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

3. The supply chain Flow of Information Delays (lead times) –Information delays –Transportation delays RetailerWholesalerDistributorManufacturer Customer DemandR. OrdersW. OrdersD. OrdersProduction

4. The supply chain Information Delay Two period delay RetailerWholesalerDistributorManufacturer Customer DemandR. OrdersW. OrdersD. Orders

5. The supply chain Transportation Delay Two period delay RetailerWholesalerDistributorManufacturer Customer R. OrdersW. OrdersD. Orders

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. On hand inventory carried from last period Arriving inventory Total 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/http://scm.bus.umich.edu/BeerNet/ Go down the page till you see the section: D ownload Client Software

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

13. Installation

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

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

17. Click

20. Select your role Select a gameJoin

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