Key Terms in Operations, Inventory, and Forecasting
Forecasting and Demand
Causal Relationship: A situation in which one event causes another. If the event is far enough in the future, it can be used as a basis for forecasting.
Collaborative Planning, Forecasting, and Replenishment (CPFR): An Internet tool to coordinate forecasting, production, and purchasing in a firm’s supply chain.
Dependent Demand: Requirements for a product or service caused by the demand for other products or services. This type of internal demand does not need a forecast but can be calculated based on the demand for the other products or services.
Independent Demand: Demand that cannot be directly derived from the demand for other products.
Time Series Analysis: A type of forecast in which data relating to past demand are used to predict future demand.
Linear Regression Forecasting: A forecasting technique that assumes that past data and future projections fall around a straight line.
Focus Forecasting: An approach to forecasting in which several different techniques are tried in a computer simulation, and the best technique or combination of techniques is used to make the actual forecast.
Exponential Smoothing: A time series forecasting technique in which each increment of past demand data is decreased by (1 – α).
Smoothing Constant Alpha (α): The parameter in the exponential smoothing equation that controls the speed of reaction to differences between forecasts and actual demand.
Smoothing Constant Delta (δ): An additional parameter used in an exponential smoothing equation that includes an adjustment for trend.
Mean Absolute Deviation (MAD): The average forecast error using absolute values of the error of each past forecast.
Tracking Signal: A measure that indicates whether the forecast average is keeping pace with any genuine upward or downward changes in demand.
Operations Planning
Enterprise Resource Planning (ERP): A computer system that integrates application programs in accounting, sales, manufacturing, and other functions in a firm. This integration is accomplished through a database shared by all the application programs.
Aggregate Operations Plan: Translating annual and quarterly business plans into labor and production output plans for the intermediate term. The objective is to minimize the cost of resources required to meet demand.
Intermediate-Range Planning: Activity that usually covers a period from 3 to 18 months, with weekly, monthly, or quarterly time increments.
Long-Range Planning: Activity typically done annually, focusing on a horizon of a year or more.
Short-Range Planning: Planning that covers a period of less than six months, with either daily or weekly increments of time.
Sales and Operations Planning: A term that refers to the process that helps companies keep demand and supply in balance. The terminology is meant to capture the importance of cross-functional work.
Production Rate: The number of units completed per unit of time.
Workforce Level: The number of production workers needed each period.
Inventory on Hand: Unused inventory carried from a previous period.
Production Planning Strategies: Plans that involve trade-offs among workforce size, work hours, inventory, and backlogs.
Pure Strategy: A plan that uses just one of the options available for meeting demand. Typical options include chasing demand, using a stable workforce with overtime or part-time work, and constant production, with shortages and overages absorbed by inventory.
Mixed Strategy: A plan that combines options available for meeting demand.
Yield Management: Allocating the right type of capacity to the right type of customer at the right price and time to maximize revenue or yield.
Inventory Management
Inventory: The stock of any item or resource used in an organization.
Cycle Counting: A physical inventory-taking technique in which inventory is counted on a frequent basis rather than once or twice a year.
Fixed-Order Quantity Model (or Q-Model): An inventory control model where the amount requisitioned is fixed, and the actual ordering is triggered by inventory dropping to a specified level.
Fixed-Time Period Model (or P-Model): An inventory control model that specifies inventory is ordered at the end of a predetermined time period. The interval of time between orders is fixed, and the order quantity varies.
Inventory Position: The amount on-hand plus on-order minus backordered quantities. In the case where inventory has been allocated for special purposes, the inventory position is reduced by these allocated amounts.