APPENDIX B

The Risk Pool Game

B.1 INTRODUCTION

One of the most important concepts in supply chain management is risk pooling.
Recall that risk pooling involves the use of centralized inventory to take advantage of
the fact that if demand is higher than average at some retailers, it is likely to be lower
than average at others. Thus, if each retailer maintains separate inventory and safety
stock, a higher level of inventory has to be maintained than if the inventory and safety
stock are pooled. Therefore, the system with risk pooling has less overall inventory and
is thus cheaper to operate with the same service level.
We developed the Risk Pool Game, included with this text, to illustrate risk pooling
concepts. In the game, you simultaneously manage both a system with risk pooling
(we also call this a centralized system) and a system without risk pooling (a decentralized system). The system records the profits of both systems, so you can compare
performance.
Windows 95 or later is required to operate the game. To install the software, place
the included CD in your CD-ROM drive. If the installation program doesnt run automatically, open Windows Explorer, select the CD, and double click on the setup
program.
B.2 THE SCENARIOS

The Risk Pool Game models the following scenarios. The top half of the screen, the
centralized game, consists of the following supply chain: A supplier serves a warehouse,
which in turn serves three retailers. It takes two time periods for material to arrive from
the supplier at the warehouse. This material can be shipped out during the same period
or held in inventory. Once shipped, it takes an additional two periods for material to
arrive at the retailers. The retailers then fill all the demand that they can. If demand
cannot be met at the time it arrives, it is lost.
The bottom half of the screen represents the decentralized system. Three retailers
order separately from the supplier, and the supplier ships material directly to each
retailer. This takes four periods from the time the order is placed, the same length of
time as the minimum total lead time in the centralized system. As in the centralized

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system, the retailers fill as much demand as possibledemand that if not met is lost.
In each system, total holding cost, materials costs, and revenue are tracked. The goal
in both systems is to maximize profit.
B.3 PLAYING SEVERAL ROUNDS

In this section, we describe how to play several rounds of the Risk Pool Game using the
default settings. In the next section, we describe each of the menu settings and options
so that you can customize the game play.
B.3.1 Introducing the Game

When the Risk Pool Game software is started, the following screen appears:

Order of Events

During each period or round of the game, several events occur.

Step 1. To start this step, press the Start Round button. The inventory is advanced.
In the centralized game, this means that inventory four periods away moves
to three periods away, inventory three periods away is added to the warehouse
inventory, inventory two periods away is moved to one period away, and
inventory one period away is added to retailer inventory. In the decentralized
game, inventory four, three, and two periods away is moved, respectively,
three, two, and one period away. Inventory one period away is added to retailer
inventory.
Step 2. This step starts automatically. Demand is met. Each retailer experiences
demand and fills as much as possible. Note that the top retailer in both the
centralized and decentralized systems faces the same demand; the same is
true for the middle and bottom retailers. Also, demand is not back ordered.
Demand that cannot be met immediately is lost.

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Step 3. Place orders. In the centralized system, enter an order for the supplier in
the box closest to the supplier. Allocate the warehouse inventory to the three
retailers in the three boxes closest to the retailers. Note that the allocation
amount must be less than or equal to the total warehouse inventory. In the
decentralized system, enter an order for each retailer. The system will present
a default selection for each entry. You can keep the default or type in new
values. As we describe in the next section, you have control over how the
system selects default values. When entries are completed (or the decision has
been made to keep the default values), press the Place Orders button.
Step 4. This step starts automatically. Orders are filled. The amount ordered is moved
into the inventory slots four weeks away. In the centralized system, the amount
allocated to each retailer is moved into the inventory slots two weeks away.
Step 5. This step starts automatically. Cost, revenue, and service level: A holding cost
is charged for each unit in inventory, revenue is realized for each unit sold,
and the cost of each item sold is subtracted from revenue. Service level is
calculated as the fraction of demand met over total demand. For that reason,
we refer to service level in the game as the fill rate.
Lead Times Note that in both systems, it takes a minimum of four periods for material
that has been ordered to reach the retailer. In the centralized system, it can take longer
if inventory is held in the warehouse.
B.3.2 Understanding the Screen

At the start of each round, the screen looks like this:

APPENDIX B: THE RISK POOL GAME

On the top half of the screen, the supplier is represented by the box at the left. The
two vertical dotted lines labeled 4 and 3 have boxes on them representing inventory
at least four or three periods away from the retailers, respectively. The large middle
box represents the warehouse. The top line in the warehouse indicates the inventory
contained there; the other boxes are used to enter an order from the supplier and
allocation to the warehouse when appropriate. Note that the button in the lower righthand corner of the screen initially says Start Round. This indicates that it is not the
appropriate time to enter the orders and allocation. The two vertical dotted lines to the
right of the warehouse are labeled 2 and 1, indicating inventory two and one period
from the retailers, respectively. Note that unlike the 3 and 4 lines to the left of the
warehouse, lines 1 and 2 can have up to three inventory boxes, representing inventory
going to each of the three retailers. To the right of these lines are the three boxes
representing the retailersthe numbers in these boxes represent retailer inventory. The
right-hand side of the screen contains cost and profit data. Holding costs and cost of
goods sold (COGS) are subtracted from revenue to get profit. Service level and period
number are also indicated.
The bottom half of the screen is similar to the top half, except that there is no
warehouse. Also, when appropriate, orders are entered directly at the retailers.
The button in the lower right-hand corner initially reads Start Round. After the round
has started, it looks like this:

B.3.3 Playing the Game

The game follows the order of events listed above. To start each round, press the Start
Round button. Inventory is advanced, and then as much demand as possible is met.
At this point, the button in the lower right-hand corner of the screen will change to
read Place Orders. Do so either by accepting the default choices that are displayed or
by typing in new ones. Recall that in the centralized game, you can allocate up to the
total amount of inventory in the warehouse to the retailers. Once orders are placed,
press the Place Orders button. Orders are filled, and cost, revenue, and service level
are calculated. You can continue playing for any number of rounds.
B.3.4 Other Features

The game has several other features, which we discuss in detail in the next section. The
Play menu has options that allow you to set various game parameters. The Reports
menu allows you to display lists of demands and orders for all of the periods up to the
current one.
B.4 OPTIONS AND SETTINGS

This section follows the menu in the Risk Pool Game and describes the function of
each of the parameters and options that can be set by the user or instructor. In the

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following subsections, the convention menuselection item is used to describe menu

selections.
B.4.1 File Commands

These commands are used to stop and reset play and exit the system.
FileReset. This command resets the game. All data from the previous game are
lost.
FileExit. This command exits the game.
B.4.2 Play Commands

These commands control game play and allow various parameters to be set.
PlayStart Round. This command duplicates the Start Round button on the
lower right-hand corner of the screen. Selecting it starts each round.
PlayPlace Orders. This command duplicates the Place Orders button on the
lower right-hand corner of the screen. Select it after entering orders and allocations.
PlayOptions. This command displays a submenu with the following choices:
Initial Conditions. This command displays the following dialog box:

This enables you to select starting inventories throughout both systems. Note that
in the centralized system, each retailer must have the same initial inventory level,
and the inventory in transit from the warehouse to the retailer must be the same
level for each of the retailers and for both periods. Similar restrictions exist for
the decentralized system. After making changes, enter OK to accept the changes
or Cancel to keep the current levels. Note that this option can only be used before
the first round is played.

APPENDIX B: THE RISK POOL GAME

Demand.

This command displays the following dialog box:

This enables you to control the demand faced by each of the retailers. The demand
is normally distributed, with the mean and standard deviation that can be entered
on the dialog box. The slider control at the top of the box enables you to control the
correlation of the demand at the retailers. If the slider is in the center of its range,
demand will be independent. At the right, demand is strongly positively correlated
while at the left, demand is strongly negatively correlated. Intermediate positions
allow correlation between these extremes.1 After making changes, select OK to
accept the changes or Cancel to keep the current levels. Note that this option can
only be used before the first round is played.
Inventory Policy. This command displays the following dialog box:

1 If demand is positively correlated, it is likely that if one retailer has high demand, all of them will; if one retailer
has low demand, all of them will. If demand is negatively correlated, it is likely that if one retailer has high demand,
at least one other will have low demand.

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This enables you to control the inventory policy that displays the default order and
allocation quantities. Note that you can always override the default suggestions
when you are playing, but having good defaults speeds up game play. There are
two types of default policies, the Safety Stock policy and the Weeks of Inventory
policy. Select between them using the radio buttons at the top of the dialog box.
The Safety Stock policy allows you to select order-up-to levels for the warehouse
and retailers in the centralized system and the retailers in the decentralized system
as a function of demand mean and standard deviation. There are three input boxes
for each level: the first box is the mean multiplier, and the second and third are
multiplied by the standard deviation. These quantities are then summed to get the
final order-up-to level.
When the Weeks of Inventory policy is used, a single value multiplied by the
mean demand is used to determine the order-up-to level.
To determine default orders, the system does the following: For the centralized
system, warehouse echelon inventory (i.e., inventory in transit to the warehouse,
inventory at the warehouse, inventory in transit to the retailers, and inventory at
the retailers) is subtracted from the order-up-to levels to determine order quantity.
Inventory at the retailers and in transit from the warehouse to the retailers is subtracted from the retailer order-up-to level to determine allocations. If insufficient
inventory is available at the warehouse, the available inventory is allocated so that
the same fraction of desired level is sent to each retailer. For the decentralized
system, inventory at each retailer plus inventory in transit to the retailer is raised
to the order-up-to level.
After making changes, select OK to accept the changes or Cancel to keep the
current levels. Note that this option can be used at the start of any round.
Costs. This command displays the following dialog:

You can adjust costs using this dialog. Holding cost is per item per period; cost
and revenue are per item. After making changes, select OK to accept the changes
or Cancel to keep the current levels. Note that this option can only be used before
the first round is played.
B.4.3 The Reports Commands

These commands display game-related information.

APPENDIX B: THE RISK POOL GAME

ReportsOrders. This command displays the following report, which lists orders
placed by the warehouse in the centralized game and retailers in the decentralized
game:

Select Done to hide the report.

ReportsDemands. This command displays the following report, which lists
demand faced by the retailers since the start of the game:

Select Done to hide the report.

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