Supply Chain Management

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• Supply Chain Management

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Supply Chain Management

• First appearance Financial Times
• Importance -
• ? Inventory 14 of GDP
• ? GDP 12 trillion
• ? Warehousing/Trans 9 of GDP
• ? Rule of Thumb - 12 increase in sales to 1
  savings in Supply Chain
• 1982 Peter Drucker last frontier
• Supply Chain problems can cause 11 drop in
  stock price
• Customer perception of company

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SCOR
Reference www.supply-chain.org
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Supply Chain

• All activities associated with the flow and
  transformation of goods and services from raw
  materials to the end user, the customer
• A sequence of business activities from suppliers
  through customers that provide the products,
  services, and information to achieve customer
  satisfaction

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Supply Chain

• The global network used to deliver products and
  services from raw materials to end customers
  through an engineered flow of information,
  physical distribution, and cash.
• APICS Dictionary, 10th ed.

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Supply Chain Management

• Synchronization of activities required to achieve
  maximum competitive benefits
• Coordination, cooperation, and communication
• Rapid flow of information
• Vertical integration

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Supply Chain Uncertainty

• Forecasting, lead times, batch ordering, price
  fluctuations, and inflated orders contribute to
  variability
• Inventory is a form of insurance
• Distorted information is one of the main causes
  of uncertainty Bullwhip effect

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Information in the Supply Chain

• Centralized coordination of information flows
• Integration of transportation, distribution,
  ordering, and production
• Direct access to domestic and global
  transportation and distribution channels
• Locating and tracking the movement of every item
  in the supply chain - RFID

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Information in the Supply Chain

• Consolidation of purchasing from all suppliers
• Intercompany and intracompany information access
• Electronic Data Interchange
• Data acquisition at the point of origin and point
  of sale
• Instantaneous updating of inventory levels
• Visibility

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Electronic Business
In Theory

• Replacement of physical processes with electronic
  ones
• Cost and price reductions
• Reduction or elimination of intermediaries
• Shortening transaction times for ordering and
  delivery
• Wider presence and increased visibility

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Electronic Business

• Greater choices and more information for
  customers
• Improved service
• Collection and analysis of customer data and
  preferences
• Virtual companies with lower prices
• Leveling the playing field for smaller companies
• Gain global access to markets customers

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Electronic Data Interchange

• Computer-to-computer exchange of business
  documents in a standard format
• Quick access, better customer service, less
  paperwork, better communication, increased
  productivity, improved tracing and expediting,
  improves billing and cost efficiency

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Bar Codes

• Computer readable codes attached to items flowing
  through the supply chain
• Generates point-of-sale data which is useful for
  determining sales trends, ordering, production
  scheduling, and deliver plans

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IT Issues

• Increased benefits and sophistication come with
  increased costs
• Efficient web sites do not necessarily mean the
  rest of the supply chain will be as efficient
• Security problems are very real camera phones,
  cell phones, thumb drives
• Collaboration and trust are important elements
  that may be new to business relationships

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Suppliers

• Purchased materials account for about half of
  manufacturing costs
• Materials, parts, and service must be delivered
  on time, of high quality, and low cost
• Suppliers should be integrated into their
  customers supply chains
• Partnerships should be established
• On-demand delivery (JIT) is a frequent
  requirement - what is JIT and does it work?

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Sourcing

• Relationship between customers and suppliers
  focuses on collaboration and cooperation
• Outsourcing has become a long-term strategic
  decision
• Organizations focus on core competencies
• Single-sourcing is increasingly a part of
  supplier relations

How does single source differ from sole source?
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E-Procurement

• Business-to-business commerce conducted on the
  Internet
• Benefits include lower transaction costs, lower
  prices, reduce clerical labor costs, and faster
  ordering and delivery times
• Currently used more for indirect goods
• E-Marketplaces service industry-specific
  companies and suppliers

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Distribution

• The actual movement of products and materials
  between locations
• Handling of materials and products at receiving
  docks, storing products, packaging, and shipping
• Often called logistics
• Driving force today is speed
• Particularly important for Internet dot-coms

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Distribution Centers and Warehousing

• DCs are some of the largest business facilities
  in the United States
• Trend is for more frequent orders in smaller
  quantities
• Flow-through facilities and automated material
  handling
• Final assembly and product configuration
  (postponement) may be done at the DC

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Warehouse Management Systems

• Highly automated systems
• A good system will control item slotting, pick
  lists, packing, and shipping
• Most newer systems include transportation
  management (load management/configuration), order
  management, yard management, labor management,
  warehouse optimization

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Vendor-Managed Inventory

• Not a new concept same process used by bread
  deliveries to stores for decades
• Reduces need for warehousing
• Increased speed, reduced errors, and improved
  service
• Onus is on the supplier to keep the shelves full
  or assembly lines running
• variation of JIT
• ProctorGamble - Wal-Mart
• DLA moving from a manager of supplies to a
  manager of suppliers
• Direct Vendor Deliveries loss of visibility

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Collaborative Distribution and Outsourcing

• Collaborative planning, forecasting, and
  replenishment (CPFR) started by Nabisco
• Allows suppliers to know what is really needed
  and when
• Electronic-based exchange of data and information
• Significant decrease in inventory levels and more
  efficient logistics - maybe not!
• Companies work together for benefit of all of the
  supply chain

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Transportation

• Common methods are railroads, trucking, water,
  air, intermodal, package carriers, and pipelines

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Railroads

• 150,000 miles in US
• Low cost, high-volume
• Improving flexibility
• intermodal service
• double stacking

Complaints slow, inflexible, large
loads Advantages large/bulky loads, intermodal
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Award-Winning Service Recognition
United Parcel Service 99.5 failure free, damage
free and on-time rating from United Parcel
Service every year since 1995
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Trucking

• Most used mode in US -75 of total freight (not
  total weight)
• Flexible, small loads
• Consolidation, Internet load match sites
• Single sourcing reduces number of trucking firms
  serving a company
• Truck load (TL) vs. Less Than Truck Load (LTL)

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Air

• Rapidly growing segment of transportation
  industry
• Lightweight, small items
• Quick, reliable, expensive (relatively expensive
  depending on costs of not getting item there)
• Major airlines and US Postal Service, UPS, FedEx,
  DHL

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Package Carriers

• FedEx, UPS, US Postal Service, DHL
• Significant growth driven by e-businesses and
  the move to smaller shipments and consumer desire
  to have it NOW
• Use several modes of transportation
• Expensive - relative!!
• Fast and reliable - relative!!
• Innovative use of technologies in some cases
• Online tracking some better than others

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Intermodal

• Combination of several modes of transportation
• Most common are truck/rail/truck and
  truck/water/rail/truck
• Enabled by the use of containers the
  development of the 20 and 40 foot containers
  significantly changed the face of shipping
• 2 of all US cargo via intermodal

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Water

• One of oldest means of transport
• Low-cost, high-volume, slow (relative)
• Security - sheer volume - millions of containers
  annually
• Bulky, heavy and/or large items
• Standardized shipping containers improve service
• The most common form of international shipping

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Pipelines

• Primarily for oil refined oil products
• Slurry lines carry coal or kaolin
• High initial capital investment
• Low operating costs
• Can cross difficult terrain

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Global Supply Chain

• Free trade global opportunities
• Nations form trading groups
• No tariffs or duties
• Freely transport goods across borders
• Security!!

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Global Supply Chain Problems

• National and regional differences
• Customs, business practices, and regulations
• Foreign markets are not homogeneous
• Quality can be a major issue

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Security

• 10 million containers annually
• Customs-Trade Partnership Against Terrorism
  (C-TPAT)
• Port Security SAFE Ports Act Scanning of all
  Containers
• Cost - 2 billion closing of major port
• 66 of all goods into US comes through 20 major
  ports
• 44 through LA/Long Beach
• Cost of attack on major port estimated at 20
  Billion

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Chapter 11

• Forecasting

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Forecasting Survey

• How far into the future do you typically project
  when trying to forecast the health of your
  industry? ? less than 4 months 3 ? 4-6
  months 12 ? 7-12 months 28 ? gt 12
  months 57

Fortune Council survey, Nov 2005
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Indices to forecast health of industry

• Consumer price index 51
• Consumer Confidence index 44
• Durable goods orders 20
• Gross Domestic Product 35
• Manufacturing and trade inventories and
  sales 27
• Price of oil/barrel 34
• Strength of US 46
• Unemployment rate 53
• Interest rates/fed funds 59

Fortune Council survey, Nov 2005
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Forecasting Importance

• Improving customer demand forecasting and sharing
  the information downstream will allow more
  efficient scheduling and inventory management
• Boeing, 1997 2.6 billion write down due to raw
  material shortages, internal and supplier parts
  shortages Wall Street Journal, Oct 23, 1987

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Forecasting Importance

• Second Quarter sales at US Surgical Corporation
  decline 25, resulting in a 22 mil
  lossattributed to larger than anticipated
  inventories on shelves of hospitals. US Surgical
  Quarterly, Jul 1993
• IBM sells out new Aetna PC shortage may cost
  millions in potential revenue. Wall Street
  Journal, Oct 7, 1994

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Principles of Forecasting

• Forecasts are usually wrong
• every forecast should include an estimate of
  error
• Forecasts are more accurate for families or
  groups
• Forecasts are more accurate for nearer periods.

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Important Factors to Improve Forecasting

• Record Data in the same terms as needed in the
  forecast production data for production
  forecasts time periods
• Record circumstances related to the data
• Record the demand separately for different
  customer groups

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Forecast Techniques

• Extrinsic Techniques projections based on
  indicators that relate to products examples
• Intrinsic historical data used to forecast
  (most common)

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Forecasting

• Forecasting errors can increase the total cost of
  ownership for a product - inventory carrying
  costs
• - obsolete inventory - lack of sufficient
  inventory - quality of products due to
  accepting marginal products to prevent
  stockout

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Forecasting

• Essential for smooth operations of business
  organizations
• Estimates of the occurrence, timing, or magnitude
  of uncertain future events
• Costs of forecasting excess labor excess
  materials expediting costs lost revenues

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Forecasting

• Predicting future events
• Usually demand behavior over a time frame
• Qualitative methods
• Based on subjective methods
• Quantitative methods
• Based on mathematical formulas

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Impact of Just-in-Timeon Forecasting

• Just in time as a inventory method
• Just in time as a Continuous process improvement
  program
• Just in time - one on the shelf
• Usage factors
• Single order vs. Case order

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Strategic Role of Forecasting

• Focus on supply chain management
• Short term role of product demand
• Long term role of new products, processes, and
  technologies
• Focus on Total Quality Management
• Satisfy customer demand
• Uninterrupted product flow with no defective
  items
• Necessary for strategic planning

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Strategic Role of Forecasting

• Focus on supply chain management
• Short term role of product demand
• Long term role of new products, processes, and
  technologies
• Focus on Total Quality Management
• Satisfy customer demand
• Uninterrupted product flow with no defective
  items
• Necessary for strategic planning

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Total Quality Management

• Management approach to long term success through
  customer satisfaction
• Total Quality Control - process of creating and
  producing quality goods and services that meet
  the expectations of the customer
• quality - conformance to requirements or fitness
  for use

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Trumpet of Doom

• As forecast horizon increases, so does the
  forecasting error (i.e., accuracy decreases)
  shorten horizon by shortening of cycles or flow
  times
• Law of Large Numbers as volume increases,
  relative variability decreases forecasting
  error is smaller goal forecast at aggregate
  levels collaborate standardize parts
• Volume and activity increase at end of reporting
  periods Krispy Kreme

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Components of Forecasting Demand

• Time Frame
• Short-range, medium-range, long-range
• Demand Behavior
• Trends, cycles, seasonal patterns, random

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Time Frame

• Short-range to medium-range
• Daily, weekly monthly forecasts of sales data
• Up to 2 years into the future
• Long-range
• Strategic planning of goals, products, markets
• Planning beyond 2 years into the future

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Demand Behavior

• Trend
• gradual, long-term up or down movement
• Cycle
• up down movement repeating over long time frame
• Seasonal pattern
• periodic oscillation in demand which repeats
• Random movements follow no pattern

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Forms of Forecast Movement
Figure 8.1
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Forecasting Methods

• Time series
• Regression or causal modeling
• Qualitative methods
• Management judgment, expertise, opinion
• Use management, marketing, purchasing,
  engineering
• Delphi method
• Solicit forecasts from experts

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Forecasting Process
Figure 8.2
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Time Series Methods

• Statistical methods using historical data
• Moving average
• Exponential smoothing
• Linear trend line
• Assume patterns will repeat
• Naive forecasts
• Forecast data from last period

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Moving Average

• Average several periods of data
• Dampen, smooth out changes
• Use when demand is stable with no trend or
  seasonal pattern
• stock market analysis - trend analysis

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Moving Average

• Average several periods of data
• Dampen, smooth out changes
• Use when demand is stable with no trend or
  seasonal pattern

Sum of Demand In n Periods n
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Simple Moving Average
Example 8.1
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Simple Moving Average
DaugDsepDoct
MAnov
110 orders for Nov
Example 8.1
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Simple Moving Average
Example 8.1
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Simple Moving Average
91 orders for Nov
Example 8.1
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Simple Moving Average
Example 8.1
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Smoothing Effects
Figure 8.2
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Smoothing Effects
Figure 8.2
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Smoothing Effects
Figure 8.2
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Smoothing Effects
Figure 8.2
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Weighted Moving Average

• Adjusts moving average method to more closely
  reflect data fluctuations

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Weighted Moving Average

• Adjusts moving average method to more closely
  reflect data fluctuations

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Weighted Moving Average Example
Example 8.2
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Weighted Moving Average Example
3 Month 110 5 month 91
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Exponential Smoothing

• Averaging method
• Weights most recent data more strongly
• Reacts more to recent changes
• Widely used, accurate method

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Exponential Smoothing
Ft 1 ??Dt (1 - ?)Ft where Ft 1 forecast
for next period Dt actual demand for present
period Ft previously determined forecast for
present period ?? weighting factor, smoothing
constant

• Averaging method
• Weights most recent data more strongly
• Reacts more to recent changes
• Widely used, accurate method

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Forecast for Next Period

• Forecast (weighting factor)x(actual demand for
  period)(1-weighting factor)x(previously
  determined forecast for present period)

0 gt ? lt 1
Lesser reaction to recent demand
Greater reaction to recent demand
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Exponential Smoothing
Example 8.3
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Exponential Smoothing
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Exponential Smoothing
Example 8.3
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Exponential Smoothing
Example 8.3
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Linear Trend Line
y a bx where a intercept (at period
0) b slope of the line x the time
period y forecast for demand for period x
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Seasonal Adjustments

• Repetitive increase/ decrease in demand
• Use seasonal factor to adjust forecast

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Seasonal Adjustments

• Repetitive increase/ decrease in demand
• Use seasonal factor to adjust forecast

demand for period/sum of demand
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Seasonal Adjustment
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Seasonal Adjustment
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Seasonal Adjustment
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Seasonal Adjustment
Forecast for 1st qtr 2002
Forecast for 2002 using simple 3 year moving ave
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Forecast Accuracy

• Find a method which minimizes error
• Error Actual - Forecast
• Mean Absolute Deviation (MAD)

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Mean Absolute Deviation (MAD)
where t the period number Dt demand
in period t Ft the forecast for period t
n the total number of periods ???? the
absolute value
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Forecast Control

• Reasons for out-of-control forecasts
• Change in trend
• Appearance of cycle
• Weather changes
• Promotions
• Competition
• Politics

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Tracking Signal

• Tracking Signal establishes control limits -
  usually /- 3 MAD
• The greater the tracking signal the more the
  demand exceeds the forecast
• Sum(Demand-Forecast)/Mean Absolute Deviation
• Sometimes called Running Sum of Forecasting Error

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Tracking Signal

• Compute each period
• Compare to control limits
• Forecast is in control if within limits

Use control limits of /- 2 to /- 5 MAD
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Tracking Signal Values
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Tracking Signal Values
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Tracking Signal Values
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Forecasting

• Long Term location, capacity, new product
  design
• Short Term production, inventory control, labor
  levels, cost controls

Questions?
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Next Class After your Break

• Chap 6
• Chapter 12
• The Beer Game