurate forecasts, share information in the supply chain with customers and suppliers, and compare forecasts

Works best in B2B with few customers (e.g., a small number of large retailers)

Maximum output that can be produced over a given period of time
Theoretical capacity
Labor availability and overtime
Physical assets, delayed maintenance, etc
Can be used for short-term demand spikes
Effective capacity
Should be used in planning
Subtracts maintenance downtime, shift breaks, absenteeism
Capacity utilization
(Actual output / Capacity) * 100%

Utilization is seldom 100%

Facilities decisions
How much capacity
Size of facility
When capacity is needed
Location of facility
Type of facility/capacity needed

Constrain all other capacity decisions

Facilities strategy
Considerations include:
Amount of capacity, size of facilities, timing of facility decisions, types of facilities
Factors affecting facilities strategy
Predicted demand
Cost of facilities
Likely behavior of competitors
Business strategy
International considerations
Capacity cushion
100% – Utilization
Strategies for capacity cushion
1.) Large cushion – make-to-order
2.) Moderate cushions – cost of running out balanced with cost of excess capacity
3.) Small cushion – make-to-stock
Optimum facility size
Economies of scale – production costs are not linear and overhead is spread over more units

Diseonomies of scale – increased transportation costs ,cost of more bureaucracy, and increased organizational complexity

Timing of facility additions
Preempt the competition – build capacity ahead of need and positive capacity cushion

Wait-and-see strategy – Small or negative capacity cushion, lower risk strategy

Location of facilities
Quantitative factors – ROI, transportation, taxes, lead times

Qualitative factors – language, norms, worker and customer attitudes, proximity to customers/suppliers/competitors

Types of facilities
Product-focused (55%) -One family of products/services (e.g., computers)
Market-focused (30%) – Located near sales (e.g., electricity, bakeries)
Process-focused (10%) – Few technologies (e.g., computer chips, MRI center)
General purpose (5%) – Several products/services (e.g., furniture, banking)
Sales & Operations Planning
Matching supply and demand over a medium time range
Time horizon of about 12 months
Aggregated demand for one or few categories of product, demand may fluctuate or be uncertain
Possible to change both supply and demand
Facilities are fixed
Options for Managing (Influencing) Demand
Advertising and promotion
Backlogs or reservations
Development of complementary offerings
Hiring and layoff of employees
Using overtime and undertime
Using part-time or temporary labor
Carrying inventory
Cooperative arrangements
Aggregate planning strategies
Level strategy – constant work force, inventory as a buffer

Chase strategy – vary workforce, produce to demand, typical for services

Batch scheduling
Network of queues, as job moves from work center to work station job = manufacturing parts, customer, paperwork work station = machine, room, facility, worker

Customers or jobs spend most of their time at work stations waiting to be processed

Typical for actual work to be 5-20% of total throughput time

Challenges of batch/job shop scheduling
Variety of jobs processed, different routing and processing requirements of each job, number of different job orders in the facility at any one time, competition for common resources
Gantt Charting
-Scheduling multiple jobs through set of work centers in order to minimize completion time
-Used to monitor progress of jobs
-Optimal schedule can be computationally intensive of multiple jobs/multiple machines
Total time to complete a set of jobs
Mahcine utilization
Percent of makespan time machine (or person) is used
Finite capacity scheduling
-Scheduling jobs onto work stations, but not to exceed the capacity of any given resource
-Can be used to identify bottlenecks
Forward scheduling
To determine completion date for all orders
Backward scheduling
Work backward from due date to determine start date for orders
Theory of Constraints
-Goal is to make money from operations
-Production does not have value until it is sold
TOC Key Elements
Throughput = sales – COGS
Inventory = raw materials value
Operating expenses = cost of conversion and overhead
Critical Ratio
= Remaining time until due date / remaining processing time
A stock of materials used to facilitate production or satisfy customer demands
Types of inventory
-Raw materials, purchased parts
-Work in process
-Finished goods
Purpose of inventories
-To protect against uncertainties (ie safety stock)
-To allow economic production and purchase (ie cycle inventory)
-To cover anticipated changes in demand/supply (ie anticipation inventory)
-To provide for transit (ie pipeline inventory)
Costs of inventory
-Item cost
-Ordering (or setup) cost
-Carrying (or holding) cost
-Stockout cost
Item cost
-Expressed as cost per unit or SKU
-Quantity discounts possible
Ordering (or setup) cost
-Paperwork, worker time (ordering)
-Worker time, downtime (setup)
-Transportation costs
-Typically a fixed cost per order (or setup)
Carrying (or holding) cost
-Cost of capital (market rate or internal rate of return)
-Cost of storage (building, utilities, insurance, handling)
-Cost of obsolescence, deterioration, and loss (shrinkage)
Stockout cost
-Back order costs
-Lost income
-Customer dissatisfaction
-Loss of future sales
Types of demand
-Independent demand
-Dependent demand
Independent demand
-Finished goods, spare parts
-Based on market demand, independent of other items
-Requires forecasting
Dependent demand
-Components/parts of the finished products (raw materials/WIP)
-Demand is a known function of independent demand items
-Calculate instead of forecast
Economic order quantity (EOQ)
-Used to answer the question: How much should we order?
-Used for independent demand items
-Objective is to find order quantity that minimizes total cost of managing inventory
-Must calculate for each SKU
EOQ assumptions
-Demand rate is constant, recurring, and known.
-Lead time is constant and known.
-No stockouts allowed.
-Items are ordered or produced in a lot or batch, and the lot is received all at once.
-Costs are constant
-Item is a single product or SKU; demand not influenced by other items.
EOQ calculation notation
D = Demand rate, units per year
S = Cost per order placed or setup cost, dollars per order
C = Unit cost, dollars per unit
i = Carrying rate, percent of value per year
Q = Lots size, units
TC = Total of ordering cost plus carrying cost, dollar per year
Order cost per year
(cost per order) x (orders per year) = SD/Q
Carrying cost per year
(annual carrying rate) x (unit cost) x (average inventory level) = iCQ/2
Total annual cost
ordering cost per year + carrying cost per year = SD/Q + iCQ/2
Continuous review system
-Relax assumption of constant demand; demand is assumed to be random
-Check inventory position each time there is demand
-If inventory position drops below reorder point, place order for the EOQ
-Also called the fixed-order-quantiy or Q system
Reorder point calculation
R = m + s

R = Reorder point
m = mean demand during lead time
s = safety stock

Service level
-When demand is random, reorder point must account for desired service level (fill rate)
Types of service levels
-Probability all customer orders will be filled while waiting for supply order to arrive.
-Percentage of demand filled from stock.
-Percentage of time item is on hand.
Periodic review system
-Review inventory position at fixed interval (P), like a bread truck visiting grocery stores every Tuesday
-Inventory is brought up to a target level
-Order quantity varies according to demand
-Also called the fixed-order-interval system or P system
Periodic review system calculation
P system service level
Safety stock must cover a longer interval (P+L)
Vendor managed inventory (VMI)
-Supply chain management where you pass responsibility for managing inventory stocks to vendors
-Vendor must access to buyer’s demand forecast and inventory records
-Managed through contractual arrangement
-Supply chain partners share cost savings of collaboration
ABC inventory management
-Based on Pareto concept (80/20) and total usage in dollars of each item
-Classification of A, B, and C items based on usage
-Purpose it to set effort priorities to manage different SKUs
Materials requirement planning (MRP)
-Used to manage dependent demand items
-driven by the master schedule
-parts explosion breaks end items into all requirements for components/parts using BOM
-Schedule offset based on lead times
-Push system used because master schedule is constantly changing
Types of MRP
Type I: Inventory control system (MRP)
Type II: Production, inventory control system (MRPII)
Type III: Enterprise Resource Planning system (ERP)
MRP elements
-Inputs – master schedule, BOM, inventory records
-Capacity planning
-Shop-floor control
Master schedule
-Quantities derived from aggregate production plan
-Frozen within production lead time
-Quantities reflect “build” schedule rather than demand forecasts
-Quantities represent what needs to be produced
Bill of Materials (BOM)
-Structured list of all parts and materials
-Must be 100 percent accurate
-Should be one BOM per product per company
-Greatly enhanced by use of MRP
-Past due orders mostly eliminated
-Order expediting mostly eliminated
-Can provide vendors with reports of planned future orders
-Can use EDI to communicate directly with vendors
Shop floor control
-Purposes – release orders to the shop floor and manage the orders for on-time completion
-Set job priorities
-Manage lead times on basis of priority
-Minimize inventory while meeting completion dates
Required elements for successful MRP system
-Implementation planning
-Appropriate and adequate IT support
-Accurate data
-Management support
-User knowledge
Enterprise resource planning (ERP) systems
-Extension and integration of all functions through a common database
-Coordinates decisions along the supply chain
-Expensive, time-consuming to implement
-Major software vendors
A qualitative forecast would most likely be used for
process design
A regression model is example of..
a causal forecasting method.
When should qualitative methods not be used?
When making major costly decisions such as facilities locations.
The difference between actual demand and the forecast
Forecast error
Measures of forecast accuracy
Cumulative sum of forecast errors
Mean square error
Mean absolute deviation of forecast errors
Mean absolute percentage errors
Time-series forecasting
-Basic strategy is to identify the magnitude and form of each component based on available past data
-Is used to make detailed analyses of past demand patters over time and to project these patterns forward into the future
-Demand can be divided into components such as average level, trend, seasonality, cycle, and error.
With exponential smoothing, if we want forecasts to be very responsive to recent demand then the value of alpha should be
Forecast error estimates are used to
-monitor erratic demand observations or outliers
-determine when the forecasting method is no longer tracking actual demand and needs to be reset
-determine parameter values that provide the most accurate forecasts
Important factors in selecting a forecasting method
-User and system sophistication
-Time and resources available
-Data availability
-Basic idea is to share forecasting information with the suppliers and customers in the supply chain
-Is best applied to a few customers representing the bulk of demand
-Creates visibility in the supply chain, minimizing the occurrence of bullwhip in supply chains
All forecasts should include two estimates
-Estimate of demand
-Estimate of the forecasting error
In aggregate planning
“aggregate” implies that planning is done for a single overall measure of output or at most a few products
Demand management variables
Reservations, pricing, and advertising
Supply management variables
Inventory, subcontracting, and cooperative agreements
The aggregate planning problem
Needs to consider multiple tradeoffs such as customer service level, inventory levels, labor force stability, and costs
Aggregate planning is
-concerned with matching supply and demand of output
-determines not only the output levels but also the appropriate resource mix to be used
-aimed at setting overall output levels for the medium-range future
Aggregate planning in service organizations
-time horizon of 12 months, on average, is used
-Both supply and demand variables can be changed
-Facilities are considered fixed
Under a level strategy, variations in demand are managed by
varying inventory levels
Aggregate planning costs include
Hiring and layoff costs, part-time labor costs, subcontracting costs
Chase strategy
Firm produces exactly what is needed each month
A large capacity cushion is appropriate when
a firm is attempting to capture market share in a growing industry
Aggregate planning and scheduling differ in that
aggregate planning deals with acquiring resources and scheduling deals with allocating resources
Three conflicting objectives of scheduling
Low inventories, high efficiency, and good customer service
Overriding problem of batch scheduling
Managing queues
A bottleneck is
a resource whose capacity is less than the capacity of all other resources and whose capacity is less than the demand placed on it
Reasons for batch scheduling being a complex management problem
-Irregular flow of units with many starts and stops
-Layout of the batch process by machine group or skills into work centers
-Batches result in inventory or people waiting in queues
Gantt charting determines
-Waiting time of each job, makespan of all jobs, and resource utilization
Most common priority dispatch rule
First come, first served
TOC is
a strategic technique used to help firms effectively improve the rate at which raw materials are converted to finished goods and then money through sales
In TOC, inventory is
the raw material value of any goods being held in inventory
Finite capacity scheduling can be used to
identify the bottleneck in a given process.
Throughput is defined as
the difference between sales and the operating expenses of a plant.
Stockout costs
are the most difficult to estimate in determining total inventory costs.
Carrying cost components
obsolescence cost, storage cost, and capital cost
Replenishment philosophy
is appropriate give nindependent demand
Capacity is
resources that provide the potential to produce items
Components of inventory ordering costs
transportation costs, obsolescence costs, and receiving costs
Purposes of inventory
to protect against uncertainties, to allow economic production of batches, and to provide for transit
Independent demand consists of
inventory whose demand is determined by market conditions outside the firm
ABC analysis requires that inventory be classified according to
annual dollar usage
Safety stock inventory is
maintained to absorb uncertainty in, for example, delivery lead time from suppliers
Service levels is
the percentage of time the system has an item on hand, the percentage of demand filled from stock, and the probability that all orders are filled from stock
Type II MRP systems has
feedback to control capacity
A requirements-based system derives orders from
the master schedule
A replenishment-based system derives orders from
forecast or customer request
An MRP system is designed to deal with
lumpy demand
The parts explosion results in
purchase orders and shop orders
Mechanisms for handling uncertainty when operating an MRP system
safety stock, safety lead-time, and safety capacity
Objective of an MRP system is to
meet manufacturing needs.
Successful MRP system elements
implementation planning, accurate data, user knowledge
Master scheduling specifies
the output of the operations function
Inputs for an MRP parts explosion
inventory, master schedule, bill of materials
At the EOQ
annual ordering cost and annual holding cost for an item are equal

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