Term
| Concept of demand management |
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Definition
Defined as “focused efforts to estimate and manage customers’ demand, with the intention of using this information to shape operating decisions.”
“The creation across the supply chain and its markets of a coordinated flow of demand”
Traditional business practice has been just the opposite, with the manufacturer determining the what, where, when, and how many of the sale.
It is this disconnect between manufacturing and the demand at the point of consumption that attracts attention to demand management.
Any attention paid to demand management will likely result in benefits flowing through the supply chain. |
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Term
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Definition
Supply chain management with special regard to the customer pull
Management of upstream and downstream relationships between suppliers and consumers with an objective of delivering the best value to the customer at the least cost to the demand chain as a whole
Method: Demand Driven Supply Network (DDSN) – share more information and collaborating with other channel partners to have a better visibility of consumer demand |
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Term
| How can demand strategy support business strategy? |
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Definition
1. Growth strategy - Perform "what if" analysis on total industry volume to gauge how specific mergers and aquistions might leverage market share.
Analyze industry supply/demand to predict changes in product pricing structure and market economics based on mergers and acquisitions.
Build staffing models for merged comapny using demand data
2.Portfolio strategy - manage maturity of products in current portfolio to optimally time overlapping life cycles.
create new product development/introduction plans based on life cycle.
Balance combination of demand and risk for consistent "cash cows" with demand for new products.
ensure diversification of product portfolio through demand forecasts.
3. Positioning strategy - manage produt sales through each channel based on demand and product economics.
Manageing positioning of finished goods at appropriate distribution centers, to reduce working capital based on demand.
define capability to supply each channel
4. Investment strategy - Manage capital investments, marketing expenditures and research development budgets based on demand forecasts of potential products and maturity of current products.
determine whether to add manufacturing capacity. |
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Term
| External balancing methods |
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Definition
External balancing methods: change consumers’ behaviors (e.g. Dell)
Price
Lead time |
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Term
| Internal balancing methods |
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Definition
Internal balancing methods: change firms’ internal processes
Inventory
Production flexibility |
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Term
| What are the basic types of forecasts? |
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Definition
| simple moving average, Weighted moving average, Exponential smoothing |
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Term
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Definition
| The simple moving average model assumes an average is a good estimator of future behavior. It forgets the past quickly but is quick and easy to use. |
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Term
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Definition
the weighted moving average permits an unequal weighting on prior time periods which allows emphasis to be placed on more recent demand as a predictor of future demand.
the weights assigned to the three periods might not accuratly reflect the patterns in demand and using three periods might not be the appropriate number of periods. it also does not accomodate patterns with seasonal influences |
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Term
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Definition
The most recent observations might have the highest predictive value
Therefore, we should give more weight to the more recent time periods when forecasting. The forecasts will be more accurate if the demand is relativly constant. It's will be more inaccurate when it is used for highly seasonal demand patterns. |
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Term
| What are the basic elements of the S&OP Process? |
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Definition
| A process in which all internal departments can agree upon and execute when it is arrived. |
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Term
| How do marketing, finance, logistics, and manufacturing contribute to each element? |
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Definition
Step 1:Run sales forecast
Step 2: demand planning phase
Step 3: Supply planning phase
Step 4: Pre S&OP meeting
Step 5: Executive S&OP meeting |
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Term
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Definition
| Sales and marketing review the forecast and make adjustments based on promotions of existing products, the introductions of new products or the elimination of products. |
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Term
| Step 3:Supply planning phase |
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Definition
| Manufacturing warehousing and transportation analyize the sales forecast to see if existing capacity is adequate |
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Term
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Definition
| SAles marketing operations and fnance review the initial forecast and any capacity issues that emerged during step 3. Alternative scenarios are developed |
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Term
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Definition
CPFR is recognized as a breakthrough business model for planning, forecasting, and replenishment.
Uses available Internet-based technologies to collaborate from operational planning through execution.
Developed by Wal-Mart and Warner-Lambert in 1995.
Emphasizes a sharing of consumer purchasing data among and between supply chain partners.
Creates a direct link between the consumer and the supply chain.
The CPFR model is illustrated next.
The plan and the forecast are entered by suppliers and buyers into an Internet accessible system.
Within established parameters, any of the participating partners is empowered to change the forecast.
Only a few CPFR initiatives have been made public, but results are impressive. |
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Term
| Types of forecasting models |
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Definition
Judgmental: when there is limited or no historical data, such as with a new product introduction
Times series: when future demand is sorely dependent on past demand
Cause and effects: one or more factors are related to demand and that the relationship between cause and effect can be estimate future demand |
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Term
List three major approaches of demand forecasting models and discuss strengths and weaknesses of these models
D(t+1) = 0.9 D(t) + 0.1 D(t-1)
If a firm that has the above forecasting model realized that this model is inaccurate, what corrections can make to improve forecasting accuracy? |
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Definition
Try different time series models to reflect trends and seasonality
Try the cause and effect approach
Adopt collaborative approaches such as S&OP and CPFR to improve forecasting accuracy and demand management practice. |
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Term
| Order management and order cycle |
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Definition
Management of the various activities associated with the order cycle, or replenishment cycle, or lead time
The order cycle includes those activities that occur from the time an order is placed to the time it is received by the customer.
How an organization receives, fills, and ships an order |
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Term
| Order cyccle vs order to cash cycle |
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Definition
| Order managemtn is all the activities that occur from when an order is received by a seller until the product is received by the buyer. The order to cash cycle is all of those activities included in the order cycle plus the flow of funds back to the seller based on the invoice |
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Term
| 4 activities of the order cycle |
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Definition
Four principal activities of the order cycle
Order placement - The time from when the customer places an order until sellers receive the order
In person, mail, telephone, fax, email, EDI
Order processing - The time from when the seller receives an order until an appropriate location is authorized to fill the order
Checking an order for completeness and accuracy and the buyer’s ability to purchase
Entering the order into the system and recording the transaction, and crediting a sale person
Determining inventory location and arranging for outbound transportation
Order preparation - The time from when an proper location is authorized to fill the order until goods are loaded aboard an outbound carrier
Best opportunity to improve the effectiveness and efficiency of an order cycle, up to two-thirds of a facility’s operating cost and time
Pick-to-light technology
Order shipment - The time from when a transportation carrier picks up the shipment until it is received by the customer
Influence of transit time on order cycle time |
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Term
| Two major components of order management |
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Definition
| There are two phases of order management. First is influencing the order, the phase where an organization attempts to change the manner by which its customers place orders. Second is order execution, the phase that occurs after the organization receives the order. |
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Term
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Definition
Customer relationship management:
is the art and science of strategically positioning customers to improve the profitability of the organization and enhance its relationships with its customer base.
is not a new concept used by service industries.
has not been widely used in the business-to-business environment until lately.
Step 1: Segment the Customer Base by Profitability - much like an income statement.
One method to classify customers by profitability.
Protect Zone
Those customers who fall into the “Protect” segment are the most profitable.
Danger Zone
Customers in the “Danger Zone” segment are the least profitable and incur a loss.
The firm has three alternatives for danger zone customers:
(1) change customer interaction with firm so the customer can move to another segment
(2) charge the customer the actual cost of doing business
(3) switch the customer to an alternative distribution channel
Build Zone
These customers have a low cost to serve and a low net sales value, so the firm should maintain the cost to serve and build net sales value to help drive the customer into the “Protect” segment.
Step 2: Identify the Product/Service Package for Each Customer Segment - The goal of this step is to determine what each customer segmant values in it's relationship with it's supplier. The challege here is how to package the value adding products and services for each customer segment
Step 3: Develop and Execute the Best Processes - Make sure that your organization can deliver on those promises such as delivery time, order fill etc. The higher the expectations of the customere are the more dissatisfaction if they are not achieved.
Step 4: Measure Performance and Continuously Improve - Once the CRM program has been implimented it must be evaluated if (1) the different customer segmants are satisfied (2) the supplier's overall profitability has improved.. |
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Term
| Customer classification in CRM |
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Definition
Protect Zone
Those customers who fall into the “Protect” segment are the most profitable.
Danger Zone
Customers in the “Danger Zone” segment are the least profitable and incur a loss.
The firm has three alternatives for danger zone customers:
(1) change customer interaction with firm so the customer can move to another segment
(2) charge the customer the actual cost of doing business
(3) switch the customer to an alternative distribution channel
Build Zone
These customers have a low cost to serve and a low net sales value, so the firm should maintain the cost to serve and build net sales value to help drive the customer into the “Protect” segment. |
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Term
| major components of the order cycle |
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Definition
Forecasting
Influence the Order (CRM)
Execute the order:
Order placement (transmittal):
The time from when the customer places an order until sellers receive the order
In person, mail, telephone, fax, email, EDI
Order processing
The time from when the seller receives an order until an appropriate location is authorized to fill the order
Checking an order for completeness and accuracy and the buyer’s ability to purchase
Entering the order into the system and recording the transaction, and crediting a sale person
Determining inventory location and arranging for outbound transportation
Order preparation (picking and assembly)
The time from when an proper location is authorized to fill the order until goods are loaded aboard an outbound carrier
Best opportunity to improve the effectiveness and efficiency of an order cycle, up to two-thirds of a facility’s operating cost and time
Pick-to-light technology
Order Shipment (delivery)
The time from when a transportation carrier picks up the shipment until it is received by the customer
Influence of transit time on order cycle time |
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Term
| Order cycle time analysis |
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Definition
| The time that elapses from when a buyer places an order with a seller until the buyer receives the order |
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Term
| Order fulfillment and supply chain relationships |
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Definition
| Order fulfillment activities differ as a supply chain matures through transactional to interactive, to interdependent levels. |
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Term
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Definition
One or more companies or individuals who participate in the flow of goods and services from the producer to the final user or consumer.
Wide variety of firms comprise these channels. A channel of distribution can also be thought of as the physical structures and intermediaries through which these flows travel. these channels encompass a variety of intermediary firms, including those that can be classified as distributers wholesalers, retailers, transportation providers and brokers. |
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Term
| Direct-to-Customer (DTC) Fulfillment |
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Definition
| many different types of channel structures are available in an industry to deliver product to the point of consumption. |
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Term
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Definition
Retailer maintains both a “bricks-and-mortar” and “clicks-and-mortar” presence
operates one distribution network to service both channels
That is, retailers have both retail stores as well as internet sites where customers can buy direct and the retailer operates one distribution network to service both sites
Advantage
low start-up costs
existing network can service both: workforce efficiency from consolidated operations
Disadvantages
order profile will change with addition of Internet orders
case lots versus “eaches”
would require a “fast pick,” or broken case operation
conflict might arise between a store order and an Internet order |
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Term
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Definition
Both a store and an Internet presence with two separate distribution networks
Advantage:
separate distribution network for store delivery and consumer delivery eliminates most of the disadvantages of integrated fulfillment
Disadvantage:
duplicate facilities and duplicate inventories |
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Term
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Definition
Assumes that another firm will perform the fulfillment (tOYS r US)
Advantages:
low start-up costs for the retailer to service the Internet channel
possible transportation economies
Disadvantage:
loss of control over service levels |
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Term
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Definition
Also called direct store delivery, vendor delivers directly to retailer, bypassing retailer’s distribution network.
Works best for products that have a short shelf life
fRITO lAY MANUFACTURES IT'S PRODUCTS AND STORES THEM IN IT'S DISTRIBUTION NETWORK. From this central distribution networm, products flow to regional storage locations where Frito Lay delivery vehicles are stocked and make direct store deliveries.
Advantages:
reduction of inventory in the distribution network
vendor has direct control of its inventories
Disadvantage:
possible reduction of inventory visibility |
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Term
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Definition
The order is placed through the Internet site and sent to the nearest store for customer pick up
(Best Buy or Circuit City)
Advantages:
short lead time to the customer
low start-up costs for the retailer
returns can be handled through the store
product availability in consumer units
Disadvantages:
reduced control and consistency over order fill
conflict may arise between inventories
must have real-time visibility to in-store inventories
stores lack sufficient space to store product |
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Term
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Definition
Product is picked and packed at distribution center, then sent to the store for pickup
Advantages:
eliminates the inventory conflict
avoids the cost of the “last mile”
returns can be handled through the existing store network
Disadvantage:
Storage space at the store for pickup items a problem |
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Term
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Definition
as a system of
calculating the costs of individual activities and assigning those costs to cost
objects such as products, customers and delivery channels on the basis of the
activities undertaken to produce each product or service |
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Term
| 5. What are the basic types of forecasts? What are their strengths and weaknesses? |
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Definition
1) Judgmental
When there is limited or no historical data, such as a case of new product introduction, future demand can be forecasted based on intuition and reasoning. For example, survey is helpful to know consumer preferences.
However, consumer preference stated in a survey is not always translated into consumer behaviors directly. Since the model inherently assumes that preference is equal to levels of sales, the adjustment should be made.
2) Cause and effect
The cause and effect approach is useful when one or more historical and non-historical factors are related to demand, and that the relationship between variables can be used to estimate future demand.
It is difficult to come up with the list of variables that influence demand.
3) Time series
Time series is useful when future demand is sorely dependent on past demand.
The simple moving average is probably the simplest to develop method in basic time series forecasting. It makes forecasts based on recent demand history and allows for the removal of random effects. The simple moving average method does not accommodate seasonal, trend, or business cycle influences. This method simply averages a predetermined number of periods and uses this average as the demand for the next period. Each time the average is computed, the oldest demand is dropped and the most recent demand is included. A weakness of this method is that it forgets the past quickly. A strength is that it is quick and easy to use.
In the simple moving average method, each previous demand period was given an equal weight. The weighted moving average method assigns a weight to each previous period with higher weights usually given to more recent demand. The weights must equal to one. The weighted moving average method allows emphasis to be placed on more recent demand as a predictor of future demand. This is primarily because the weighted moving average method does not assume equal weights for each period in the calculation. However, the results from the weighted moving average method are still not very good forecasts of demand. There are three possible causes for this. First, the weights assigned to the three periods might not accurately reflect the patterns in demand. Second, using three periods to develop the forecast might not be the appropriate number of periods. Finally, the weighted moving average technique does not easily accommodate demand patterns with seasonal influences.
Exponential smoothing is one of the most commonly used techniques because of its simplicity and its limited requirements for data. Exponential smoothing needs three types of data: an average of previous demand, the most recent demand, and a smoothing constant. However, exponential smoothing forecasts will lag actual demand. If demand is relatively constant, exponential smoothing will produce a relatively accurate forecast. However, highly seasonal demand patterns or patterns with trends can cause inaccurate forecasts using exponential smoothing. The next method will attempt to introduce the concept of trend into the forecast. (Pages 235-242) |
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Term
| What are the basic elements of the S&OP process? How do marketing, logistics, finance, and manufacturing contribute to each element? |
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Definition
Answer: A process that can be used to arrive at this consensus forecast is called the sales and operations planning process. The S&OP Benchmarking Consortium in the Center for Supply Chain Research adopted a five step process in arriving at this consensus forecast.
Step 1 (Run sales forecast reports) requires the development of a statistical forecast of future sales. This would be done using one or more of the forecasting techniques discussed in the previous section.
Step 2 (Demand planning phase) requires the sales and/or marketing departments to review the forecast and make adjustments based on promotions of existing products, the introductions of new products, or the elimination of products. This revised forecast is usually stated in terms of both units and dollars since operations are concerned with units and finance is concerned with dollars.
Step 3 (Supply planning phase) requires operations (manufacturing, warehousing, and transportation) to analyze the sales forecast to determine if existing capacity is adequate to handle the forecasted volumes. This requires analyzing not only the total volumes but also the timing of those volumes. However, heavy promotions might produce a “spike” in demand that might exceed existing capacity. Two options to solve this capacity constraint are available. First, the promotional activity could be curtailed to bring demand to a more stable level. This could result in lost revenue. Second, additional manufacturing could be secured either by investing in more manufacturing capacity.
Step 4 (Pre-S&OP meeting) involves individuals from sales, marketing, operations, and finance. This meeting will review the initial forecast and any capacity issues that might have emerged during Step 3. Initial attempts will be made during this meeting to solve capacity issues by attempting to balance supply and demand. Alternative scenarios are usually developed to present at the executive S&OP meeting (Step 5) for consideration. These alternatives would identify potential lost sales and increased costs associated with balancing supply and demand. The sales forecast is also converted to dollars to see if the demand/supply plan meets the financial plan of the organization.
Finally, Step 5 (Executive S&OP meeting) is where final decisions are made regarding sales forecasts and capacity issues. (Pages 243-248) |
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Term
| What are the critical elements of collaborative planning? What benefits do they provide for the supply chain? |
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Definition
Answer: One of the most recent initiatives aimed at achieving true supply chain integration is collaborative planning, forecasting, and replenishment (CPFR). CPFR has become recognized as a breakthrough business model for planning, forecasting, and replenishment. Using this approach, retailers, distributors, and manufacturers can utilize available Internet-based technologies to collaborate on operational planning through execution. Transportation providers have now been included with the concept of collaborative transportation management (CTM). Simply put, CPFR allows trading partners to agree to a single forecast for an item where each partner translates this forecast into a single execution plan. This replaces the traditional method of forecasting where each trading partner developed its own forecast for an item and each forecast was different for each partner.
Figure 7-3 shows the CPFR model as a sequence of several business processes that include the consumer, retailer, and manufacturer. The four major processes are strategy and planning, demand and supply management, execution, and analysis. Two aspects of this model are important to note. First, it includes the cooperation and exchange of data among business partners. Second, it is a continuous, closed-loop process that uses feedback (analysis) as input for strategy and planning.
CPFR emphasizes a sharing of consumer purchasing data (or point-of sale data) as well as forecasts at retail among and between trading partners for the purpose of helping to manage supply chain activities. From these data, the manufacturer analyzes its ability to meet the forecasted demand. If it cannot meet the demand, a collaborative effort is undertaken between the retailer and manufacturer to arrive at a mutually agreed-upon forecast from which execution plans are developed. The strength of CPFR is that it provides a single forecast from which trading partners can develop manufacturing strategies, replenishment strategies, and merchandising strategies.
The CPFR process begins with the sharing of marketing plans between trading partners. Once an agreement is reached on the timing and planned sales of specific products, and a commitment is made to follow that plan closely, the plan is then used to create a forecast, by stock-keeping unit (SKU), by week, and by quantity. The planning period can be for 13, 26, or 52 weeks. A typical forecast is for seasonal or promotional items that represent approximately 15 percent of sales in each category. The regular turn items, or the remainder of the products in the category, are forecast statistically Then the forecast is entered into a system that is accessible through the Internet by either trading partner. Either partner may change the forecast within established parameters.
Theoretically, an accurate CPFR forecast could be translated directly into a production and replenishment schedule by the manufacturer since both quantity and timing are included in the CPFR forecast. This would allow the manufacturer to make the products to order (based on the quantity and timing of demand) rather than making them to inventory, thus reducing total inventories for the manufacturer. The retailer would enjoy fewer out-of-stocks at the retail shelf. Although CPFR has not yet fully developed into a make-to-order environment, it has enjoyed the benefits of reduced supply chain inventories and out-of-stocks. The use of collaborative efforts among supply chain partners can have positive results on the service and cost performance of these partners. (Pages 249-252) |
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Term
| 8. What are the various fulfillment models? What are the strengths and weaknesses of each? |
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Definition
Answer: Many retailers today maintain both a “bricks-and-mortar” and “clicks-and-mortar” presence to the consumer. That is, retailers have both retail stores as well as Internet sites where consumers can buy direct. Integrated fulfillment means the retailer operates one distribution network to service both channels. In a typical distribution center for this model, both store orders and consumer orders are received, picked, packed, and shipped.
One advantage to this model is low start-up costs. New distribution centers need not be built, and it may also eliminate the need to have a duplicate inventory to handle the Internet orders. Another advantage to this model is workforce efficiency because of consolidated operations. The existing workforce now has an opportunity to move more volume through a fixed-cost facility. However, the order profile will change with the addition of consumer Internet orders. While store orders would probably be picked in case and/or pallet quantities, consumer orders would require eaches in smaller order quantities. Second, products might not be available in consumer units (eaches). Third, the addition of unit pick (each pick) would require a “fast pick,” or broken case, operation to be added to the distribution center. Finally, a conflict might arise between a store order and an Internet order. If both orders want the same item and there is not sufficient inventory to fill both, which gets priority?
Another option for the retailer that desires to have both a store and an Internet presence is called dedicated fulfillment. Dedicated fulfillment achieves the same delivery goals as integrated fulfillment but with two separate distribution networks. Having a separate distribution network for store delivery and consumer delivery eliminates most of the disadvantages of integrated fulfillment. However, now the retailer is faced with duplicate facilities and duplicate inventories. This assumes that the retailer offers exactly the same product offering through both channels. However, many retailers offer many more products on their Internet sites than they offer in their stores. This makes dedicated fulfillment a more logical choice.
While both integrated and dedicated fulfillment assume that the retailer will perform the fulfillment itself, outsourced fulfillment assumes that another firm will perform the fulfillment. One advantage of this outsourcing is low start-up costs for the retailer to service the Internet channel. Also, possible transportation economies could result from using outsourced fulfillment for Internet orders. Consumers, then, would have more choices of products when creating their orders, resulting in more items per order and possibly lower transportation costs. A major disadvantage often cited with outsourcing fulfillment is the loss of control the retailer might experience over service levels. The major disadvantage of this model is the potential loss of control.
Drop-shipped fulfillment is also referred to as direct store delivery. In this model, the manufacturer delivers its product directly to a retailer’s stores, bypassing the retailer’s distribution network. Two major advantages of this model are the reduction of inventory in the distribution network and the vendor’s direct control of its inventories at the store level. A disadvantage to the retailer is the possible reduction of inventory visibility of the vendor’s products since the retailer does not “touch” these products in its distribution network. This type of model requires close collaboration and agreement between the manufacturer and retailer. Drop-shipped fulfillment works best for products that have a short shelf life and/or where freshness is a requirement. As such, this model makes sense for a limited number of products sold in a retail store.
For a retailer that has both a store-front as well as an Internet presence, store fulfillment can offer several opportunities. In this model, the order is placed through the Internet site. The order is sent to the nearest retail store where it is picked and put aside for the customer to pick up. Several advantages exist for this type of fulfillment. First, there is a short lead time to the customer, if the item is in stock. Second, there are low start-up costs for the retailer. Inventory is already in place in close proximity to the consumer. Third, returns can be handled in the usual manner through the retail store. Finally, the product will be available in consumer units. Several disadvantages exist for this type of fulfillment. First, there might be reduced control and consistency over order fill since each store will be responsible for its own order picking. Second, conflict may arise between inventories. Stores hold inventories for the shopper, which can result in impulse buys. Now the store is required to remove the item from the shelf for an Internet order, resulting in a possible out-of-stock at the shelf. One method to alleviate this conflict is to adjust the profit of the store so it also gets credit for the Internet sale. Third, the retailer must have real-time visibility to instore inventories in order to satisfy the Internet order. Finally, stores lack sufficient space to store product. Staging products for customer pickups in any area of the store takes space away to generate additional sales for the store.
The flow-through fulfillment method is very similar to store fulfillment. The main difference between the two is that in flow-through fulfillment the product is picked and packed at the retailer’s distribution center and then sent to the store for customer pickup. The flow-through model eliminates the inventory conflict the store might realize between store sales and Internet sales. Because the consumer is providing the pickup service, the retailer avoids the cost of the “last mile.” The retailer also does not need store level inventory status in the flow-through model. Returns can be handled through the existing store network, as in store fulfillment. Storage space at the store for pickup items remains an issue. (Pages 256-262) |
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Term
| . Describe the two approaches to order management. How are they different? How are they related? |
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Definition
Answer: The order management system represents the principal means by which buyers and sellers communicate information relating to individual orders of product. Effective order management is a key to operational efficiency and customer satisfaction. To the extent that an organization conducts all activities relating to order management in a timely, accurate, and thorough manner, it follows that other areas of company activity can be similarly coordinated. In addition, both present and potential customers will take a positive view of consistent and predictable order cycle length and acceptable response times. By starting the process with an understanding of customer needs, organizations can design order management systems that will be viewed as superior to competitor firms.
There are two phases of order management. First is influencing the order, the phase where an organization attempts to change the manner by which its customers place orders. Second is order execution, the phase that occurs after the organization receives the order. (Pages 269-270) |
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Term
| Compare and contrast the concepts of order-to-cash cycle time and order cycle time. |
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Definition
| Answer: When referring to outbound-to-customer shipments, the term order to cash (or order cycle) is typically used. The term replenishment cycle is used more frequently when referring to the acquisition of additional inventory, as in materials management. Basically, one organization’s order cycle is another’s replenishment cycle. Traditionally, organizations viewed order management as all of those activities that occur from when an order is received by a seller until the product is received by the buyer. This is called the order cycle. The OTC cycle is all of those activities included in the order cycle plus the flow of funds back to the seller based on the invoice. The OTC concept is being adopted by many organizations today and more accurately reflects the effectiveness of the order management process. (Pages 273-275) |
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Term
| . Explain the impacts of order cycle time length and variability on both buyers and sellers. |
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Definition
| Answer: While interest has traditionally focused more on the overall length of the OTC cycle, recent attention has been centered on the variability or consistency of this process. Industry practices have shown that while the absolute length of time is important, variability is more important. A driving force behind the attention to OTC cycle variability is safety stock. The absolute length of the order cycle will influence demand inventory. The concept of the order cycle is used here because the focus is on the delivery of product to the buyer and not on the flow of cash to the supplier. For example, assume that the order cycle (time from order placement to order receipt) takes 10 days to complete and the buyer needs five units per day for its manufacturing process. Assuming the basic economic order quantity (EOQ) model is being used by the buyer, the buyer will place an order when it has 50 units of demand inventory on hand. Assuming that the supplier has been able to reduce the order cycle to eight days, the buyer will now place an order when it has 40 units of demand inventory on hand. This is a reduction of 10 units of demand inventory on hand during lead time for the buyer. (Pages 280-281) |
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Term
| What events might occur when an organization is out of stock of a needed product? How might the cost of a stockout be calcuculated? |
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Definition
Cost of not having product available when a customer wants it.
Backorder costs (special order).
Losing one item profit by substituting a competing firm’s product.
Losing a customer permanently if customer finds they prefer the substituted product and/or company.
In a manufacturing firm, a stockout may result in lost hours of production until the item is restocked.
Possible to handle this by adding safety stock.
Back order
Lost sale
Lost customer
Calculate each results expense and then estimate the cost of a single stockout. Assume the following: 70% of all stockouts result in a backorder and B/O requires the seller to spend an additional $75; 20% result in a lost sale equaling $400 in lost profit; 10% result in lost customer or a loss of $20,000.
(0.7 * $75)+(0.2* $400)+(0.1*$20,000)= $2132.50 |
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Term
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Definition
| The portion of inventory incrementally consumed by demand and periodically replenished when a resupply is triggered by reaching a predetermined level. The portion of total inventory over and above safety stock. |
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Term
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Definition
| An inventory quantity planned to be on-hand at all times to provide a hedge against future uncertainty. |
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Term
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Definition
| Goods that have been shipped by an originating source but not yet received. Treated as an expected receipt by planning systems, and classified as belonging to either the shipping or receiving entity based on the contracted freight terms for purposes of claims and inventory status. |
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Term
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Definition
| Large variations in product demand that reoccur during the same approximate timeframe on a yearly basis and are not due to a trend or promotion (as in the yearly demand for Halloween candy or snow shovels). Products that exhibit a high degree of seasonality normally require an inventory build based on forecast prior to the high demand period, or the flexibility to greatly vary production and supply. |
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Term
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Definition
| A reason to hold inventory for some unusual event that might negitivly impact it's source of supply like strikes, significant raw materials or unfinished goods price inccrease or a major shortage of supply becasue of political unrest. |
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Term
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Definition
| Product that has been in inventory for an extended period of time without being moved or ordered. |
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