Part A: Question One
Forecasted demand is the size of orders placed on the supplier by the company. Conversely, the actual demand is the size of orders placed by customers. Forecasted demand is netted against the actual demand to estimate the material requirements for a specific period of time. The difference between actual and demand forecast is referred to as forecast error.
Step One: Sum up All Inventory Costs
Transportation cost – 1,500,000
Labor cost – 300,000
Insurance cost – 250,000
Public warehouse storage – 450,000
Obsolescence cost – 90,000
Inventory shrinkage – 10,000
Other transportation cost – 50,000
Total – 2,650,000
Step Two: Divide Inventory Cost by Variable Manufactured Cost
Total Inventory cost = 2,650,000
Variable manufactured cost = 70/100*26,000,000 = 18,200,000
Therefore, 2,650,000/18,200,000 = 0.15 or 15%
Step Three: Add Other Costs
Opportunity cost of capital – 30%
Required rate of return before tax – 30%
Step Four: Inventory Carrying Cost
As a percentage = 30 + 30 + 15= 75%
As a value = 75/100*26,000,000 = 19,500,000
The company should adopt the medium-range planning strategy. Even though the new model is more expensive, brand loyalty for the company’s products will enable it to penetrate the market much easily. The new product will also be produced in an existing plant and share a production line with other products. These logistics will enable the company to introduce their new product into the market within a time horizon of 3 years.
Qualitative and quantitative methods can be used in lifecycle forecasting to predict the anticipated demand of the new model. Demand for new product should exceed that of the existing product that has become less desirable since it has been in the market for many years. Based on demand information from existing model, improved-demand-based forecasting methodology could be used to determine the impact of the new model on sales. Pre-orders placed by customers during the showcase, can also be used to forecast demand. Finally, time series analysis could also be used to forecast demand. The demand of the new convertible model is expected to rise during summer.
Dedicated operation involves a contract with a third-party company tasked with providing necessary distribution facilities and operation services uniquely for its client company. The service provider establishes a specific operation dedicated to a particular customer. Dedicated operation opportunities are normally limited to large companies because of the high cost and scale demanded. Conversely, multi-user operations are mainly outsourced by small-to-medium-size companies. The third-party’s operations are not limited to a single client.
Third-party operators can collect products from consumers and deliver them to the clients for recycling or deposal.
Contractors can offer delivery, refurbishment, installation, disposal, return and repair services to the consumers, on behalf of the client company.
Third-party companies can provide value-added services to their clients by making manufactured products ready for consumption. Such services could include removing packaged items from boxes, cleaning and labeling.
Third-party operators can provide timely delivery of relevant components especially for clients with items that share a production line but are located in different locations.
Contractors can assemble items produced by different clients and repackage them for sale. For example, a service provider could package torches together with batteries.
Unit Price or Fixed Price Agreements
Service providers and clients agree on the unit price to be paid for the services offered. Sum of all operating costs is divided by the number of units to be handled.
Hybrid Unit Price Agreements
To protect the contractor from making losses resulting from demand fluctuations and underutilized resources, a minimum number of items to be handled is agreed upon and used to calculate the unit price.
The clients incur the actual cost of operation. The provider gains profits by charging an extra fee.
Open-Book Contract/ Management Fee
Used in dedicated operations and involves payment for the entire operation and contractor’s management fee by the client.
Specific performance requirements and a fixed-price structure are agreed upon by the client and third-party company. The distinctive feature about this agreement is that it has a lengthy contract period.
Part B: Question One
Causes and Effects of Demand Amplification
Poor inventory management is one of the causes of demand amplification. This is because insufficient record keeping affects the accuracy of demand forecasting. Poor inventory management practices, such as failure to record sales transactions, have resulted to forecasting errors that effect the normal business operations. It might results to inventory problems since the business will order excess inventory. This may result to liquidity problems because of tied-up capital. Product discounting and shrinkage might also threaten a firm’s revenue.
Prevention and Mitigation Measures
Understanding demand patterns. Creating a stable demand pattern might be difficult but it should be the primary objective of a business. Firms should also consider the impact on uncoordinated pricing changes on their demand patterns. Information relating to demand volatility can also be used by the business to determine their production lead time and suppliers’ decoupling point.
Minimizing order to delivery cycle time. Having a short inventory cycle is necessary in order to reduce distortion in demand information. Businesses should supply its consumers with products and services on a timely basis. Quick delivery will also protect a business from incurring losses resulting from obsolete products.
Replace end-period targets and incentives with more effective means of increasing sales. A business can encourage its customers to place early orders to allow pre-building for seasonal peaks. The pre-orders will prevent purchase of excess inventory because the business will order for a specific quantity.
Record sales transactions to measure price sensitivity. Transaction prices for all sales, along with associated discounts, bonuses, delivery dates and trade-in information should be recorded. This information can be used to forecast demand and set prices
Establish an efficient communications channel. Businesses should be able to pass information very quickly to all as customers and suppliers. The occurrence of demand amplification can be prevented if businesses introduce a real-time system to order for supplies. A real-time ordering system will also eliminate any delays between order query, confirmation and acceptance.
Using detailed demand information in forecasting. Information from previous sales can be used to predict prices and product promotion activities. Detailed demand information can also be used to understand order batching, effects of its delay, true demand and forecasting error. The same method in forecasting should be used to create consistency in prediction.
Optimization through Supply Chains
The flow of demand information from consumers to the producers will necessitate the transformation of raw material into finished goods and services. In an end-to-end system, inefficiency in one tire will affect the entire supply chain. This is because inventory in one tire is directly related to the demand transmitted from the next tire in the supply chain. To reduce the cost of inventory in a supply chain with different companies, it is important for demand information to flow effectively and efficiently across the chain, to benefit all players. With the complexity of modern supply chains, the best approach to production is ‘building to customers order.’ Producers should rely on information from other tires within the supply chains to supply goods that meets the demands specified by the consumers. Sufficient flow of demand information across different supply tires will therefore optimize inventory management by reducing the levels of unsold stocks and tied working capital.
Rushton, Alan. Diploma in Logistics Management Module 3: Outsourcing Trends and Best Practice. Oakfield, L.n.: North West Kent College, 2013.
Waller, Ben. Diploma in Logistics Management Module 2: Inventory Management Supply Chain. Oakfield, L.n.: North West Kent College, 2013.
 Alan Rushton, Diploma in Logistics Management Module 3: Outsourcing Trends and Best Practice. (Oakfield, L.n.: North West Kent College, 2013), 14.
 Ben Waller, Diploma in Logistics Management Module 2: Inventory Management Supply Cahin. (Oakfield, L.n.: North West Kent College, 2013), 46.
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