Operations Final 2 (3/19 PP)
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Having Output inventory available allows:
Management to switch products, meet increased demand, etc. independent of outflow rate.
Two reasons firms carry inventory for stock out protection:
1. Cover for supply disruptions (strike, fire)
2. Cover inaccurate demand forecast, promotions, etc.
Inventory Costs (2)
Costs explain the urgency of moving the cups (getting rid of the inventory)
1. Physical Holding Costs - Cost of storing inventory (includes operating costs) - Warehouse rental, utilities
2. Opportunity Costs - Lost returns on the funds invested in inventory that could have been used for other purposes
Supply may fall short of demand due to variability in supply or demand. This results in (input v output issues):
- Input Issues:
- 1. Process Starvation (no inputs to keep process going)
- Output Issues:
- 1. Product shortages
- 2. Lost Sales
- 3. Customer dissatiscfaction
Unpredictable, random factors that affect demand
Tool for predicting future demand and dealing with noise
Firms forecast on these factors (4):
- 1. Customer Demand
- 2. Sales (past sales)
- 3. Resource requirements
- 3. Interest rates
Supply/Demand mismatch example
Apple's products. Don't produce enough to match demand which leads to long lines, backorder products, waits, etc.
Based on judgement, experience, customer surveys.
Surveys (on receipts) are becomming more common.
This type of forecasting can be risky
Based on data and analysis.
Causal models, Time series models
Objective Forcasting - Causal model
Methods assume in addition to data, other factors influence demand ( future sales could be a function of future prices)
Objective Forcasting - Time-series analysis
methods based solely on past data
Forecasts should include margin of error
Include measure for degree of confidence since forecasts are normally wrong.
1. Aggregate forecasts vs individual product forecases.
2. Short term forecasts vs long term forecasts.
- 1. Aggregate more accurate
- 2. Short term more accurate
Inventory in excess of average or the forecast demand =
Cycle Service Level (customer service measure)
Probability that there will be no stock out within a given timeframe
Fill Rate (customer service measure)
Percentage of orders that can be filled with current inventory on hand.
Safety inventory is used to ensure both customer service measures (2)
- 1. Cycle Service Levels
- 2. Fill Rate requirements
Comparing expected costs and benefits of purchasing each incremental unit.
Need to balance benefit of holding more safety inventory vs cost of holding it.
Three main factors that affect amount of safety inventory
- Level of desired customer service
- Average and uncertainty of demand
- Average and uncertainty of lead time
Aggregation of forecasts
Pooling demand for several similar products
Phsyical Centralization of inventory good because:
Will result in improved customer service with the same level of inventory as decentralized model (one layer of safety stock since you don't have to hold it at each location)
Disadvantages of centralization of inventory (3)
- 1. Reduced response time (decentralized better for JIT)
- 2. Shipment costs (longer)
- 3. Language, cultural, regulatory issues in different geographical areas
Pooling Inventory (2)
Inventory is shared among various demand sources
- 1. Component Commonality - products with common components can be pooled at same site
- 2. Product substitution - ability to substitue one product for anothe
Levers for reducing safety inventory (5)
- 1. Reduce demand variability through improved forecasting (subjective and objective)
- 2. Reduce replenishment lead time (bring product in quicker)
- 3. Common Components
- 4. Postponement
- 5. Product substitution
Job shops and Service operations - How to ensure demand is met
Cannot have inventory on finished orders so mush have enough capacity to process orders as they come in
Inflow of Job orders (service)
- Customer arrivals (customers at bank window)
- Grocery checkouts
Resource Unit that processes a customer
Server (airline agent, loan officer)
If server not available, input inventory builds (line @ checkout)
Customer wait time occurs due to insufficient processing capacity caused by (2):
- 1. Variability of arrival (even with appointments, people can be late)
- 2. Processing times (vary by customer's needs - think emergency room)
Customers who exit queue prior to being serviced due to a long wait
Service process improvement (3):
- 1. Decerase arrival rate or increase # of servers
- 2. Make appointments to syncrhonize available processing capacity with demand
- 3. Increase buffer capacity to reduce blocking arrivals
To help managing arrivals to improve service level (5):
- 1. Reservations
- 2. Early bird specials
- 3. Online banking vs Clerk (offer alternatives)
- 4. Discounts for early taxk filing
- 5. online shopping vs store
To reduce processing time (3):
- 1. Process simplification
- 2. Worker specilization (specific tasks that can be performed quickly)
- 3. Technology/automation - barcode scanning
Ex. - online boarding passes for flight + check in (24 hours online)
To reduce variability (3):
- 1. Reduce arrival variability - scheduling/appointments
- 2. Reduce processing time variability - limit variety (standardization)
- 3. Minimize employee turnover - more consistent processing times.
Capacity Synchronization Levers (supply v demand)
Supply - add cashiers during peak times
Demand - not economical (can't add tables to restaurant when demand spikes)
longer the time frame, easier it is to sychronize capacity
Managing Customer Expectations (4)
- - Provide comfort
- - Provide wait times
- - Provide information
- - Ensure fairness (first in line = first)
Key role of service manager =
Manage the customers!!
Waiting occurs due to: (3)
- High capacity utilization
- High Variability
- Lack of synchronization
Ways to better manage wait times (4)
- 1. Safety capacity (additional servers)
- 2. Decrease variability (appointments)
- 3. Improve synchonization
- 4. Increase buffer capacity (bigger, nicer wait room)
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