Supply Chain Management Concepts

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Questions and Answers

Which of the following accurately describes the relationship between MAD and MFE?

MAD is less than MFE. (correct)

MAD is always equal to MFE.

MFE is always greater than MAD.

MFE is less than MAD.

What is one reason for holding inventory related to uncertainties?

To buffer against unpredictable demand. (correct)

To eliminate forecasting errors.

To maximize storage costs.

To ensure immediate fulfillment of all orders.

Which of the following is NOT a component of inventory holding cost?

Opportunity cost of alternative investment

Loss of customer goodwill (correct)

Cost of storage space

Product obsolescence

How does Q* typically change when demand increases?

Q* increases with an increase in demand. Signup and view all the answers

What is a key aspect of managing inventory during seasonal demand fluctuations?

Smoothing to manage seasonal patterns. Signup and view all the answers

What is a characteristic of a pull process in supply chain management?

Low production lead times Signup and view all the answers

How does a push process function in supply chain management?

Manages inventory based on future demand predictions Signup and view all the answers

Which of the following best describes the push/pull boundary?

It separates speculative processes from reactive processes. Signup and view all the answers

What is the purpose of forecasting in supply chain management?

To explain systematic variability and quantify unsystematic variability Signup and view all the answers

What is a potential effect of implementing more pull processes in a supply chain?

Reduction in customer demand uncertainty Signup and view all the answers

Which of the following statements is true regarding long-term forecasts?

Long-term forecasts are less accurate than aggregate forecasts. Signup and view all the answers

Which objective is a common conflict for manufacturing in the supply chain?

High quality versus low production cost Signup and view all the answers

What describes a time series that has no systematic variability?

Stationary time series Signup and view all the answers

In the context of supply chain surplus, what does SC Surplus equal?

Consumer Value - SC Cost Signup and view all the answers

What would likely be the effect of using a larger 'N' in the moving average calculation?

The forecast becomes more volatile. Signup and view all the answers

Which of the following products is most likely to benefit from a push strategy due to their characteristics?

Water Signup and view all the answers

Which measure indicates that a forecast consistently overestimates demand?

Positive Running Sum of Forecast Errors (RSFE) Signup and view all the answers

In exponential smoothing, which value of alpha would be more appropriate for forecasting stable demand?

Low alpha Signup and view all the answers

What does a Mean Absolute Deviation (MAD) close to zero indicate?

The forecast has a high accuracy. Signup and view all the answers

Which of the following is true regarding the Mean Squared Error (MSE)?

MSE gives different weight to large errors compared to small errors. Signup and view all the answers

If the Tracking Signal (TS) is within the range of [-0.5, 0.5], what can be concluded?

The forecast is considered unbiased. Signup and view all the answers

What is the relationship between optimal order quantity and average forecast demand?

Optimal order quantity can be less than average forecast demand. Signup and view all the answers

What happens to average profit as the order quantity increases?

Average profit eventually decreases after an initial increase. Signup and view all the answers

In the context of the Newsvendor model with continuous demand, what does Q* represent?

The optimal order quantity that ensures demand is met. Signup and view all the answers

What does the variable z* represent when desired Cycle Service Level (CSL) is higher than 0.5?

z* is greater than zero. Signup and view all the answers

How does safety stock (SS) change with an increase in Cycle Service Level (CSL)?

SS increases at an increasing rate. Signup and view all the answers

If the desired CSL is lower than 0.5, what happens to Q* and z*?

Q* is less than average demand and z* is negative. Signup and view all the answers

What is the implication of running out of stock regarding customer goodwill?

Goodwill may be lost, impacting future sales. Signup and view all the answers

In the analysis of Q and z in relation to CSL, what happens when CSL = 0.5?

Q* is independent of demand variability. Signup and view all the answers

What is a significant drawback of the revenue-sharing contract?

It requires the manufacturer to monitor the retailer's revenues. Signup and view all the answers

In what situations is the buy-back contract deemed unsuitable?

When the transportation cost is too high. Signup and view all the answers

How does aligning the incentives of firms in a supply chain impact performance?

It enhances cooperation and can lead to optimal performance. Signup and view all the answers

What is a critical factor for achieving the same order quantity under a buy-back contract compared to an integrated supply chain?

Aligning critical ratios between the two scenarios. Signup and view all the answers

What advantage does the buy-back contract have over the revenue-sharing contract?

It simplifies the monitoring process. Signup and view all the answers

What scenario is most suited for implementing a revenue-sharing contract?

Situations with peak demand like clothing or digital media. Signup and view all the answers

What is one potential benefit of reducing the Mean Absolute Deviation (MAD) in a supply chain?

It results in lower safety stock levels. Signup and view all the answers

What does the primary objective of a revenue-sharing contract aim to achieve for firms in a supply chain?

Alignment of incentives to enhance overall supply chain performance. Signup and view all the answers

Study Notes

Push and Pull Boundary

Pull processes are initiated in response to customer orders, while push processes are initiated in anticipation of customer orders.
Push processes rely on forecasting, while pull processes use actual customer demand.
Push processes are more efficient for products with stable demand and long production lead times, while pull processes are better suited for products with variable demand and shorter lead times.
The push/pull boundary separates the push and pull parts of the supply chain.

Reducing Customer Demand Uncertainty

Shifting from a push to a pull model can result in reduced customer demand uncertainty.

Conflicting Objectives in the Supply Chain

Different stakeholders in the supply chain (purchasing, manufacturing, customers) often have conflicting objectives.
These conflicting objectives can make it difficult to achieve optimal supply chain performance.
There is a trade-off between cost efficiency and responsiveness.

SC Surplus

The goal of a supply chain is to maximize SC surplus.
SC surplus is calculated by subtracting the supply chain cost (SC Cost) from the consumer value.
Consumer value is the sum of the price and consumer surplus.
SC Profitability is the difference between the price and SC Cost.
Only the consumer contributes revenue to the supply chain.

The Purpose of Forecasting

Forecasting helps explain systematic variability in demand.
Forecasting helps quantify unsystematic variability in demand.

Facts about Forecasting

A good forecast is a range, not a single number.
Long-term forecasts are less accurate than short-term forecasts.
Aggregate forecasts tend to be more accurate than forecasts for individual products.
The bullwhip effect is the amplification of demand variability as it moves up the supply chain.

Types of Forecasting

Qualitative Forecasting: Relies on subjective methods like intuition and experience.
Causal Models: Use data to identify cause-and-effect relationships between variables.
Time Series Models: Use historical data to predict future demand.

Time Series

A time series is a sequence of data points collected at regular intervals.
Level: The average value of the data points.
Trend: A consistent upward or downward movement in the data.
Seasonality: A cyclical pattern in the data that repeats over time.
Random Noise: Unpredictable fluctuations in the data.
A stationary time series has no systematic variability.

Moving Average

A moving average forecast is based on the average of recent historical demand data.
A larger N (number of periods considered in the average) makes the forecast more responsive and variable (volatile).
A smaller N makes the forecast more smooth.

Exponential Smoothing

Exponential smoothing forecasts are weighted averages of current and past demand data.
A small alpha puts more weight on past demand, resulting in a smoother forecast.
A large alpha puts more weight on recent demand, leading to a more variable (responsive) forecast.

Forecasting Error

Forecasting error measures the difference between the forecast and actual demand.

Measures of Accuracy

MAE (Mean Absolute Error): Average of the absolute values of forecast errors.
MSE (Mean Squared Error): Average of the squared forecast errors.
MAPE (Mean Absolute Percentage Error): Average of the absolute percentage errors.

Measures of Bias

MFE (Mean Forecast Error): Average of the forecast errors.
RSFE (Running Sum of Forecast Errors): Sum of the forecast errors over time.
A forecast is biased if it consistently overestimates or underestimates demand.

Inventory Management

Reasons for holding Inventory:
- Economies of scale
- Uncertainties (demand, lead time, supply)
- Speculation
- Smoothing
- Transportation

Inventory Holding Cost

Includes all costs associated with physically holding inventory:
- Maintenance and handling
- Warehouse costs
- Opportunity costs
- Obsolescence
- Insurance
- Investment in warehouse facilities

EOQ (Economic Order Quantity)

The optimal order quantity that minimizes total ordering and holding costs.
Calculated by balancing ordering costs and holding costs.

Observation under Q*

The annual holding cost equals the annual ordering cost at Q*.
Total costs fluctuate minimally around Q*.
Q* increases with demand (D) and ordering cost (S) and decreases with holding cost (H).
Changes in D or S proportionally affect Q*.
Changes in H have a square root effect on Q*.

Newsvendor Model

Used to model inventory situations with short lifecycles and uncertain demand where the goal is to find the optimal order quantity that maximizes expected profit.

Discrete Demand

The optimal order quantity is the highest quantity where the expected profit is greater than the expected loss.
The probability of not running out of stock (Pr(D≤Q)) is called the cycle service level (CSL).

Loss of Goodwill

The cost of stockouts can include loss of customer goodwill, an intangible asset of companies.

Facts about the Newsvendor Model:

The optimal order quantity may not equal average forecast demand.
The optimal quantity depends on the relationship between marginal profit and marginal cost.
As order quantity increases, average profit first rises, then decreases.
Larger production quantities increase risk, leading to a higher chance of both significant gains and significant losses.

Continuous Demand

The optimal order quantity is found by setting marginal gain equal to marginal cost.
The formula for Q* is: Q* = μp + z* ση (where μp is expected demand, z* is the safety factor, σ is the standard deviation of demand, and η is the unit cost)

Analysis of Q and Z

The impact of the desired CSL on the safety factor (z*) and the optimal order quantity (Q*):
- CSL of 0.5: z*=0, Q* = μD
- CSL > 0.5 : z* > 0, Q* > μD, Q* is increasing in σ
- CSL < 0.5 : z* < 0, Q* < μD, Q* is decreasing in σ

Demand Forecasting

Demand has both a systematic component (μD) and an unsystematic (random) component (σD).
μD is estimated using a point forecasting method (e.g., moving average).
σD is typically calculated as 1.25 times the MAD (Mean Absolute Deviation) from historical data.

Facts about Safety Stock

Safety stock increases at an increasing rate with the CSL.
Higher service levels require higher safety stock.
Lower MAD leads to lower safety stock.

Supply Chain Coordination Contracts

Supply Chain Coordination: Aligning individual firm objectives to achieve optimal supply chain performance.
Revenue-Sharing Contract: The supplier sells products at a lower wholesale price, and the retailer shares a portion of their revenue with the supplier.
Buy-back Contract: The supplier agrees to buy back unsold inventory from the retailer at a predetermined buyback price.

Summary

Supply chain coordination contracts can help align incentives and improve profitability.
Revenue-sharing contracts are effective for products with high demand variability.
Buy-back contracts transfer some risk from the retailer to the supplier.

Solution to Buy-back Contract Question

The buy-back price should be set to ensure the same critical ratio under the buy-back contract as in an integrated supply chain.

Revenue-Sharing:
- Suitable for products with peak demand.
- Requires monitoring of retailer revenues.
Buy-back:
- Entails less risk for retailers.
- Not ideal for products with high transportation costs, distant suppliers, or low salvage value.

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Description

Explore the fundamental concepts of push and pull processes in supply chain management. This quiz covers the differences between push and pull models, their impact on customer demand uncertainty, and the conflicting objectives among supply chain stakeholders. Test your understanding of these critical supply chain strategies!