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Players’ guide The Supply Chain Game
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Contents 1
Introduction to the Game Objective of the Game About the Game What you can learn from the Game
3
GameCo and its supply chain Background to GameCo
8
Game-playing schedule and rules Schedule Rules of replenishment
11
Costing and accounting policies Revenue, cost of sales and stock accounting Storage and distribution Overheads
12
Team strategy Strategy presentation
14
Decision pro-forma
15
Last year’s reports Distribution report Production report Sales report Branch report Profit and Loss account
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
The Supply Chain Game
Introduction to the Game To play the Supply Chain Game, you will become a member of a small business team. Your job as a team will be to take decisions on the supply and deployment of inventory to meet the demand for product in the company simulated in the Game – ‘GameCo’.
Objective of the Game Your team’s objective in the Game is to: ‘enhance profitability through effective management of the supply chain’.
About the Game The Game is competitive – your mission is to exceed your objective and to do better than the other teams. The winning team will be the one that makes the most profit for GameCo – although, the Game managers have the discretion to adjust the winning order if a leading team has left itself short of inventory for next year, or not met its goals on customer service. So be warned – end games are not acceptable! The Game focuses on the supply chain only, and you should note the following points: •
the demand data that you will encounter is the same for every team and cannot be influenced by actions between teams, such as pricing and promotion
•
the structure of the supply chain is fixed in terms of material flow and lead time, and you do not have the opportunity to change it.
•
there is only one product in GameCo, which is a necessary simplification to keep the time to play the Game down to a few hours.
Apart from these points, GameCo is exactly like a real company. The Profit and Loss account that you get each period follows standard accounting practice; and your team will be taking decisions which are typical in an organisation every week or accounting period.
What you can learn from the Game The Game has been developed to enable you to experience some key areas of the supply chain: •
the strategic significance that supply chain management plays on profitability
•
the impact of long lead times throughout the supply chain
•
the hard work of forecasting in a business
•
the complexity of managing a supply chain with several levels of distribution, each with different cost and margin structures
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Introduction
1
The Supply Chain Game •
the implications for manufacturing and supply of changing schedules on unit cost, and how that balances with the cost of holding inventory
•
the organisation and team dynamic issues that are faced every day in making decisions around supply chain management.
But, above all, the Game is designed to be an enjoyable and challenging experience. So, make sure you make the most of it and –
have fun!
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Introduction
2
The Supply Chain Game
GameCo and its supply chain Background to GameCo GameCo is a manufacturer of high quality kitchen equipment. Sales volume for last year was 46,500 units. The overall company performance was a profit before tax of £2.2 million for last year and inventories increased slightly over the year to more than 17 weeks of coverage. The sales manager has managed to get some ‘evidence’ of lost sales of well over 2,000 units over their peak selling period, but he believes that the lost sales had been as high as 3,000 units last year. The management has been able to agree that they lost sales on a number of occasions during the year due to poor supply chain management but not on how much had been lost. The Profit and Loss account for last year is as follows.
Units 46,532 46,532
Sales Cost of Sales* Gross Margin Overheads Operating Storage Stock Finance Transport Net Profit before tax
£000’s 35,824 21,478 14,346 £000’s 5,720 4,548 1,050 840
£/unit 770 462
% 100 60 40
123 98 23 18 12,159 2,188
34 6
* includes £455K cost of schedule change The management believes that there is real growth in the market, at the unit level, of between 3% and 4% pa. GameCo sells its products through retail, wholesale and bulk direct channels with a sales mix and pricing structure, as shown in the ‘Table of mix and value’, on the next page. The structure of the supply chain is illustrated in the diagram on the next page. This diagram also shows that the retail outlets are supplied from the regional distribution centre which, then, is supplied from the central warehouse. The central warehouse is adjacent to the plant, and product is moved from the plant as soon as it is made. This structure is not available to change.
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
GameCo and its supply chain
3
The Supply Chain Game
Manufacturing Manufacturing Central Central Warehouse Warehouse
9 Weeks
Regional Regional Distribution Distribution
3 Weeks
4 Weeks
Retail RetailBranches Branches
Table of mix and value From
Sales last year percentage
units
Revenue per unit
Central warehouse
23.5%
10,947
£720
Regional distribution centre
22.5%
10,497
£750
Retail branch
54.0%
25,088
£800
Lead times through the GameCo supply chains are quite long, but typical for an industrial company. It takes a total of 16 weeks to get a change right the way though the GameCo supply chain. Specifically: •
a change in manufacturing output is available after 9 weeks
•
a change in replenishment from the central warehouse to the regional distribution centre is available after 3 weeks
•
a change in replenishment from the regional distribution centre to the retail branch is available after 4 weeks.
The implications of lead times are important, and they are shown in the diagram on the next page.
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
GameCo and its supply chain
4
The Supply Chain Game
4 wks
4 wks
4 wks
4 wks
last period
next period
2nd period
3rd period
today
9 week leadtime Manufacturing
900 900 900 900 900 900 900 900 ?? ?? ?? ?? 3 week leadtime
RDC Replen
800 800 800 800 ?? ?? ?? ?? 4 week leadtime
Retail Replen
today’s decision
300 300 300 300 ?? ?? ?? ??
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
GameCo and its supply chain
5
The Supply Chain Game
Seasonality and volatility of sales The following charts show the sales by period and week for last year at each echelon. There are some key features to these charts: •
weekly volatility is much greater than would be interpreted from sales data on a period basis
•
volatility and seasonality are very significant at the retail branch level but much less so at the regional distribution centre and central warehouse levels
•
there is at least one major seasonal peak in demand at the retail branch echelon
•
close inspection reveals some evidence of lost sales.
Pattern of period sales for last year
Central Region
Sales Results Last Year
Branch
3000 2500 2000 1500 1000 500 0
1
2
3
4
5
6
7
8
9
10
11
12
13
1
2
3
4
5
6
7
8
9
10
11
12
13
Year
Central
806
777
810
1035
791
1007
1054
805
676
844
651
753
938
10,947
Region
1038
896
1009
831
780
601
749
728
667
715
691
882
910
10,497
Branch
1691
1756
2577
2108
2000
1603
1782
2135
2798
972
1255
2504
1907
25,088
Total
3535
3429
4396
3974
3571
3211
3585
3668
4141
2531
2597
4139
3755
46,532
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
GameCo and its supply chain
6
The Supply Chain Game
Pattern of weekly sales for last year
SalesCW SalesRDC
1200
SalesBr 1000 800 600 400 200
52
49
46
43
40
37
34
31
28
25
22
19
16
13
10
7
4
1
0 Week No
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
GameCo and its supply chain
7
The Supply Chain Game
Game-playing schedule and rules Schedule The Game is played for a financial year consisting of 13 four-week accounting periods. Each team takes 13 decisions using the ‘Decision input form’ shown below.
Decision input form Your Team: Year:
1
For Period No:
Units per week Branch Replenishment Order: Region Replenishment Order: Production Schedule: N.B. Range: 400 - 1500
It all looks extremely simple – all you appear to have to do is enter 3 numbers each period, over the 13 periods. But appearances can be deceiving…
How it works Each decision specifies the weekly manufacturing and replenishment quantities for the next four weeks at the lead time for each echelon, as shown in the diagram on page 5. Until that time, the previous decision in the system applies. At the start of the Game there are decisions already in the system that you will experience. These are also shown in the diagram on page 5.
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Schedule and rules
8
The Supply Chain Game You may not vary the weekly quantity within the decision period; the quantity you specify is applied equally to each week within the period. The system recalculates the position each week, based on the decisions your team has made and the demand that is in the Game. Each period you receive a set of reports showing: •
the weekly situation within the period
•
the total for the period
•
the Profit and Loss account for the period
•
the total position for the year to date.
You can find the reports for the last period of last year on page 13.
Rules of replenishment The rules in the Game regarding replenishment and production are as follows. •
Stock arriving at a location is added to the stock after the customer demand and replenishment has been taken from the previous balance on hand. See the diagram on page 5 to understand how this works.
•
At both the regional and central stores, priority is given to satisfying customer orders, before replenishment orders from the lower levels are satisfied.
•
Unsatisfied customer demand is perishable; that is, if insufficient stock is available for customer demand, part orders are satisfied, but the shortfall is not carried over as a back-order, and is registered as ‘lost’.
•
However, unsatisfied stock replenishment is not perishable, and will be carried over to the following period, but with customer demand remaining the priority. In these cases, care is needed to ensure that you do not allow the level of back-orders to build up over a longer period. The ‘Branch report’ will give you a clear indication when this problem arises.
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Schedule and rules
9
The Supply Chain Game
Production Production can be specified at a weekly rate of between 400 and 1,500 per week but not outside this range. If you elect to reduce production, the company continues to bear the full variable and fixed cost of the previous production rate for one period after the schedule change has been applied. For example, if the schedule was 900 per week in weeks 5–8 and you reduce the rate of supply to 800 units for weeks 9–13, the unit cost of production for weeks 9–13 would be as follows: Fixed cost (4 weeks at £110,000 per week)
£440,000
Variable cost (900 times £325 per unit, times 4 weeks)
£1,170,000
Total cost
£1,610,000
Actual production
3,200
Unit cost = £1,610,000 divided by 800 times 4 weeks
£503
The next period, the unit cost is the fixed cost, plus the rate of production, times the variable cost, divided by the rate of production (£462.50) – unless you lower the rate of production again. If production is increased, the variable unit cost remains at £325, but the full unit cost goes down as the fixed costs are spread over a greater volume.
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Schedule and rules
10
The Supply Chain Game
Costing and accounting policies Revenue, cost of sales and stock accounting As explained earlier, the unit price is different for the three trade channels, resulting in substantial differences in gross margin between the echelons, based on a standard cost with fixed costs fully overhead absorbed at the rate of 1,000 units per week Selling price
Gross margin
Margin %
Retail branch
£800.00
£365.00
46%
Regional distribution centre
£750.00
£315.00
42%
Central warehouse
£720.00
£285.00
40%
The accounting policy for stock is to use the weighted average of the stock value in the company, and the current period’s production with the fixed costs for the period of £440,000 (£110,000 per week), absorbed on the output in the period. The cost of sales for the period is calculated using this weighted average unit cost. The average stock value is updated weekly, and is used to calculate the stock investment charge using a financing rate of 18% pa.
Storage and distribution The storage and distribution costs at each level in the chain are as follows: Storage cost per unit per week
Transport cost to each level
£10.00
£10.00
Regional distribution centre
£7.00
£15.00
Central warehouse
£5.00
nil
Retail branch
The cumulative cost of shipping product to the retail level from the plant is £25.
Overheads There is an operational overhead charge on the business of £440,000 per period.
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Costing and accounting policies
11
The Supply Chain Game
Team strategy You need to think as a team about your strategy to play the Game. The session starts with a period of about an hour in which you are not required to make any deployment decisions. During this time, you should understand the overall dynamics of the situation and put together a high level assessment of what you will be trying to achieve when you make your decisions. The following are some guidelines to the elements of strategy. You may find it useful to work using these headings. •
Profitability – given the profit and loss account for last year, where are the opportunities to improve profit going to come from?
•
Customer service objectives – what should your team be aiming for in terms of satisfying demand? Given the apparent volatility of sales at the retail level, is it viable to aim for 100% fulfilment?
•
Sales forecast for the year – what do you think the overall volume will be if the company meets all the demand, given the forecast growth rate and the estimates of lost sales?
•
Target total inventory to run the business, and at each echelon – how much stock is needed in total and at each level in the chain to cover replenishment lead times and the volatility of demand? Currently, there is about 14 weeks of cover. What will be the leverage on the Profit and Loss account if this is reduced?
•
Manufacturing run rate and schedule change strategy – based on your conclusions above and the high cost of making changes to output, how should you operate the supply side of the business?
•
How to correct any out-of-balance in the current situation – given your assessment above, how should inventory be re-deployed ?
•
How to handle the lead time variations through the chain – given your overall strategy, what are the implications of lead times and how should your team handle them?
•
How to organise to make the decisions – this is the final question for you, as you consider your strategy, but by no means the least important. Who in your team is going to do what? Will you organise functionally with someone guiding you on finance, another on forecasting, another on inventory planning and manufacturing scheduling? Or will you go for a collective approach, where you, as a team, define the process and work out your decisions together?
We have prepared a ‘Decision pro-forma’ to help you manage the numbers. It is part of this pack. However, it’s worth noting that it’s easy to get immersed in trying to crank the numbers and to lose sight of the objectives and the key drivers. Think how, or if, you want to use it to best effect.
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Team strategy
12
The Supply Chain Game
Strategy presentation When you have considered all the factors above, write on just one page of flip chart paper, a statement of your objectives, and your strategy for managing the company’s supply chain. Use the following headings: •
Customer service objectives
•
Manufacturing strategy – change and run rate
•
Inventory levels and positioning
•
Team organisation – such as, functional, collective, or your own structure?
•
Profit improvement on last year.
This will be used in the review process after you have made your decisions. It is helpful for you to: •
see if you met your own objectives
•
see if your objectives were right
•
understand where you might have been able to improve.
Enjoy the Game!
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Team strategy
13
The Supply Chain Game
Decision pro-forma
Decision input form Your Team: Year:
1
For Period No:
Units per week Branch Replenishment Order: Region Replenishment Order: Production Schedule: N.B. Range: 400 - 1500
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Decision pro-forma
14
The Supply Chain Game
Last year’s reports This section contains the set of reports published for the company for period 13 of last year, together with two charts showing the pattern of sales for last year. This information should help you to operate the network over the following year.
Distribution Report Week
1
2
3
4
23,205 54,313 32,510 110,028
23,245 55,972 31,360 110,577
22,745 57,925 32,010 112,680
22,825 59,969 30,560 113,081
92,020 227,906 126,440 446,366
1,048,840 2,350,754 1,148,890 4,548,484
800 300 1,100
800 300 1,100
800 300 1,100
800 800 1,100
3,200 1,200 4,400
39,000 25,500 64,500
12,000 3,000 15,000
12,000 3,000 15,000
12,000 3,000 15,000
12,000 3,000 15,000
48,000 12,000 60,000
585,000 255,000 840,000
Week
1
2
3
4
Current Period
Cumulative to date
Production units Current production New schedule
1,000 900
1,000 900
1,000 900
1,000 900
4,000 3,600
49,000 --
Production stock units - central store Stock-central 4,641
4,649
4,549
4,565
4,565
--
Warehousing storage costs (£) Central Regional Branch Total Trunking Units Regional Branch Total units Trunking costs (£) Regional Branch Total
Current Cumulative Period to date
Production Report
Production costs (£) Production - fixed Production - variable Production - change
110,000 325,000 65,000
110,000 325,000 65,000
110,000 325,000 65,000
110,000 325,000 65,000
440,000 1,300,000 260,000
5,720,000 16,055,000 455,000
Total production cost (£)
500,000
500,000
500,000
500,000
2,000,000
22,230,000
Unit production cost (£) 500 500 500 500 500 Note Because of the 8-week lead time, production of the 900 units per week scheduled for period 13 of last year will not start until week 1 of period 2.
450
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Last year’s reports
15
The Supply Chain Game Production during period 12 of last year was scheduled at 900 units per week. This schedule will commence during week 1 of period 1.
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Last year’s reports
16
The Supply Chain Game
Sales Report Week
1
2
3
4
Current period
Cumulative to date
Sales units Central Regional Branch Total units
192 263 415 870
300 221 235 756
184 247 445 876
262 179 812 1,253
938 910 1,907 3,755
10,947 10,497 25,088 46,532
Total revenue (£)
667,490
569,750
673,730
972,490
2,883,460
35,824,900
4,641 7,459 3,251 15,351
4,649 7,696 3,136 15,481
4,549 7,975 3,201 15,725
4,565 8,228 3,056 15,849
4,503 8,549 2,544 15,596
— — — —
Stock units Central Region Branch Total stock Note: The weekly stock figures are opening stocks, while the period end units are closing stocks. For period 13 of last year the branch and region replenishment orders were scheduled at 300 and 800 units respectively. These will become available during week 4 period one (branch) and during week 3 period one (region).
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Last year’s reports
17
The Supply Chain Game
Branch Report Week
1
2
3
4
Current period
Cumulative to date
Retail sales Total units Total revenue (£)
415 332,000
235 188,000
445 356,000
812 649,600
1,907 1,525,600
25,088 20,070,400
Branch stocks Receipts Stock units
300 3,251
300 3,136
300 3,201
300 3,056
1,200 2,544
25,500 —
Orders outstanding Region Branch
1,600 900
1,600 900
1,600 900
1,600 900
— —
— —
Note: The branch stock units in week 2: stock (week 2) = stock (week 1) – sales (week 1) + receipts (week 1) 3136 =
3251
–
415
+
300
The orders outstanding include all replenishment orders raised but not delivered including those within the lead time and therefore not yet eligible for delivery. These orders will (subject to stock being available) continue to flow during year 1.
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Last year’s reports
18
The Supply Chain Game
Profit and Loss Account Units
£s
£ / unit
% 100%
Sales
46,532
35,824,990
770
Cost of sales*
46,532
21,478,437
462
Gross margin
14,346,553
40%
£s Overheads
Operating
5,720,000
123
Storage
4,548,484
98
Stock finance
1,050,460
23
840,000
18
Transport Net profit before tax
12,158,944
34%
2,187,609
8%
* includes £455,000 cost of scheduled change
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Last year’s reports
19
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Contents 1
Introduction to the Game Objective of the Game About the Game What you can learn from the Game
3
GameCo and its supply chain Background to GameCo
8
Game-playing schedule and rules Schedule Rules of replenishment
11
Costing and accounting policies Revenue, cost of sales and stock accounting Storage and distribution Overheads
12
Team strategy Strategy presentation
14
Decision pro-forma
15
Last year’s reports Distribution report Production report Sales report Branch report Profit and Loss account
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
The Supply Chain Game
Introduction to the Game To play the Supply Chain Game, you will become a member of a small business team. Your job as a team will be to take decisions on the supply and deployment of inventory to meet the demand for product in the company simulated in the Game – ‘GameCo’.
Objective of the Game Your team’s objective in the Game is to: ‘enhance profitability through effective management of the supply chain’.
About the Game The Game is competitive – your mission is to exceed your objective and to do better than the other teams. The winning team will be the one that makes the most profit for GameCo – although, the Game managers have the discretion to adjust the winning order if a leading team has left itself short of inventory for next year, or not met its goals on customer service. So be warned – end games are not acceptable! The Game focuses on the supply chain only, and you should note the following points: •
the demand data that you will encounter is the same for every team and cannot be influenced by actions between teams, such as pricing and promotion
•
the structure of the supply chain is fixed in terms of material flow and lead time, and you do not have the opportunity to change it.
•
there is only one product in GameCo, which is a necessary simplification to keep the time to play the Game down to a few hours.
Apart from these points, GameCo is exactly like a real company. The Profit and Loss account that you get each period follows standard accounting practice; and your team will be taking decisions which are typical in an organisation every week or accounting period.
What you can learn from the Game The Game has been developed to enable you to experience some key areas of the supply chain: •
the strategic significance that supply chain management plays on profitability
•
the impact of long lead times throughout the supply chain
•
the hard work of forecasting in a business
•
the complexity of managing a supply chain with several levels of distribution, each with different cost and margin structures
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Introduction
1
The Supply Chain Game •
the implications for manufacturing and supply of changing schedules on unit cost, and how that balances with the cost of holding inventory
•
the organisation and team dynamic issues that are faced every day in making decisions around supply chain management.
But, above all, the Game is designed to be an enjoyable and challenging experience. So, make sure you make the most of it and –
have fun!
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Introduction
2
The Supply Chain Game
GameCo and its supply chain Background to GameCo GameCo is a manufacturer of high quality kitchen equipment. Sales volume for last year was 46,500 units. The overall company performance was a profit before tax of £2.2 million for last year and inventories increased slightly over the year to more than 17 weeks of coverage. The sales manager has managed to get some ‘evidence’ of lost sales of well over 2,000 units over their peak selling period, but he believes that the lost sales had been as high as 3,000 units last year. The management has been able to agree that they lost sales on a number of occasions during the year due to poor supply chain management but not on how much had been lost. The Profit and Loss account for last year is as follows.
Units 46,532 46,532
Sales Cost of Sales* Gross Margin Overheads Operating Storage Stock Finance Transport Net Profit before tax
£000’s 35,824 21,478 14,346 £000’s 5,720 4,548 1,050 840
£/unit 770 462
% 100 60 40
123 98 23 18 12,159 2,188
34 6
* includes £455K cost of schedule change The management believes that there is real growth in the market, at the unit level, of between 3% and 4% pa. GameCo sells its products through retail, wholesale and bulk direct channels with a sales mix and pricing structure, as shown in the ‘Table of mix and value’, on the next page. The structure of the supply chain is illustrated in the diagram on the next page. This diagram also shows that the retail outlets are supplied from the regional distribution centre which, then, is supplied from the central warehouse. The central warehouse is adjacent to the plant, and product is moved from the plant as soon as it is made. This structure is not available to change.
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
GameCo and its supply chain
3
The Supply Chain Game
Manufacturing Manufacturing Central Central Warehouse Warehouse
9 Weeks
Regional Regional Distribution Distribution
3 Weeks
4 Weeks
Retail RetailBranches Branches
Table of mix and value From
Sales last year percentage
units
Revenue per unit
Central warehouse
23.5%
10,947
£720
Regional distribution centre
22.5%
10,497
£750
Retail branch
54.0%
25,088
£800
Lead times through the GameCo supply chains are quite long, but typical for an industrial company. It takes a total of 16 weeks to get a change right the way though the GameCo supply chain. Specifically: •
a change in manufacturing output is available after 9 weeks
•
a change in replenishment from the central warehouse to the regional distribution centre is available after 3 weeks
•
a change in replenishment from the regional distribution centre to the retail branch is available after 4 weeks.
The implications of lead times are important, and they are shown in the diagram on the next page.
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
GameCo and its supply chain
4
The Supply Chain Game
4 wks
4 wks
4 wks
4 wks
last period
next period
2nd period
3rd period
today
9 week leadtime Manufacturing
900 900 900 900 900 900 900 900 ?? ?? ?? ?? 3 week leadtime
RDC Replen
800 800 800 800 ?? ?? ?? ?? 4 week leadtime
Retail Replen
today’s decision
300 300 300 300 ?? ?? ?? ??
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
GameCo and its supply chain
5
The Supply Chain Game
Seasonality and volatility of sales The following charts show the sales by period and week for last year at each echelon. There are some key features to these charts: •
weekly volatility is much greater than would be interpreted from sales data on a period basis
•
volatility and seasonality are very significant at the retail branch level but much less so at the regional distribution centre and central warehouse levels
•
there is at least one major seasonal peak in demand at the retail branch echelon
•
close inspection reveals some evidence of lost sales.
Pattern of period sales for last year
Central Region
Sales Results Last Year
Branch
3000 2500 2000 1500 1000 500 0
1
2
3
4
5
6
7
8
9
10
11
12
13
1
2
3
4
5
6
7
8
9
10
11
12
13
Year
Central
806
777
810
1035
791
1007
1054
805
676
844
651
753
938
10,947
Region
1038
896
1009
831
780
601
749
728
667
715
691
882
910
10,497
Branch
1691
1756
2577
2108
2000
1603
1782
2135
2798
972
1255
2504
1907
25,088
Total
3535
3429
4396
3974
3571
3211
3585
3668
4141
2531
2597
4139
3755
46,532
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
GameCo and its supply chain
6
The Supply Chain Game
Pattern of weekly sales for last year
SalesCW SalesRDC
1200
SalesBr 1000 800 600 400 200
52
49
46
43
40
37
34
31
28
25
22
19
16
13
10
7
4
1
0 Week No
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
GameCo and its supply chain
7
The Supply Chain Game
Game-playing schedule and rules Schedule The Game is played for a financial year consisting of 13 four-week accounting periods. Each team takes 13 decisions using the ‘Decision input form’ shown below.
Decision input form Your Team: Year:
1
For Period No:
Units per week Branch Replenishment Order: Region Replenishment Order: Production Schedule: N.B. Range: 400 - 1500
It all looks extremely simple – all you appear to have to do is enter 3 numbers each period, over the 13 periods. But appearances can be deceiving…
How it works Each decision specifies the weekly manufacturing and replenishment quantities for the next four weeks at the lead time for each echelon, as shown in the diagram on page 5. Until that time, the previous decision in the system applies. At the start of the Game there are decisions already in the system that you will experience. These are also shown in the diagram on page 5.
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Schedule and rules
8
The Supply Chain Game You may not vary the weekly quantity within the decision period; the quantity you specify is applied equally to each week within the period. The system recalculates the position each week, based on the decisions your team has made and the demand that is in the Game. Each period you receive a set of reports showing: •
the weekly situation within the period
•
the total for the period
•
the Profit and Loss account for the period
•
the total position for the year to date.
You can find the reports for the last period of last year on page 13.
Rules of replenishment The rules in the Game regarding replenishment and production are as follows. •
Stock arriving at a location is added to the stock after the customer demand and replenishment has been taken from the previous balance on hand. See the diagram on page 5 to understand how this works.
•
At both the regional and central stores, priority is given to satisfying customer orders, before replenishment orders from the lower levels are satisfied.
•
Unsatisfied customer demand is perishable; that is, if insufficient stock is available for customer demand, part orders are satisfied, but the shortfall is not carried over as a back-order, and is registered as ‘lost’.
•
However, unsatisfied stock replenishment is not perishable, and will be carried over to the following period, but with customer demand remaining the priority. In these cases, care is needed to ensure that you do not allow the level of back-orders to build up over a longer period. The ‘Branch report’ will give you a clear indication when this problem arises.
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Schedule and rules
9
The Supply Chain Game
Production Production can be specified at a weekly rate of between 400 and 1,500 per week but not outside this range. If you elect to reduce production, the company continues to bear the full variable and fixed cost of the previous production rate for one period after the schedule change has been applied. For example, if the schedule was 900 per week in weeks 5–8 and you reduce the rate of supply to 800 units for weeks 9–13, the unit cost of production for weeks 9–13 would be as follows: Fixed cost (4 weeks at £110,000 per week)
£440,000
Variable cost (900 times £325 per unit, times 4 weeks)
£1,170,000
Total cost
£1,610,000
Actual production
3,200
Unit cost = £1,610,000 divided by 800 times 4 weeks
£503
The next period, the unit cost is the fixed cost, plus the rate of production, times the variable cost, divided by the rate of production (£462.50) – unless you lower the rate of production again. If production is increased, the variable unit cost remains at £325, but the full unit cost goes down as the fixed costs are spread over a greater volume.
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Schedule and rules
10
The Supply Chain Game
Costing and accounting policies Revenue, cost of sales and stock accounting As explained earlier, the unit price is different for the three trade channels, resulting in substantial differences in gross margin between the echelons, based on a standard cost with fixed costs fully overhead absorbed at the rate of 1,000 units per week Selling price
Gross margin
Margin %
Retail branch
£800.00
£365.00
46%
Regional distribution centre
£750.00
£315.00
42%
Central warehouse
£720.00
£285.00
40%
The accounting policy for stock is to use the weighted average of the stock value in the company, and the current period’s production with the fixed costs for the period of £440,000 (£110,000 per week), absorbed on the output in the period. The cost of sales for the period is calculated using this weighted average unit cost. The average stock value is updated weekly, and is used to calculate the stock investment charge using a financing rate of 18% pa.
Storage and distribution The storage and distribution costs at each level in the chain are as follows: Storage cost per unit per week
Transport cost to each level
£10.00
£10.00
Regional distribution centre
£7.00
£15.00
Central warehouse
£5.00
nil
Retail branch
The cumulative cost of shipping product to the retail level from the plant is £25.
Overheads There is an operational overhead charge on the business of £440,000 per period.
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Costing and accounting policies
11
The Supply Chain Game
Team strategy You need to think as a team about your strategy to play the Game. The session starts with a period of about an hour in which you are not required to make any deployment decisions. During this time, you should understand the overall dynamics of the situation and put together a high level assessment of what you will be trying to achieve when you make your decisions. The following are some guidelines to the elements of strategy. You may find it useful to work using these headings. •
Profitability – given the profit and loss account for last year, where are the opportunities to improve profit going to come from?
•
Customer service objectives – what should your team be aiming for in terms of satisfying demand? Given the apparent volatility of sales at the retail level, is it viable to aim for 100% fulfilment?
•
Sales forecast for the year – what do you think the overall volume will be if the company meets all the demand, given the forecast growth rate and the estimates of lost sales?
•
Target total inventory to run the business, and at each echelon – how much stock is needed in total and at each level in the chain to cover replenishment lead times and the volatility of demand? Currently, there is about 14 weeks of cover. What will be the leverage on the Profit and Loss account if this is reduced?
•
Manufacturing run rate and schedule change strategy – based on your conclusions above and the high cost of making changes to output, how should you operate the supply side of the business?
•
How to correct any out-of-balance in the current situation – given your assessment above, how should inventory be re-deployed ?
•
How to handle the lead time variations through the chain – given your overall strategy, what are the implications of lead times and how should your team handle them?
•
How to organise to make the decisions – this is the final question for you, as you consider your strategy, but by no means the least important. Who in your team is going to do what? Will you organise functionally with someone guiding you on finance, another on forecasting, another on inventory planning and manufacturing scheduling? Or will you go for a collective approach, where you, as a team, define the process and work out your decisions together?
We have prepared a ‘Decision pro-forma’ to help you manage the numbers. It is part of this pack. However, it’s worth noting that it’s easy to get immersed in trying to crank the numbers and to lose sight of the objectives and the key drivers. Think how, or if, you want to use it to best effect.
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Team strategy
12
The Supply Chain Game
Strategy presentation When you have considered all the factors above, write on just one page of flip chart paper, a statement of your objectives, and your strategy for managing the company’s supply chain. Use the following headings: •
Customer service objectives
•
Manufacturing strategy – change and run rate
•
Inventory levels and positioning
•
Team organisation – such as, functional, collective, or your own structure?
•
Profit improvement on last year.
This will be used in the review process after you have made your decisions. It is helpful for you to: •
see if you met your own objectives
•
see if your objectives were right
•
understand where you might have been able to improve.
Enjoy the Game!
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Team strategy
13
The Supply Chain Game
Decision pro-forma
Decision input form Your Team: Year:
1
For Period No:
Units per week Branch Replenishment Order: Region Replenishment Order: Production Schedule: N.B. Range: 400 - 1500
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Decision pro-forma
14
The Supply Chain Game
Last year’s reports This section contains the set of reports published for the company for period 13 of last year, together with two charts showing the pattern of sales for last year. This information should help you to operate the network over the following year.
Distribution Report Week
1
2
3
4
23,205 54,313 32,510 110,028
23,245 55,972 31,360 110,577
22,745 57,925 32,010 112,680
22,825 59,969 30,560 113,081
92,020 227,906 126,440 446,366
1,048,840 2,350,754 1,148,890 4,548,484
800 300 1,100
800 300 1,100
800 300 1,100
800 800 1,100
3,200 1,200 4,400
39,000 25,500 64,500
12,000 3,000 15,000
12,000 3,000 15,000
12,000 3,000 15,000
12,000 3,000 15,000
48,000 12,000 60,000
585,000 255,000 840,000
Week
1
2
3
4
Current Period
Cumulative to date
Production units Current production New schedule
1,000 900
1,000 900
1,000 900
1,000 900
4,000 3,600
49,000 --
Production stock units - central store Stock-central 4,641
4,649
4,549
4,565
4,565
--
Warehousing storage costs (£) Central Regional Branch Total Trunking Units Regional Branch Total units Trunking costs (£) Regional Branch Total
Current Cumulative Period to date
Production Report
Production costs (£) Production - fixed Production - variable Production - change
110,000 325,000 65,000
110,000 325,000 65,000
110,000 325,000 65,000
110,000 325,000 65,000
440,000 1,300,000 260,000
5,720,000 16,055,000 455,000
Total production cost (£)
500,000
500,000
500,000
500,000
2,000,000
22,230,000
Unit production cost (£) 500 500 500 500 500 Note Because of the 8-week lead time, production of the 900 units per week scheduled for period 13 of last year will not start until week 1 of period 2.
450
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Last year’s reports
15
The Supply Chain Game Production during period 12 of last year was scheduled at 900 units per week. This schedule will commence during week 1 of period 1.
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Last year’s reports
16
The Supply Chain Game
Sales Report Week
1
2
3
4
Current period
Cumulative to date
Sales units Central Regional Branch Total units
192 263 415 870
300 221 235 756
184 247 445 876
262 179 812 1,253
938 910 1,907 3,755
10,947 10,497 25,088 46,532
Total revenue (£)
667,490
569,750
673,730
972,490
2,883,460
35,824,900
4,641 7,459 3,251 15,351
4,649 7,696 3,136 15,481
4,549 7,975 3,201 15,725
4,565 8,228 3,056 15,849
4,503 8,549 2,544 15,596
— — — —
Stock units Central Region Branch Total stock Note: The weekly stock figures are opening stocks, while the period end units are closing stocks. For period 13 of last year the branch and region replenishment orders were scheduled at 300 and 800 units respectively. These will become available during week 4 period one (branch) and during week 3 period one (region).
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Last year’s reports
17
The Supply Chain Game
Branch Report Week
1
2
3
4
Current period
Cumulative to date
Retail sales Total units Total revenue (£)
415 332,000
235 188,000
445 356,000
812 649,600
1,907 1,525,600
25,088 20,070,400
Branch stocks Receipts Stock units
300 3,251
300 3,136
300 3,201
300 3,056
1,200 2,544
25,500 —
Orders outstanding Region Branch
1,600 900
1,600 900
1,600 900
1,600 900
— —
— —
Note: The branch stock units in week 2: stock (week 2) = stock (week 1) – sales (week 1) + receipts (week 1) 3136 =
3251
–
415
+
300
The orders outstanding include all replenishment orders raised but not delivered including those within the lead time and therefore not yet eligible for delivery. These orders will (subject to stock being available) continue to flow during year 1.
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Last year’s reports
18
The Supply Chain Game
Profit and Loss Account Units
£s
£ / unit
% 100%
Sales
46,532
35,824,990
770
Cost of sales*
46,532
21,478,437
462
Gross margin
14,346,553
40%
£s Overheads
Operating
5,720,000
123
Storage
4,548,484
98
Stock finance
1,050,460
23
840,000
18
Transport Net profit before tax
12,158,944
34%
2,187,609
8%
* includes £455,000 cost of scheduled change
© January 1998 Logistics Consulting Partners Limited Team User Systems Company Limited
Last year’s reports
19
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