Supply Chain Management
Lecture 26
Detailed Outline
• Thursday April 22
Simulation game briefing
– Simulation game description
– FCQs
• Tuesday April 27
Review
– Simulation strategy
– Formula sheet (available online)
– Review final
• Thursday April 29
Simulation Game
– Thursday December 10 is the last day to turn in homework
• Tuesday May 4
Final 7:30pm – 10:00pm
Teams
The Supply Chain Game
• Simulation game description:
http://co.responsive.net/sc/colorado/Assign1/
• Simulation game login:
http://co.responsive.net/SupplyChain/SCAdmin
The Supply Chain Game
• Manage the supply chain for the Jacobs Industries on
the fictional continent of Pangea
– Jacobs only product is an industrial chemical that can be mixed
with air to form a foam (used in air conditioner retrofit kits)
Assignment
• You can make the following changes to the supply chain
– Add capacity to the factory (increase only)
Assignment
• You can make the following changes to the supply chain
– Change the order quantity
– Change the reorder point
Assignment
• You can make the following changes to the supply chain
– Change the type of transportation (mail or truck)
Objective
• It is now day 730, two years after Jacobs began
producing and marketing the chemical. A new foam
technology is in development at Jacobs that will render
all production capacity and inventory of the current foam
obsolete and worthless on day 1460. All customers are
aware of the pending new technology and as a result,
demand will decrease to zero on day 1460.
– Maximize the cash generated by the foam technology over the
remaining two years of its lifetime. On day 1460 the game will
end and all inventory and capacity will become obsolete
The winning team is the one with the
highest cash position on day 1460
The Market
• Jacobs Industries’ only product is an industrial chemical
that can be mixed with air to form a foam that is
– Lightweight, stable over a wide range of temperatures, a very
efficient thermal insulator, a very efficient acoustic insulator
• Jacobs sells its chemical to manufacturers of air
conditioner retrofit kits. The manufacturers are all located
in the region of Calopeia
The Market
• The chemical is shipped in small plastic drums at a price
of $1450 a piece.
– Demand for the chemical is highly seasonal but otherwise very
stable. There are no long-run market trends, either upward or
downward.
– The size of orders is very random and arrive randomly
throughout each 24-hour day.
– If Jacobs cannot ship an order within 24 hours of receiving the
order from the customer, the customer makes its purchase from
a competitor without any loss of future demand.
Demand
• It is now day 730, two years after Jacobs began
producing and marketing the chemical.
140
Demand
120
Forecast
100
80
60
40
20
0
0
200
400
600
800
1000
1200
1400
Operations
• The current capacity of the factory is 20 drums per day.
More factory capacity can be purchased at a cost of
$50,000 per drum per day. For example, expanding the
capacity by 10 drums per day for a total of 30 drums per
day would be 10*$50,000 = $500,000. Capacity costs
are incurred as soon as the capacity expansion begins. It
takes 90 days to complete a capacity expansion.
Capacity cannot be retired
20 units per day
Unlimited storage
Operations
• Jacobs produces its chemical in batches, loads the
chemical into small plastic drums, and then transports
the drums from the factory to the warehouse by truck.
The warehouse sends drums to customers as orders are
received. The cost of fulfilling an order, including the cost
of mailing the drum to the customer, is $150 per drum
$1000
$150 by mail
(1 day)
$15,000 by truck
(7 days)
$150
$1,450
One truck can carry up to 200 drums
Operations
• Production in factories is carried out in batches, where
each batch is an integer number of drums set by you.
The cost to produce one batch equals $1500 plus the
number of drums in the batch times $1000. For example,
the cost to produce a batch of 10 drums is $1500 +
10*$1000 = $11,500.
Drums won’t ship until
batch is complete
$1500 per batch
Order quantity = batch size
Operations
• Both the costs of producing the batch and then shipping
it to the warehouse are incurred as soon as production of
the batch starts. If there is insufficient cash to pay for the
production and shipping of the batch, the factory will
remain idle
• Production of a batch is triggered when the finished
goods inventory (both en route to the warehouse and in
the warehouse) fall below the order point
• Holding costs for one drum for one year equal $100,
whether the drum is en route to a warehouse or the drum
is physically in the warehouse. There are no such
holding costs for work-in-process inventory in the factory
• Jacobs earns 10% interest per year on its cash,
compounded daily
Assignment
• You can make the following changes to the supply chain
–
–
–
–
Add capacity to the factory (increase only)
Change the order quantity (i.e. batch size)
Change the reorder point
Change the type of transportation (mail or truck)
Decisions
• Add capacity to the factory (increase only)
140
Demand
120
Capacity
100
80
60
40
20
0
0
100
200
300
400
500
600
700
Decisions
• Change capacity of factory (increase only)
140
Demand
120
Lost demand
100
80
60
40
20
0
0
100
200
300
400
500
600
700
Decisions
• Change the order quantity (i.e. batch size)
• Change the reorder point
• Change the type of transportation (mail or truck)
Grading
• Based on your analysis (see handout)
Hints
• Create a general strategy beforehand
• All inventory and capacity will be obsolete at the
end of the simulation
• Most investments pay off, but it takes time
Analysis questions
• When are transportation cost per drum minimized?
• What is minimum transportation cost per drum?
• What is the physical annual holding cost of one drum?
• What is the financial annual holding cost of one drum
(what is the opportunity cost)?
• What is the total holding cost of one drum?
Analysis questions
• Ignore the batch production cost. What is the maximum
margin that can be obtained from selling one drum?
–
–
–
–
–
–
Retail price per drum
Production cost per drum
Minimum transportation cost per drum
Minimum holding cost per drum
Fulfillment cost per drum
Maximum margin per drum