MKT 360 Midterm

• Global marketing places are [blank_start]growing[blank_end] • Number of competitors are [blank_start]growing[blank_end] • Prices of labor, material, real estate, and fuel are [blank_start]growing[blank_end] • Successful organizations today must be heavily involved with their best suppliers and [blank_start]customers[blank_end] Managers must pay closer attention to: • Where materials come from • How suppliers’ products are designed, produced, and transported • How their own products and [blank_start]services[blank_end] are produced and distributed to customers • What their customers and consumers really think

A supply chain consists of the flow of products and [blank_start]services[blank_end] from: • Raw materials manufacturers • Component and intermediate manufacturers • Final product manufacturers • Wholesalers and distributors • Retailers Connected by transportation and storage activities, and integrated through information, planning, and integration activities Many large firms are moving away from in-house Vertically Integrated structures to Supply Chain [blank_start]Management[blank_end]

What is supply chain management? The integration of key business processes regarding the [blank_start]flow[blank_end] of materials from raw material suppliers to the [blank_start]final[blank_end] customer ...and coordinating activities among supply chain participants to improve operating efficiencies, quality, and customer [blank_start]service[blank_end]. ✓The right [blank_start]product[blank_end] ✓At the right place ✓At the right time ✓Of the right [blank_start]quality[blank_end] ✓And the right cost

Old paradigm - Firm gained synergy as a vertically integrated firm encompassing the ownership and coordination of several supply chain activities. Organizational cultures emphasized [blank_start]short[blank_end]-term, company focused performance. New paradigm - Firm in a supply chain focuses activities in its area of [blank_start]specialization[blank_end] and enters into voluntary and trust-based relationships with supplier and customer firms. • All participants in the supply chain benefit. • Boundaries are dynamic and extend from “the firm’s suppliers’ suppliers to its customers’ customers (i.e., second tier suppliers and customers)” • Supply chains also include reverse logistics activities to handle returned products, warranty repairs, and recycling. When a firm, its customers, and its suppliers all know each other’s future plans and are willing to work together, the planning process is easier and much more [blank_start]productive[blank_end] in terms of cost savings, quality improvements, and service enhancements. Successful firms work together by sharing information on things like: • Demand forecasts • Production plans • Production changes • New marketing [blank_start]strategies[blank_end] • New technologies employed • Purchasing plans • Delivery dates

Firms using Supply Chain Management: 1. Start with key [blank_start]suppliers[blank_end] 2. Move on to other suppliers, [blank_start]customers[blank_end], and logistics services 3. Integrate second tier suppliers and [blank_start]customers[blank_end] (second tier refers to the customer’s customers and the supplier’s suppliers)

Origins of Supply Chain Management: 1950s-1960s U.S. manufacturers focused on mass [blank_start]production[blank_end] techniques as their principal cost reduction and productivity improvement strategies 1960s-1970s Introduction of new computer technologies lead to development of Materials Requirements Planning (MRP) and Manufacturing Resource Planning (MRPII) to coordinate inventory [blank_start]management[blank_end] and improve internal communication 1980s - Breakout years for SCM - Intense global competition led U.S. manufacturers to make low-cost, high-quality products along with high levels of customer [blank_start]service[blank_end] 1990s - Companies began giving only their best suppliers most of their business, and in turn expecting suppliers to provide high- [blank_start]quality[blank_end], low-cost, on-time deliveries and help with new product design efforts 2000s and Beyond • Emphasis on environmental and [blank_start]social[blank_end] impacts of supply chains

Use of Supply Chain Analytics •Examining raw supply chain [blank_start]data[blank_end] to drive better business decisions •Market for supply chain analytics solutions is growing [blank_start]15[blank_end]% annually Examples: • Scheduling [blank_start]production[blank_end] according to expected supplierdeliveries • Routing delivery trucks through a distribute network • Determining when a [blank_start]customer[blank_end] is most likely to be home to accept delivery Improving Supply Chain Sustainability •Meeting today’s supply chain needs without hindering the ability to meet the needs of future generations •Most companies are focusing on improving environmental, [blank_start]social[blank_end], and governance performance throughout the supply chain

Increasing Supply Chain Visibility • Knowing exactly where products are, at any point in the supply [blank_start]chain[blank_end] • Inventory visibility is made easier by [blank_start]technology[blank_end] • Sophisticated software applications for tracking orders, inventories, deliveries, returned goods, and even employee attendance

SCOR Model •Plan: Alignment of resources to [blank_start]demand[blank_end] •Source: Buying or acquiring [blank_start]materials[blank_end] or services •Make: Conversion or value-added activities within a [blank_start]supply[blank_end] chain operation •Deliver: All [blank_start]customer[blank_end] interaction, from receiving order to final delivery and installation •Return: All processes that reverse [blank_start]material[blank_end] or service flows from the customer backward through the supply chain

Bullwhip Effect What is it? • Amplification of the variation in the [blank_start]demand[blank_end] pattern along the supply chain • Small fluctuations in [blank_start]demand[blank_end] at one end can cause huge distortions in production Causes: • [blank_start]Discounts[blank_end]/cost changes, which may lead to irregular buying patterns • Bad decision making • Lack of [blank_start]communication[blank_end] • Over or under-reacting to demand expectations • Inaccurate [blank_start]forecasting[blank_end] due to over reliance on historical data Problems: • Too much [blank_start]inventory[blank_end] • Too little inventory (service issues / back orders) • High cost

Purchasing – Obtaining merchandise, capital equipment; raw materials, services, or maintenance, repair, and operating (MRO) supplies in exchange for [blank_start]money[blank_end] or its equivalent Two categories of purchasing: Merchants – Wholesalers and retailers who purchase (at high volumes) for [blank_start]resale[blank_end] to take advantage of quantity discounts Industrial Buyers – Purchase [blank_start]raw[blank_end] materials for conversion, services, capital equipment, & MRO supplies Ex. Manufacturers Purchasing vs. Supply Management vs. Procurement • Purchasing: a key business function responsible for acquisition of required materials, services, and equipment •Supply management: anewertermtodescribethe expanded set of responsibilities of purchasing professionals. Reflects the increasing needs for higher [blank_start]level[blank_end] skill and responsibility of purchasing professionals. • Procurement: typically includes added activities of specifications development, value analysis, negotiation, expediting, contract administration, supplier [blank_start]quality[blank_end] control Many companies use purchasing and supply management interchangeably as it’s difficult to distinguish where purchasing ends and supply management begins

The primary goals of purchasing are: • Ensure uninterrupted flows of [blank_start]raw[blank_end] materials at the lowest total cost • Improve quality of the finished [blank_start]goods[blank_end] produced • Maximize customer [blank_start]satisfaction[blank_end] Purchasing contributes to these objectives by: • Actively seeking better [blank_start]materials[blank_end] and reliable suppliers • Work closely with and exploiting the expertise of strategic suppliers to improve quality and [blank_start]materials[blank_end] • Involving suppliers and purchasing personnel in new product design and development efforts

Purchasing Process Step 1- Material Requisition/Purchase Requisition – Stating product, quantity, and delivery [blank_start]date[blank_end]. Step 2- Request for Quotation (RFQ) / Request for Proposal (RFP) Buyer identifies [blank_start]suppliers[blank_end] & issues a request for quotation (RFQ) for routine items, or a Request for Proposal (RFP) for highly technical products. Supplier Development is used to develop supplier capabilities when there is a lack of suitable suppliers. Step 3- Purchase Order (PO) – Is the buyer’s offer & becomes a binding [blank_start]contract[blank_end] when accepted by supplier.

The Purchasing Process: e-Procurement Step 1- Material user inputs a materials requisition through the Purchase Requisition module – Relevant information such as quantity and [blank_start]date[blank_end] needed. Step 2- Materials requisition submitted to buyer – At purchasing department (hardcopy or electronically). Step 3- Buyer assigns qualified suppliers to bid – Product description, closing [blank_start]date[blank_end], & conditions are given. Step 4- Buyer reviews closed bids & selects a [blank_start]supplier[blank_end] web-based Step 5- Electronic Purchase Order is prepared and transmitted to selected [blank_start]supplier[blank_end]. Allows users to submit purchase requisitions to the purchasing department electronically, and enables buyers to transmit purchase orders easily

Advantages of the e-Procurement System • Time savings • Selecting & maintaining a list of potential [blank_start]suppliers[blank_end] • Processing requests for quotes & PO’s • Making repeat purchases • Cost savings • Buyers can handle more [blank_start]purchases[blank_end] / fewer buyers needed • Lower prices since more suppliers can be contacted • Accuracy • Real-time use • Posting bids immediately; suppliers can respond 24/7 • Mobility • Regardless of location and [blank_start]time[blank_end] of day • Trackability • Management benefits • Storing important supplier [blank_start]information[blank_end] (minority, local, other statistics) • Supplier benefits • Lower barriers to entry & transaction costs; access to more buyers

Outsourcing – Buying materials and components from [blank_start]suppliers[blank_end] instead of making them in-house. The trend has moved toward outsourcing. Backward vertical integration – Acquiring [blank_start]upstream[blank_end] suppliers (ie. factory starts growing hops) Forward vertical integration –Acquiring [blank_start]downstream[blank_end] customers (ie. factory starts distributing beer) The Make or Buy decision is a strategic decision Reasons to Buy (Outsource) •[blank_start]Cost[blank_end] advantage – BUY! • Especially for components that are non-vital to the organization’s operations, suppliers may have economies of scale •Insufficient capacity – A firm may be at or near [blank_start]capacity[blank_end] and subcontracting from a supplier may make better sense Lack of expertise – Firm may not have the necessary [blank_start]technology[blank_end] and expertise • “Focus on your core competency, then outsource the rest” •Quality – Suppliers have better [blank_start]technology[blank_end], process, skilled labor, and the advantage of economy of scale

Reasons to Make •Protect proprietary [blank_start]technology[blank_end] •No competent supplier •Better quality [blank_start]control[blank_end] •Use existing idle [blank_start]capacity[blank_end] •Control of lead-time transportation, and warehousing costs •Lower cost Supply Base - list of [blank_start]suppliers[blank_end] that a firm uses to acquire its materials, services, supplies, and equipment • Firms emphasize long-term strategic supplier alliances consolidating volume into one or fewer suppliers, resulting in a smaller supply base Preferred suppliers provide: • Product and process [blank_start]technology[blank_end] and expertise to support buyer’s operations, particularly new product development and value analysis • Information on latest trends in materials, processes, or designs • Information on the supply [blank_start]market[blank_end] • Capacity for meeting unexpected demand • Cost efficiency due to economies of scale

Single-source - a risky proposition. Current trends favor [blank_start]fewer[blank_end] sources. Single Supplier ▪To establish a good [blank_start]relationship[blank_end] ▪Less quality variability ▪Lower [blank_start]cost[blank_end] ▪Transportation economies ▪Proprietary product or process ▪Volume too small to split Multiple Suppliers ▪Need capacity ▪Spread [blank_start]risk[blank_end] of supply interruption ▪Create competition ▪ Information ▪Dealing with special kinds of businesses Current trends favor using [blank_start]fewer[blank_end] sources, although not necessarily a single source.

Supply base rationalization (AKA supply base [blank_start]reduction[blank_end] or supply base optimization): • Reduce purchases from poor-performing [blank_start]suppliers[blank_end] • Increasing purchases among top-performing [blank_start]suppliers[blank_end] Buyer-supplier partnerships are easier with a rationalized supply base & result in: • Reduced purchase [blank_start]prices[blank_end] • Fewer supplier management problems • Closer & more frequent [blank_start]interaction[blank_end] between buyer & supplier • Greater levels of quality & delivery reliability

Purchasing Organization is dependent on many factors, such as market conditions & types of [blank_start]materials[blank_end] required •Centralized Purchasing - purchasing department located at the firm’s [blank_start]corporate[blank_end] office makes all the purchasing decisions •Decentralized Purchasing - individual, [blank_start]local[blank_end] purchasing departments, such as plant level, make their own purchasing decisions Advantages - Centralization • Concentrated volume • Avoid duplication of job functions • [blank_start]Specialization[blank_end] in item(s) • Lower [blank_start]transportation[blank_end] costs • No [blank_start]competition[blank_end] between units for the same product(s) • Common supply base Advantages - Decentralization •Better knowledge of unit [blank_start]requirements[blank_end] •Local sourcing •Less bureaucracy

Reasons for Global Sourcing – • Lower [blank_start]price[blank_end] of materials: cheaper labor costs & raw materials, favorable exchange rates, more efficient process • Better [blank_start]quality[blank_end]: newer & better product & process technologies • Faster [blank_start]delivery[blank_end]: to foreign units and potentially even domestic units Potential Challenges – • Requires additional skills and [blank_start]knowledge[blank_end] to deal with international suppliers, logistics, communication, political environment, and other issues • Costs & resources involved in identifying, selecting, and evaluating foreign suppliers can be prohibitive • Delivery [blank_start]lead[blank_end] time: Customs clearance & transportation • Additional [blank_start]costs[blank_end]: duties, tariffs, currency exchange • Potential political, cultural, labor, and legal problems

Outsourcing will continue to [blank_start]increase[blank_end] as companies focus on their core competencies. Provide many [blank_start]benefits[blank_end] such as delivery flexibility, better quality, better information, and faster material flows between buyers and suppliers Help achieve competitive performance for both the buyer and [blank_start]supplier[blank_end] -- these require a strategic, not tactical, perspective Win-win, long-term partnerships with key suppliers can contribute to innovations & create a competitive [blank_start]advantage[blank_end] for the firm

Keys to Successful Partnerships Building Trust With trust, partners are more willing to work together, find compromise solutions to [blank_start]problems[blank_end], work toward achieving long-term benefits for both parties, and, in short, go to the extra mile.  Shared Vision & Objectives Both partners must share the same vision & have objectives that are not only clear but mutually agreeable. The focus must move beyond tactical issues & toward a more strategic path to corporate [blank_start]success[blank_end]. Personal Relationships It is [blank_start]people[blank_end] who communicate & make things happen Mutual Benefits & Needs Partnership should result in a win-win situation, which can only be achieved if both companies have compatible needs. An alliance is much like a [blank_start]marriage[blank_end]; if only one party is happy, then the marriage is not likely to last.

Commitment & Top Management Support Commitment must start at the highest management level. Partnerships tend to be successful when top [blank_start]executives[blank_end] are actively supporting the partnership Change Management Companies must be prepared to manage [blank_start]change[blank_end] that comes with the formation of new partnerships Information Sharing & Lines of Communication Both formal & informal lines of communication should be set up to facilitate free flow of [blank_start]information[blank_end]. Confidentiality of sensitive information must be maintained.  Relationship Capabilities -Key suppliers must have the right [blank_start]technology[blank_end] & capabilities to meet cost, quality, and delivery requirements in a timely manner. -Suppliers must be [blank_start]flexible[blank_end] to respond quickly to changing customer requirements

Performance Metrics Measures related to quality, cost, delivery, and flexibility are used to evaluate [blank_start]suppliers[blank_end] Metrics should be: Understandable Easy to measure Focused on real value-added [blank_start]results[blank_end] Use data to: identify suppliers with exceptional performance or development needs Improve supplier communication Reduce risk Manage the partnership

Continuous Improvement -Making a series of small [blank_start]improvements[blank_end] over time to eliminate waste in a system -Buyers & suppliers must be willing to continuously [blank_start]improve[blank_end] their capabilities in meeting customer requirements of cost, quality, delivery, and technology -Evaluating suppliers based on a set of mutually agreed performance measures provides opportunities for continuous [blank_start]improvement[blank_end] Monitoring Supplier Relationships -Assess how the relationships are doing across various factors -Establish key [blank_start]performance[blank_end] indicators

Supplier Certification -Allows firms to identify the [blank_start]suppliers[blank_end] who are most committed to creating & maintaining a partnership & who have the best capabilities. -Involves making [blank_start]visits[blank_end] to observe the supplier’s operations -Implies a willingness on the part of both parties to share goals, commitments, and risks to improve their relationship -Indicates long-term mutual [blank_start]commitment[blank_end] Helps to: -Reduce the supplier [blank_start]base[blank_end] -Build long-term [blank_start]relationships[blank_end] -Reduce time spent on incoming inspections -Improve delivery & responsiveness -Recognize excellence -Develop a commitment to continuous improvement -Improve overall [blank_start]performance[blank_end].

Criteria Generally Found in Certification Programs -No incoming product lot [blank_start]rejections[blank_end] (e.g., less than 0.5 percent defective) for a specified time period -No incoming non-product [blank_start]rejections[blank_end] (e.g., late delivery) for a specified time period -No significant supplier production-related [blank_start]negative[blank_end] incidents for a specified time period -Successfully passing a recent, on-site quality system [blank_start]evaluation[blank_end] -Mutually agreed-upon set of quality [blank_start]performance[blank_end] measures -Fully documented process & quality system with cost controls & continuous improvement capabilities -Supplier’s processes stable & in control

Supplier Evaluation -A process to identify the best & most reliable [blank_start]suppliers[blank_end] -Sourcing decisions are made on [blank_start]facts[blank_end], not perception -Frequent [blank_start]feedback[blank_end] on supplier performance can help avoid surprises & maintain good relationships -Suppliers should be allowed to provide constructive [blank_start]feedback[blank_end] to the customer Weighted-Criteria Evaluation System -A method of evaluating multiple [blank_start]suppliers[blank_end] based on criteria deemed important by the company and its customers Two key purposes: Ranking potential [blank_start]suppliers[blank_end] to determine which to select Evaluate [blank_start]performance[blank_end] of current suppliers

Steps: -Identify the key criteria for [blank_start]performance[blank_end]. -Assign weights to each criteria. The weights sum to [blank_start]1[blank_end]. -Determine a score (0-100) for each supplier for each criteria. -Multiply criteria score by [blank_start]weight[blank_end], then sum the weighted scores. -The supplier with the highest overall score is the recommended [blank_start]supplier[blank_end]. Supplier Development Definition: Any activity that a buyer undertakes to [blank_start]improve[blank_end] a supplier’s performance and/or capabilities to meet the buyer’s needs. Approach: -Identify critical goods and [blank_start]services[blank_end] -Identify critical suppliers not meeting [blank_start]performance[blank_end] requirements -Form a cross-functional supplier development team -Meet with top management of suppliers -Rank supplier development projects -Define details of buyer-supplier agreement -Monitor status & modify strategies

Supplier Recognition Programs -It is not sufficient just to reward your best suppliers with more business. -Companies should recognize & celebrate the [blank_start]achievements[blank_end] of their best suppliers. -Award winners exemplify true partnerships continuous [blank_start]improvement[blank_end], organizational commitment, & excellence. -Award-winning suppliers serve as role models for other [blank_start]suppliers[blank_end]. Rewarding Supplier Performance Rewarding suppliers provides an incentive to surpass [blank_start]performance[blank_end] goals. Can be monetary or non-monetary. Punishment is a [blank_start]negative[blank_end] reward, ie. reducing future business or a billback penalty equal to the incremental costs resulting from a late delivery or poor quality Strategic supplier agreements can reward suppliers by allowing: -A share of the cost reductions resulting from supplier improvements or their suggestions to the firm -More business and/or longer [blank_start]contracts[blank_end] -Access to in-house training seminars & other resources -Company & public recognition

Early supplier involvement (ESI): key [blank_start]suppliers[blank_end] become more involved in the internal operations of their customer, which may include: -Managing inventories at their customers’ points of use (more on this later in the semester) -Participating in their customers’ new product & process design processes Value engineering: designing better [blank_start]quality[blank_end] and cost savings into the products upfront Negotiating Win-Win Strategic Alliance Agreements -Collaborative negotiations (aka win-win negotiations): both sides work together to maximize the [blank_start]outcome[blank_end] or create a joint optimal result -Requires trust, commitment, open discussions and a free-flow of information between parties Distributive negotiations: a process that leads to self-interested, one-sided outcome; adversarial -“What’s in it for me” attitude -Some information will be withheld, distorted, delayed, or [blank_start]misrepresented[blank_end]

Assessing & Improving the Firm’s Sourcing Function -The sourcing function is one of the most value-enhancing functions in any organization Purchasing staff members are viewed as strategic members of the organization and are expected to generate cost [blank_start]savings[blank_end] and quality enhancements Sourcing or purchasing function performance are periodically monitored against set standards, [blank_start]goals[blank_end], and/or industry benchmarks. The skill set requirements of purchasing professionals have been changing as the function has become more strategic. Purchasing personnel today must exhibit world-class skills such as: -Negotiating contracts -Selecting [blank_start]suppliers[blank_end] -Managing supplier [blank_start]relationships[blank_end] -Controlling costs Benchmarking: researching (and potentially [blank_start]copying[blank_end]) what other businesses do best An effective approach to improving sourcing practices & overall supply chain [blank_start]performance[blank_end]. Benchmarking data regarding sourcing practices can be obtained in any number of ways, both formal & informal -Evaluation [blank_start]surveys[blank_end] distributed to customers/suppliers -Discussions at industry meetings / conferences -Published trade information

Unprecedented pressures on companies to become more [blank_start]ethically[blank_end] and environmentally focused • Global population growth • Increasing awareness of environmental issues • Consumers’ desires for better corporate responsibility Purchasing personnel can have a tremendous impact on their companies’ costs and reputations through use of [blank_start]ethical[blank_end] and sustainable sourcing practices Strategic sourcing - managing the firm’s external [blank_start]resources[blank_end] to support firm’s long term goals; “sourcing to the next level” Strategic Sourcing includes: * • development of ethical and [blank_start]sustainable[blank_end] sourcing initiatives * • identification and selection of environmentally and [blank_start]socially[blank_end] conscious suppliers • monitoring and rewarding [blank_start]supplier[blank_end] performance • managing and improving supplier relationships and capabilities

▪Business Ethics is the application of ethical principles to [blank_start]business[blank_end] situations ▪Ethical Sourcing is bringing about [blank_start]positive[blank_end] social change through organizational buying behavior. Ethical Sourcing examples: ▪Promoting [blank_start]diversity[blank_end] by intentionally buying from small firms, ethnic minority businesses, and women-owned enterprises ▪Discontinuing purchases from firms that use child labor or unacceptable labor practices ▪Buying from firms in underdeveloped nations Ethical Sourcing: Risks • Human rights, animal rights, safety, or environmental abuses can be risks associated with purchasing from developing countries. • Many companies are not even aware of their supply chains beyond their immediate [blank_start]suppliers[blank_end] and customers. • Potential for significant impact to the buying firm: negative publicity, boycotts, tarnished image/brand, lower employee morale, lower sales/profits/stock prices.

To minimize the risks from using suppliers in developing countries, ethical sourcing policies should include: -Determining where all purchased goods originated and how they were made -Knowledge of the suppliers’ workplace principles Inclusion of [blank_start]ethics[blank_end] as a performance rating -Independent verification of vendor compliance -Report of supplier compliance to stakeholders -Provision of detailed ethical sourcing expectations to suppliers • Fair trade product - manufactured or grown by a disadvantaged producer in a [blank_start]developing[blank_end] country that receives a fair price for their goods • Mainly farming products, ie. coffee, cocoa, bananas, sugar, tea, cotton Fair Trade coffee - Starbucks • Ethical Trading Initiative (ETI) - an [blank_start]alliance[blank_end] of organizations seeking to take responsibility for improving working conditions and agreeing to implement the ETI Base Code (a standard for ethical practices for the firm and its suppliers)

• Sustainability in the supply chain: the ability to meet current needs of the supply chain without hindering the ability to meet the needs of [blank_start]future[blank_end] generations in terms of economic, environmental, and social challenges. • Sustainable sourcing: a process of purchasing goods & services that takes into account the long-term impact on people, [blank_start]planet[blank_end], and profits (three P’s). Key areas of focus: -Respect human [blank_start]rights[blank_end] and reduce poverty by creating profitable trading -Work within the finite limits of the planet’s [blank_start]resources[blank_end] -Move toward a low carbon [blank_start]economy[blank_end] -Companies must develop collaborative relationships with their key [blank_start]suppliers[blank_end] and customers to make sustainable sourcing a beneficial reality

Ethical and environmental certifications: certifying companies according to [blank_start]ethical[blank_end] and environmental requirements. •[blank_start]Outsourcing[blank_end] is one way to allow a firm to reach its sustainability goals •Firms are outsourcing to suppliers with outstanding ethical and sustainable reputations •Outsourcing based solely on [blank_start]cost[blank_end] can be dangerous. To minimize risk: • Ensure suppliers operate to the same high standards as your company • Ensure outsourcing choices align with your company’s social & ethical objectives

▪Suppliers must be able to accurately forecast (predict) [blank_start]demand[blank_end] so they can produce and deliver the right quantities demanded by their customers in a timely & cost- effective fashion. •Suppliers must find ways to better match supply & [blank_start]demand[blank_end] to achieve optimal levels of cost, quality, & customer service to enable them to compete with other supply chains. •Improved forecasts benefit all trading partners in the supply [blank_start]chain[blank_end] & mitigates supply-demand mismatch problems. The Importance of Demand Forecasting ▪Forecast: an estimate of [blank_start]future[blank_end] demand; provides the basis for planning and sound business decisions ▪Rule #1: your forecast will always be incorrect! ▪Your objective is to minimize forecast [blank_start]error[blank_end]. GOOD forecasting: ▪Provides reduced inventories, costs, and [blank_start]stockouts[blank_end] ▪Provides improved production plans & customer service BAD forecasting: • Stockout/backorder: impacts sales, profitability, and customer relationships • A customer will look for another [blank_start]supplier[blank_end] that can meet its demands • Bullwhip effect: causes stockouts, lost sales, high costs of inventory, etc • Too much inventory!

Forecasting Techniques ▪Qualitative forecasting is based on [blank_start]opinion[blank_end] & intuition. ▪Quantitative forecasting uses mathematical models & historical [blank_start]data[blank_end] to make forecasts. It is generally recommended to use a combination of quantitative & qualitative techniques. Qualitative Forecasting Methods Generally used when data are limited, unavailable, or not currently [blank_start]relevant[blank_end], & for new product introductions. Forecast accuracy depends on [blank_start]skill[blank_end] & experience of forecaster(s) & available information.

1. Jury of executive opinion Group of senior management [blank_start]executives[blank_end] who are knowledgeable about their markets, competitors, and the business environment collectively develop the forecast 2. Delphi method Group of internal and [blank_start]external[blank_end] experts are surveyed during several rounds in terms of future events and long-term forecasts of demand, in hopes of converging on a consensus forecast 3. Sales force composite Forecast is based on the sales force’s knowledge of the market and [blank_start]estimates[blank_end] of customer needs. 4. Consumer survey Forecasts are developed from the results of surveying [blank_start]customers[blank_end] on future purchasing needs, new product ideas and opinions about existing or new products

Forecasting Techniques – Quantitative Quantitative Methods ▪Time series forecasting – based on the assumption that the future is an extension of the [blank_start]past[blank_end]. Historical data is used to predict future demand ▪Most frequently used among all forecasting models ▪Cause & Effect forecasting – assumes that one or more [blank_start]factors[blank_end] (independent variables) predict future demand Time Series Forecasting Data should be plotted to detect for the following components: ▪Trend variations: increasing or [blank_start]decreasing[blank_end] over many years ▪Cyclical variations: wavelike movements that are longer than a [blank_start]year[blank_end] (e.g., business cycle) ▪Seasonal variations: show peaks & valleys that repeat over a consistent interval such as hours, days, weeks, months, seasons, or years ▪Random variations: due to unexpected or unpredictable [blank_start]events[blank_end]

Types of Time Series Forecasting Approaches: Naïve Forecast – the estimate of the next period is [blank_start]equal[blank_end] to the demand in the previous period. Simple Moving Average Forecast – uses historical data’s [blank_start]average[blank_end] to generate a forecast. Works well when demand is stable over time. Weighted Moving Average Forecast – is based on an n-period weighted moving [blank_start]average[blank_end] Linear Trend Forecast – trend can be estimated using simple linear [blank_start]regression[blank_end] to fit a line to a series of data occurring over time

Types of Cause & Effect Approaches One or several external [blank_start]variables[blank_end] are identified that are related to demand. Simple regression – Only [blank_start]one[blank_end] explanatory variable is used, similar to the previous trend model. The difference is that the x variable is no longer time but an explanatory variable. Multiple regression – several explanatory variables are used to make the [blank_start]forecast[blank_end] The formula for forecast error, defined as the difference between actual quantity & the forecast Forecast Error = Actual – Forecast (units) Some [blank_start]error[blank_end] between a forecast and actual demand is to be expected; the goal is to minimize this deviation

• Mean absolute deviation (MAD)- a MAD of 0 indicates the forecast exactly predicted [blank_start]demand[blank_end] • Mean absolute percentage error (MAPE)- provides a perspective of the true magnitude of the forecast [blank_start]error[blank_end] • Mean squared error (MSE)- analogous to [blank_start]variance[blank_end], large forecast errors are heavily penalized • BIAS- measures the tendency of a forecast to be consistently higher or [blank_start]lower[blank_end] than the actual demand Mean absolute percentage error (MAPE): • Measures the true magnitude of the forecast [blank_start]error[blank_end] • What percentage, on average, the forecast is off from the actual demand. Absolute Value (Actual– Forecast)/Actual

BIAS – measures the tendency of a forecast to be consistently higher or [blank_start]lower[blank_end] than the actual demand, over time True Value (Actual – Forecast)/Actual • Forecasts solely developed by one company tend to be inaccurate. • The key to generating accurate forecasts is collaborative forecasting with different partners inside and outside the [blank_start]company[blank_end], working together to eliminate forecasting error. • Information is shared between suppliers and retailers to develop a single forecast: • Forecasting data • Base sales • Point-of-sale data • Promotions • Store openings/closings • New product introductions • Requires a fundamental change in the way that buyers & sellers work together Benefits • Strengthens partner [blank_start]relationships[blank_end] • Provides analysis of sales and order forecasts • Uses point-of-sale data, seasonal activity, promotions, to improve forecast accuracy • Manages the demand chain and proactively eliminates problems before they appear • Allows collaboration on future requirements and plans • Provides better understanding of consumer purchasing patterns Challenges • Internal resistance to change • Cost • Trust

▪ Inventory can be one of the most [blank_start]expensive[blank_end] assets of an organization ▪ Inventory may account for more than [blank_start]10[blank_end]% of total revenue or total assets ▪ Effective inventory management is important to both manufacturers and service organizations ▪ Excessive inventory is a sign of poor inventory management ▪ Management must reduce inventory levels yet avoid [blank_start]stockouts[blank_end] Inventory management models are generally separated by the types of inventory being considered, and can be classified as dependent demand and independent demand models ▪Independent Demand – The demand for [blank_start]final[blank_end] products; has a demand pattern affected by trends, seasonal patterns, & general market conditions. ▪Dependent Demand – The internal demand for [blank_start]parts[blank_end]; based on the demand of the final product in which the parts are used. Ex. components & raw materials

Functions and Basic Types of Inventory ▪The primary functions of inventory are to: • Buffer from [blank_start]uncertainty[blank_end] in the marketplace • Decouple dependencies between stages in the supply chain ▪Four broad categories of inventory: • Raw materials: [blank_start]unprocessed[blank_end] materials for manufacturing the finished product • Work-in-process (WIP): [blank_start]partially[blank_end] processed materials not yet ready for sales • Finished goods: [blank_start]completed[blank_end] products ready for shipment • Maintenance, repair & operating (MRO) supplies: materials used in production, but not part of the [blank_start]product[blank_end] Inventory Costs Inventory costs can be categorized in many ways. • Direct costs: [blank_start]directly[blank_end] traceable to unit produced (ex. labor, materials) • Indirect costs: cannot be traced [blank_start]directly[blank_end] to the unit produced (ex. overhead: heating, lighting, security, MRO) • Fixed costs: [blank_start]independent[blank_end] of the output quantity (ex. buildings, equipment, & plant security) • Variable costs: [blank_start]vary[blank_end] with output level (ex. labor, materials) • Order costs: direct variable costs for placing an order with a supplier (ex. managerial/clerical costs). • Holding or carrying costs: incurred for holding inventory in [blank_start]storage[blank_end] (ex. warehousing expenses, insurance, pilferage)

• Inventory is important, but [blank_start]excessive[blank_end] inventory is detrimental • Firms should diligently measure inventory investment to ensure that it does not adversely affect competitiveness • Measures include: • Absolute value of inventory: annual stock counts; reported on balance [blank_start]sheet[blank_end] • Inventory turnover or turnover ratio: how many times a company turns over its inventory in an accounting period. [blank_start]More[blank_end] is better because it’s faster! Inventory Turnover Ratio = Cost of Goods Sold Average Inventory

ABC Inventory Control System It is challenging for companies to maintain accurate [blank_start]inventory[blank_end] records. It is time-consuming and expensive to reconcile a company’s [blank_start]physical[blank_end] inventory vs. inventory record on a regular basis. ABC Inventory Control System: • Determines which inventories should be counted and managed more closely than others • Groups inventory as A, B, and C items based on inventory dollar usage • Given the highest priority. Account for about [blank_start]20[blank_end]% of total items & about [blank_start]80[blank_end]% of total inventory cost • Greater attention, safety stocks, and resources devoted to these items • Items monitored more frequently and have [blank_start]higher[blank_end] safety stock • Account for the other about [blank_start]40[blank_end]% of total items & 15% of total inventory cost. • Have the lowest value and hence lowest priority. Account for the remaining [blank_start]40[blank_end]% of total items & 5% of total inventory cost. • Counted less frequently & stockouts may be allowed to save inventory space & carrying costs

wait... what’s the PARETO RULE? • A common rule of thumb in business: for many events, roughly [blank_start]80[blank_end]% of the effects come from 20% of the causes • The observation that most things in life are not distributed evenly, that the majority of results come from a [blank_start]minority[blank_end] of inputs. • Encourages a focus of activity and energy that usually produces faster and more substantial results – more bang for your buck Radio Frequency Identification (RFID) Successor to the barcode for tracking individual unit of goods. RFID does not require [blank_start]direct[blank_end] line of sight to read a tag, and information on the tag is [blank_start]updatable[blank_end]. ▪Tag - computer chip and an antenna for wireless [blank_start]communication[blank_end] ▪Reader - handheld or fixed-position RFID device that reads the [blank_start]tags[blank_end] ▪Communication network - connects the readers to transmit inventory information to the enterprise information [blank_start]system[blank_end] ▪RFID software - manages the collection, synchronization, and communication of the data with systems, and stores the information in a [blank_start]database[blank_end]

RFID is a valuable technology for tracking inventory in the supply chain. Benefits • Materials Management – goods automatically counted and logged as they enter the supply [blank_start]warehouse[blank_end] (inbound) • Manufacturing – assembly [blank_start]instructions[blank_end] encoded on RFID tag provide information to computer- controlled assembly devices • Distribution Center – shipment leaving DC automatically updates [blank_start]inventory[blank_end] levels and initiate invoices (outbound) • Retail Store – store shelf [blank_start]replenishment[blank_end] automatically triggered Challenges • Tagging strategies differ considerably by [blank_start]region[blank_end] • [blank_start]Costs[blank_end] are among the major impediments to a faster adoption of the technology • Differences between radio [blank_start]frequencies[blank_end] in different parts of the world • Signals don’t pass through liquids and [blank_start]metals[blank_end] well

Fixed Order Quantity Models These models use fixed [blank_start]parameters[blank_end] (ie. demand, delivery lead time) to derive the optimum order quantity to minimize total inventory costs. The Economic Order Quantity (EOQ) Model – A quantitative decision model based on the trade-off between annual inventory holding costs & annual order costs The EOQ model seeks to determine an optimal order quantity and timing, where order cost & inventory holding cost is minimized. • Order Cost is the [blank_start]direct[blank_end] variable cost associated with placing an order. • Holding Cost is the cost incurred for holding inventory in [blank_start]storage[blank_end]. Sometimes called carrying cost. Reorder Point: The lowest inventory level at which a new order must be placed to avoid a [blank_start]stockout[blank_end]. Safety stock: because demand and delivery lead time are never certain!

Inventory Management Systems •Continuous review systems: physical inventory levels are counted on a continuous/daily basis • EOQ inventory models assume inventory levels are precisely [blank_start]known[blank_end] at every point in time and assume no discrepancies • Difficult to achieve and [blank_start]expensive[blank_end] to implement •Periodic review systems: physical inventory is reviewed at regular [blank_start]intervals[blank_end] (ie. weekly, monthly). • More safety [blank_start]stock[blank_end] is required to buffer the added variation or inaccuracy risk Slow-Moving & Obsolete Inventory (SLOB) • Slow-moving: product that hasn’t moved in > [blank_start]6[blank_end] months • Obsolete: expired or discontinued inventory; can no longer be [blank_start]sold[blank_end] Why we hate SLOB: • Takes up space and inventory [blank_start]dollars[blank_end] • Utilizes labor & [blank_start]resources[blank_end] What causes SLOB? • Inaccurate [blank_start]forecasting[blank_end] • Failed new product launches • Inadequate inventory management system • Long lead times • Short [blank_start]shelf[blank_end] life • Large minimum order quantities (MOQ’s) • Cancelled customer programs or distribution Options to reduce SLOB: • Donation • Liquidation • Demand generation • Destruction