Designing Robust Supply Chain with Computer Simulation

Chan Yin Kai, David

Consultant, Advent2 Labs
Lecturer, Singapore Institute of Material Management
Lecturer, Temasek Polytechnic

Computer simulation:

Computer simulation is a technique to emulate the operation of any system, so as to

have an understanding of the system in a virtual dimension. A system is a collection
of different entities such as people or machines1. For example, a simulation study
could be conducted to understand how the number of baker required for a bakery has
an impact in meeting the daily demand of customers. Based on the result, analysts
could:

1. Justify new investments, such as new oven.

2. Determining ordering policies for an inventory system, such as the quantity of
flour to be kept.
3. Designing and analyzing manufacturing systems, such as the workflow and
equipment layout of the bakery.
4. Designing and operating transportation systems such as airport, freeways,
ports and subways.
5. Evaluating designs for service organizations such as call center, fast-food
restaurant, hospitals and post offices.
6. Reengineering of business processes.

Stages in Supply Chain:

Supply chain is about supplying the right material with the right amount to the right
people and at the right cost. In order to operate the supply chain effectively, not only
the manufacturer or the suppliers, but also everyone in the chain are to ensure the
customer request is fulfilled2. Chopra and Meidl have listed the 5 stages involved in a
typical Supply Chain,

• Customers
• Retailers
• Wholesalers/Distributors
• Manufacturers
• Component/Raw material suppliers.

Figure 1 has shown these different stages in a detergent supply chain. In this typical
supply chain, customers obtain the supply of detergent from a local retailer. The local
retailer is at one level above the customer on the detergent supply chain. The retailer
will obtain their supply from another level above them that is the wholesaler or
distributor. In the same manner, every stage is obtaining their supply of the detergent
from a higher level in the supply chain. Therefore the raw material required and the
finished product will flow from the upstream to the downstream of the supply chain
and the order of the detergent will go from downstream to upstream of the supply
1
Law M. A. and Kelton W. D.: Simulation Modeling and Analysis. McGraw Hill. (2000). 3rd Ed. USA.
2
Chopra S. and Meindl P.: Supply Chain Management: Strategy, Planning and Operation. Prentice
Hall. 2004. 2nd Ed. New Jersey.
chain. At all stages, the order and delivery must coordinate and handle effective to
ensure a smooth supply chain operation. If any part of the chain is mismanagement,
the upstream is getting their order and the downstream is not getting their supply. The
whole chain will break down.

Manufacturers
Suppliers

Timber Paper Tenneco

Company Manufacturer Packaging Distributors Retailers
Timber

P & G or Other Customer

Distributor Wal-Mart Store
Manufacturer

Chemical Plastic
Manufacturer Producer
Chemical

Figure 1: Stages of Detergent Supply Chain

Factors effecting Supply Chain:

Christopher Martin3 has also pointed out company focusing on Responsiveness to the
downstream requirement; Reliability of the delivery and Relationship between the
different stages of the supply chain will provide an effective supply chain. Chopra and
Meindl have also mentioned the effectiveness of the supply chain should measure in
terms of ability to meet the customer need and the costs for an effective Supply Chain.

To be able to meet the need of customer are, the performance of supply chain is
measured by:

• Response time:
o The time between when an order is placed and the time when the order
is received.
• Product variety:
o The amount of different products or mix that a customer desires from
the supplier.
• Product availability:
o The probability of having the product in stock when the customers
require.
• Customer experience:
o The ease that a customer could place an order and receive an order. It
could also be the service level provided to the downstream by the
people from the upstream.
• Order visibility:
o The ability that an order could be tracked.
• Return-ability:

3
Christopher M.: Logistic and Supply Chain Management: Strategy for Reducing Cost and Improving
Service. Prentice Hall. 2nd Ed. 1998. Great Britain.
 o The ability that downstream process could return the unsatisfactory
product and the ability that the Supply Chain Network able to handle
such return.

These factors are measured at every stage and across the different stages of the supply
chain.

The cost of supply chain is the cost of getting the materials, pushing them through the
different stages of the supply chain and placing them at the hands of the customers.
Inventory cost, distribution cost, ordering cost, information cost, facility cost and
quality cost are the cost component of the supply chain.

• Inventory cost.
o This is the cost of having and maintaining the goods required. This
goods includes raw material, work in-progress, sub-assembly,
assembled goods and finished products which could be found any
where in the chain.
• Distribution cost.
o This is the cost of distributing the goods into the different channel of
the supply chain. Distribution includes transporting, warehousing,
material handling and packaging or re-packaging.
• Ordering cost:
o This is the cost of getting the material into the respective stages in the
supply chain. For example in manufacturing stage, the ordering cost is
cost of getting the raw material into the process, which includes
sourcing, ordering, insurance and other activities.
• Information cost:
o This is the cost of setting-up the information infrastructure; gathering
and providing the necessary information for facilitate the smooth
operation of the supply chain.
• Facility cost:
o This is the cost of setting-up building, warehouses, distribution center
and other to facilitate the supply, storage and distribution of the
material.
• Quality cost:
o This is the cost of rectifying any mistake that happened during the
supply chain. It could be a wrong delivery, late delivery or any
misshapen in supply chain.

Company must find optimal trade off between cost efficiency, responsiveness and
flexibility. For example, Widget Co. implemented a pull system to reduce the
inventory cost4. They cut down the lot sizes and increase the number of delivery to
improve the responsiveness to the customer. They are able to reduce the inventory
cost by 80%. On the other hand, as the number of delivery increases, they have also
increased the distribution cost. In such situation, Jordan has recommended company
should find an optimum solution where the two conflicting objectives are neither
negatively impacts one another. The approach of getting into that optimum solution
has increased the uncertainties and difficulties in the design of supply chain.

4
Jordan S. M.: Pulling Widgets into Lean Success. Industrial Engineer. (2003)
Uncertainties in Supply Chain:

At every stage of the supply chain, they are subjected external and internal changes
and uncertainties. Hence the design needs to cater for the dynamics of the enterprise
and the market, which have great impact to the supply chain function. External
changes such as changes in the customer demand, changes in the environmental
factor, bank rates fluctuation, changes to the political situation and others. Few years
ago, the earthquake in Kobe, Japan has cut off the supply of raw material and creates
a big impact to the Japan industries. Internal changes such as material do not arrive on
time, failure of production facilities and supply routes, workers falling sick, changes
in customer orders or cancels order, and others. Such problems will increase the
uncertainty and instability of each stage of the supply chain, and these problems
spread and pass from one stage to another; both upstream and downstream. The
impact will spread like a domino and entire chain will cease to perform. Supply Chain
designer have to consider and prepare for these uncertainties within the organization
and across the organization, which cause the design task extremely difficult and
challenging.

Furthermore, the lack visibility and understanding of the downstream process in the
supply chain has increased the uncertainties, and weaken the design of the supply
chain.

Finally, the supply chain design required validation before implementation. As the
implementation required the involvement many resources horizontally and vertically
in the chain, an invalidated design has high risk of de-proving the productivity and
injecting more uncertainty into the chain.

Increase visibility and understanding:

Computer simulation has become an important tool in the design and improving an
effective Supply Chain. In the virtual world, supply chain designer could use
simulation tool to

• Visualize their conceptual layout.

• Experiment the different configuration in the supply chain.
• Benchmark the performance measures by the different configuration and the
respective investment involved.
• Expose the potential problems could have in different design.
• Verify the various countermeasures to reduce or eliminate the impact of the
problem to the supply chain in the virtual world before actual implementation.
• Supply chain designer could also test the robustness of the chain by changing
the upstream or downstream parameters such as deliver schedule and number
of resources available.

Basically, we could manipulate and play with the whole supply chain in the virtual
world, which could not be done in the real world. In his article “Get The Bird in the
Air”5, Bill has described that “Simulation is a management tool that helps managers
and engineers make correct decisions about systems with all their complexities.
Whether the system is a production system, warehousing system, material handing
system, or a people system, simulation modeling can expose problems, so the
5
Nordgren W. B.: Get The Bird in the Air. Flexsim Software Product, Inc. (1996) USA.
manager or engineer can deal effectively with the problem. Simulation not only
“flushes” the problem, but it “retrieves” the data that helps you understand why the
problem exists. Simulation modeling is just as important for decision making for
managers and engineers in charge of systems, as spreadsheets are for managing
business decisions, and should be used just as often. “

Therefore, by adopting simulation in the planning and designing of a supply chain,

before the implementation we could test and experiment our concept and design and
obtain more information and understanding of entire system by assuming changes in
the internal and external factors. We could then design a robust system that is least
affected by the uncertainties in the system.

How simulation could be used to design a Supply Chain?

Figure 2 shows a process view of a detergent Supply Chain. Each stage is inter-
connected by a replenishment process known as “cycle”. The replenishment process
between customers and retailers is known as customer order cycle. It involves
customer arrival process, order entry process, order fulfillment process and order
receiving process. The other replenishment processes are the replenishment cycle,
manufacturing cycle and procurement cycle; which connect the retailers to the
wholesalers, the wholesaler to the manufacturers and the manufacturers to the supplier
respectively.

Manufacturers
Suppliers

Timber Paper Tenneco

Company Manufacturer Packaging Distributors Retailers
Timber

P & G or Other Customer

Distributor Wal-Mart Store
Manufacturer

Chemical Plastic
Manufacturer Producer
Chemical

Figure 2 Detergent Supply Chain

In building a simulation model, one needs to decide what kind of complexity and
what level of detail is required; and what could be ignore. It is not feasible to model
every detail of the real world due to time, money or computer constraints. (Law 2000)
And sometime it is not necessary. Therefore base on the purpose of the simulation,
firstly we need to determine the level of detail. For example, it is not required to
model the material handling process with each distribution center to find out the
number of distribution required in the overall supply chain.

Secondly, we draft out the conceptual flow of the supply chain design according to
the level of detail required. We then build the model within the simulation software
environment. When a model is built, based on the historical data collected, we enter
the process information such as cycle time, material handling rules, equipment
operation information and others into each entity.
Thirdly, we run the simulation and validate the model with the real world. As the
model is only representation of the real world, it could never represent the real world
100% accurately in all aspects. Hence we need to check if the area that we are
interested in is sufficiently representing the area of study. These could be done
through animation, observation, getting the confirmation from the experts and others.
(Law 2000) When the models validated, then is the model ready for analysis.

In the analysis of the model, firstly we study the output data to find out the model
effectiveness with respect to the key performance factors. Secondly, using the same
set of performance factors, we make comparison with alternative models to determine
the best options. Lastly, by injecting possible “problems” into the model, we find out
how the input parameters affect the key performance factors. The robust model will
be one that varies least affected by the changes. The objective of using simulation is
to find out the optimized way of managing and coordinating a Supply Chain operation
and robust design ready for the changes from the external environment, and able to
meet the customer need with the lowest cost.

Case study I: Anderson Air Force Base

A supply chain model was built to address the refueling problem of military aircraft in
Anderson Air Force Base, USA. In addition, it also elaborates how simulation is used
in designing the supply chain6.

Problem description: In the process of replacing the aging refueling system, 50% of
the hydrants are taken offline. A new design of the refueling supply chain is required
to ensure the fast refueling and combat readiness of the aircraft.

Approach: Four models are built for four different proposal, they are then compared
where the best option is selected. The selected proposal is optimized to achieve the
best outcome in terms of resource utilization. (See Figure 3)

Result: The model helped the designers to develop a process to increase a throughput
of refueling system even while 50% of the refueling system is inoperative. (See
Figure 4 for sample report)

6
Monson, Lori: Andersen Air Force Base Hits Refueling Target. Simulation Success. ProcessModel,
Inc. USA. 2003
Figure 3 Andersen Air Force Models

Figure 4 Simulation Report

Case study II: Happy Customers
In a case presented by Mario Ivanoff of Galileo on the Simulation Success, June
20007, he described how simulation was adopted to find out how the streamlining of
their sales force could have impacted on their customer order cycle mainly on
customer relationship and sales revenue. Galileo employed several methods,
including simulation, to identify areas for improvement. An “as-is” model was created
and used to analyze various “what-if” scenarios. This approach revealed that some
current internal systems, processes and organizations could be made even more
effective and efficient.

Through simulation, the average waiting time of a customer was reduced from 20
weeks to less than two days. From an average queue size of 54, it was reduced to an
average of less than one. Over a two-year simulation, the maximum queue size was
reduced from 102 to six. Simulation also revealed process improvements reducing
account managers utilization. The simulated two-year period also revealed that the
number of contracts with new medium sized accounts and the number of large
account contract was increased by about 120 percent and 150 percent respectively.
Supported by the results of this modeling activity, Galileo continues to focus on
building an innovative customer relationship management program that includes
enhancing key systems and processes, while automating aspects of its sales force to
increase positive interaction with its customers.

Stage 1: Procurement Stage 2: Manufacturing Stage 3: Distribution

StoreRM1 1 Unit=1000 Bulbs

RM
1
P1
P1 Line1
Move Stock1 FillOrders Update
Ship
StoreRM2 P1Alt P1 for Product 1 Total Costs

RM2
Line2 P2

P2 Move Stock2 FillOrdersfor

Choose Packaging
Kitting P2 Product 2
Line
StoreRM3 P2Alt
RM3 Line3
P3
P3

P3Alt P2Alt Move Stock3 FillOrdersfor

P3 Product 3
StoreRM4 Line4 Check
Inv1
RM4

Scheduling Check
Inv2

StoreRM5 Check
RM5 Inv3

Demand

P1Order P2Order P3Order

Figure 5 Supply Chain Model

7
Ivanoff, I.: Happy Customer: The Heart of Business Success. Simulation Success. (June 2000).
Case III: Verification of design
Simulation is adopted when one of the semiconductor companies in Singapore would
like to verify the design of the new Auto Storage and Retrieval System (ASRS) is able
to meet the requirement of the supply chain8. Firstly, the “As-is” model of the existing
material handling system is built. The existing information with regards to the
operation is collected from the Warehouse Management System (WMS) and input
into the model. The simulation result is presented to the management for validation.
Some changes over the model are carried out based on the feedback from the process
owner. After a few rounds of fine-tuning, the management approved the model. Based
on the validated model, the new ASRS is added to model. A few round of simulations
are conducted to obtain the average performance of the system. From the simulation,
it is shown the new ASRS is able to improve the material throughput time by 30%.

Figure 6 Semiconductor Warehouse Systems

Figure 7 New Semiconductor warehouse System with ASRS implemented

8
Foo, M.F.: Throughput Optimization Study for a Logistic Distribution Center. Temasek Polytechnic.
Singapore (2003)
The followings are some other models (See Figure 8 & Figure 9) that are built for
analyzing the detail operation of a distribution center and warehouse design,
conveying system and material handling systems. Figure 10 & Figure 11 shows the
type of information that could be obtained from simulation.

Figure 8: Distribution Center

Figure 9: Warehouse
Figure 10: Waiting time

Figure 11: Changes in inventory against time

Conclusion:
Simulation has added value to the design of a robust supply chain as it provides better
understanding of the chain and the impact of uncertainties toward each stage of the
chain. This will allow us to able to response to chain effectively and making the
supply chain stable and robust.