2012

MANAGEMENT DEVELOPMENT INSTITUTE GURGAON

Post Graduate Program in Management (PGPM): 2012-14 Term: II (Oct-Dec, 2012)

Operations Management-I
Submission Date: nd 22 Dec 2012

Minor Project

Weightage: 10%

Cloud Computing in Supply Chain Management

12P049 Sidhant Gupta 12P050 Sourabh Inani

Acknowledgement
We would like to extend our heartfelt thanks to Dr. Manoj K. Srivastava for giving us the opportunity to work on a challenging topic such as this and guiding us throughout. Though We faced a lot of difficulties in narrowing down our scope to be able to cover under this project, we were given some helpful ideas which gave us a direction to work in. This project has increased our understanding of cloud computing and forecasting.

Table Of Contents Contents

Acknowledgement ........................................................................................................................................ 2 Table Of Contents ......................................................................................................................................... 3 Abstract ......................................................................................................................................................... 4 Literature Review .......................................................................................................................................... 5 Cloud Computing ...................................................................................................................................... 5 Different Types Of Cloud Computing ........................................................................................................ 7 Infrastructure as a service (IaaS) ..................................................................................................... 7 Platform as a service (PaaS) ............................................................................................................ 7 Software as a service (SaaS) ........................................................................................................... 8 Network as a service (NaaS) ............................................................................................................ 8 Why cloud computing? .............................................................................................................................. 9 Challenges for cloud computing ....................................................................................................... 9 Different successes with cloud ....................................................................................................... 12 Forecasting................................................................................................................................................ 13 Types of forecasting............................................................................................................................. 14 Qualitative forecasting ..................................................................................................................... 14 Quantitative forecasting................................................................................................................... 14 Measures of Forecast accuracy ......................................................................................................... 16 Evaluating Whether the model being used gives Good forecast or Not ? ................................. 18 Tracking Signal ................................................................................................................................. 18 Moving Average Forecasting .................................................................................................................. 19 Is the model good enough ? ............................................................................................................... 20 References .................................................................................................................................................. 21

Abstract
Today, irrespective of industry, corporations must focus on speed, efficiency and customer value to be globally competitive. But most of all, the companies should focus on technological innovation to keep ahead of their competitors. Cloud Computing Techniques have recently taken the software world by storm and have been on top of every software makers wishlist. Cloud computing helps to reduce capital expenditures for an organization giving it the flexibility to feed inputs from any location to determine the best possible forecast.

This project aims to establish the benefits of cloud computing in supply chain management and understand different types of forecasting, What is a good forecast and evaluating whether the forecast model gives a good forecast. We have also developed a prototype model of Moving Average Method which forecasts the expected demand using the inputted data, calculating the performance of forecast model.

Literature Review
Cloud Computing
Cloud computing is the use of computing resources (hardware and software) that are delivered as a service over a network (typically the Internet). The name comes from the use of a cloudshaped symbol as an abstraction for the complex infrastructure it contains in system diagrams. Cloud computing entrusts remote services with a user's data, software and computation. In the business model using software as a service (SaaS), users are provided access to application software and databases. The cloud providers manage the infrastructure and platforms on which the applications run. SaaS is sometimes referred to as on-demand software and is usually priced on a pay-per-use basis. SaaS providers generally price applications using a subscription fee.

Experts claim that the SaaS allows a business the potential to reduce IT operational costs by outsourcing hardware and software maintenance and support to the cloud provider. This enables the business to reallocate IT operations costs away from hardware/software spending and personnel expenses, towards meeting other company goals. In addition, with applications hosted centrally, updates can be released without the need for users to install new software. One drawback of SaaS is that the users' data are stored on the cloud providers server. As a result, there could be unauthorized access to the data. End users access cloud-based applications through a web browser or a light-weight desktop or mobile app while the business software and user's data are stored on servers at a remote location. Proponents claim that cloud computing allows enterprises to get their applications up and running faster, with improved manageability and less maintenance, and enables IT to more rapidly adjust resources to meet fluctuating and unpredictable business demand.

Cloud computing relies on sharing of resources to achieve coherence and economies of scale similar to a utility (like the electricity grid) over a network. At the foundation of cloud computing is the broader concept of converged infrastructure and shared services.

Different Types Of Cloud Computing

Some of the types of Cloud Computing are: Infrastructure as a service (IaaS) Platform as a service (PaaS) Software as a service (SaaS) Network as a service (NaaS)

Infrastructure as a service (IaaS)

In this most basic cloud service model, IaaS providers offer computers, as physical or more often as virtual machines, and other resources. The virtual machines are run as guests by a hypervisor. Pools of hypervisors within the cloud operational support system support large numbers of virtual machines and the ability to scale services up and down according to customers' varying requirements. Sometimes, additional services offered by the IaaS cloud includes images in a virtual machine image library, raw (block) and file-based storage, firewalls, load balancers, IP addresses, virtual local area networks (VLANs), and software bundles. IaaS cloud providers supply these resources on demand from their large pools installed in data centers. For wide area connectivity, the Internet can be used orin carrier clouds -- dedicated virtual private networks can be configured. To deploy their applications, cloud users install operating system images and their application software on the cloud infrastructure. In this model, it is the cloud user who is responsible for patching and maintaining the operating systems and application software. Cloud providers typically bill IaaS services on a utility computing basis, that is, cost reflects the amount of resources allocated and consumed. Examples of IaaS providers include Amazon CloudFormation, Amazon EC2, Windows Azure Virtual Machines, DynDNS, Google Compute Engine, HP Cloud, Joyent, Rackspace Cloud, ReadySpace Cloud Services, and Terremark.

Platform as a service (PaaS)

In the PaaS model, cloud providers deliver a computing platform typically including operating system, programming language execution environment, database, and web server. Application developers can develop and run their software solutions on a cloud platform without the cost and complexity of buying and managing the underlying hardware and software layers. With some PaaS offers, the underlying computer and storage resources scale automatically to match application demand such that cloud user does not have to allocate resources manually. Examples of PaaS include: Amazon Elastic Beanstalk, Cloud Foundry, Heroku, Force.com, EngineYard, Mendix, Google App Engine, Windows Azure Compute and OrangeScape.

Software as a service (SaaS)

In the SaaS model, cloud providers install and operate application software in the cloud and cloud users access the software from cloud clients. The cloud users do not manage the cloud infrastructure and platform on which the application is running. This eliminates the need to install and run the application on the cloud user's own computers simplifying maintenance and support. What makes a cloud application different from other applications is its scalability. This can be achieved by cloning tasks onto multiple virtual machines at run-time to meet the changing work demand. Load balancers distribute the work over the set of virtual machines. This process is transparent to the cloud user who sees only a single access point. To accommodate a large number of cloud users, cloud applications can be multitenant, that is, any machine serves more than one cloud user organization. It is common to refer to special types of cloud based application software with a similar naming convention: desktop as a service, business process as a service, test environment as a service, communication as a service. The pricing model for SaaS applications is typically a monthly or yearly flat fee per user, so price is scalable and adjustable if users are added or removed at any point. Examples of SaaS include: Google Apps, Microsoft Office 365, and Onlive.

Network as a service (NaaS)

A category of cloud services where the capability provided to the cloud service user is to use network/transport connectivity services and/or inter-cloud network connectivity services. NaaS involves the optimization of resource allocations by considering network and computing resources as a unified whole. Traditional NaaS services include flexible and extended VPN, and bandwidth on demand. NaaS concept materialization also includes the provision of a virtual network service by the owners of the network infrastructure to a third party (VNP VNO).

Why cloud computing?

The cloud computing industry is expected to grow to 109 billion dollars from 91.4 billion dollars last year registering a growth of 19.6% according to Gartner estimates. According to Eschinger estimates The market for subscription-based supply chain services is growing at about 20% a year. Cloud computing is an attractive idea for mid-market companies as They save on capital expenditures of investing in a full-blown, on-premise software installation. They receive the following benefits from cloud computing 1. Requirement of fewer internal IT resources which allows them the leeway to focus on their core competenices 2. Faster implementation times 3. Offsite software maintenance and updates The total size of middle-market companies (generally revenues between 100 mn USD to 1 bn USD) is equal to Fourth largest economy of the world!

Challenges for cloud computing

The benefits of cloud computing also invite challenges regarding trust ,performance, adaptation. 1. Security : One of the prime concerns of customers is regarding Data theft on cloud infrastructure. Cloud security architecture is only effective if the correct defensive implementations are in place. An efficient cloud security architecture should recognize the issues that will arise with security management. The security management addresses these issues with security controls. These controls are put in place to safeguard any weaknesses in the system and reduce the effect of an attack. While there are many types of controls behind a cloud security architecture, they can usually be found in one of the following categories: Deterrent Controls : These controls are set in place to prevent any purposeful attack on a cloud system. Much like a warning sign on a fence or a property, these controls do not reduce the actual vulnerability of a system.

Preventative Controls : These controls upgrade the strength of the system by managing the vulnerabilities. The preventative control will safeguard vulnerabilities of the system. If an attack were to occur, the preventative controls are in place to cover the attack and reduce the damage and violation to the system's security. Corrective Controls : Corrective controls are used to reduce the effect of an attack. Unlike the preventative controls, the corrective controls take action as an attack is occurring. Detective Controls : Detective controls are used to detect any attacks that may be occurring to the system. In the event of an attack, the detective control will signal the preventative or corrective controls to address the issue. Manufacturers need to make sure that cloud computing companies meet industry standards for security such as ISO 27001. 2. Legal Issues : Numerous regulations pertain to the storage and use of data, including Payment Card Industry Data Security Standard (PCI DSS), the Health Insurance Portability and Accountability Act (HIPAA), the Sarbanes-Oxley Act, among others. Many of these regulations require regular reporting and audit trails. Cloud providers must enable their customers to comply appropriately with these regulations. 3. Reliability : The cloud computing offering services have to make sure that they have redundant backups because for a 99% uptime The downtime is 3.65 days per year OR 7.20 hours in a month. As Bob Parker, group vice president of research for IDC Manufacturing Insights puts it : If Salesforce.com goes down for two hours, your salespeople will be inconvenienced, but it is not necessarily going to bring your company to its knees, said Bob Parker, group vice president of research for IDC Manufacturing Insights. But if you cant send invoices or process orders for half a day, youve got a different issue. 4. Customization :

Because users typically share the same instance of cloud computing software, the application may not be as customizable as on-premises software or traditional hosted ERP.

Different successes with cloud

Below is a list of SCM software suppliers.

Cloud computing is focus of nearly all the top 20 SCM software suppliers. Some such as SAP are focussing on private cloud while others such as IBM on public cloud network, But nearly all are focussed on increasing share of revenues derived from cloud computing.

According to ARC Advisory Group study: Transportation Management System (TMS) derived nearly 25% of revenues from public or private cloud service Warehouse Management Systems (WMS) derived only 3% of revenue from cloud offerings This difference is mostly due to established Enterprise Resource Planning Vendors like Oracle and SAP integrating Warehouse Management Solutions in their products, exposing their APIs and providing integration hooks. But still for new businesses it is much cheaper to purchase SaaS WMS per warehouse at 500$ per month than invest Hundred thousand dollars and more in traditional WMS systems.

Forecasting
Forecasting is simply estimating future value of any variable. The variable can be demand for goods, supply for goods, prediction of share prices. General laws of forecasting: 1. Forecasting involves risk : 2. Forecasting provides a future value which may exceed the actual value or be less than the actual value. 3. Forecast are generally more accurate in near term than long term : The longer the duration of prediction, the more difficult it becomes to predict the demand because of increasing number of factors. 4. Forecast can never be substitute for calculated value : If a company can get actual data for expected demand through efficient IT use. It would not need forecasting. If forecasting does not give exact value, Why forecast? Forecasting is done because it reduces inventory costs as a reward for risks. Thus forecasting cost should be always less than the risks involved. So Managers are deeply focussed on Returns on Investments made in forecasting.

Types of forecasting
The two main types of forecasting are 1. Qualitative forecasting 2. Quantitative forecasting

Qualitative forecasting
Qualitative forecasting is subjective in nature, taking into account the views of consumers and experts. It is most appropriate when past data is not available. Example of Qualitative forecasting is Delphi Method, Market research.

Quantitative forecasting
Quantitative forecasting is an objective method based on availability of numerical past data to forecast future value. Some of the common methods of quantiative forecasting are : 1. 2. 3. 4. 5. Moving Average Weighted Moving Average Exponential Smoothing, Linear Regression Multiple Regression

The appropriateness of method depends on the value to be forecasted. If value to be forecasted is dependent on time. Time series models are useful. If the value to be forecasted is dependent on value of factors other than time and present in Historical data. Causal models such as Linear regression and multiple regression are useful.

Measures of Forecast accuracy

Since forecasting is generally inaccurate. It begs to question : How accurate is forecasting ? to measure its performance. 1. Error: Error of forecast is defined as et = At - Ft Where et = Error At = Actual Demand Ft = Forecasted demand

2. Mean Forecast Error : Mean forecast error is average of forecast errors for the n observations taken.

Ideal value MFE > 0, model MFE < 0, model tends to over-forecast 3. Mean Absolute Deviation (MAD) :

tends

= to

0; under-forecast

Mean Absolute Deviation is average of magnitude observations taken.

of forecast errors for the n

While MFE is a measure of forecast model bias, MAD indicates the absolute size of the errors

Illustration Period 3 4 5 6 7 8 Demand Forecast Error 11 9 10 8 14 12 13.5 13 10 9.5 9 11 -2.5 -4 0 -1.5 5 1 -2 Absolute Error 2.5 4 0 1.5 5 1 14

Number of observations = 6 Mean forecast error = -2/6 = -0.33 Mean Absolut Deviation = 14/6 = 2.33 Conclusion: Model tends to slightly over-forecast, with an average absolute error of 2.33 units.

Evaluating Whether the model being used gives Good forecast or Not ?
A forecast model is good enough OR not can be determined by computing the tracking signal.

Tracking Signal

A forecast can be called good in statistical terms if In Statistical Process Control, people study when a process is going out of control and needs intervention. Tracking signal checks if the forecast extent to which under predicts or over predicts demand because in that case even after keeping some buffer for variation in forecast the firm would find its warehouses increasingly falling short or exceeding capacity. If Tracking signal is above 3.75 or less than -3.75 the system is consistently overforecasting or underforecasting. Illustration :

Why this figure 3.75? At a promised service level of 99% (i.e. 3 sigma level) the error rate is magnitude is 3.75 times Mean Absolute Deviation. Thus Tracking level should be between +3.75 and -3.75 for a good forecast.

Moving Average Forecasting

Moving Average model takes the average of several periods of data. It is used when demand is stable and there is no evidence of a trend or seasonal pattern. For example : It can be used to forecast demand for soaps.

Lets suppose the data set below:

Description: 1. Month and Demand : Month and Demand column give the actual value of forecast for the month.

2. 3 month MA :The forecasting is done by taking past 3 months moving average (as shown in third column) 3. Error : The Error column gives the error made by forecast given by the formula : Error = Actual Demand 3 month Moving Average 4. Absolute Error : The Absolute error column gives the magnitude of error. It is used in calculation of Mean Absolute Deviation. 5. Mean Forecast error : The Mean Forecast error gives the direction of forecasting. It is given by the formula : Mean Forecast error = Sum of errors / Number of observation If the value is negative the model overforecasts and if its positive the model underforecasts. In our case Mean Forecast error = (-19 + -7 + 39 + 13 + 8 + -30 + -10 + -12 + -1) / 9 = -2 Thus the model tends to over-forecast. 6. Mean Absolute Deviation : Mean Absolute Deviation = (19 + 7 + 39 + 13 + 8 + 30 + 10 + 12 + 1) / 9 = 15 Thus the average size of overcast is 15 units.

Is the model good enough ?

To find whether the model is good enough, We calculate tracking signal Tracking signal = -2 / 15 = - 0.13 Since the magnitude of tracking signal is less than 3.75. The model is good enough.

References
http://www.logisticsmgmt.com/article/supply_chain_technology_will_wms_take_over_the_world/ accessed

on 11/12/2012 11:00 PM
http://www.shmula.com/introduction-to-forecasting/307/ accessed on 11/12/2012 12:15 PM

http://scm.ncsu.edu/scm-articles/article/measuring-forecast-accuracy-approaches-to-forecasting-a-tutorial

accessed on 11/12/2012 12:30 PM

http://searchmanufacturingerp.techtarget.com/news/1362348/Some-manufacturers-giving-SaaSwarehouse-management-systems-a-shot accessed on 12/12/2012 10:00 PM

http://www.forecastingblog.com/?p=39 accessed on 12/12/2012 10:30 PM

http://articles.economictimes.indiatimes.com/2012-09-18/news/33926226_1_cloud-servicesiaas-market-services-market accessed on 14/12/2012 9:00 PM http://www.shmula.com/forecasting-unweighted-and-weighted-moving-average-model/308/ accessed on 14/12/2012 10:00 PM