c





    
     

    
     

The choice of how to control inventory depends upon the fact of whether
or not the demand of the items has a dependent or an independent
character.

This difference is important in selecting an adequate inventory

management approach.

     exists for those items for which demand is linked

to the use of other items (for example, subassemblies which go into a

higher-level component or finished item, such as the motherboard for a
computer).

The essential aspect of dependent demand is that inventory items can be

calculated.

Controlling can take place by means of the ͚MRP͛ system (see chapter 5).

      exists where the rate of use for an item does not
relate directly to the use of another item (for example, finished goods such
as a computer).

Controlling can take place by means of an ͚Order Point͛ system (see chapter
4.5).
It is obvious that most organizations have items which fall into each
category, namely

the category of dependent and independent demand.

If this is the case, then the organization will have to use both systems,
because it would be a mistake to suppose that you can use a dependent
system for an independent item and, the other way around, to use an
independent system for a dependent item.

`
  
 
   
 

— you need the past demand in connection with future requirements

— you need a mechanism for initiating the order to replenish inventory

To lay down the character of controls to use here, one has to understand
the relative values of inventory. In understanding this, it is possible to
decide the type of controls to apply to each item of inventory.

This is due to maximizing the return (i.e. reduced inventory investment

versus the involved control costs).

For the organization it is important to know where to put most effort in

controlling inventory, in other words which items are - in this respect - the
most important ones.

In achieving this, the organization can make use of a ͚Pareto͛ diagram.

The organization can take a sample at random of its total inventory.

From such a sample you make a list with the inventory items placed in
order of decreasing Annual Dollar Usage (ADU). ADU stands here for the
product of the
͚unit value͛ and ͚annual usage͛ of each item of inventory.

`

In statistics, a 
  is the difference between the actual or real
and the predicted or forecast value of a time series or any other
phenomenon of interest.

In simple cases, a forecast is compared with an outcome at a single time-

point and a summary of forecast errors is constructed over a collection of
such time-points. Here the forecast may be assessed using the difference or
using a proportional error. By convention, the error is defined using the
value of the outcome 2
 the value of the forecast.

In other cases, a forecast may consist of predicted values over a number of

lead-times; in this case an assessment of forecast error may need to
consider more general ways of assessing the match between the time-
profiles of the forecast and the outcome. If a main application of the
forecast is to predict when certain thresholds will be crossed, one possible
way of assessing the forecast is to use the timing-errorͶthe difference in
time between when the outcome crosses the threshold and when the
forecast does so. When there is interest in the maximum value being
reached, assessment of forecasts can be done using any of:

— the difference of times of the peaks;

— the difference in the peak values in the forecast and outcome;
— the difference between the peak value of the outcome and the value
forecast for that time point.

Forecast error can be a calendar forecast error or a cross-sectional forecast

error, when we want to summarize the forecast error over a group of units.
If we observe the average forecast error for a time-series of forecasts for
the same product or phenomenon, then we call this a calendar forecast
error or time-series forecast error. If we observe this for multiple products
for the same period, then this is a cross-sectional performance error.
Reference class forecasting has been developed to reduce forecast error.

` !`"

  

is the activity of estimating the quantity of a product
or service that consumers will purchase. Demand forecasting involves
techniques including both informal methods, such as educated guesses,
and quantitative methods, such as the use of historical sales data or current
data from test markets. Demand forecasting may be used in making pricing
decisions, in assessing future capacity requirements, or in making decisions
on whether to enter a new market.

Necessity for forecasting demand

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— Unaided judgment
— Prediction market
— Delphi technique
— Aame theory
— Xudgmental bootstrapping
— £imulated interaction
— Intentions and expectations surveys
— Conjoint analysis
ï



 
   

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  An alternative way to summarize the past data is to compute the

2
 mean of successive smaller sets of numbers of past data as follows:
   
Recall the set of numbers 9, 8, 9, 12, 9, 12, 11, 7, 13, 9, 11, 10 which
2

 were the dollar amount of 12 suppliers selected at random. Let us
   set , the size of the "smaller set" equal to 3. Then the average of
the first 3 numbers is: (9 + 8 + 9) / 3 = 8.667.

This is called "smoothing" (i.e., some form of averaging). This

smoothing process is continued by advancing one period and
calculating the next average of three numbers, dropping the first
number.


 The next table summarizes the process, which is referred to as
  
 
. The general expression for the moving average is
 2

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-1
-+1]

 
 


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% 9

& 8

' 9 8.667 0.333 0.111

( 12 9.667 2.333 5.444

) 9 10.000 -1.000 1.000

* 12 11.000 1.000 1.000

+ 11 10.667 0.333 0.111

, 7 10.000 -3.000 9.000

- 13 10.333 2.667 7.111

%. 9 9.667 -0.667 0.444

%% 11 11.000 0 0
 %& 10 10.000 0 0

`

 



 


/ 

is a technique that can be applied to time series

data, either to produce smoothed data for presentation, or to make
forecasts. The time series data themselves are a sequence of observations.
The observed phenomenon may be an essentially random process, or it
may be an orderly, but noisy, process. Whereas in the simple moving
average the past observations are weighted equally, exponential smoothing
assigns exponentially decreasing weights over time.

Exponential smoothing is commonly applied to financial market and

economic data, but it can be used with any discrete set of repeated
measurements. The raw data sequence is often represented by {
}, and the
output of the exponential smoothing algorithm is commonly written as {
},
which may be regarded as a best estimate of what the next value of  will
be. When the sequence of observations begins at time
= 0, the simplest
form of exponential smoothing is given by the formulas

c!! 01""2"`

£upply chain management (£CM) is the management of a network of

interconnected businesses involved in the ultimate provision of product
and service packages required by end customers (Harland, 1996).[1] £upply
chain management spans all movement and storage of raw materials,
work-in-process inventory, and finished goods from point of origin to point
of consumption (supply chain).
Another definition is provided by the APIC£ Dictionary when it defines £CM
as the "design, planning, execution, control, and monitoring of supply chain
activities with the objective of creating net value, building a competitive
infrastructure, leveraging worldwide logistics, synchronizing supply with
demand and measuring performance globally."

— £upply chain management is the systemic, strategic coordination of

the traditional business functions and the tactics across these
business functions within a particular company and across businesses
within the supply chain, for the purposes of improving the long-term
performance of the individual companies and the supply chain as a
whole
— A customer focused definition is given by Hines (2004:p76) "£upply
chain strategies require a total systems view of the linkages in the
chain that work together efficiently to create customer satisfaction at
the end point of delivery to the consumer. As a consequence costs
must be lowered throughout the chain by driving out unnecessary
costs and focusing attention on adding value. Throughput efficiency
must be increased, bottlenecks removed and performance
measurement must focus on total systems efficiency and equitable
reward distribution to those in the supply chain adding value. The
supply chain system must be responsive to customer requirements

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— £trategic network optimization, including the number, location, and

size of warehousing, distribution centers, and facilities.
— £trategic partnerships with suppliers, distributors, and customers,
creating communication channels for critical information and
operational improvements such as cross docking, direct shipping, and
third-party logistics.
— Product life cycle management, so that new and existing products
can be optimally integrated into the supply chain and capacity
management activities.
— Information technology chain operations.
— Where-to-make and make-buy decisions.
— Aligning overall organizational strategy with supply strategy.
— It is for long term and needs resource commitment.





— £ourcing contracts and other purchasing decisions.

— Production decisions, including contracting, scheduling, and planning
process definition.
— Inventory decisions, including quantity, location, and quality of
inventory.
— Transportation strategy, including frequency, routes, and
contracting.
— Benchmarking of all operations against competitors and
implementation of best practices throughout the enterprise.
— Milestone payments.
— Focus on customer demand and Habits.

h



— Daily production and distribution planning, including all nodes in the

supply chain.
— Production scheduling for each manufacturing facility in the supply
chain (minute by minute).
— Demand planning and forecasting, coordinating the demand forecast
of all customers and sharing the forecast with all suppliers.
— £ourcing planning, including current inventory and forecast demand,
in collaboration with all suppliers.
— Inbound operations, including transportation from suppliers and
receiving inventory.
— Production operations, including the consumption of materials and
flow of finished goods.
— Outbound operations, including all fulfillment activities, warehousing
and transportation to customers.
— Order promising, accounting for all constraints in the supply chain,
including all suppliers, manufacturing facilities, distribution centers,
and other customers.
— From production level to supply level accounting all transit damage
cases & arrange to settlement at customer level by maintaining
company loss through insurance company.