Supply Chain Management

1
Supply Chain Management

• Lecture 26

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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 730pm 1000pm

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Teams
4
The Supply Chain Game

• Simulation game description http//co.responsive
  .net/sc/colorado/Assign1/
• Simulation game login http//co.responsive.net/S
  upplyChain/SCAdmin

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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)

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Assignment

• You can make the following changes to the supply
  chain
• Add capacity to the factory (increase only)

7
Assignment

• You can make the following changes to the supply
  chain
• Change the order quantity
• Change the reorder point

8
Assignment

• You can make the following changes to the supply
  chain
• Change the type of transportation (mail or truck)

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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
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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

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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.

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Demand

• It is now day 730, two years after Jacobs began
  producing and marketing the chemical.

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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
  1050,000 500,000. 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
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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

150 by mail(1 day)
15,000 by truck(7 days)
150
1000
1,450
One truck can carry up to 200 drums
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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 101000
  11,500.

Drums wont ship until batch is complete
Order quantity batch size
1500 per batch
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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

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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)

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Decisions

• Add capacity to the factory (increase only)

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Decisions

• Change capacity of factory (increase only)

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Decisions

• Change the order quantity (i.e. batch size)
• Change the reorder point
• Change the type of transportation (mail or truck)

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Grading

• Based on your analysis (see handout)

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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

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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?

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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