Forecasting, Planning & Distribution

Question 1

Type of Forecast by Time Horizon

Answer 1

• Short range: up to 1 year, usually less than 3months
  
  • job scheduling, worker assignment
• Medium range: 3months to 3 years
  
  • sales & production planning, budgeting
• Long range: 3+ years
  
  • new production planning, facility location

Question 2

Steps in Forecasting Process

Answer 2

1. Determine purpose of forecast
2. Establish time horizon
3. Select technique
4. Obtain, clean & analyze data
5. Make the forecast
6. Monitor the forecast

Question 3

Objective Forecasting Approaches

Answer 3

• Time Series: past predicts the future
  
  • Naive approach
  • Moving averages
  • Exponential smoothing
  • Trend projection
• Causal / Relational: econometric models
  
  • A/F ratios
  • [linear regression]

Question 4

Time Series Goal and Basic Components

Answer 4

• Goal: generate the large number of short-term, SKU level, demand forecasts required for production, logistics and sales
• Components:
  
  • Level: value where demand hovers around
  • Trend: persistent movement in one direction
  • Seasonal variations: periodic to calender movements
  • Cyclical movements: periodic movements not tied to calendar
  • Random fluctuations: irregular & unpredictable

Question 5

Time Series: Naive method

Answer 5

Demand in the next period is the same as in the last period

-> sometimes can be effective and cost efficient

Question 6

Time series: Moving average

Answer 6

• A series of arithmetic means
• Effective if there is little or no trend
• used for smoothing since it provides overall impression of data over time

Question 7

Time Series: Weighted moving average

Answer 7

• Like MA, but with weights for different periods (add up to 1)
• Weights are based on intuition!

Question 8

Disadvantages of moving average methods

Answer 8

• Require vast amount of historical data (all n periods)
• When the demand has a trend, they lag and
  
  • overestimate demand for a downward trend
  • underestimate demand for an upward trend

Question 9

Time series: Exponential smoothing

Answer 9

• Form of weighted moving average
• Weights decline exponentially
• most recent data is weighed the most
• Requires choice of smoothing constant alpha
  
  • from 1 to 0
  • subjectively chosen
• Involves little record keeping of past data!

Question 10

Metrics of Forecast Accuracy

Answer 10

Question 11

Time series: Exponential smoothing with Trend Adjustment

Answer 11

• Applies and exponential smoothing to the forecasts and the trend in period t
• beta as smoothing constant for trend is introduced

=> reduces the lag and moves forecast closer to actual demand

Question 12

A/F Ratios

Answer 12

• Gather dataset related to products whose demand forecasts are obtained using similar forecasting techniques
• Calculate the ratio between:
  
  • actual demand A
  • forecast demand F
• Calculate mean µ and std. dev. σ of the ratios
• Use the usual forecasting technique to obtain the new forecasted demand F
  
  • This expected demand will have
  • µ_D = µ * F and
  • σ_D = σ * F
• Example: If µ = 1,09, std. dev. 0,25 and the obtained point forecast is 200, the expected demand will be 218 with std. dev. 50

Question 13

Aggregate Planning: time horizon, goal, inputs & outputs

Answer 13

• Medium term: typically 12 months
  
  • production plan
  • staffing plan
• Objective: match supply and demand over the next few months on an aggregate level
• Inputs
  
  • reasonably accurate forecast
  • definition of the aggregate unit to be considered (e.g. one model is defined as base model for product family)
  • production costs data
• Output:
  
  • Production levels and resource requirements for one or few product families using similar resources

Question 14

Two generic production strategies

Pros & cons

Answer 14

Chase strategy: production quantity equals the aggregate demand for each period

• ​Lower inventory buildup
  
  • low holding costs
  • low obsolescence costs
• Less backorders/stockouts
• More flexible to demand changens
• Applicable for service industries

Level strategy: production quantity equals the average demand for the whole planning horizon

• No need for subcontracting
• Predictable budgets
• Stable workfore level
• Constant production rate
  
  • higher resource utilization
  • lower capacity needed

Question 15

Production

MRP: Material Requirement Planning

Answer 15

• Takes a Master Production Schedule (MPS) and “explodes” it into detailes production/procurement schedules (timing+quantities) of all components and raw materials
  
  • Gross requirements: using end-items (level 0, e.g. mountain bikes), it generates the required quantities of immediate components (level 1, e.g. wheels), by using the bill of materials (BOM)
  • Net requirements: taking into account projected inventories (“we will have 8 wheels already at hand…”)
  • Time phasing: production and procurement lead times are taken into account to position requirements in time
  • Assumes necessary capacity is available
• Inputs:
  
  • MPS
  • Inventory Records
  • BOM
• Output:
  
  • Recommended production schedule
  • Recommended purchasing schedule

Question 16

Distribution

Criteria to chose the right transportation mode

Answer 16

• Quantities moved
• nature / physical characteristics of goods
• Frequency of transportation
• Transportation time
• Lead time variance / Reliability
• Lead time customer requirements
• Customer location (distance, concentration)
• Economies of scale, scope and density

Question 17

Direct operations:

Truckload

Answer 17

• Pros:
  
  • door to door service
  • speed
  • costs (if truck is full)
• Cons
  
  • costs (if truck is not full)
  • lower frequency
  • high inventory
• Carriers
  
  • Own fleet
  • Truck rental

Question 18

Consolidated Operations:

Less than Truckload (LTL)

Answer 18

• Pros
  
  • transport in small quantities
  • high frequency
  • low inventory
• Cons:
  
  • longer lead time due to milk runs
  • high costs
• Carriers:
  
  • Mory, Exel, Danzas…

Question 19

Consolidated Operations:

Package delivery

Answer 19

• Pros
  
  • Flexibility
  • Speed
• Cons
  
  • High costs
  • limited to small parcels
• Carriers
  
  • Postal service
  • FedEx, UPS

Question 20

Distribution related costs

Answer 20

• Transportation
• Facility
• Processing
• Inventory
• Service Level

Question 21

Why local depots?

Answer 21

• Faster customer service, shorter delivery lead times
• Lower transportation costs; freight consolidation from central warehouse to local market
• Lower capital burden on clients: short lead times require clients to have less safety stock

Question 22

Why central warehouse?

Answer 22

• Faster service for local depots
• Lower transportation costs: freight consolidation from factory/supplier to central warehouse
• Risk pooling: lower overall safety stock
• Single point of contact for factory/suppliers: one office for supplier management, economies of scale: producing & ordering large lots, quantity discounts

Question 23

Distribution strategies:

Direct Shipment vs. Warehousing

Answer 23

• Advantages
  
  • less handling = less damage
  • less inventory = less holding costs
  • transportation lead time decreases
• Disadvantages
  
  • higher transport costs (LTL)
  • smaller production runs
  • lead time for end customer increses

Question 24

Distribution strategies:

Cross Docking

Answer 24

• Moving products from inbound to outbound vehicle without storage inbetween
• Benefits
  
  • reduced labor costs
  • reduced inventory holding costs
  • reduced transportation costs (TL in- and outbound)
• Requirements:
  
  • High demand
  • Low variance
  • Easy to handle items
  • Periodic coordinated orders from suppliers