Final Exam Chapter 10 1.

Supply chain design- designing a firms supply chain to meet the competitive priorities of the firms operations strategy a. Supply Chain- interrelated series of processes w/in a firm and across different firms that produces a service or product to the satisfaction of customers 2. Internal Organizational Pressures a. Dynamic Sales Volume- caused by volatile demand...involves excessive inventories, underutilized personnel, or more expensive delivery options to meet customer demands on time...supply chain design should involve close collaboration b/w top level managers across the org. so that unnecessary costly supply chain options are avoided b. Customer Service Levels- caused from the sales and marketing groups for superior service levels for the org.s customers c. Service/Product Proliferation- newer/more services/products adds complexity to the supply chain...a balance is needed to be struck b/w the cost of operating the supply chain and the need to market new services/products 3. Supply Chain for Services a. Driven by the need to provide support for the essential elements of the various services it delivers b. Must provide convenience 4. Supply Chain for Manufacturers a. Main purpose for chain is to control inventory by managing flow of materials b. Tier 1- suppliers provide major subassemblies that are assemble by the manufacturing firm c. Tier 2- suppliers provide tier 1 with components and so on d. Not all companies have the same number of levels in their supply chains 5. Inventory Measures a. All methods of measuring inventory begin with a physical count of units, volume, or weight b. Average Aggregate Inventory Value- total average value of all items held in inventory for a firm i. Dollar values are expressed at cost ii. = (# of units of A* value of each unit A) + (# of units of B * value of each unit) iii. Tells how much of a firms assets are tied up in inventory c. Weeks of Supply- obtained by dividing the average aggregate inventory value by sales per week at cost i. = AAIV/ (COGS/weeks of operations) ii. Can be in hours or days iii. Denominator represents only FG sold at cost- COGS iv. Numerator includes the value of all items a firm holds in inventory (RM, WIP, and FG) d. Inventory Turnover- dividing annual sales at cost by the AAIV maintained during the year i. Annual COGS/AAIV 6. Financial Measures a. Total Revenue- increase sales through better customer services b. COGS- reduce costs of transportation and purchased materials c. Operating Expenses- reduce fixed expenses by reducing OH associated with supply chain operations d. Net Cash Flows- improve positive cash flows by reducing lead times and backlogs e. Inventory- increase inventory f. Working Capital- reduce by reducing inventory investments, lead times, and backlogs

g. Fixed Assets- reduce the number of warehouses through improved supply chain design h. Total Asset- achieve the same or better performance with fewer assets i. Net Income- improve profits with greater revenue and lower costs j. Return on Assets (ROA)- increase with higher net income and fewer total assets 7. Inventory Placement a. Centralized Placement- keeping all inventory of a product at a single location, such as a firms plant or warehouse, and shipping directly to each of its customers. i. Advantage comes from inventory pooling- reduction in inventory and safety stock b/c of the merging of uncertain and variable demands from the customers ii. Disadvantage- added cost of shipping smaller, uneconomical quantities directly to customers over long distances. b. Forward Placement- locating stock closer to customers at a warehouse, distribution center, wholesaler, or retailers i. Advantages- faster delivery times and reduced transportation costs- that can stimulate sales ii. Pooling effect is reduces b/c safety stocks for the item must increase to take care of uncertain demands at each center iii. Time to get the product to customer is reduces...service is quicker and firm can take advantage of larger, less costly shipments to the centers from the plant, at expense of larger overall inventories 8. Mass Customization- firms highly divergent processes generate a wide variety of customized services/products at reasonably low costs a. 3 Competitive Advantages i. Managing customer relationships- closer relationships with customers ii. Eliminating FGI iii. Increasing Perceived Value of Services or Products b. Three Considerations when Choosing Supply Chain Design i. Assemble-to-Order Strategy 1. The Two Stages- standardized components are produces and held in stock...second stage the firm assembles these standard components to specific orders 2. No FGI ii. Modular Design- the product must be able to be customized iii. Postponement- some of the final activities in the provision of a product are delayed until the orders are received 1. Advantage- firms plants can focus on the standardized aspects of the product, while the distributor can focus on customizing a product that may require additional components from local suppliers iv. Advantage: channel assembly- members of the distribution channel act as if they were assembly stations in the factory...useful when the required customizing has some geographical rationale, such as language difference or technical requirements 9. Outsourcing- paying others to perform processes and provide needed services and materials a. Make or buy decision i. Make decision- vertical integration ii. Buy decision- outsource iii. BE Quantity = Fixed make Fixed buy VC buy VC make iv. Vertical Integration

1. Backward Integration- firms movement upstream in the chain toward the source of RM, parts, and services through acquisitions...reduces the risk of supply 2. Forward Integration- firm acquires more channels of distribution, such as its own distribution centers and retail stores v. Outsourcing 1. Offshoring- involves moving processes to another country a. Vertical integration due to locating internal processes in other countries 10. Strategic Implications a. Efficient Supply Chains i. manufacturing ii. Work best when demand is highly predictable...competitive priorities- low cost, consistent quality, and on time delivery...infrequent new product introduction, low CM, low product variety iii. Build-to-stock (BTS)- product is built to a sales forecast and sold to the customer from a FG stock, the end customer has no individual inputs, typically purchases product from retailer 1. Keeps inventory to the minimum, product design last long time, markets where price is crucial to winning an order iv. Operation strategy: make to stock standardized services/products; emphasizes high volumes...low capacity cushion...low inventory investmentshigh turns...shorten lead time but do not increase costs...emphasize low prices, consistent quality, on time deliver in supplier selection b. Responsive Supply Chains i. Services ii. Designed to react quickly to order to hedge against uncertainties in demand...work best when firms offer a great variety of products and demand predictability is low...demand has high forecast errors, competitive priorities- development speed, fast delivery times, customization, volume flexibility, variety, top quality...frequent intros for new products...high CM...high product variety iii. Assemble-to-Order (ATO)- product is built to customer specifications from a stock of existing components...no control over the design of the components...assembly is delayed until order is received iv. Make-to-Order (MTO)- the product is based on a standard design; component production and manufacture of final product is linked to customer specifications v. Design-to-Order (DTO)- product is designed and built entirely to the customers specifications...allows customers to design the product to fit their specific needs vi. Customized service/product, emphasize variety...high capacity cushion...inventory investment-as needed to enable fast delivery time...shorten aggressively the lead time...emphasize fast delivery time, customization, variety, volume flexibility, top quality Chapter 12 1. Supply Chain Integration- the effective coordination of supply chain processes through the seamless flow of info up and down the supply chain 2.

3. Bullwhip Effect- the phenomenon in supply chains whereby ordering patterns experience increasing variance as you proceed upstream the chain a. Slightest change in customer demands can ripple through the entire chain, w/ each member receiving more variability in demands from the member immediately downstream b. Firms contributes to the bullwhip effect if the variability of the orders to its suppliers exceeds the variability of the orders from is immediate customers c.

d. External Causes- volume changes, service and product mix changes, late deliveries, under filled shipments e. Internal Causes- internally generated shortages, engineering changes, order batching, new service/product introductions, service/product promotions, information errors f. Concept of Rationing and Shortage Gaining (not in book) i. Shortage gaining: creating artificial demand because youre going to be rationed ii. Makes the bullwhip worse iii. Everyday low pricing 4. Supplier Relationship Process a. Five Processes: Sourcing, Design Collaboration, Negotiation, Buying, Info Exchange b. Purchasing- the activity that decides which suppliers to use, negotiates contracts, and determines whether to buy locally c. Supplier Selection (Sourcing Process) i. Material Costs- negotiating w/ suppliers for the provision of a service/product results in a price/unit. 1. Annual Material Costs = pD 2. Annual Demand times Price /unit ii. Freight costs- costs of transporting the product or the equipment and personnel who will perform the service can vary greatly depending on the location of the supplier, the size of shipments, number of shipments /year, etc iii. Inventory Costs 1. Cycle inventory= Q/2 a. Q- Shipping quantity b. Determines the cycle inventory the buyer must maintain until the next shipment of the product 2. Pipeline inventory = dL a. d- average requirements/day or week b. L- lead time 3. Annual Inventory Costs = (Q/2 + dL)H a. H- annual holding costs

iv. Administrative Costs- include the managerial time, travel, and other variable costs associated with interacting with a supplier v. Total Annual Cost = pD + Freight + (Q/2 + dL)H + Administrative 1. The lowest is best 5. Preference Matrix- weight times score a. Highest is the best 6. Logistics- key aspect of order fulfillment...delivers the product to the customer a. Mode Selection- truck, train, ship, pipeline, airplane b. Expected Value Decision Rule = probability of a level of demand occurring * payoff for using the alternative Chapter 14 1. Forecast- a prediction of future events used for planning purposes 2. Demand Patterns a. Time Series- repeated observations of demand for a product in their order of occurrence form a pattern b. Horizontal- fluctuation of data around a constant mean c. Trend- the systematic increase/decrease in demand, depending on the time of day, week, month, or season d. Cyclical- the less predictable gradual increases/decreases in demand over longer periods of times (years or decades) e. Random- unforecastable variation in demand f.

3. Forecast Error- difference found by subtracting the forecast from actual demand a. Et = Dt - Ft b. Total Forecast Error- Cumulative Sum of Forecast Errors (CFE)= sum of all forecasted errors= bias error c. Average Forecast Error or Mean Bias = CFE/n i. n= number of errors d. Mean Absolute Deviation (MAD)- measurement of the dispersion of forecast errors attributed to trend, seasonal, cyclical, or random effects

i. e. Mean Squared Error (MSE)- measures the dispersion of forecast errors attributed to trend, seasonal, etc i. Standard deviation of errors ii.

f. Mean Absolute Percent Error (MAPE)- a measurement that relates the forecast error to the level of demand and is useful for putting forecast performance in the proper perspective i.

4. Linear Regression- causal method in which one variable (dependent) is related to one or more independent variables by a linear equation a. Dependent Variable- the variable that one wants to forecast b. Independent Variable- variables that are assumed to affect the dependent variable and thereby cause the results observed in the past c. Y = a + bX i. Y- dependent variable ii. X- independent variable iii. a- Y-intercept of the line iv. b- slope d. Sample Correlation Coefficient (r)- measures the direction and strength of the relationship b/w the independent variable and dependent variable i. [-1,1] ii. Closer to +/- 1 mean a close fit to line iii.

e. Sample Coefficient of Determination (r2)- measures the amount of variation in the dependent variable about its mean that is explained by the regression line i. [0,1] ii. Close to 1 means close fit f. Standard Error of the Estimate (sxy)- measures how closely the data on the dependent variable cluster around the regression line...measures the error from the dependent variable, Y, to the regression line, rather than to the mean...std. deviation of the difference b/w the actual demand and the estimate provided by the regression equation 5. Time Series Methods a. Nave Forecast- forecast for the next period equals the demand for the current period i. Ft+1 = Forecast + Dt

b. Simple Moving Average Method- used to estimate the average of a demand time series by averaging the demand for the n most recent time periods i. Ft+1 = Sum of Last n Demands n ii. Changes to nave forecast if n is set to its lowest level...n should be large if demand series are stable and small if susceptible to changes c. Weighted Moving Averages- historical demand in the average can have its own weight; the sum of the weights must equal 1 i. Ft+1 = (weightt * Dt) + (weightt-1 * Dt-1) + (weightt-2 * Dt-2) ii. Advantage: allows you to emphasize recent demand over earlier demand...it can handle seasonal effects by putting higher weights on prior years in the same season...will be more responsive to changes in the underlying average of the demand series than the simple moving average forecast d. Exponential Smoothing- weighted moving average method that calculates the average of a time series by implicitly giving recent demands more weight than earlier demands, all the way back to the first period i. Ft+1 = Dt + ( 1 - )Ft ii. Larger alpha values emphasizes recent levels of demand and result in forecasts more responsive to changes in the underlying average; may reduce forecast errors when thers a change in the average...smaller values treat past demand more uniformly and result in more stable forecasts