Supply Chain

Management
Session 7

Course Facilitator
Kashif Mahmood

My Expectations from
Students

Honesty
Hard Work
Responsible

Attitude

Review of Previous
Session

Contents of session 6
Lean Manufacturing

Basic elements in lean

manufacturing
Benefits of lean
manufacturing
Integration of lean
manufacturing into
SCM
Success factors for
leanness

Distribution Decisions

Role of distribution in
supply chain

Structure of distribution
channel

Designing distribution
channel

Distribution network in
practice

What we will cover

today ?

Contents of session 7
Different
Linear

QTs used in decision making in SC

programming

Modelling
Queuing
Game

theory

theory

Simulation

3
2
r
e
t
p
a
h
C
Quantitative Techniques in Supply
Chain

Quantitative Forecasting
Methods
Correlation analysis
Time series forecasting models
Cross-impact matrix method
Scenario method

Correlation Analysis

Measure
strength
of
association
between quantitative variables.

For example, we could measure the

degree of relationship between sales(y)
and the corresponding ad spent(x).

Strength of relationship between two

sets of data is usually measured by the
correlation coefficient.

Correlation
Year Promotio Sale
nal
s
expenses

Yea
r

Promoti Sales
onal
expense
s
2001
19
70
200
44
119
6
2002
22
76
200
49
132
7
2003
25
80
200
51
144
8
The correlation coefficient with the above formula
2004 out to
29be 0.96,89
200
155
works
which
means 54
two variables
9
highly correlated.
2005
40
102 201
60
161

Time Series Forecasting

Models
Historical data is explored to find out its
cyclic nature or trends.
Mathematical techniques are then used
to extrapolate to find out the future
value/trends.

Naive Forecasts

Uh, give me a minute....

We sold 250 wheels last
week.... Now, next
week we should sell....
The forecast for any period equals
the previous periods actual value.

Nave Forecasts
Simple

to use
Virtually no cost
Quick and easy to prepare
Data analysis is nonexistent
Easily understandable
Cannot provide high accuracy
Can be a standard for accuracy

Uses for Nave Forecasts

Stable

time series data

F(t) = A(t-1)
Seasonal

variations

F(t) = A(t-n)
Data

with trends

F(t) = A(t-1) + (A(t-1) A(t-2))

Techniques for Averaging

Moving

average

Weighted

moving average

Exponential

smoothing

Moving Averages
Moving

average A technique that

averages a number of recent actual
values, updated as new values become
available.
A +A +A

Ft = MAn=

t-n

t-2

t-1

Weighted

moving average More recent

values in a series are given more weight
in computing the forecast.

Ft = WMAn= wnAt-n + wn-1At-2 + w1At-1

Example of Moving Average

Month

Attendance

Month

Attendance

47

13

44

51

14

57

54

15

60

55

16

55

49

17

51

46

18

48

38

19

42

32

20

30

25

21

28

10

24

22

25

11

30

23

35

12

35

24

38

Compute 3 Months, 5 Months and 7 Months Moving Average and forecast the
attendance for next 6 months.

Simple Moving Average

Actual

MA5

MA3

Ft = MAn=

At-n + At-2 + At-1

n

Exponential Smoothing

Ft = Ft-1 + (At-1 - Ft-1)

Weighted

averaging method based

on previous forecast plus a
percentage of the forecast error
A-F is the error term, is the %
feedback

Example 3
Exponential Smoothing

Forecast demand for 12th period by using smoothing factor or 0.1 and 0.4
Calculate Error term for both cases and select the best smoothing factor

Example 3
Exponential Smoothing
Period

Actual
1
2
3
4
5
6
7
8
9
10
11
12

Alpha = 0.1 Error

42
40
43
40
41
39
46
44
45
38
40

42
41.8
41.92
41.73
41.66
41.39
41.85
42.07
42.36
41.92
41.73

Alpha = 0.4 Error

-2.00
1.20
-1.92
-0.73
-2.66
4.61
2.15
2.93
-4.36
-1.92

42
41.2
41.92
41.15
41.09
40.25
42.55
43.13
43.88
41.53
40.92

-2
1.8
-1.92
-0.15
-2.09
5.75
1.45
1.87
-5.88
-1.53

Picking a Smoothing Constant

Actual

Demand

50

.4

45

.1

40
35
1

Period

9 10 11 12

Linear Trend Equation

Ft

Ft = a + bt
0 1 2 3 4 5

Ft

= Forecast for period t

t = Specified number of time
periods
a = Value of Ft at t = 0
b = Slope of the line

Calculating a and b
n (ty) - t y
b =
n t 2 - ( t) 2

y - b t
a =
n

Linear Trend Equation

Example
Week (t) Sales (y)
1

150

157

162

166

177

Linear Trend Equation

Example
t
W eek
1
2
3
4
5
t = 15
2
( t) = 2 2 5

t
1
4
9
16
25
t

= 55

y
S a le s
150
157
162
166
177

ty
150
314
486
664
885

y = 812

ty = 2 4 9 9

Linear Trend Calculation

5 (2499) - 15(812)
12495-12180
b =
=
= 6.3
5(55) - 225
275 -225

812 - 6.3(15)
a =
= 143.5
5

y = 143.5 + 6.3t

Linear Model
X
7
2
6
4
14
15
16
12
14
20
15
7

Y
15
10
13
15
25
27
24
20
27
44
34
17

Computed
relationship
50
40
30
20
10
0
0

10

15

20

25

A straight line is fitted to a set of sample points.

Forecast Accuracy
Error

- difference between actual value

and predicted value

Mean

Average absolute error

Mean

Absolute Percent Error (MAPE)

Average absolute percent error

Root

Squared Error (MSE)

Average of squared error

Mean

Absolute Deviation (MAD)

Mean Square Error (RMSE)

Square root of average squared errors

MAD, MSE, and MAPE

MAD

Actual

forecast
n

MSE

( Actual

forecast)

MAPE =

Actual forecast
n

/ Actual*100)

Cross-impact Matrix Method

Occurrence of an event can effect the
likelihoods of other events.
Probabilities are assigned to reflect the
likelihood of an event in the presence
and absence of other events.
Helps decision makers to look at the
relationships
between
system
components, rather than viewing any
variable as working independently of
the others.

Scenario Method
Describes
interrelationships
of
all
system components
Scenarios
are
new
technology,
population
shifts
and changing consumer preferences
Expected to forecast that is likely to
happen
Enables the decision makers to organize
resources and decide course of action in
advance

Linear Programming
Its a mathematical method for
determining a way to achieve the best
outcome (such as maximum profit or
lowest cost).
Describe many realistic problems arising
in modern industry.
Largely used in logistics, transportation,
finance, warehousing, etc.

Linear Programming
Structure
Single and well-defined objective with a
set of decision variables (i.e. maximum
profit or minimum cost)
Set of constraints including non-negative
constraints (i.e., representations of a
limited supply of resources)
There exist more than one solution to
the problem (there are infinite number of
solutions)
Objective and constraints are in the form

Applications of LP Models
Product mix problem
Investment problem
Scheduling problem
Transportation problem
Assignment problem

Mathematical Models

Mathematical modelling is most useful

for tactical decision-making, with a
certain time horizon and where certain
level of aggregation of data is possible.

In modelling, the quantification of

certain key elements of cost, or
quantifying the attributes of various
scenarios, is often very useful in
strategic decision-making process.

Models are useful to describe the interrelationships

between
different
quantities of interest and sometimes to

Mathematical Models
Inventory Model
Square Root Law
Warehouse-Cost vs. Area

Limitations of Mathematical
Models
Input data may be uncertain.
Apparent precision of model forecasts
may be misleading.
Usefulness of a model may be limited
by its original purpose.

Queuing Theory
Queue a line of people or vehicles
waiting for something
Queuing Theory Mathematical study of
waiting
lines, using models to show results, and
show opportunities, within arrival,
service, and departure processes

Queuing Problem
Queuing model is relevant in serviceoriented industry such as logistics,
transportation, shipping, hospitality and
banking.
Customer arrives randomly to avail the
service.
Service time is a random variable.
Typical queuing situation: customers
arrive to avail the service at a service
system, enter a waiting line, receive
service, and then leave.

Key Elements of Queuing

Process
Source population
Arrival process
Waiting time
Queuing discipline
Service process
Departure

Game Theory
Powerful tool for analyzing situations in
which the decisions of multiple agents
effects each payoff.
Game theory focuses on how groups of
people interact.
Game theory provides a mathematical
background for modelling the system
and generating solutions in competitive
or conflicting situations.

Simulation
Simulation is a numerical technique for
conducting

experiments

on

digital

computers, which involves certain types of

mathematical

and

logical

relationships

necessary to describe the behaviour and

structure of a complex real world system
over extended period of time.

.T.H.Taylor

Simulation Basic Concepts

System
Decision variables
Environmental
variables
Endogenous variables
Criteria function

Monte Carlo Simulation

Technique

A Monte Carlo method is a technique that

involves using random numbers and
probability to solve problems.
The term Monte Carlo Method was coined
by S.Ulam and Nicholas Metropolis in
reference to games of chance, a popular
attraction in Monte Carlo.
Monte Carlo simulation is a method for
evaluating a deterministic model using
sets of random numbers as inputs.
This method is often used when the
model is complex, nonlinear or involves
more than just a couple uncertain

Review of Todays Session

Contents of session 7
Different
Linear

QTs used in decision making in SC

programming

Modelling
Queuing
Game

theory

theory

Simulation

Next Class Assignment

Written

today

Quiz of Topics Covered

Any Question?