1. Supply Chain Management: The Game Developed for the Engineering Management Program James R. Holt, Ph.D., PE. http://www.vancouver.wsu.edu/fac/holt/ http://www.vancouver.wsu.edu/fac/holt/ Washington State University ©20011 IBU Raw Material Supplier Final Customer Buyer Individual Business Units Work flows into the System Work flows out of the System Work flows through the System Raw Material supplier has infinite capacity and instantaneous delivery. Sells RM for $2 per unit. Each unit is represented in the system by a token. Final Customer Buyer purchase on average 2.5 units per period at a price of $22 each. The demand curve is:1, 0, 3, 0, 5, 6 (based on a fair die counting 0 to replace the 2 and 4 sides). Expected average gross sales then is $55 per period. Individual Business Units start with 5 units of raw material. Each period, they produce according to the roll of a fair die. They control (negotiate with their supplier) how much input material they buy each week. They sell (negotiate transfer with their customer) Finished Goods at a price $2 above what they pay their supplier. Inventory Holding Costs are $0.50 per unit in Raw Material or in Finished Goods each period. If the average production is 2.5 units ($5.00) and average inventory is 5 units ($2.50), and periodic Operating Expenses are $2, the expected profit would be about $0.50 per period. The Total System then sells each unit for $22 (final product price). The cost-of-goods-sold or raw material cost is $2 per unit. The Total System pays Inventory Holding Costs of $0.50 per unit per period for all inventory as long as it is in the system. This covers the expense of warehousing, transportation, scrape and loss. The total system has a periodic Operating Expense of $20 per period (10 Individual Business Units * $2 each). The expected average profit for the system is not high: Average sales of 2.5 per units per period * $22 - $2 (gross profit per unit) - $25 (expected Inventory Holding Cost for 50 units in the system) - $20 (Operating Expenses) = $5.00 profit per period. Players needed to play the game: Raw Material Supplier (1 each) Ten (10) Individual Business Unit Managers (each can use an assistant if available to keep the books) Market Representative (1 each) Inventory Control Manager (1 each) System Accountant (1 each) System Policy Maker (1 each)

2. Supply Chain Management: The Game Developed for the Engineering Management Program James R. Holt, Ph.D., PE. http://www.vancouver.wsu.edu/fac/holt/ http://www.vancouver.wsu.edu/fac/holt/ Washington State University ©20012 Raw Material Supplier The Raw Material Supplier sells raw material to the first Individual Business Unit (IBU). The IBU can purchase as much Raw Material as they want and have it instantaneously. (There are not returns-All sales are final). Each period, give the first IBU one token for each RM unit requested. Record sales for each period on your work sheet. Report your period sales to the Inventory Manager Tally your Revenues at $2.00 per unit. Period Sold Revenue @$2 each 1 2 @$1 each 3 @$2 each 4 5 6 7 8 9 10 @$2 each Total

3. Supply Chain Management: The Game Developed for the Engineering Management Program James R. Holt, Ph.D., PE. http://www.vancouver.wsu.edu/fac/holt/ http://www.vancouver.wsu.edu/fac/holt/ Washington State University ©20013 Market Representative The Market Representative acts as the Final Customer Buyer. You buy completed units from the last Individual Business Unit (IBU) for $22 per per unit. The number you want to buy changes each period according to the roll of a fair die (except if you roll a 2 or 4 then you do not order anything that period). On average, you request 2.5 units per period. The IBU sells you the minimum of what you want to buy (your roll) or what they have to sell. There are no back orders! If you cannot buy what you want (when they can’t deliver), you complain loudly! And you record a $100 Customer Dissatisfaction Complaint for each unit you were not able to buy. Record your Roll each period (Marking 0 each time you roll a 2 or 4). Report your period purchases (the minimum of your roll or number delivered) to the Inventory Manager Tally Gross Sales at $22.00 per unit. Record any Customer Dissatisfaction Complaints ($100 for each unit requested that is not received) and complain again loudly! Period Roll Rec’d Sales Complaints @$22 each 1 2 3 4 5 6 7 8 9 10 @$22 each Total @$100 each Inv. Number

4. Supply Chain Management: The Game Developed for the Engineering Management Program James R. Holt, Ph.D., PE. http://www.vancouver.wsu.edu/fac/holt/ http://www.vancouver.wsu.edu/fac/holt/ Washington State University ©20014 System Inventory Control Manager The Inventory Control Manager tracks the total inventory in the system Since the inventory between and within Individual Business Units (IBUs) constantly changes, the only practical way of managing this is to take a periodic audit of What was in the System last period, What came in this period and What left this period. You collect information about the inventory that entered the System from the Raw Material Supplier. You collect information about the inventory that left the System from the Market Representative (Final Customer Buyer). Please try and stay current and be accurate! At the end of each period, Record the Incoming Inventory and the Outgoing Inventory. Calculate the new System Inventory. Report the period Sales and the new System Inventory to the System Accountant. Period Inv. RM In FG Out Inv. Level 1 50 + - = 2 3 4 5 6 7 8 9 10 Ending Inventory Prior NewSalesNew + - = + - = + - = + - = + - = + - = + - = + - = + - =

5. Supply Chain Management: The Game Developed for the Engineering Management Program James R. Holt, Ph.D., PE. http://www.vancouver.wsu.edu/fac/holt/ http://www.vancouver.wsu.edu/fac/holt/ Washington State University ©20015 System Accountant The System Accountant is responsible for documenting the performance of the System as a whole. Each Individual Business Unit (IBU) records their own local data. You record the summary data for the whole system. Since it is impractical to communicate with each IBU each period, you base you numbers on the System Aggregate numbers. You record the periodic System Sales (Revenue to the system ) and subtract out all the costs to the system during that period to determine the systems period cash flow. The costs to the system include the money spent for new Raw Material each period, the period Inventory Holding Costs and the period Operating Expenses. The System Inventory Control Manager will give you all the numbers you need. Raw Material costs are $2 per unit purchased during the period Inventory Holding Cost is $0.50 per unit in the system (total of RM and FG) for each period. Operating Expenses are $2 per IBU per period or $20 total for the ten IBUs. Each Period, record the Sales Revenue, Raw Material Purchased, and Inventory Holding Cost. The Operating Cost is already noted. Calculate the Cash Flow (Sales - RM - Inv. - OE = Cash Flow). Report your Cash Flow figure to the System Policy Maker each period. Period Sales RM Inv. OE Cash Flow 1 2 3 4 5 6 7 8 9 10 Total $ Cash flow equals Sales less RM less Inv. less OE $ Cash flow equals Sales less RM less Inv. less OE Cash flow equals Sales less RM less Inv. less OE Cash flow equals Sales less RM less Inv. less OE Cash flow equals Sales less RM less Inv. less OE Cash flow equals Sales less RM less Inv. less OE Cash flow equals Sales less RM less Inv. less OE Cash flow equals Sales less RM less Inv. less OE Cash flow equals Sales less RM less Inv. less OE Cash flow equals Sales less RM less Inv. less OE $ @$22 each $ @$2 each $ @$0.50 each $ 20 $ $ @$22 each $ @$2 each $ @$0.50 each $ 20 $ $ @$22 each $ @$2 each $ @$0.50 each $ 20 $ $ @$22 each $ @$2 each $ @$0.50 each $ 20 $ $ @$22 each $ @$2 each $ @$0.50 each $ 20 $ $ @$22 each $ @$2 each $ @$0.50 each $ 20 $ $ @$22 each $ @$2 each $ @$0.50 each $ 20 $ $ @$22 each $ @$2 each $ @$0.50 each $ 20 $ $ @$22 each $ @$2 each $ @$0.50 each $ 20 $ $ @$22 each $ @$2 each $ @$0.50 each $ 20

6. Supply Chain Management: The Game Developed for the Engineering Management Program James R. Holt, Ph.D., PE. http://www.vancouver.wsu.edu/fac/holt/ http://www.vancouver.wsu.edu/fac/holt/ Washington State University ©20016 Individual Business Unit Manager You manage your Individual Business Unit (IBU). You are the one that makes things happen. You order Raw Material, Produce Product and Deliver Finished Goods to the next IBU or customer. Each period, you have three duties and responsibilities. The first is to produce. The second is to order (negotiate) for new Raw Material from the previous IBU (or supplier) and to Sell (transfer) your Finished Goods to the next IBU or customer. Third is to calculate your profits Production: Each period, you roll a fair die to decide how much production capacity you have during that period. Some times its 1, some times it 6 and could be any other number on the die. The average roll is 3.5 products per period. You are in control. You get to choose. If you do not want to produce anything after your roll, you don’t have to. You can produce the minimum of the number rolled on the die, the Raw Material Inventory you have available, or some lesser number if you choose. The Raw Material Inventory is your buffer against the variability of the die. Material Control: After Production is over (still during the same period) you negotiate with your supplier on the number of Raw Material units you want to receive. The maximum Raw Material you receive from your supplier is the number you want or the number the supplier wants to give you. Also, you negotiate with your customer. The maximum Finished Goods you can sell to your customer is the maximum you have produced (in your Finished Goods Inventory) or the maximum the customer wants. You must keep any Finished Goods inventory that you produce that your customer does not want. Calculate Profit: Each Period after you produce products and transferred inventory, you calculate your profit. Profit comes from the Sale of Finished Goods to your customer. Each product sells for $2 each above the price you paid for the purchase. (You don’t have to pay anything in this model, just get gross revenue of $2 each. This makes accounting easier.) Subtract from your Total Sales your Inventory Holding Cost and period Operating Expense to determine your profit. Costs: You have to pay an Inventory Holding Cost of $0.50 on each Raw Material or Finished Good in your possession each period. You also have a $2 per period Operating Expense. Again, the period Profits are Sales less Holding Costs less Operating Expense The Play in the First Half of the Period: Roll the Die. Record the Production Capacity. Determine how many you can (want to ) produce and record the production. Move the Produced tokens from Raw Material to Finished Goods. The Play in the Second Half of the Period: Negotiate with your supplier on the number of products (tokens) to transfer in to your IBU as additional Raw Material. Record the new Raw Material Level. Negotiate with your customer on the number of Finished Goods you will sell (transfer) to your customer. Move those tokens out of your IBU and record your new Finished Goods level. The Last Act: Calculate your Profits for the period. You may want to keep a running Profit total from period to period to see how your profits build up. Warning! This game uses valuable tokens to represent the Raw Material and Finished Goods. Keep your Raw Material and Finished Goods separate but near you (so they don’t become stolen).

7. Supply Chain Management: The Game Developed for the Engineering Management Program James R. Holt, Ph.D., PE. http://www.vancouver.wsu.edu/fac/holt/ http://www.vancouver.wsu.edu/fac/holt/ Washington State University ©20017 Add Less Add Less Add Less Add Less Add Individual Business Unit Manager Record Sheet RM Roll Produced FG Sold @$2 Cost $ Profit 5 New Numb Numb New Numb Revenue - Inv. Hold - OE = Period Period 6 $$ $2$2 $ X2 (RM + FG)/2 7 $$ $2$2 $ X2 (RM + FG)/2 8 $$ $2$2 $ X2 (RM + FG)/2 9 $$ $2$2 $ X2 (RM + FG)/2 10 $$ $2$2 $ X2 (RM + FG)/2 1 $$ $2$2 $ X2 (RM + FG)/2 2 $$ $2$2 $ X2 (RM + FG)/2 3 $$ $2$2 $ X2 (RM + FG)/2 4 $$ $2$2 $ X2 (RM + FG)/2 5 $$ $2$2 $ X2 (RM + FG)/2 RM Add Less Add Less Add Less Add Less Add Less Add Less Add Less Add Less Add Less Add Less Add Less Add Less Add Less Add Less Add Less Add Less Add Less Add Less Add Less Add

8. Supply Chain Management: The Game Developed for the Engineering Management Program James R. Holt, Ph.D., PE. http://www.vancouver.wsu.edu/fac/holt/ http://www.vancouver.wsu.edu/fac/holt/ Washington State University ©20018 System Policy Maker You are the System Policy Maker. You are the CEO of the whole Supply Chain System. It is your role to oversee the whole system. Don’t get too involved with the periodic problems of Individual Business Units (IBUs). Keep a global view. From this viewpoint, you guide the Supply Chain. You guide by issuing Global Policy Statements that your IBUs try to follow. Current Policy: The Current policy empowers each IBU to make their own decisions. The IBUs decide how much Raw material to order. They decide how much of their productive capacity to use. They decide if they want to sell their Finished Goods or to hold them. Each IBU tries to make as much profit as possible. Each IBU can negotiate with other IBUs for its own benefit. Executing Your role: In your role as CEO, you should monitor the profits and inventories of individual IBUs. You may need to “strongly suggest improvements” to an IBU Manager from time to time. Try to keep ethical operations in your System (No Cheating! Else, you won’t learn what you need to learn). As CEO, you should scrutinize carefully the report of the System Accountant. Try and keep the system profitable by securing a positive Cash Flow. An occasional period with negative Cash Flow is acceptable. However, if your system has three periods of loses (negative Cash Flow) in a row, you may be replaced! The CEO should listen to the final customer as well. It shouldn’t be too hard since the Market Representative will complain loudly to everyone if you can’t deliver. If such a complaint occurs, record a $100 loss for each complaint. If necessary, issue new policies to the IBUs. That’s what CEOs do! There is a lot of money to be made here. I hope you can find it. Dr Holt holt@vancouver.wsu.edu

9. Supply Chain Management: The Game Developed for the Engineering Management Program James R. Holt, Ph.D., PE. http://www.vancouver.wsu.edu/fac/holt/ http://www.vancouver.wsu.edu/fac/holt/ Washington State University ©20019 Having trouble managing the whole supply chain? After you have played the Supply Chain Game for 6 to 10 periods using individual business unit measures for decisions, its obvious no one can control what is happening to them. It becomes very frustrating for all IBUs and for the CEO. Clearly, the beginning strategies (policies) are not working. So, what should the new policies be? Possible new ones are: “Balance the Line”- Make everyone move the lowest roll. “Kanban”-Only replenish what was taken. “Traditional”- Push as much as you can through the system. However, the best method of managing a supply chain is with Drum-Buffer-Rope. The constraint in this system (Drum) is the market that demands only 70% of the IBU individual capacities. The final market demand must be buffered by moving as many tokens as possible as quickly as possible to the final IBU. The Inventory in this system is way too high. It needs to be reduced to half or less. The competitive measurement system between IBUs should be abolished. The sales of the system as a whole is what is important, not the profit of the isolated IBUs. To try out DBR, start the game over. Only this time, only give RM and FG inventory to the last five IBUs (the first five remain empty--no inventory) for a total inventory of only 25 tokens. Tell each IBU to roll their die and move as many tokens as possible down the line. Tell them to take as much RM inventory as possible (except for IBU #1). The first IBU only requests RM from the Raw Material Supplier at the rate of the Market Representative (customer) requests. That is, each period, IBU# 1 watches carefully how many units the Market Representative buys and requests that same amount of units from the Raw Material Supplier. With this policy, the system inventory stays constant at 25 units. All IBUs work as hard as possible to move the units to quickly from IBU#1 down the line towards the customer. After several periods, the CEO may choose to further restrict input of RM to reduce the buffer inventory. Individual IBU profits need not be calculated (some will make profit and others not). The system cash flow numbers will be substantially better. The system will share profits among all in the supply chain. References: THE GOAL by Eli Goldratt NECESSARY BUT NOT SUFFICIENT by Eli Goldratt with Eli Schragenheim and Carol A. Ptak