The supply chain

RetailerDistributorWholesalerManufacturer

Flow of goods

RetailerWholesalerDistributorManufacturer

Customer

The supply chain

Flow of Information

Delays (lead times)– Information delays– Transportation delays

RetailerWholesalerDistributorManufacturerCustomer

DemandR. OrdersW. OrdersD. OrdersProduction

The supply chain

Information Delay• Two period delay

RetailerWholesalerDistributorManufacturerCustomer

DemandR. OrdersW. OrdersD. Orders

The supply chain

Transportation Delay• Two period delay

RetailerWholesalerDistributorManufacturerCustomer

R. OrdersW. OrdersD. Orders

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.

The supply chain

The demand– The demand is unknown

The costs– Holding cost: $1– Shortage cost $2– Purchasing cost $1

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.

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.

On hand inventory carried from last periodArriving inventory

Total inventory

Installation

You should have a BeerNet folder on drive cIf 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

Click

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

Installation

Installation

Installation

Doubleclick on beernet.exe.WaitYou should see the following window

Pick a nickname

Put the correct port number

Put the correct address: scm.bus.umich.edu

Click

Select your role Select a game Join

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.

What did we observe?

Demand variability and uncertaintyAmplification of the variability

Demand variability and uncertainty

How to deal with demand uncertainty?

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?

Reasons for the magnifications (The bull-whip effect)

Unknown demand– What was the demand?– How to forecast the demand?

Reasons for the magnifications (The bull-whip effect)

Operational– Use of the wrong purchasing policy

• What is the right policy?

Reasons for the magnifications (The bull-whip effect)

Delay– Order process– Transportation– Production

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

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?

Solutions

Delay– Reduce lead times

• Reduce information lead time• Reduce transportation lead time (even if transportation

cost is higher)• Reduce production lead times

Solutions

Information– Share information

• Demand• Orders• purchasing policies