Day 5

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Forecasting & Inventory Management

Animation Source: SAP

1
Where are we?
 Significance of Operations
 Strategic and Tactical
 Variability Management

 Common Areas of Failure


 Strategic Misfit
 Operational flaws
• Improving the Performance
 Measuring Performance

• Improvement Methods
—Strategic or Systems Level
—Operations Level

2
Tools & Techniques for Improvement
Materials Maintenance
Management Management

Process Quality
Design Management

Resources
Facility
(Internal)
Design
Management

Product/ Resources
Operations
Service (External)
Design Management
Management

3
Operations Management Functions

Product, Market Charachteristics


Plant
Govt. support, Resource availability
Location Equipment
Selection Plant
Layout Engineering Analysis
Product-Process Matching
Flow synchronisation
Break Even Analysis
Inbound
Type of production philosophy
Logistics
In Plant Geographical constraints
Logistics
Outbound
Warehouses Logistics
Transportation
Material Handling Facilities Creation & Mgmt
Devices
Distribution Channel
Stock points

4
Operations Management Functions

Demand Forecasting,
Production
Aggregate Planning, Work Planning
Plng. Resources
Allocation Job
Scheduling Machine routing
Worker allocation
Capital allocation
Subcontracting
Inventory
Allocating jobs to machines
Mgmt.
Maintenance Performance parameters

Norms, Points
Mgmt Quality
Control Mgmt.
Procurement
Equipment control
Inspection, TPM
SQC,TQM, Quality Operational Functions
Measures & Mgmt

5
Operating Systems : Scope of Improvement

• What are the basic principles of System improvement?


• Removal of wastages
• What are the system improvement tools
 Better Work Designs
 Productivity improvement – Process Improvement
 Benchmarking
 Blueprinting & Fail point analysis
 Demand Supply Synchronisation
 Quality Management

6
Impact of lack of synchronisation

Excess Material
Excess Time

7
Stock of Material and profitability

Labor Sales
$.700,000 $.5,000,000 Net income
Rs.400,000 What if we
Operating cost elements

Minus
Cost of ($.515,000)
Profit
margin
decrease
Materials
$.2,300,000
Goods Sold
$.3,800,000
Divided by 8% materials cost
Sales (10.3%)
($.2,185,000) ($.3,685,000)
Plus
$.50,00,000 by 5%?
Overhead
$.800,000 Other costs (or $.115,000)
$.800,000
Return on
Investments
Multiply
10.0%

(13.0%)
Inventories
$.500,000 Sales Profit increases
$.5,000,000
($.475,000) Current assets Asset turnover
By 30%
Assets

Account $.1,100,000 Divided by rate


receivable 1.25
$.300,000 Total assets
($.1,075,000) (1.26)
Plus $.4,000,000

Cash Fixed assets ($.3,975,000)


BUT HOW TO REDUCE ?
$.300,000 $.2,900,000

8
How to reduce Solve?

• Why we need stocks of material?


• The excess stock in your enterprise is due to imperfections in

—Customer end
Demand Mgmt
—Distributor end
Retail Mgmt
—Logistics End
Logistics Mgmt
—Production End
Operations Mgmt
—Supplier End
Supply Mgmt

• Challenge is to synchronise between these factors

9
Synchronizing the Flows
• Two Aspects
• Predicting the demand
• Meeting demand in the most optimized manner

• Made to Order and Made to stock


—Operations & Forecasting

10
Managing Operations
STC Company: PCB Division

11
What is the competitive advantage of STCPCB?
• Fast-responsive, reliable supplier of small orders

• External Environment
• Fragmented structure of PCB Market

• Internal Environment
• Complex workflows & scheduling
• Equipment Flexibility
• Worker skills

12
STC :Current Situation

• Impressive Growth

• A few production issues

• Chasing the order is very effective?

• Is there any problem(s) with STC’s operations strategy

• What are the operational decisions?

13
Process Flow Diagram

Artwork Manual
Drill (7)
Stor
Inspect& Punch tooling Metalize
age
Shear Holes
CNC (1)

Panel Etch & Tin


Laminate Develop Electroplate Strip DFPR Strip
Prep

Punch Press

Inspect,Test
Soldermask Solder Dip ship
Pack

CNC Router Rework

14
Process Flow Diagram
29 /0
15 /40b
Artwork Manual
Drill (7)
10 /0.75
Stor 20 /0.5 10 /0.5
Inspect& Punch tooling Metalize
age 240 /16pa
Shear Holes
CNC (1)

5 /0.2 20 /2 20 /0.2 25 /8.5 5 /0.2 10 /0.2


Panel Etch & Tin
Laminate Develop Electroplate Strip DFPR Strip
Prep
50 /1 b
Punch Press
45 /1.5 30 /0.5 45 /1.5
Inspect,Test
Soldermask Solder Dip ship
Pack
150 /0.5 b
CNC Router Rework

15
Design Decisions
• Process Design
• Equipment selection :degree of automation
• Flexibility with product ranges
• Capacity of operating system as a whole
• Information flow designs

• Operating Decisions
• Order selection
• Loading and scheduling
— When to send an order to shop floor
— To rush an order
— Tukker and work allotment
• Technology Choice

16
Technology Choice
• Drill : Manual Vs CNC Time
• 15+40 B
• 240 + 2 B
• B= 5.975
• CNC Router vs Punch Press
• 150 + 0.5 B
• 50 + B ?
Board/order
• Minimum of 10 boards in CNC drill
• Minimum 200 boards in Router

• What should be the shop floor policy and why?

• IS CNC Drill a Botteleneck?

• What is the capacity utilisation


17
Capacity and Product Mix

Dry Film Photoresist

• What is the Capacity?


• Capacity dependent on order size?
• Calculate the capacity if order size is 1 board?

• What will be the capacity, if order size is 10 boards or 100 boards

Panel
Laminate Develop
Prep

18
Capacity and Product Mix
• Dry Film Photoresist

Panel
Laminate Develop
Prep

Order size Lam& Exp Daily Capacity Daily Capacity


Boards Time in orders in Boards

1 22 21.8 21.8
10 40 12 120
100 220 2.18 218

•Capacity is not an absolute number. It is a result of product mix decisions

19
Labour Time
• Calculate total labour time (per board basis)
• Order size of 1 board
• Order size of 8 boards
• Order size of 40,200 and 800 boards

Order size Technology Setup Run Total Time Time per


Boards Choice Time Time per order Board

1 MD/PP 339 57.55 396.55 396.55


10 CNC/PP 564 336.5 900.5 90.05
100 CNC/PP 564 3365 3929 39.29
200 CNC/CR 664 6630 7294 36.47
1000 CNC/CR 664 33150 33814 33.81
MD : Manual Drill,CNC: CNC Drill, PP :Punch Press,CR: CNC Router

•How will we price the boards?

20
How is STC’s PCB Division Doing?

• What are the problems? Why?

• What are the information flows


• Customer order-to-delivery

• How to address these problems?

21
Financial Performance
Is Financial Performance August September
Satisfactory? Gross Profit 27.2 15.8
Net Profit 14.8 3.1

• Why such dismal performance?


• Increase in Direct Labour and Manufacturing overhead
• Is it because of explosive growth?
• Poorly structured systems?
• New product introductions

22
Information Flow Analysis

Normal
Customer Design Engr Blue print Factory Order Purchasing

Bid Rush Order

Estimate Vendors
Specs Manager1
Sheet
Blue Print
Factory Raw Material
Order
Factory
COO Supervisor
DPR
Small
Sales Manager Orders Batch #

Shop Floor

Tukker

23
Information Flow Analysis

Normal
Customer Design Engr Blue print Factory Order Purchasing

Bid Rush Order

Estimate Vendors
Specs Manager1
Sheet
Blue Print
Factory Raw Material
Order
Factory
COO Supervisor
DPR
Small
Sales Manager Orders Batch #

Shop Floor

Role of Tukker? Tukker

24
Performance Measures and Problems
• Delivery Performance

• Quality Performance

• Productivity

• Financial Performance

25
Delivery Performance
• Delivery Target

• Actual deliveries are 9 days late WHY? What are the implications?

• Rush orders : 4 days avg :2-3/month : Are they the real culprit?
— What percentage of total orders are rush orders?

• Why Delay?
• Lack of material in stock
• Shifting of bottlenecks
• Mistakes
• Interruptions
• Poor information flows

26
Shifting of Bottlenecks
• Degree of variability in orders, routing
• Interruptions due to rush orders
• Tukker & Small rush orders

• Poor information flow


• Delay in reaching the shop floor
• Split set ups
• Spaghetti info flow
• Ticket number on the top rack only

27
Quality Performance
• Internal Rejects : 7%  1.4% total loss & 5.6% rework
• External rejects: 1-3% in Sep 0.6% loss and 2.4% rework

• Total rework : 8.0%


• Interrupt the work
• To tack the lot for blueprints will delay the process

• WHY there are quality problems?


• Deliveries on Sep 29: 44560 (35.694%)
— i.e 21.42 orders or 2056 boards on a day
— Inspection req : 21.42*45 +1.5*2056 = 4059 min i.e 67.65 labour hours
• No inspection or inspection by non-experts

28
Productivity
• September :
• Total hours worked :1531.7 hrs
• Available : 21 * 22* 8 = 3696 hrs i.e productivity 41.44%

• Machine utilisation : CNC Drill ? Metalisation?

• Why Low Utilisation?


• Realistic standards? Anything for rework?
• Material handling :layout?
• Idleness due to confusion and Tukker factor
• Supervision

29
Financial Performance
Is Financial Performance August September
Satisfactory? Gross Profit 27.2 15.8
Net Profit 14.8 3.1

• Why such dismal performance?


• Increase in Direct Labour and Manufacturing overhead
• Is it because of explosive growth?
• Poorly structured systems?
• New product introductions

30
What should we do?

31
Recommendations
• Specific operating Decisions

• Procedural Recommendations

• System Changes

• Strategic decisions

32
Recommendations:Operating

• Buy one more CNC Drill?

• Shop floor policy on drill and router?

• ??

33
Recommendations: Procedural
• Change information flow ? How?

• Removing “hockey stick phenomenon”?

• Tukker?

• ??

34
Recommendations: System Changes
• Scheduling with a “chain” view and change POP

• Modify the standards considering the work pressures?

• Inventory Management

• Achieve synchronisation among operations

35
Product-Process Matrix Analysis
One Low Volume Little Moderate Vol High Volume High Volume
Process Of a Little Standardisation Customised Features Low Variety High Standard
Structure Kind High Variety Multiple Products Few Major prdts Commodity
Project

Job Shop
(General Eqp
Jumbled Flow)

Batch
(Disconnected
Line Flow
Flexible Eqp)

Assembly
(Connected Line
Flow
Specialised Eqp)

Continuous Process
(Dedicated equp
Continuous flow)

Any Misalignment for STCPCB? 36


Recommendations:Strategic
• How to move : Large orders/ Small orders

• Is it necessary?

• Can we have flexibility?

37
Going Back… Synchronizing the Flows

• Two Aspects
• Predicting the demand
• Meeting demand in the most optimised manner

• Forecasting
• Supply (Operations) Management
• Inventory Management
• Production & Scheduling

38
Business Forecasting

39
Overview
• Why Forecasting?
• Changes in Business Environment and relevance of Forecasting
• Characteristics of good forecasts
• Forecasting Techniques
• Time series
• Associative
• Judgmental
• Special Forecasting cases
• Short Life Cycle products /services
— Obermeyer methods
• Advanced Computational methods

40
Why Forecasting?
:Conflicting Objectives?
• “We can’t afford to loose this customer. So let us keep plenty of inventory”
• “We have to set the numbers higher than the last year to show a plan rise”
• “We never trust those sales guys, so we make what we feel they can sell”
• “Our clients doesn’t want their customers to wait in the call centres, so we have enough
manpower to take care of the changes in demand”

Mktg Sales Quota

Oprtns. Prodn. Qty


Capacity

Forecasting creates a natural conflict between sales and operations? 41


Implications of Forecasts?
Cost
• Target Incongruence
• Resource Wastage
— Bullwhip effect
— Inventory Cost
— Delivery delays & backlogs

• Hockey stick effect Mktg


• Promotional Programmes Products,Programs
Mktg Sales Quota
Manufacturing
Inte
Prodn. Plng
grated
Sales Scheduling
Logistics
Forecast Plan
Inv,Warehousing
Prodn Prodn. Qty ning
Transportation
Finance
Capital cost
Op. Cost
42
The Chain Effect of Forecasting

Raw Logistics Assembly Warehouse Logistics


Factory
Material Provider Provider
Lead Time, Rs,

• Stochastic Models ...


• Performance Measures

• Optimization

• Partnership Design
Supplier OEM 43
General Characteristics of All Forecasts

• Assumes causal system


past  future
• Forecast are always WRONG
• Forecasts are rarely perfect because of randomness
• Aggregate Forecasts are more accurate than SKU level forecasts
• Forecast accuracy decreases as time horizon increases

44
Requirements for successful forecasts

• Segmentation Product Groups Customer Class Products


• Product SKU
Groups
Uniqueness
• Customer Geography
Types
Special Characteristics
• Market

• Timing and Responsibility • Annual


• Periodic
• Rolling
• Continuous
• Forecast Performance
• Accuracy
Historical Data Analysis & Judgment
Appropriate Forecasting Technique
Forecasting Errors and Mid-term correction
Product Promotional Activities
Exception Reporting

45
Elements of a Good Forecast

Timely

Reliable Accurate

Written

46
Forecasting Process: Decision Points

Identify Objective
And use of Prepare the
Forecast Forecast

Fix the
Forecasting Period Monitor results relative
To errors, reliability
Need for revision

Select an
Appropriate
Forecasting Approach Make Revisions
When necessary

Collect Data and


Related
Information

47
Forecast Techniques
Identify Objective
And use of Prepare the
Forecast Forecast

Fix the
Forecasting Period Monitor results relative
To errors, reliability
Need for revision

Select an
Appropriate
Forecasting Approach Make Revisions
necessary

Collect Data and


Related

Forecasting
Information

Top-Down Judgmental
Bottom-Up
Causal
Technology
Forecasting

Time Series

Both qualitative and quantitative techniques are used


48
DATA

• Data Sources
• Mature Products
— Internal records
— Secondary sources
- Government
- trade associations
- private companies
—Primary sources

49
Identify Objective
And use of
Prepare the
Forecast Forecast

Fix the
Forecasting Period
Monitor results relative

FORECASTING APPROACHES
To errors, reliability
Need for revision

Select an
Appropriate
Forecasting Approach
Make Revisions
necessary

•Top-Down Approaches vs. Bottom-Up Approaches


Collect Data and
Related
Information

–Bottom-up Approach
•Develop forecasts sales to individual accounts
then combine these account forecasts into
territory, district, region, zone, and company
forecasts.
–Top-Down Approach
•Develop aggregate company forecasts then
breakdown into zone, region, district, territory
and account forecasts.

50
BOTTOM - UP APPROACH

• Jury of Executive Opinion


–Executives of the firm use expert
knowledge to forecast sales to
individual accounts. Use broad range
of functional/product areas.

51
BOTTOM - UP APPROACH

•Survey Buyer Intentions


–Survey individual accounts about their
purchasing plans for the next year -
translate into account forecasts.
•Sales Force Composite Method
–Salespeople forecast their accounts for
next year.

52
Quantitative Approaches

•Naive Forecasts
•Time Series Models
•Moving Averages

•Exponential Smoothing

•Advanced Statistical Techniques

•Linear Regression (Causal)

53
Basic Approach to Forecasting
• Demand 42
Seasonality
$3,000 Additive Seasonal Effects
Heat Pumps Sold
• Dependent 40
Stationary Time Series
Non-Stationary Time Series
$2,500

S a le s (in $ 1 ,0 0 0 s )
• Independent $2,000
38

U n its S o ld
415 36

$1,500
34
395
• Demand Pattern 1
$1,000
2 3
32
4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

375 Time Period

• Stationary $500 Actual Sales

U n its So ld
30
Number of VCRs Sold
355 Multiplicative Seasonal Effects
• Non-stationary
$0
28
1
1 2 33 4 5 56 7 87 9 10 911 12 11
13 14 13 16
15 17 15
18 19 17
20 21 1923
22 24 21
25
Time Period
Time Period
335
• Product Life Cycle
315

295
Heat Pumps Sold
275
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
• Trends 1 3 5 7 9 11
Tim
13
TimeePeriod
Period
15 17 19 21 23

• Seasonality
• Erratic (Random) 54
Naive Forecasts
•The best estimate for the future is the
current level of sales.
–Assumes nothing is going to change
from one period to the next.
•Percentage forecasting error:

forecast - actual
Percentage forecasting error =
actual

55
Time Series Models

Stationary Non-Stationary

Normal Seasonal Linear Seasonal

Additive
Moving Average Seasonal Smoothing
Holt-Winter
Weighted Multiplicative Double Moving
Moving Average Seasonal Smoothing Additive
Average
Seasonal
Exponential Double Smoothing
Smoothing Exponential
Smoothing
(HOLT’s) Holt-Winter
Multiplicative
OLS Regression Seasonal
Models Smoothing
56
Suitability of a Forecasting Method: Performance Indicators

Ft = Forecast for period t


Yt = Actual Demand for period t
Et= (Ft-Yt); the forecast error
N = Number of Periods

 N Et 
  N  
  Et   t 1 Y 
MAPE  100%   t 
MAD/ MAE   t 1 
N
N

 N 2  N 2
  Et    Et 
RMSE   t 1   t 1 
RMSE 
N N
57

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