The supply chain

2. The supply chain • Retailer • Distributor • Wholesaler • Manufacturer Flow of goods Customer Manufacturer Distributor Wholesaler Retailer

3. The supply chain Flow of Information • Delays (lead times) • Information delays • Transportation delays Production D. Orders W.Orders R. Orders Demand Customer Manufacturer Distributor Wholesaler Retailer

4. The supply chain Information Delay • Two period delay D. Orders W.Orders R. Orders Demand Customer Manufacturer Distributor Wholesaler Retailer

5. The supply chain Transportation Delay • Two period delay D. Orders W.Orders R. Orders Customer Manufacturer Distributor Wholesaler Retailer

6. The Supply Chain • We assume a model in which unsatisfied demand is back ordered. • This means that: If an order is not satisfied at some period. The order might be satisfied in a later period.

7. The supply chain • The demand • The demand is unknown • The costs • Holding cost: $1 • Shortage cost $2 • Purchasing cost $1

8. The supply chain • Initial inventories • Every player will get 4 units in the first 4 periods • Every player has orders of 4 units for the first two periods.

9. The objective • Minimize your own total cost over 30 periods. • Definitions • Total cost = Total purchasing cost + Total holding cost + Total shortage cost. • Shortage cost. A cost paid, every period, for every unit that is not delivered.

10. Total inventory On hand inventory carried from last period Arriving inventory

11. Installation • You should have a BeerNet folder on drive c • If you don’t have go to the following webpage:http://scm.bus.umich.edu/BeerNet/ • Go down the page till you see the section: Download Client Software

12. Click Download as an auto extracting Windows executable • Save the file (Beerwin32) in C:

13. Installation

14. Installation

15. Installation • Doubleclick on beernet.exe. • Wait • You should see the following window

16. Put the correct port number Pick a nickname Put the correct address: scm.bus.umich.edu

17. Click

20. Select your role Select a game Join

25. Observations • Customer demand is quite stable • At the first four periods it is 4 units per period. • From period 5 till the end the demand is 8 units per period. • The variability of the order process of the retailer, wholesaler, distributor, and manufacturer is magnified.

28. What did we observe? • Demand variability and uncertainty • Amplification of the variability

29. Demand variability and uncertainty • How to deal with demand uncertainty?

30. Magnification of the variability • Why is it bad? • Assuming everything else is fixed, larger variability increases safety stock • Larger safety stock increases the total cost and reduces profit. • Why?

31. Reasons for the magnifications (The bull-whip effect) • Unknown demand • What was the demand? • How to forecast the demand?

32. Reasons for the magnifications (The bull-whip effect) • Operational • Use of the wrong purchasing policy • What is the right policy?

33. Reasons for the magnifications (The bull-whip effect) • Delay • Order process • Transportation • Production

34. Reasons for the magnifications (The bull-whip effect) • Information • Players don’t know the: • demand • orders placed by other players • Inventory policy of other players

35. Reasons for the magnifications (The bull-whip effect) • Incentives • What is the objective of the different players? • Maximize (minimize) their own profit (cost) • They have no incentive to cooperate unless they benefit. • What does it mean to cooperate? • Share information • What are the risks? • What are the difficulties?

36. Solutions • Delay • Reduce lead times • Reduce information lead time • Reduce transportation lead time (even if transportation cost is higher) • Reduce production lead times

37. Solutions • Information • Share information • Demand • Orders • purchasing policies