Simulations and Supply Chain Management

1. Simulations and Supply Chain Management David Sparling Court of Experts September 6, 2002 University of Guelph

2. Supply Chain Management • What is a Supply Chain? • A network of organizations designed to secure raw materials, convert them into products and deliver them to consumers • How can simulation help managers learn about supply chains?

3. Outline • Beer game simulation I – the problems • Paper based introductory simulation • Discussion of results and how to use them • Beer game simulation II – moving toward solutions • Excel based • Supported by lectures and Excel forecasting models • Taking supply chain simulations further

4. Understanding Supply Chain Challenges – The Beer Game Beer Game Simulation How does interaction with other organizations affect our ability to satisfy the needs of our customers? Manufacturer Distributor Wholesale Retailer Customer

5. Beer Game Simulation • I’m the customer • Information passes between levels only through the Order Forms • Orders which you cannot fill from inventory are backordered and filled later • It takes two periods to ship from one level to the next or to manufacture product • Only the manufacturer actually produces beer • Inventory Form never leaves your level

6. Completing the Simulation • Update demand on Inv Form • Update filled and backorder on Inv and Order forms • Give Order form back to customer • Place order with supplier • Wait for supplier to return form • Enter amount from filled into Transit 2

7. Beer Game Results • What happened? • Why? • What would have made your job easier? • What would have made it harder? • This discussion identifies the problems and challenges

8. Group Discussion 1. What are 2-3 objectives for different members of the supply chain? Group 1 - Retail Group 2 - Wholesale Group 3 - Distributor Group 4 - Manufacturing • What performance measures would are be appropriate determining how well the chain is accomplishing its objectives?

9. Moving Toward Solutions • Once problems are identified the next step is to develop solutions • Discussion includes • Decreasing number of levels • Decreasing transportation times • Coordination in the supply chain • Forecasting • Managing inventory • Placement • Safety stock and service levels

10. Stage 2 • Next stage determined by learning objectives • My second simulation deals primarily with • Forecasting • Supply chain coordination • Adjusting forecasts based on recent results • Inventory management

11. Stage 2 - Group Assignment • Work as a complete supply chain • Plan a strategy for improving supply chain performance • Submit the supply chain strategy summary sheet prior to the second simulation • Simulate the chain for up to 15 periods and analyse supply chain performance

12. Stage 2 Simulation Model • Excel model of the beer game supply chain • Levels linked and orders and shipments are transmitted automatically between levels • Costs are calculated automatically for the each level and the entire supply chain. • Backorder costs • Inventory carrying costs • Costs for changing the level of manufacturing production by more than 5% per period.

13. Features of the Stage 2 Assignment • Smaller groups (3-4) work together as a complete supply chain. • Data provided • Last 15 periods demand for a recently introduced product Discussion: What does the data tell us? Can it be used to predict future demand?

14. Forecasting Lecture or Discussion • When should different models be used? • What information should be included in the forecasts – what is relevant? • How can one select the best choice among different forecast methods? TASK 1 – Select a forecasting method and forecast for periods 16-30

15. Simulation Support • Excel Time Series Forecasting Models • Moving average, exponential smoothing, trend lines and double exponential smoothing • Models include a measure of forecasting bias, Cumulative Sum of Error and a measure of accuracy, Mean Absolute Deviation

16. Initializing the Supply Chain Task 2 – Translating the forecasts into supply chain setup values • Participants assume that they have completed period 15 and are beginning period 16 • They must initialize their supply chains • Opening inventory at each level • Transit 1 leading into each level • Opening production level at manufacturing

17. Simulation Preparation • Groups disperse for 2-3 hours to prepare • Armed with simulation model and forecasting models • They begin by addressing the forecasting problem first • Once they have the forecasts they address the inventory adjustments • Finally they make a strategy for handling new data as demand occurs

18. Decisions • Inventory and transit 1 quantities – must consider • Forecast • Demand variability • Response time • Customer service level • Costs of backorders vs inventory

19. Running the Simulation • Groups return and are given period 16 demand. • Orders are passed directly from one level to the next to speed up the simulation – assumes complete coordination • Groups decide how much to produce to replenish their system

20. Running the Simulation • They review demand relative to forecast – do they need to change their strategy and alter forecasts? • Repeated periods 17-25 - stop • Total costs reviewed for all groups • Strategies and where groups were successful or had problems are discussed

21. Further Steps • Additional simulations can include • More complicated inventory management • Fewer levels and shorter transit times • Multiple retail customers – multiple prices • Multiple products and suppliers -beyond the capabilities of the current simulation model • Learning objectives • Inventory placement as well as quantities • Managing multiple customers – tradeoffs

22. Benefits of the Simulations • Experiential learning has a higher retention • Highlights supply chain challenges and importance of communication • Introduces the many management decisions involved in managing a supply chain • Can be used to review and reinforce key concepts

23. Thank youQuestions?