Forecast Errors and Aggregate Planning - Introduction to Operations Management - Lecture Slides, Slides of Production and Operations Management

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Forecast Errors and Aggregate Planning

Air Alberta revisited: recap Mountain Wear revisited: using safety stock to hedge against uncertain demand

Q 1

Given the Efficient Frontier depicted below, which firm, “A”

“B” or “C” has a competitive advantage?

A

B C

Short Answer

Many government contracts are awarded to the lowest bidder. The government agency will put out for bid the specifications required to meet the contract. If your product does better than the specifications it doesn’t benefit you, the contract goes to the lowest bidder among those who can meet the specifications_._ As discussed in class, price is the order winner. Meeting the specifications is an example of an order ________ (one word).

Q 10

• You need to decide how much inventory to order each day for your company. Your company buys inventory for $3/$7 per unit. They sell it for $10 per unit. If demand equals or exceeds the amount you ordered, everything you order is sold. Inventory is perishable; any inventory left over immediately becomes obsolete and is disposed of at no cost. Leftover inventory has no value. It cannot be saved to be used in later periods. Demand is random between 50 and 150 units per day, and every value in that range is equally likely (uniformly distributed.) You order inventory in packs of 10, full packs only. Forty days of simulated demand are given in the excel file.

Air Alberta Recap

• Identify uncertainty in input data
  • Attrition is highly uncertain
• Identify “lever” to hedge against

uncertainty

• Lever: % safety capacity
• Generate multiple plans by “turning the

lever”

• Vary the % safety capacity, run solver for each value

Air Alberta Recap

• Evaluate each plan
  • Compute total staffing cost
  • Use simulation to estimate average total shortage
• Generate trade-off curve
  • Plot total staffing cost vs. average total shortage
• Decide on a plan

Let’s do the same for Mountain Wear:

• Identify uncertainty in input data
  • Demand forecasts are likely to be uncertain
  • Assumption 1: actual demand is normally distributed, with mean = point forecast and std. dev. = SQRT(point forecast)
  • Assumption 2: demand that is not satisfied is lost
• Identify “lever” to hedge against uncertainty
  • Safety stock = minimum planned inventory level
• Generate multiple plans by “turning the lever”
  • Vary safety stock, run solver for each value

Mountain Wear

• Evaluate each plan
  • Use simulation to estimate: avg. total inventory cost and avg. total lost demand
• Generate trade-off curve
  • Plot avg. total inv. cost vs. avg. total lost demand
• Decide on a plan