Bill Drake March 14, PDF Free Download

SUPPLY CHAIN SIMULATION Bill Drake March 14, 2013

Agenda I. Introduction and Objectives (15 minutes) II. Playing the Game description of game and rules (15 minutes) trial (example) rounds (15 minutes) break (5 minutes) playing the game (25 rounds) (60 minutes) half-time break (5 minutes) playing the game (25 rounds) & summary reporting (60 minutes)

GMA Meta-Study OOS Extent OOS Causes Retailer shelving and replenishment practices 28% Upstream causes 25% 47% Store ordering and forecasting Grocery Manufacturers of America

Out-of-Stock Effects Retailer Sales Loss Risk: Delayed purchase Purchase lower priced substitute Canceled purchase Purchase at another store Supplier Sales Loss Risk: Delayed purchase Cancelled purchase Substitute

Out-of-Stock Effects Long-Term Behavioral Changes: STORE Switching BRAND Switching

Substitution. 21% Brand switch 22% Delayed purchase... 16% No purchase. 11% STORE SWITCH 31%

The Bottom Line. OOS typical retailer loses 4% of sales to OOS

The creation of shareholder value is increasingly dependent on the competitiveness of the supply chain

VS.

Today s Objectives: Gain first-hand experience in the difficulties of managing inventories within a simple supply chain Illustrate the effects of individual supply chain participant s decisions on overall supply chain performance Discuss learnings within context of real world supply chain management

Method Simulation of a simple supply chain Management Flight Simulator - experiential learning - time compression so that we may see and experience the long-term consequences of our actions Game developed by MIT s Sloan System Dynamics Group Simulator consists of simplified supply chain - single supplier, single customer - no ordering cost, no transportation cost - no price fluctuations - no capacity restrictions

The Game Board Orders Sold to Customers Raw Materials Used Order Cards Orders Placed Inc. Orders Orders Placed Inc. Orders Orders Placed Inc. Orders Prod. Requests Production Delay Order Cards Production Delay Retailer Wholesaler Distributor Factory Current Inventory Ship Delay Ship Delay Current Inventory Ship Delay Ship Delay Current Inventory Ship Delay Ship Delay Current Inventory The Production-Distribution Game The System Dynamics Society

Basic Rules Teams consist of 5-6 individuals and 4 stages: - manufacturer(brewery) - wholesaler - distributor - retailer One team per board (Supply Chain) Object of the game is minimize cost for your team. The team with the lowest total cost at the end of the game wins COSTS Inventory = $.50 per case per week Out-of-stocks (backlogs) = $1.00 per case per week Game consist of 50 rounds. round = week

Basic Rules (cont.) Jointly develop a team name, and individually record your team name and position on your green record sheet. Each stage will be recording your activity throughout the game. NO COMMUNICATION BETWEEN STAGES OTHER THAN THROUGH THE WRITTEN TRANSMISSION AND RECEIPT OF ORDERS YOU MAY COMMUNICATE WITH YOUR STAGE PARTNER NO COMMUNICATION WITH OTHER TEAMS DO NOT ATTEMPT TO READ OTHERS ORDER CARDS End-consumer demand is known only to the retailers We will call out steps to maintain synchronization

Steps in Each Round Retailer/Wholesaler/Distributor Factory Exceptions 1. Receive inventory and advance shipping Advance Production Delay delay (move chips to the left) 2. Read incoming order Read Order, not Production Discard incoming order (face down) Request FILL ORDER (move chips to the left) - fill backlog in addition to order - if insufficient inventory, add deficit to backlog 3. Record inventory OR backlog (can t have both!!!) 4. Advance the order slips to the right Read & discard Production Request, brew beer, and put inventory (chips) in first Production Delay box 5. Place and record orders Place and record Production Request

Steps in each round: Action Ret/Whol/Dist Factory 1. Receive inventory Current Inventory Shipping Delay 1 Current Inventory Prod n Delay 1 2. Advance delay Shipping Delay 1 Shipping Delay 2 Prod n Delay 1 Prod n Delay 2 3. Read order Incoming Order UPPER LEFT Incoming Order 4. Fill order Shipping Delay 2 Current Inventory Shipping Delay 2 Current Inventory 5. Record inventory or backlog 6. Move order slips to right / brew Orders Placed Incoming Order Production Request Prod n Delay 2 7. Place new order and record Orders Placed UPPER RIGHT Production Request

Basic Rules (cont.) Shipments to downstream customers CANNOT be larger than demand Shortages (backlogs) must be filled when beer is available Orders to fill = incoming orders + backlog If sufficient inventory exists, ship the entire order (current order + backlog) and record new inventory level If inventory is not enough to satisfy entire order, ship what you can and add the unfilled order quantity to the backlog. Record the new backlog.

Examples Scenario 1: 16 in Current inventory Received order for 4 Action: Ship 4 cases of beer New inventory = 12 Inventory Record this Inventory on your Record Sheet

Examples (cont.) Scenario 2: 8 in Current inventory Received order for 12 Action: Ship 8 cases of beer New inventory = -4 (backlog) Inventory Record this Inventory on your Record Sheet Satisfy this backlog in the next/subsequent rounds

Examples (cont.) Scenario 3: 14 in Current inventory Received order for 2 Backlog of 20 (i.e. Inventory = -20) Total Order = 20 + 2 = 22 Action: Ship 14 New inventory = -8 (backlog) Inventory Record this Inventory on your Record Sheet

Examples (cont.) Scenario 4: 20 in Current inventory Received order for 5 Backlog of 10 (i.e. Inventory = -10) Total Order = 10 + 5 = 15 Action: Ship 15 New inventory = 5 (Physical inventory) Inventory Record this Inventory on your Record Sheet

Discussion

Supply Chain Decision-Making Framework Competitive Strategy Supply Chain Strategy Efficiency Responsiveness Supply Chain Structure Inventory Transportation Facilities Information

Product Proliferation Climate Shrinking Product Life Cycles Competitive Strategy Efficiency Supply Chain Strategy Supply Chain Structure Responsiveness Globalization Inventory Transportation Facilities Information Sophisticated, More demanding customers Fragmentation of Supply Chain Ownership

Theoretically.. * Modeling Managerial Behavior: Misperceptions of Feedback In a Dynamic Decision Making Experiment (Sterman, 1989)

The Simulation Experience Feelings Attitudes Perceptions Relationships

The Bullwhip Effect Order variabilities are amplified as they move up the supply chain

The Bullwhip Effect What causes the fluctuations? What about the commonalities between teams? How could performance be improved?

Different people in the same structure produce qualitatively similar results. While differences in individual ordering patterns determine the quantitative results, the overall patterns of behavior are similar

35 37 33 31 29 15 17 19 21 23 25 27 40 35 30 25 20 15 10 5 0 Orders Factory Customer 5 7 9 11 13 3 1

The bullwhip effect is a consequence of rational behavior within the supply chain infrastructure

Rational Behavior Produces Unexpected Results..

Behavior is Influenced by Structure

Efforts to control the bullwhip effect and improve overall supply chain performance must focus on structure and process rather than behavior

Bullwhip Effect: Consequences Demand Variability?????

Bullwhip Effect: Consequences Demand Variability increased manufacturing cost (cost of flexibility in inventory or capacity) increased supply chain Inventory longer replenishment lead times out of stocks increased transportation cost (cost of flexibility)

Demand Forecast Updating Rationing and Shortage Gaming The Bullwhip Effect Order Batching Price Fluctuations

Demand Forecast Updating Links in the supply chain view incoming orders as a signal about future product demand Forecasting is based on the order history from the company s immediate customers

Demand Forecast Updating The Bullwhip Effect 40 36 Variation in demand increases with movement up the supply chain 15 Amplification is internally generated 8 0 4 4 4 Consumer Demand Retailer Demand Manufacturer Demand Demand Per Period

Demand Forecast Updating Rationing and Shortage Gaming The Bullwhip Effect Order Batching Price Fluctuations

Order Batching caused by fixed costs associated with placing, receiving or transporting an order result: order stream is more erratic than demand stream effect often magnified by artificial time constraints (e.g. monthly quotas, etc )

Demand Forecast Updating Rationing and Shortage Gaming The Bullwhip Effect Order Batching Price Fluctuations

Price Fluctuations In response to trade promotions or short-term discounts, retailers/wholesalers FORWARD BUY Forward Buy constitutes $75 billion to $100 billion in inventory in the U.S. grocery industry, and accounts for a majority of the transactions between manufacturers and retailers/wholesalers.

Price Fluctuations Forward buying and other promotion-based buying create huge order variability, with orders not reflective of demand Wal-Mart vs. Target (EDLP) (High-Low)

Base vs. Promotional Volume 3500 3000 2500 2000 1500 1000 500 0 1 11 21 31 41 51 61 71 81 91 101 111 121 Base Incremental Copyright IRI, 2005. Confidential and proprietary.

Rationing & Shortage Gaming Demand Forecast Updating The Bullwhip Effect Order Batching Price Fluctuations

Rationing and Shortage Gaming Manufacturers ration product when demand exceeds supply Common rationing scheme is to allocate in proportion to amount ordered Downstream response is often to exaggerate real needs in shortage situations, and cancel order if product becomes available This gaming results in fluctuations in orders, and suppliers have little information on real demand

Managerial Levers to Achieve Supply Chain Coordination functional synchronized with corporate Alignment of Goals and Incentives focus on profit impact avoid local perspective sales force incentives based on sell-through data synchronization Improve Information Accuracy shared data collaborative planning, forecasting and replenishment (CPFR) single stage control of replenishment - continuous replenishment (CRP) - vendor managed inventories (VMI)

CPFR Collaborative Planning, Forecasting and Replenishment INFORMATION SUPPLIER RETAILER CONSUMER PRODUCT PROCESS: - create plan - replenish - transfer knowledge - evaluate / refine - ID discrepancies - build forecast

Demand Driven Supply Network (DDSN) A system of technologies & processes that senses & reacts to real-time demand signals across a supply network of customers, suppliers, & employees Start with the Moment of Truth....and work backwards.

Managerial Levers to Achieve Supply Chain Coordination (cont.) Improve Operational Performance reduce replenishment lead times - electronic data interchange (EDI) - advance shipment notices (ASN) - cross docking reduce batch sizes - computer assisted ordering (CAO) - aggregation -EDI eliminate shortage gaming Pricing Strategies volume based discounts rather than lot size-based discounts EDLP vs Promotional Pricing

Managerial Levers to Achieve Supply Chain Coordination (cont.) TRUST KEY STEPS: 1. corporate culture as foundation 2. assessing the value of the relationship 3. identifying operational roles and decision rights for each party 4. creating effective contracts 5. designing effective conflict resolution mechanisms

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