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.

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 wont 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