Chapter 18 of
Business Dynamics
The Manufacturing Supply
Chain
 This chapter adapts the stock
management structure of the previous
chapter to represent the supply chain in
manufacturing firms
The stock management
structure…
 Is broken up into



An order fulfillment structure
A production starts structure
A demand forecasting component
Acquisition Lag
AL
Supply Line SL
Order Rate OR
Average
Lifetime L
Stock S
Loss Rate
Acquisition Rate
AR
Expected Acquisition
Lag EAL
Adjustment for
Supply Line ASL
Indicated
Orders IO
Desired Supply
Line SL*
Supply Line Adjustment
time SLAT
Desired Stock S*
Adjustment for
Stock AS
Stock Adjustment
Time SAT
Desired Acquisition
Rate DAR
Expected Loss
Rate EL
Overview Production Model
Work in Process
Inventory
Production Start
Rate
Inventory
Production Rate
Shipment Rate
B
B
B
Stockout
Inventory Control
WIP Control
Order Fulfillment
Customer Order
Rate
Production
Scheduling
demand
Forecasting
Inventory
Coverage
Production Start
Rate
Work in Process Inventory
Inventory
Production Rate
Shipment Rate
Manufacturing
Cycle Time
Desired Production
Start Rate
Adjustment for
WIP
Maximum
Shipment Rate
Order Fulfillment
Ratio
Desired Shipment
Rate
Desired WIP
WIP Adjustment
Time
Inventory
Adjustment Time
Adjustment for
Inventory
Table for Order
Fulfillment
Minimum Order
Processinig Time
Desired
Production
Desired Inventory
Expected
Order Rate
Desired Inventory
Coverage
Safety Stock
Coverage
Customer Order
Rate
Key management decisions
are made by
 Order Fulfillment
 Production Scheduling
Three Balancing Loops
 Stockout loop regulates shipments as
inventory varies
 Inventory and WIP Control Loops adjust
production starts to move the levels of
inventory and WIP toward their desired
levels
In this initial model there are…
 No capacity constraints (from either
labor or capital)
 No stocks of materials
Production Structure
Production Start
Rate
Work in Process
Inventory
Inventory
Production Rate
Production
Manufacturing
Cycle Time
Production Rate =
 DELAY3(Production Start Rate,
Manufacturing Cycle time)
Terms
 Manufacturing Cycle Time—the average
transit time for all items aggregated
together in the model
 Manufacturing delay is being modeled as
a fourth-order material (flow) delay
Inventory
Coverage
An Order
Fulfillment
Structure
Inventory
Shipment Rate
Maximum
Shipment Rate
Order Fulfillment
Ratio
entory
ment Time
Table for Order
Fulfillment
Minimum Order
Processinig Time
Desired Inventory
Coverage
Safety Stock
Coverage
Desired Shipment
Rate
Customer Order
Rate
Table for Order Fulfillment
 From Fig. 18-3
Desired Shipment Rate =
 Customer Order Rate
Order Fulfillment Ratio =
 Table for Order Fulfillment(Maximum
Shipment Rate/Desired Shipment Rate)
Minimum Order Processing
Time =
6
 Is a constant
Maximum Shipment Rate =
 Inventory/Minimum Order Processinig
Time
Safety Stock coverage =
6
 Is a constant
Time to Average Order Rate =
6
 Is a constant
Desired Inventory coverage =
Minimum Order Processing
Time =
6
 Is a constant
Desired Inventory =
 whatever
Adjustment for Inventory =
 Difference between desired inventory
and actual inventory, all divided by the
Inventory Adjustment Time
Inventory Adjustment Time =
6
 Is a constant
Production Start
Rate
A
production
starts
structure
Work in Process Inventory
Production Rate
Manufacturing
Cycle Time
Desired Production
Start Rate
Adjustment for
WIP
Desired WIP
WIP Adjustment
Time
Inventory
Adjustment Time
Adjustment for
Inventory
Desired
Production
Desired Inventory
Expected
Order Rate
Manufacturing Cycle time =
6
 Is a constant
Desired WIP =
 Manufacturing Cycle Time * Desired
Production
 This is an implementation of Little’s Law
WIP Adjustment Time =
6
 Is a constant
Adjustment for WIP =
Guess: f(Desired WIP, WIP
Adjustment time, Work in Process
Inventory)
Desired Production =
 MAX(0, Expected Order Rate +
Adjustment for Inventory)
Desired Production Start Rate
=
 Adjustment for WIP + Desired
Production
Production Start Rate =
 MAX(0, Desired Production Start Rate)
A demand forecasting
component
 This structure simply smoothes the
customer order rate, much like
exponential smoothing would do to
provide a realistic model of the
forecasting process used in many firms
The demand forecasting
structure
Expected
Order Rate
Change in Exp
Orders
Customer Order
Rate
Time to Average
Order Rate

What is the equation for Change in Exp
Orders?
Typical constants
 Minimum order processing time = 2 wks
 Safety Stock Coverage = 2 wks
 Manufacturing Cycle Time = 8 wks
 Inventory Adjustment Time = 8 wks
 WIP Adjustment Time = 2 wks
Initial Stocks for Equilibrium
 Initial Inventory = Desired Inventory\
 Initial WIP = Desired WIP
 Initial Expected Order Rate = Customer
Order Rate
 These are all the initial conditions
needed to create an initial equilibrium
Behavior—Inventory
Inventory vs. Desired Inventory
60,000
50,000
40,000
30,000
20,000
0
5
10
15
20
25
30
Time (Week)
35
40
45
Inventory : run2
Desired Inventory : run2
 Inventory drops below desired inventory
50
Behavior—The Rates
The Rates
15,000
13,250
11,500
9,750
8,000
0
5
10
Customer Order Rate : run2
Production Rate : run2
Shipment Rate : run2
Production Start Rate : run2
15
20
25
30
Time (Week)
35
40
45
50
What the rate BOT charts tell
us
 Amplification of the customer order rates
by the production starts rate is
unavoidable

This is what causes the bull whip effect in
supply chains, especially when suppliers
are linked to the manufacturer by JIT
Kanban or signaling systems
 There is a phase lag between receipt of
the order and its fulfillment
 There is no significant oscillation
What about backlogs?
 Boeing, like not other manufacturer,
carries backlogs stretching out years.
 Boeing is a make to order manufacturer
 Consideration of backlogs modifies the
order fulfillment structure
Delivery
Delay
+
-
Backlog
Order
Fulfillment
Rate
+
Order
Rate
+
Target
Delivery
Delay
B
Desired
Shipment
Rate
Order
Fulfillment
-
+
ventory
Shipment
Rate
B
+
The
backlog
structure
Backlog equations
 What is the equation for backlog?
 The equation for delivery delay is
formulated from one of the most
important principles in Operations
Management—Little’s Law:


Delivery delay = backlog/order fulfillment
rate
Desired Shipment Rate = Backlog/Target
Delivery Delay
More Backlog Equations
 Order fulfillment rate = shipment rate
 These are, however, totally different
entities
 Shipment rate is a physical flow
 Order fulfillment rate is an information
accounting that reduces the amount of
backlog within the computer’s database
Materials Inventory
-
Materials
Inventory
Coverage
<Material
Usage
Rate>
Material
Delivery
Rate
+
+
-
<Shipment
Rate>
<Materials
Inventory>
Materials
Inventory
Material
Usage Rate
+
Maximum
Material
Usage Rate
-
Materials
Control
+
Adjustment
for Material
Inventory
+
Material
Inventory
Adjustment
Time
+
+
Feasible
Production
Starts from
Materials
Production
Start Rate
B
Materials
Stockout
B
+
+
B
Desired
Material
Delivery Rate
+
Material
Usage
Ratio
+
WIP Control
+
Minimum
Material
Inventory
Coverage
Desired
Material
Inventory
Coverage
Material
Usage per
Unit
Table for
Material
Usage
+
Material
Safety Stock
Coverage
+
Desired
Material
Inventory
+
+
Desired
Material
Usage Rate
+
+
+
Desired
Production
Start Rate
+
The final single supplier model
-
Materials
Inventory
Coverage
+
-
Inventory
Coverage
Delivery
Delay
+
-
+
Backlog
<Material
Usage
Rate>
<Shipment
Rate>
<Materials
Inventory>
<Inventory>
-
Material
Delivery
Rate
+
Materials
Inventory
+
B
Materials
Control
Desired
Material
Delivery Rate +
+
+
Maximum
Material
Usage Rate
Adjustment
for Material
Inventory +
-
Material
Inventory
Adjustment
Time
Feasible
Production
Starts from
Materials
Production
Start Rate
Material
Usage +
Ratio
WIP Control
+
Minimum
Material
Inventory
Coverage
Desired
Material
Inventory
Coverage
Material
Usage per
Unit
Table for
Material
Usage
+
Production
Rate
-
Adjustment +
for WIP
-
WIP
Adjustment
Time
Material
Safety Stock
Coverage
Shipment
Rate
B
Manufacturing
Cycle Time
Order
Fulfillment
+
Inventory
B
Materials
Stockout
B
+
Material
Usage Rate +
+
+
B
Desired
Shipment
Rate
+
Work in
Process
Inventory
Order
Fulfillment
Rate
Order
Rate
Target
Delivery
Delay +
B
Inventory
Control
+
Stockout
+
Maximum
Shipment
Rate
Inventory
Adjustment
Time
Order
Fulfillment
Ratio
+
-
+
Desired WIP
Adjustment
+
from Inventory
Table for
Order
Fulfillment
Minimum
Order
Processing
Time
+
Desired
+
Inventory
+
+
+
+
Safety
Stock
Coverage
Desired
Inventory
Coverage
+
+
Desired
Material
Inventory
Desired
Material
Usage Rate
+
+
+
Desired
Production
Start Rate
+
Desired
Production +
+
<Desired
Shipment
Rate>
Expected
Order Rate
Change in
Exp Orders +
-
Time to Average
<