Journal of Manufacturing Technology Management

Emerald Article: An examination of the differential effects of transportation in supply chain optimization modeling Faizul Huq, Thomas F. Stafford, M. Khurrum S. Bhutta, Saurajit Kanungo

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To cite this document: Faizul Huq, Thomas F. Stafford, M. Khurrum S. Bhutta, Saurajit Kanungo, (2010),"An examination of the differential effects of transportation in supply chain optimization modeling", Journal of Manufacturing Technology Management, Vol. 21 Iss: 2 pp. 269 - 286 Permanent link to this document: http://dx.doi.org/10.1108/17410381011014404 Downloaded on: 14-05-2012 References: This document contains references to 47 other documents To copy this document: permissions@emeraldinsight.com This document has been downloaded 1550 times.

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An examination of the differential effects of transportation in supply chain optimization modeling

Faizul Huq
Management Systems Department, College of Business, Ohio University, Athens, Ohio, USA and IRMAPE, Pau, France

Supply chain optimization modeling 269

Received April 2008 Revised June 2009 Accepted September 2009

Thomas F. Stafford
Fogelman College of Business, University of Memphis, Memphis, Tennessee, USA

M. Khurrum S. Bhutta
Management Systems Department, College of Business, Ohio University, Athens, Ohio, USA, and

Saurajit Kanungo
Pariveda Solutions, Dallas, Texas, USA

Abstract
Purpose It has been suggested that much of the potential inefciencies associated with supply chain management (SCM) costs can be traced to wasteful practices such as inefcient, unnecessary, or redundant stocking practices, or inefcient transportation. The purpose of this paper is to develop a model which reconciles many of these inefciencies by integrating production factors, purchasing, inventory, and trucking decisions for optimizing supply chain costs between rst-, and second-tier suppliers and subsequent OEM customers. Design/methodology/approach The modeling technique is mathematical programming tested in a simulation model. In an effort to determine the signicance of the transportation component of the proffered model, the fully developed model is differentially tested, including standard production variables varying transportation costs, paired with similar instances of the model in which the transportation costs are xed. Findings Signicant differences are found in the predictive abilities of the respective models, and this supplies pragmatic evidence of the important role that transportation issues play in the consideration of integrated SCM costs. Research limitations/implications The key limitation to this nding lies in the validation process. As suggested by Sargent, Monte-Carlo studies are useful for validation purposes, and the supply chain optimization model (MHSCM) is certainly conrmed through this particular simulation. Practical implications The managerial focus on transportation management and cost control in SCM can be highlighted as a critical implication of the study. Originality/value The structure of the MHSCM is robust, and may be useful for cost-control planning purposes in a dynamic environment, subject to certain limitations accruing to the methodology. Keywords Distribution management, Transportation, Supply chain management, Simulation Paper type Research paper

Journal of Manufacturing Technology Management Vol. 21 No. 2, 2010 pp. 269-286 q Emerald Group Publishing Limited 1741-038X DOI 10.1108/17410381011014404

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I. Introduction Effective management of the distribution function has become a critical issue in business; known as supply chain management (SCM), this new approach to the integration of distribution and manufacturing is one of the most popular management concepts in logistics (Kiefer and Novack, 1999; Ballou, 2007). Businesses seek to increase value through efcient SCM, and one of the easiest ways to increase value is through increasing volume while reducing waste through the lowering of operating costs (Chase, 1998; Ballou, 2007). Since about 10 percent of domestic gross national product is expended on supply channel costs, the effective management of supply chain costs could very well result in cost savings of as much as 10 percent of annual operating costs, as has been suggested with regard to specic industries, such as grocery retailing (Henkoff, 1994). In other areas, savings can be as dramatic as 7 percent of annual revenues. While the literal interpretation of the process view of business might imply that connections between individual processes like order fulllment and supplier development are not critical, a more accurate representation would be that the economic realities of how businesses generate value imply that organizations should act as an integrated whole in the supply chain (Braithwaite and Samakh, 1998). Certainly, transportation can play a key integrative role in supply chain structures, since carriers may be in an ideal position to integrate and coordinate ows throughout the supply chain (Morash and Clinton, 1997; Stank and Goldsby, 2000). This suggests a close consideration of the role that transportation plays in the integrated SCM scenario. A recent study by Green et al. (2008) theorized that logistics performance of a rm positively impacted supply chain performance, which in turn, improved the nancial performance. Using SEM modeling, their research validated this and they argue that success of supply chain partners depended on the overall success of the supply chain in which they participated. From the transportation and logistics perspective, SCM is synonymous with integrated logistics systems (Tan et al., 1998). To that end, transportation is a key component in SCM (Trunick, 1999a), as has particularly been the case since legislation signed by President Clinton in 1994 eliminated tariffs and intrastate deregulation, subsequently providing carriers much greater exibility in meeting shippers needs (Kellerman, 1998). However, to effectively manage the total supply chain, companies will need to source, buy, and manage transportation much differently than they have in the past (Minahan, 1998), and it should be noted that transportation companies, while often considered a strategic resource, are not always included in critical strategic planning processes among channel partners (Gentry, 1996). Hence, carriers can be considered critical in meeting important SCM goals of on-time delivery (including just-in-time (JIT) initiatives), reduced inventory levels, and increased customer service levels (Crosby and LeMay, 1998; Gentry, 1996), yet it seems that transportation is a portion of the managed supply chain that is taken for granted or under appreciated, relative to its value, and contribution to channel efciencies. More importantly, it appears that cooperating buyers and suppliers cannot possibly optimize supply chain costs without involving transportation carriers in the process (Carter and Ferrin, 1995; Sheu, 2005). Since carriers often conclude that they lack the skills necessary to operate a supply chain on their own (Foster, 1999), the strong implication is that carriers as well as suppliers should be involved with OEMs in the organization and management of supply chains. Transportation elements of the supply

chain has received relatively less attention in the supply chain literature but a few studies such as (Giunipero and Eltantawy, 2004; Hendricks and Singhal, 2005), have discussed the risks and disruptions in supply chains and have suggested appropriate strategies to mitigate the crippling of a supply chain. This paper is an effort to determine the signicance of the transportation component of the proffered model; we differentially test the fully developed model, including standard production variables varying transportation costs, paired with similar instances of the model in which the transportation costs are xed. Signicant differences are found in the predictive abilities of the respective models, and this supplies pragmatic evidence of the important role that transportation issues play in the consideration of integrated SCM costs. II. SCM and cross-organizational integration As organizations face increasingly competitive circumstances, managers seek new ways to manage supply chains effectively; as a result, companies are beginning to leverage not only their own internal assets, but also at least implicitly those held by partners in the supply chain (Hall, 1999). In many cases, the consideration goes beyond just the strategic determination of assets among partners in the channel; companies are beginning to focus solely on what they do best their core activities and to outsource the rest, even though their success depends strongly on the ability to control what happens in the value chain outside their own corporate boundaries (Krause et al., 1998; Magretta, 1998). In this core competency/outsourcing orientation, SCM is increasingly viewed as a source of competitive advantage. However, the implication is that supplier performance must be both managed and developed in accordance with the strategic requirements of the buying rm if the supply chain is to be a source of competitive advantage (Krause et al., 1998). A key challenge in SCM is the evaluation of supply chain performance; a fundamental consideration in the evaluation process is the determination of which processes are to be managed and, subsequently, which intermediaries are to be included, in a supply chain (Kiefer and Novack, 1999). Of the factors which are evaluated in structuring supply chain agreements, price, and quality are critical, but so, too, is the consideration of suppliers and their delivery performance (Groves and Valsamakis, 1998). Historically, supply channel integration has been administered by inuential channel captains utilizing traditional systems of control, adversarialism and functional management, often to their own self-motivated (if not exclusive) benet. However, businesses are increasingly recognizing that there is only one real source of income for the whole chain (the end customer), and that forced co-optation (and subsequent sub-optimization) of individual supply chain members by a dominant channel member will only transfer, and not remove, costs and inefciencies to the less powerful channel partners. Hence, the functional, adversarial approach to the management of supply chain resources has become outdated, and frankly, inefcient, in a time when maximum efciency across the entire supply chain is the route to shared advantage for all participating partners (Burgess, 1998). As such, the mutual benets of operating supply chains as integrated systems of material, information and nancial ows can be expected to accrue to all participating parties, and these benets are increasingly sought and advocated by rst-tier suppliers

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(Rich, 1999), who often nd themselves in the middle between suppliers of their own (the second tier) and the OEM companies which are ultimately served by the integrated channel between the three parties. To this end, the conundrum of the supply chain could be characterized as one of companies not wishing to bear the cost of owning the entire set of strategic assets needed to efciently obtain materials and distribute products, but also of not wishing to relinquish control over the disposition and deployment of these selfsame assets. The solution would appear to be the development of close, long-term relationships in supply chains between manufacturers and their suppliers (Landry, 1998). It is a key position of this paper that the integrative activities of rst-tier suppliers, ranging from their own suppliers in the second tier of the supply chain, through to the automotive OEM served by the multi-functional supply chain, tend to lend rather greater degrees of efciency than might be realized in more traditional arms length, adversarial channel management models previously practiced in the automotive industry. To that end, an integrative two-tier SCM model for optimization of efciency and minimization of associated costs is presented and proposed here for testing. In the following section, we present a supply chain optimization model (MHSCM) that tests the impact of transportation costs. In subsequent sections, we describe the experimental design and test the model using the little red wagon scenario. III. An integrative model Supply chains are dened as three or more organizationally distinct handlers of products, where products include physical goods, services, and information (Cooper et al., 1997; Ballou, 2007). Such might be the case with an OEM and its rst- and second-tier suppliers. In such a case, what would otherwise be considered a dyadic partnership between an OEM and its individual suppliers could actually represent an inbound supply chain involving a tripartite alliance of rms working together to meet common goals and objectives (Gentry, 1996). This represents a potent rationale for the consideration of the supply chain dynamics between an OEM and several levels of suppliers. Transportation, from the planners perspective, is only one of the elements in the supply chain representing about 36 percent of total distribution costs; the other 64 percent of cost is consumed by other elements in the supply chain, which the logistician will take into account when making decisions about channel relationships (Horsley, 1993). Successful SCM, however, generally requires good transportation resources, because the transportation system becomes the warehouse, with orders consolidated in the computer and carriers coordinated for JIT delivery (Tan et al., 1998). Even though carriers are considered to be critical in meeting supply channel partnership goals and objectives (Trunick, 1999b), they are not generally included in the strategic planning for SCM (Gentry, 1996). Perhaps, rms are reluctant to devote management and systems resources to the negotiations and operational transactions necessary for truly cross-functional, trilaterally optimized, and SCM (Carter and Ferrin, 1995). Hence, it seems wise to demonstrate the differential effects of efcient SCM both with transportation costs varying as they might be expected to in normal market conditions, and with xed transportation costs to form a basis for comparison of model efciencies. Such a comparison would rmly demonstrate the value that the transportation variable plays in SCM efciencies. Mohamed and Huqs (2000) MHSCM distinguishes between three key components of supply chain costs: inventory, setup, and transportation. Since the optimization model is

based on three sub-models, it is easy to alternatively test the incremental value of the transportation element through degenerative testing (Sargent, 1988), in which the full model including the transportation calculation is compared to a reduced version, with transportation cost xed. Mohamed and Huq (2000) characterize the three costs components, thus: 2 3 X XX 1 4 mj nj hj r kj mj nj nkj hkj 5 Inventory cost Q h 2 j j k 2 3 X 1 XX 1 D4 S Sj r kj S kj 5 Setup cost Q mj mj j j k 2 3 XX 1 D 4X 1 Transportation cost cj r kj ckj 5 Q mj mj j j k where: D annual demand for the end item of the OEM. J index set of rst-tier suppliers. K index set of second-tier suppliers. Q optimal quantity per order. rkj 1 if kth second-tier supplies to the jth rst tier, otherwise 0. nj number of units from jth supplier required to make one unit by OEM. nkj number of units from kth second tier to the jth rst tier, to produce one unit. S setup cost of the OEM. Sj setup cost of the jth rst-tier supplier. Skj setup cost of the kth second-tier supplier to the jth rst tier. H unit holding cost of the OEM. hj unit holding cost of the jth rst-tier supplier. hkj unit holding cost of the item kth second-tier supplies to the jth rst-tier supplier. cj ckj mj transportation cost from the jth rst-tier supplier to the OEM. transportation cost from kth second-tier supplier to the jth rst-tier supplier. number of cycles supply quantity pickup from jth rst-tier supplier by the OEM.

Supply chain optimization modeling 273

In the model: Total cost Inventory cost Setup cost Transportation cost:

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As demonstrated by Mohamed and Huq (2000), the following roots are found by setting the two partial derivatives, with respect to mj and Q, equal to zero and solving simultaneously. Q has only one real root that can be obtained using the goal seek function of the Excele spreadsheet program: v i u h P PP u2D S j 1=mj S j cj j k 1=mj r kj S kj r kj ckj t P PP Q h j mj nj hj j k r kj mj nj nkj hkj s P 2D S j cj k r kj S kj ckj P Q mj nj hj k r kj nj nkj hkj III.1 Experimental design The purpose of this study is to determine whether a reduced version of the MHSCM, with the transportation variable xed, will be as efcient in optimizing supply chain costs as the full version of the MHSCM, including varying transportation costs. To that end, the experimental design for this study involves a simple 1 2 comparison. In the design, the independent variable is transportation either varying or xed. Hence, in the 1 2 design, cell one is represented by the full model with varying transportation costs, and cell two is represented by the reduced model, with xed transportation costs. The dependent variable assessed will be model stability. We are interested in seeing if the models perform in similar fashion: if the reduced version of the model is stable at differing demand levels, and if, in fact, the cost factors supplied by the reduced model are any different than in the full MHSCM. Signicantly different returns in the reduced model would tend to support the contention that transportation is an integral variable in MHSCM, as tested here in the form of the MHSCM. III.2 Simulation methodology Simulation models can be validated in a number of ways; most involve some comparison to real world events, or evaluation by knowledgeable persons involved with the phenomenon at hand, though some methods can utilize mathematical studies of model characteristics in early stages of development (Sargent, 1988). Generally, data are required for three distinct types of testing, including building the conceptual model, validating the model and performing experiments with the validated model; in the absence of good sources of realistic industry data in validation, internal consistency testing can be substituted in Monte-Carlo approaches (Sargent, 1988). Among the many methods that might be used for validation, internal validity can be demonstrated by performing several replications of a model to determine the amount of variability it may demonstrate. Replications notwithstanding, the researcher can choose from wide variety of approaches. Some are qualitative, involving graphical depiction or examination by skilled practitioners familiar with the phenomenon under study; some are quite methodological, such as degenerative testing, where portions of a model are removed and various reduced versions are compared to each other

(Sargent, 1988, p. 33). It is the degenerative approach, combined with repeated internal validity replications, which will be utilized here, as we examine the complete model discussed above, and compare it to the reduced model, absent the transportation effect, in an effort to demonstrate the critical role that transportation plays in models of SCM processes. This iterative approach is much the same as the tatonnement process (Takayama, 1985), and Schuster (1987) demonstrates a handy method for examining such iterative models, using ordinary spreadsheet programs and les of randomly generated numbers (limited within some set of reasonable parameter limits) as data input. The Log and trig method of Mihram (1972) is recommended for purposes of generating normally distributed sets of numbers for use in Monte-Carlo simulations (Schuster, 1987, p. 848). Schusters approach is particularly useful, since it parallels the approach advocated by Sargent (1988), where internal validity of a model is examined by repetitious testing; Schusters (1987) suggestion is to run a simulation using random numbers at least ten times, comparing each iteration of the models performance using t-tests. This method seems reasonable and expedient for purposes of individually testing the full and reduced versions of the proffered supply chain model. Yet, one last matter must be attended to: if the model is robust to demand uctuations, it must produce results that compare favorably to returns based on some ideal or predicted state of demand. To that end, the work of Giaglis et al. (1999) is noteworthy. Their approach to examining the efcacy of business process simulation in comparisons of as-is to to-be organizational models during ERP implementation demonstrates the use of average performance gures as useful benchmarks for determining SCM-related qualities of simulation models. With the need of an adequate as-is benchmark in mind, we intend to compare the performance of the to-be model iterations to a putative average performance level exemplied by the scenario-specied planned weekly production level of 20,000 units. That is, the model will be calculated once, using the average performance level drawn from the planned weekly production levels of 20,000 units, and this will form the comparison point for iterations of the model that will be based on random variations from the planned production levels for purposes of calculating model outcomes. The reasoning is that the proffered model, if it is valid and robust, should perform equally well at both planned, as well as unplanned and uctuating, production levels. IV. The little red wagon scenario We intend to use the heuristic demonstration of building the little red wagon, in lieu of actual automotive market data in our simulation. This is a simplistic product, which forms a simplistic analog for a vehicle, and it is easily envisioned for purposes of simulation testing. The scenario is reasonable since our purpose is to examine model validity. Let us assume that rst-tier suppliers produce components for wagon production, which are purchased by the OEM, Red Wagon, Ltd, and that the rst-tier suppliers in this imaginary scenario obtain their basic components from second-tier suppliers in the channel. The rst-tier suppliers of which there will be ve build red wagon bodies from sheet steel stock, wheels from plastic resin, axle truck assemblies and towing handles from sheet steel stock, and axles from steel rods. An assortment of nine

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washers, ve cap nuts and one tie rod are provided by another rst-tier supplier who serves as a wholesale distribution warehouse for supplying basic hardware; we do not presume to examine their second-tier supplier relationships in this model, since they are not engaged in manufacturing. Three second-tier suppliers provide raw material to the rst-tier suppliers for production (in one case, one second-tier supplier provides raw sheet steel stock to two rst-tier suppliers). This scenario is visually shown in Figure 1. Assume the OEM, Red Wagon, Ltd, has a market volume of one million units per year, sold into the distribution channels for large volume variety and toy stores. Further assume that production and delivery of parts necessary to support this volume will correspond to the weekly OEM production batch of 20,000 units. This production batch is based on a six day week, three shifts per day, 50 weeks per year, with one day off, weekly, for maintenance and setup, and two weeks downtime, yearly, for major maintenance. This weekly production batch will the predicating factor in establishing production levels and other gures for SCM on the part of the administered channel made up of Red Wagon, Ltd, its rst tier, comprised of WheelCo, BodCo, HandleCo, AxleCo, and PartsCo (the wholesale parts distributor), and the second tier made up of PlastiCo, SteelCo, and RodCo. The transportation contractor be known as Diesel Weasels, LLC. The objective of the simulation is to rst determine if the model is stable. Second, an objective is also to determine if the inclusion of managed transportation costs in the overall SCM perspective results in more or less (or even unchanged) channel efciencies, based on paired tests between iterations of the full model which include varying transportation costs, and reduced versions of the model which hold transportation costs xed. The efcacy of the individual model iterations of each type using randomly generated OEM demand levels, and uctuating pickup frequencies from suppliers as input will be assessed with one sample t-tests using the baseline gures for planned production levels of 20,000 units per week as the test value.

Red Wagon, Ltd.

OEM

PartsCo

AxleCo

BodCo

HandleCo

WheelCo

First tier

Figure 1. Conceptual model of two-tier supply chain

RodCo

SteelCo

PlastiCo Second tier

IV.1 Cost basis for modeling Costs for use in generating log/trig randomized input of OEM demand and supplier pickup frequency for model validation will be based on starting points which correspond to the following estimations for actual costs of the various SCM elements, and are displayed in Appendix 1. Cost calculations are based on the starting point of an estimated annual demand for one million red wagons in the channel, hence weekly batches at Red Wagon, Ltd, are in the amount of 20,000 units. We assume steel sheeting will be shipped in 8 10 foot panels, and that steel rods will be shipped in the form of 34-foot rods. Resin will be shipped in 50-pound blocks, with one pound required to produce a set of four wagon wheels. Wagon parts from BodCo are calculated based on a nished body size of 36 inches long, by 24 inches wide and three inches deep, with truck sets (two per wagon) expected to occupy the volume of a shipping box that is 24 inches long, by three inches wide and four inches high. Wheel sets for a single wagon are expected to ll a shipping box eight inches long, by ve inches wide and ve inches tall. Finished axles are packed 100 to a box, dimensions of which are 24 inches long, by ten inches wide and ten inches tall. The plastic-wrapped parts sets provided by PartsCo for nal assembly t ten bags to the box, which measures three inches square. Shipping frequencies are based on the expected containment volumes of a standard semi-trailer (or, alternatively, a atbed trailer) measuring 48 feet long, by eight inches wide and eight inches high. About $1,839.00 is an average gure for low-volume private/lease carrier shipments, as provided in Bienstock and Mentzer (1999) for shipping a fully loaded unrefrigerated trailer or atbed. Dimensions of either components or packaged components (and their subsequent packaged numbers) are used to calculate typical shipment sizes, and, hence, shipment frequency starting values for the simulation. Shipping costs at the second tier are a function of the standard $1,839 cost for a full truck, modied by the expected unit volume to support the OEM weekly production batches, as expressed in number of full loads per week shipped. Holding costs are estimated using standard manufacturing management examples from a leading manufacturing management textbook (Askin and Standridge, 1993), and it is generally assumed that raw stock will entail greatly reduced holding costs as opposed to nished inventory or machined components. V. Model validation and results Data produced by log/trig randomization are displayed in Appendix 2. These data include total costs (combining the costs elements of inventory, setup, and transportation costs) for the full model in which transportation costs vary, as well as total costs for the reduced model in which transportation costs are xed at the $1,839 industry average provided by Bienstock and Mentzer (1999). As can be seen from paired tests between model iterations in which transportation costs vary and in which transportation costs are xed, shown in Table I, it would appear that the transport variable does signicantly impact the efciency of the model. This suggests that even with delivery frequencies from suppliers uctuating randomly in the model input, transportation is a critical cost component in two-tier supply chains (Table II).

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Iteration 1 2 3 4 5 6 7 8 9 10 11 12

t-value(12,11) 2304.73 61.79 57.34 249.03 70.37 2578.97 274.83 2253.122 236.45 113.42 229.43 2116.06

Signicance 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

278

Table I. Paired t-tests for reduced and full scale models

Iteration Total costs calculated 1 2 3 4 5 6 7 8 9 10 11 12 Costs without transportation 1 2 3 4 5 6 7 8 9 10 11 12

t-value(12,11) 0.838 0.614 20.160 21.723 2.089 20.368 0.453 20.101 21.157 20.242 0.414 1.132 0.343 0.562 20.186 21.740 2.074 0.415 0.393 20.133 21.179 20.544 0.205 1.050

Signicance 0.420 0.552 0.876 0.113 0.061 0.720 0.659 0.922 0.272 0.814 0.687 0.282 0.738 0.585 0.856 0.110 0.062 0.686 0.702 0.896 0.263 0.597 0.841 0.316

Table II. t-tests for 12 iterations of the simulation

Moreover, when considering the validity of the SCM model proffered by Mohamed and Huq (2000), it appears based on the one sample t-tests performed to check internal validity across 12 individual weekly cycles within each 12 different iterations of the simulation, displayed in Table I that the model is robust in either full or

transportation-xed reduced form. That is, none of the internal model iterations for either the full model, or the xed form where transportation costs do not vary, show a signicant difference from the total cost gures generated by a special version of the model set to consider the putative 20,000 unit planned production level. In short, the model is shown to be internally valid for purposes of estimating total costs in the supply chain regardless of uctuating levels of demand, and while it is demonstrated that transportation is a key model variable, the simulation is equally effective in estimating costs whether transportation is a varying factor in the model or not. In addition to showing that there is signicant total savings over the xed transportation cost scenario, presented in Table III, the MHSCM provides for the justication of supply chain cooperation amongst supply chain participants, e.g. OEM rst- and second-tier suppliers. The stability of the model as indicated from the t-test results presented in Table IV also exemplies that cost savings can be shared among the participants equally if information is shared amongst the partners in the supply chain (Table III). VI. Discussion and limitations Plentiful evidence exists to suggest the importance of the transportation variable (Allen, 1997; Baboli et al., 2008), and our simulation results tend to conrm this factor, in conditions of both uctuating OEM demand and uncertain delivery frequencies from suppliers. Hence, managerial focus on transportation management and cost control in SCM can be highlighted as a critical implication of the study. For example, in the automotive industry, efciency is no longer sufcient. Customers demand greater choice, better service, and faster results; efciency appears to be taken for granted. Traditional automotive supply chain structures and practices seem unsuited for the new level of competition, which implies the need to question assumptions and to fundamentally rethink the way in which business is carried out (Burgess, 1998). As the industry experiences intense role redenition, in the move from an undifferentiated structure of assemblers and suppliers, to a channel structure in which important differences exist among suppliers, one of the ways automotive market OEMs are responding to new challenges is by delegating tasks and responsibilities to rst-tier suppliers (Hall, 1999). As US automotive OEMs face the rigors of the competition-induced redenition of supply chain models, purchasing executives are forced to chose between a dichotomy of the traditionally used arms length model of supplier relationship management, versus an emerging cooperative model, which takes into account the synergies of integrative channel partnerships (Dyer et al., 1998). In the USA, for example, Fords Chicago supplier park located within two miles of the assembly plant, provides an integrative and collaborative supply chain model enabling Ford a savings of $50 in transportation costs per car resulting in overall potential savings of $15 million on a capacity of 300,000 cars annually (Jacobs and Chase, 2008). Of the foreign competitors in the automotive market who already practice integrative SCM, notably those in Korea and Japan, rst-tier suppliers already play a crucial role in the efciency of the automotive manufacturing process (Dyer et al., 1998). The structure of the MHSCM is robust, and may be useful for cost control planning purposes in a dynamic environment, subject to certain limitations accruing to our methodology. The key limitation to this nding lies in the validation process.

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Run 2104,775 298,546.8 2100,952 299,711.4 2104,604 295,052.3 289,317.7 286,864.6 291,434.6 2103,822 286,924.6 2102,364 214,135.5 221,488.0 196,672.7 198,268.0 208,960.5 203,354.3 186,609.0 199,260.0 197,327.7 192,610.5 192,230.8 196,959.5 2803,095 2776,893 2809,171 2822,210 2782,135 2774,581 2724,891 2772,222 2820,921 2827,558 2839,748 2786,267 2 1,638,491 2 1,633,683 2 1,625,956 2 1,625,899 2 1,617,361 2 1,645,998 2 1,627,528 2 1,635,787 2 1,632,832 2 1,617,188 2 1,615,808 2 1,617,707 2 1,163,016 2 1,282,766 2 1,146,536 2 1,260,240 2 1,329,991 2 1,253,678 2 1,245,226 2 1,193,667 2 1,242,634 2 1,278,954 2 1,280,449 2 1,164,734 2 897,730 2 906,900 2 910,596 2 913,069 2 914,058 2 928,863 2 940,598 2 929,474 2 911,537 2 910,034 2 905,513 2 928,508 1,380,800 1,310,788 1,368,006 1,406,113 1,374,334 1,414,465 1,344,782 1,333,822 1,378,754 1,316,140 1,321,454 1,441,678 2 543,401 2 560,642 2 446,943 2 433,635 2 470,302 2 460,333 2 501,689 2 573,430 2 550,575 2 446,321 2 520,956 2 394,362

1 2 3 4 5 6 7 8 9 10 11 12

Table III. Total savings from using the MHSCM model Simulation 3 4 5 6 7 8 9 10 11 12 2 1,752,522 2 1,652,791 2 1,748,727 2 1,664,561 2 1,650,854 2 1,630,284 2 1,652,994 2 1,728,003 2 1,722,511 2 1,609,873 2 1,638,605 2 1,633,446

2936,361 2927,998 2932,916 2932,566 2960,835 2949,505 2940,033 2933,339 2927,429 2933,036 2926,152 2923,257

934,013.9 824,353.9 827,065.3 771,832.8 903,565.1 821,192.7 897,975.0 889,528.0 923,616.0 866,901.4 853,544.2 840,541.3

266,569.3 329,200.2 319,144.7 323,830.4 320,099.5 282,990.7 330,182.7 309,947.8 307,731.9 301,622.9 311,702.2 309,287.8

Iteration Transportation costs varying 1 2 3 4 5 6 7 8 9 10 11 12 Transportation costs xed 1 2 3 4 5 6 7 8 9 10 11 12

t-value(12,11) 0.838 0.614 20.160 21.723 2.089 20.368 0.453 20.101 21.157 20.242 0.414 1.132 0.686 1.556 20.146 21.713 2.112 0.130 0.429 20.075 21.167 20.510 0.211 1.067

Signicance 0.420 0.552 0.876 0.113 0.061 0.720 0.659 0.922 0.272 0.814 0.687 0.282 0.507 0.148 0.887 0.115 0.058 0.899 0.676 0.942 0.268 0.620 0.837 0.309

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Note: t-tests for internal consistency of simulation models

Table IV. Stability measures

As suggested by Sargent (1988), Monte-Carlo studies are useful for validation purposes, and the MHSCM is certainly conrmed through this particular simulation. However, the future investigation of transportation components of SCM will likely require a detailed study of transportation costs over short, intermediate and long distances, at both full load and LTL scenarios, in contrast to the basic delivery frequency variations modeled here. VII. Conclusion This study performed a Monte-Carlo validation of the Mohamed and Huq (2000) SCM model. t-Tests assessed model overall cost output for uctuating OEM demand levels, and for uctuating rst- and second-tier supplier delivery levels, as compared to overall costs produced by a hypothetical stable OEM demand state input. The lack of signicant differences between model returns using uctuating input levels and the hypothetical steady state suggests that the MHSCM produces stable performance in dynamic environments; this was the case for both the full and reduced versions of the model. Hence, the MHSCM proved to be stable at various demand levels in simulation. To this end, it can be considered internally valid (Sargent, 1988) on the basis of evidence supplied by this simulation, and might reasonably be expected to be robust in application to uctuating demand levels in the marketplace.

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Comparisons between full and reduced versions of the MHSCM were also made; transportation costs were found in degenerative testing to signicantly impact the performance of the model. The signicant differences between model versions suggests that transportation costs play a signicant role in this particular simulation, and future research can seek to further examine the differential effects of transportation in simulations where the variable plays a relatively larger cost role through randomization of additional transportation features related to load size and delivery distance. Future research can seek to further investigate the MHSCM through the collection of data from supply chain organizations. Simulations have use for investigations of internal validity (Sargent, 1988), but external validity and practical application must be supported through real-world applications. Hence, future studies could seek to identify rst- and second-tier OEM supply chains which are amenable to direct investigation. Such a process will provide additional evidence for the conrmation on internal validity of the MHSCM, and will supply additional support for its application in actual working scenarios.
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Appendix 1 Model components D 1,000,000 units annually. J 5, rst-tier suppliers: WheelCo, BodCo, HandleCo, AxleCo, and PartsCo. K 3, second-tier suppliers: PlastiCo, SteelCo, and RodCo. rkj binary selection integer. nj number of units from jth supplier to make one unit by OEM.

nwheelco nbodco nhandleco naxleco npartsco

four wheels. one body, two truck assemblies. one handle. two axles. one pack of assembly parts (nine washers, ve tap nuts, and one tie rod).

Supply chain optimization modeling 285

nkj number of units from kth supplier to jth supplier.

nplastico-wheelco 1 pound of resin to make four wheels. nsteelco-bodco 5 square feet of steel sheet to make one wagon body and two trucks. nsteelco-handleco 0.75 square feet of steel sheet to make on handle. four feet of steel rod to make two axles. nrodco-axleco

S setup cost of OEM $700 per 20,000 (weekly batch).

Sj setup cost of rst-tier suppliers. Swheelco 700. Sbodco 500. Shandleco 400. Saxelco 300.

Sk setup cost of second-tier suppliers.

Splastico 500. Ssteelco 500. Srodco 500.

h holding cost of OEM $3.5/unit/year.

hj holding cost at the rst tier. hwheelco $1.50/unit/year. hbodco 2.00. hhandleco 1.50. haxelco 1.00.

hkj holding cost of k supplier to jth rst-tier supplier.

hplastico-wheelco 1.00/unit/year hsteelco-bodco 1.00. hsteelco-handleco 1.00. hrodco-axleco 1.00.

Cj transport cost from the jth rst-tier supplier to the OEM.

Cwheelco $1,839.00 per truckload. Cbodco 1,839. Chandleco 1,839. Caxelco 1,839. Cpartsco 1,839.

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mj frequency of pickup (full truckload) from jth supplier by OEM.

mwheelco 1 time weekly. mbodco 11.2 per week. mhandleco 0.55 per week. maxelco 0.1 per week. mpartsco 0.1 per week

286

Appendix 2. Randomized supply pickup for each simulation

Number of cycles supply pickup (mj) for 12 iterations randomized transportation simulation Supplier 1 2 3 4 5 6 7 8 9 10 11 12 1. 2. 3. 4. 5. WheelCo BodCo HandleCo AxleCo PartsCo 0.4 4.4 0.41 0.02 0.02 0.4 4.4 0.41 0.02 0.02 0.2 10.9 0.3 0.05 0.05 0.3 11 0.2 0.06 0.06 0.9 2.7 0.2 0.05 0.05 0.6 5 0.2 0.09 0.09 0.9 4.3 0.47 0.07 0.07 0.6 5 0.2 0.09 0.09 0.8 4.9 0.38 0.08 0.08 0.5 10.8 0.43 0.01 0.01 1 5.2 0.52 0.02 0.02 0.2 2.4 0.36 0.07 0.07

Table AI.

Supplier 1. 2. 3. 4. 5.

Number of cycles supply pickup (mj) for 12 iterations xed transportation simulation 1 2 3 4 5 6 7 8 9 10 11 0.444 7.129 0.239 0.0103 0.0233 0.191 2.813 0.472 0.0366 0.0261 0.637 0.909 0.896 0.963 0.113 8.989 10.496 1.705 8.38 9.95 0.152 0.364 0.111 0.131 0.392 0.031 0.065 0.047 0.0189 0.068 0.0586 0.023 0.062 0.012 0.0516 0.467 7.92 0.512 0.025 0.043 0.877 8.629 0.166 0.077 0.087 0.225 0.0321 9.704 10.58 0.431 0.328 0.0274 0.0913 0.074 0.089

12 0.0141 9.58 0.498 0.034 0.0633

Table AII.

WheelCo BodCo HandleCo AxleCo PartsCo

Corresponding author Faizul Huq can be contacted at: huq@ohio.edu

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