- ALL: In each supply chain there are four firms (listed from upstream to downstream): producer, distributor, wholesaler, and retailer. You represent one of these firms.
- Producer: Receives orders from the Distributor and places orders to the input market. Delivers goods to the Distributor.
- Distributor: Receives orders from the Wholesaler and places orders to the Producer. Delivers goods to the Wholesaler.
- Wholesaler: Receives orders from the Retailer and places orders to the Distributor. Delivers goods to the Retailer.
- Retailer: Receives orders from the Customers and places orders to the Wholesaler. Delivers goods to the Customer.
- ALL: From the description of each role you can see that:
- Purchase orders flow upstream through the supply chain.
- Goods are delivered downstream through the supply chain.
- ALL: Each round proceeds in the following way:
- You receive incoming deliveries from upstream firms
- Update inventory
- You receive incoming orders from downstream firm
- Send delivery to downstream firm from available inventory
- Place order with upstream firm
- Note: There is a time delay for orders to be filled. An order placed in the current round takes one week to travel upstream between each node in the supply chain. Deliveries travel downstream and are subject to shipping delays between each node in the supply chain. The example section will clarify the timing of orders and deliveries.
- ALL: There are two kinds of costs that affect each firm and the goal is to minimize those costs:
- Carrying Cost: This is the cost to holding inventory.
- Penalty Cost: This is the cost to not being able to meet the demands of your downstream firm
ALL: The goal is to minimize cost. Your payoffs are determined by the following equation that represents efficiency: $$\frac{\text{Cases Moved} \times 100 \times \text{max{carry,backlog}}}{\text{Total Cost}}$$ Total Cases Moved divided by Total Cost gives your per unit cost. The other component of the payoff functions as an adjustment term. If this objective function is ambiguous, remember to minimize your costs.
In this example we will follow a Wholesaler across two rounds to show the sequence of actions, costs, and timing issues. Each firm, including this wholesaler faces a carrying cost \$C=\$1 and a penalty cost \$P=\$2. At the start of the round the Wholesaler has 3 units in inventory and 0 backlog. There is an incoming delivery of 5 units and a 10 unit delivery is one week away.
| Receive an incoming delivery | 5 units from Distributor |
|---|---|
| Update inventory | Now have 3 + 5 = 8 units in Inventory |
| Receive incoming order | 6 unites from Retailer |
| Send delivery | 6 units to Retailer |
| Place your order | 7 units from Distributor |
At the end of the round there are two remaining units in inventory 8 - 6 = 2. Because \$C=\$1 there is a 2x\$1= \$2 carrying cost. Next round the 10 unit delivery will arrive. When will the 7 units ordered this round arrive (given a two week shipping delay)?
- Round 5: Distributor receives 7 unit order. Places their order with Producer.
- Round 6: Producer receives order. Producer engages in production.
- Round 7: Production is complete. Producer sends delivery.
- Round 8: Producer delivery delayed.
- Round 9: Distributor receives Producer delivery. Distributor sends delivery.
- Round 10: Distributor delivery delayed.
- Round 11: Wholesaler receives delivery.
So even though you place your order in Round 4 you will not receive that order until Round 11! Let’s see what happens next round.
| Receive an incoming delivery | 10 units from Distributor |
|---|---|
| Update inventory | Now have 2 + 10 = 12 units in Inventory |
| Receive incoming order | 20 units from Retailer |
| Send delivery | 12 units to Retailer |
| Place your order | 20 units from Distributor |
At the end of the round there are no remaining units in inventory. The Retailer demanded 20 units and the Wholesaler was only able to send 12 units. Therefore, there are eight units in backlog. Because \$P=\$2, 8x\$2= \$16 penalty cost to their reputation for not being able to meet demand.
The Wholesaler placed an order for 20 units to the Distributor. However, the orders take one week to travel between each upstream firm (1 week to Distributor and then 1 week to Producer) and deliveries take two weeks to travel between each firm downstream (2 weeks from Producer to Distributor and then 2 weeks from Distributor to Wholesaler). That is a six week time horizon for orders.
Note that your time horizon for orders will differ depending on:
- Shipping delay: Does the shipment take 1 or 2 weeks to move between downstream firms?
- Role: Your role in the supply chain alters the turnaround time between order and delivery. For example, Distributors have a three week time horizon while Retailers have a ten week time horizonProducer receives order. Producer engages in production.
