The supply chain
Retailer
Distributor
Wholesaler
Manufacturer
Flow of goods
Customer
Manufacturer
Distributor
Wholesaler
Retailer
The supply chain
Flow of Information
Production
D. Orders
Manufacturer
W. Orders
Distributor
Delays (lead times)
– Information delays
– Transportation delays
R. Orders
Wholesaler
Demand
Customer
Retailer
The supply chain
Information Delay
• Two period delay
D. Orders
Manufacturer
W. Orders
Distributor
R. Orders
Wholesaler
Demand
Customer
Retailer
The supply chain
Transportation Delay
• Two period delay
D. Orders
Manufacturer
W. Orders
Distributor
R. Orders
Wholesaler
Customer
Retailer
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:
– Shortage cost
– Purchasing cost
$1
$2
$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.
Arriving inventory
On hand inventory carried
from last period
Total inventory
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
Click
Download as an auto extracting Windows
executable
Save the file (Beerwin32) in C:
Installation
Installation
Installation
Doubleclick on beernet.exe.
Wait
You should see the following window
Put the correct port number
Pick a nickname
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 uncertainty
Amplification 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 bullwhip effect)
Unknown demand
– What was the demand?
– How to forecast the demand?
Reasons for the magnifications (The bullwhip effect)
Operational
– Use of the wrong purchasing policy
• What is the right policy?
Reasons for the magnifications (The bullwhip effect)
Delay
– Order process
– Transportation
– Production
Reasons for the magnifications (The bullwhip effect)
Information
– Players don’t know the:
• demand
• orders placed by other players
• Inventory policy of other players
Reasons for the magnifications (The bullwhip 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