SUPPLY CHAIN SIMULATION & GAME

Innovation & Technology Department

Global Sustainable Production

GMM3 Students
Autumn Semester – 2024

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INTRODUCTION TO THE COURSE,
EXPECTATIONS, AND EXAM

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Learning Objective: Knowledge
Systems Nervousness: Understand the concept of systems nervousness and its implications on
supply chain performance.

Network Dynamics & Design: Comprehend the factors influencing network dynamics and the
importance of designing an efficient supply chain network.

Supply Chain Structures & Dependencies: Identify the key components of supply chain
structures and understand the dependencies among them.

Supply Chain Network Process Flows & Execution: Analyze the process flows within a
supply chain network and learn techniques for efficient execution.

Scenario Planning: Comprehend the importance of scenario planning and its application in
mitigating supply chain risks.

Various Simulation Techniques & Applications: Familiarize students with different simulation
techniques used in supply chain management and their applications.

Setting Simulation Parameters & Executing Supply Chain Simulation Plans: Understand the process
of setting simulation parameters and executing simulation plans effectively.

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Learning Objective: Skills
Ability to simulate and analyze the competitive situation for a company

Ability to simulate and analyze supply chain flows and processes Assess
network structures and design

Determine a competitive SC strategy for the company Analyze the

current situation for one or more sites in a network

Recommend future capabilities and actions needed to reach them

Reflect on simulation results, provide feedback, and support decision-

making

Ability to make simulation-based SC network design & execution decisions

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Learning Objective: Competences
Planning a simulation process

Understand and use simulation results

Deciding on network design and being able to calculate the potential consequences.

Calculate cost benefits and implications based on simulated events

Analyzing and developing existing operations setup scenario simulations

Analyze and improve forecast and network plans

Plan for and calculate contingencies

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Learning Objective: Content
• The main subject will be manufacturing, network design, and improvement programs.
Aligning strategy throughout the organization is increasingly important.
1

• Therefore, the perspective of the course is to create an understanding of what drives the
supply chain processes in networks and the strategy of the business.
2

• Furthermore, the various simulations will focus on network production systems,

competitive requirements, and contingency planning through simulated events.
3

• The students will learn how to plan, apply and analyze simulated flows and events to
provide analytic feedback and support decision-making.
4

• The students will work with different systems and outline a sustainable SC network &
operations strategy based on competitors, customers, and the company's circumstances in
5 a global and UN SDG-aligned perspective.

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Exam
Examination is held: At the end of the semester

Description: Final Exam , Tests Exam

Grading is based on an overall assessment of:

- Oral presentations and written hand-ins during the semester
- An oral exam
Reflections on semester hand-ins and oral exam performance will be evaluated during the
examination in order to earn a grade to pass the module. The Final assessment includes an overall
assessment of the individual disciplines in order to determine whether the level is sufficient to
proceed to the next semester.

Form of examination: Oral Exam, Censorship: Second examiner: External

Grading: 7-point grading scale

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References

■ "Supply Chain Simulation: A System Dynamics

Approach for Improving Performance" By:
Francisco Campuzano & Josefa Mula.
■ This book focuses specifically on simulation
techniques for supply chain management and
provides practical examples and case studies.

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Applicable Software

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INTRODUCTION SUPPLY CHAIN SIMULATION
FOR CONTINGENCY PLANNING

UNDERSTANDING STRATEGIC IMPLICATIONS

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Simulation

•The use of a mathematical

or computer representation
of a physical system to study
constraint effects.

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Supply Chain Simulation

• "Supply chain simulation involves creating virtual models of

real-world supply chain processes to analyze and predict
their behavior."

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Complexity and Uncertainty in Supply Chains
"Supply chains face complexity due to multiple stakeholders, processes, and
global operations. Uncertainty arises from factors like:

Demand Unforeseen
Fluctuation Events

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Manufacturing Simulation in Supply Chain

• Simulation helps identify bottlenecks, optimize production

schedules, and ensure efficient resource utilization.
• A Company used simulation to uncover a production
bottleneck and streamline manufacturing processes.

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Simulation in Network Design

• Simulation helps evaluate alternative network scenarios,

optimizing distribution routes, and warehouse locations.
• A Company utilized simulation to redesign its distribution
network, resulting in improved cost-effectiveness.

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Scenario-Based Simulation
• Scenario-based simulation involves modeling potential supply chain
disruptions or changes to assess their impacts.
• A Company used scenario-based simulation to prepare for supplier
delays, transportation disruptions, and demand fluctuations.
• When a supplier faced a labor strike, the Company’s prior simulation
efforts allowed them to quickly switch to an alternative supplier,
avoiding costly disruptions.

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Contingency Planning
• Simulation assists in developing and testing contingency plans to
ensure supply chain resilience.
• Having a well-defined contingency plan can mean the difference
between business continuity and costly disruptions.
• A company's contingency plan included pre-negotiated contracts with
backup suppliers, ensuring a swift response during a supply chain
crisis.

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Benefits of Simulation
Simulation yields benefits such as improved decision-making, risk reduction, and cost savings

The ability to review how different components in the supply chain interact

Measuring the impact of potential changes in the supply chain

Testing upgrades and changes before implementing them in the real world using a digital twin

Evaluating different scenarios

Posing what-if questions

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Case Studies:

Scenario 1: Supply Chain Resilience in the Wind Turbine Industry

Scenario 2: Managing a Raw Material Shortage Crisis in Wind Turbine Production

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Scenario 1: Supply Chain Resilience in the Wind Turbine Industry

Supply Chain Strategies

• Supplier Diversification
• Inventory Buffer

Disruption Scenario

• Natural Disaster

Contingency Planning

• Alternative Suppliers
• Inventory Activation
• Communication and Collaboration

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Scenario 1: Supply Chain Resilience in the Wind Turbine Industry
Supply Chain Strategies

Supplier Diversification
• A wind turbine manufacturer diversifies its supplier base as part of a new supply
chain strategy.
• They avoid dependence on a single supplier by working with multiple suppliers in
different regions.
• This approach minimizes the risk of supply disruptions caused by events like
natural disasters or geopolitical issues.

Inventory Buffer
• The manufacturer keeps an inventory buffer of key components.
• This includes wind turbine blades and generator parts.
• It ensures production continues despite short-term supply disruptions.

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Scenario 1: Supply Chain Resilience in the Wind Turbine Industry
Disruption Scenario

Natural Disaster

• A severe hurricane is predicted to hit a region where one of the

manufacturer's key suppliers is located.
• This supplier produces critical blade components used in the wind
turbines.

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Scenario 1: Supply Chain Resilience in the Wind Turbine Industry
Contingency Planning
Alternative Suppliers
•The manufacturer activates its contingency plan by rerouting orders to
alternative suppliers in safer regions.
•This ensures a steady supply of critical components despite the hurricane.

Inventory Activation
•The manufacturer activates its inventory buffer, using stored blades to
maintain production.
•This ensures continued operation even if the blade supply from the affected
supplier is disrupted.

Communication and Collaboration

• The manufacturer maintains close communication with suppliers, especially in
disaster-prone regions, sharing real-time updates on the hurricane's progress.
• This helps suppliers prepare for disruptions and implement their own
contingency plans.

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Scenario 2: Managing a Raw Material Shortage Crisis in Wind Turbine Production

Supply Chain Strategies

• Dual Sourcing for Raw Materials

• Inventory Optimization

Disruption Scenario
• Raw Material Shortage

Contingency Planning
• Alternative Material Sourcing
• Secondary Supplier Activation
• Inventory Deployment

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Scenario 2: Managing a Raw Material Shortage Crisis in Wind Turbine Production
Supply Chain Strategies

Dual Sourcing for Raw

Materials

• The wind turbine manufacturer employs a dual-sourcing strategy

for critical raw materials, working with two suppliers located in
different regions.

Inventory Optimization

• The company maintains an optimized inventory of raw materials

to balance cost-efficiency with supply security.

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Scenario 2: Managing a Raw Material Shortage Crisis in Wind Turbine Production
Disruption Scenario

Raw Material Shortage

• A sudden geopolitical event disrupts the supply of rare-earth

magnets, causing a shortage.

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Scenario 2: Managing a Raw Material Shortage Crisis in Wind Turbine Production
Contingency Planning

Alternative Suppliers

•The manufacturer activates its contingency plan by identifying alternative

materials with similar properties. They collaborate with R&D teams to test and
approve these materials for production.

Inventory Activation

•The company immediately contacts its secondary raw material supplier and
requests an expedited order to bridge the shortage gap.

Communication and Collaboration

• Raw materials from inventory are deployed to maintain production while

alternative sourcing is finalized.

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INTRODUCTION SCENARIO PLANNING THEORY
AND PRINCIPLES

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Scenario Planning Theory
Scenario Planning is the prediction of future scenarios and
gauging the effect of the scenario on the business. So it helps
management be prepared for business adversities that may arise
due to changes in the current scenario.

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Scenario Planning Theory
❑ Scenario planning helps organizations address future uncertainties.
❑ It connects long and medium-term future discussions with short to medium-term
strategic planning.

❑The process has two phases:

❑ Phase 1: Creating scenarios
❑ Phase 2: Using those scenarios for strategic planning

❑It combines scenario analysis and strategic planning based on the scenarios created.

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 Scenario Planning Theory
❑ The differences between traditional strategic planning approaches and scenario
planning are illustrated below:
Traditional strategic planning Scenario planning approach

Perspective Partial, ‘Everything else being equal’ Overall, ‘Nothing else being equal’

Variables Quantitative, objective, known Qualitative, not necessarily quantitative, subjective, known or hidden

Relationships Statistical, stable structures Dynamic, emerging structures

Explanation The past explains the present The future is the raison d’être of the present

Picture of future Simple and certain Multiple and uncertain

Determinist and quantitative models Intention analysis, qualitative and stochastic models
Method
(economic, mathematical) (cross-impact and systems analysis)

Passive or adaptive Active and creative

Attitude to the future
(the future will be) (the future is created)

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Scenario Planning in Supply Chain
❑ Scenario planning involves developing and evaluating different hypothetical situations or scenarios to:

❑ Anticipate and prepare for potential disruptions or changes in the supply chain.

Supply Chain Scenario Planning:

The process of preparing for potential future events by imagining different
scenarios and planning in case they occur. In other words, scenario planning
helps an enterprise identify:

• Risks, Disruptions, and Challenges that have the potential to impact its supply
chain.
• The supply chain risks, challenges, or disruptions could also arise from
transportation delays, supplier bankruptcies, or global pandemics.

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Scenario Planning in Supply Chain – Real case
Let's consider a global automotive manufacturing company that sources components from multiple suppliers located in different
countries. They rely on a complex supply chain to ensure timely production and delivery of vehicles.

Identify the Risks

• Potential risks such as a major earthquake affecting a region where a critical supplier is located,
a key supplier going bankrupt, or a trade war resulting in import/export restrictions.

Contingency Planning
• For instance, in the case of a major earthquake, the company may identify alternative suppliers or
implement safety stock strategies to ensure a continuous supply of components.
• In the event of supplier bankruptcy, the company may have pre-qualified backup suppliers or establish
strategic partnerships to quickly switch suppliers and maintain production continuity.
• In response to geopolitical events, the company may diversify sourcing locations, renegotiate contracts, or
establish localized manufacturing capabilities to reduce dependencies on specific regions.

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Scenario Planning in Supply Chain – Real case
Let's consider a global automotive manufacturing company that sources components from multiple suppliers located in different
countries. They rely on a complex supply chain to ensure timely production and delivery of vehicles.

Collaboration and Communication

• They establish strong relationships with suppliers, regularly assess their financial health, and
maintain open lines of communication to proactively address any potential risks.
• The company may also collaborate with logistics partners to develop alternative transportation
routes or explore expedited shipping options during times of potential disruption.

Regular Review and Updates

• The company regularly reviews and updates its scenario plans and contingency strategies to reflect changing
market conditions, geopolitical landscape, or supplier dynamics.
• They monitor global events and market trends to identify emerging risks and proactively incorporate them
into their planning processes.

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Scenario Planning Steps

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Step A: Set Objectives and Build Scenario Planning Teams
■ Task A1
■ Define the objective of the scenario planning exercise
■ Identify the strategic decisions that require
pressure testing or questions that require
answers. Specify the time horizon and geographic
boundary the strategic decision needs to address.

■ Task A2
■ Establish the scenario planning team
■ Bring together a working team of relevant
stakeholders, including leaders from the supply
chain organization, business units, and other
leaders across the enterprise, to ensure scenarios
capture all relevant perspectives.

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Step B: Identity Driving Forces and Critical Uncertainties

■ Task B1
■ Determine and prioritize the key driving forces
■ Identify internal and external forces that
influence the scenario planning objectives and
shortlist the critical driving forces based on their
degree of influence and vulnerability.

■ Task B2
■ Determine the likely truths and uncertainties of the
key driving forces
■ Analyze key trends and potential states for each
driving force to determine the likely truths and
critical uncertainties. Then, engage with internal
stakeholders and external strategic customers
and suppliers to revise the likely truths and
uncertainties based on their feedback.

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Step B: Identity Driving Forces and Critical Uncertainties
Analyzing Driving Forces

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Step C: Develop Scenarios and Corresponding Signpost
■ Task C1
■ Task C2
■ Develop the potential scenarios based on
■ Create signposts or triggers to determine
the information gathered
which scenarios might occur
■ Create a range of uncertainties for any
■ Brainstorm with your team to identify
two driving forces at a time to create a
measurable signposts or scenario triggers
series of scenario matrices, and use the
to alert supply chain leaders when a
likely truths to define the scenarios.
particular scenario might arise, and define
Assess these decisions using a single-
their expected date of occurrence.
scenario matrix based on the two critical
driving forces and develop a final list of
three to six scenarios.

■ Task C3
■ Test the plausibility of critical scenarios with
the scenario planning team
■ Select a representative to present the
scenarios to the working group, asking the
group to assess the scenarios along
dimensions and revise based on feedback.
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Step C: Develop Scenarios and Corresponding Signpost
Scenario Development Tools
■ Write the extreme outcomes of each uncertainty on the two ends of the axes. For each quadrant,
analyze how the two extreme uncertainties’ outcomes will interact when considered
simultaneously within the context of the likely truths identified.

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Step D: Use Scenarios to Facilitate and Refine Supply Chain Strategy
■ Task D1
■ Pressure-test the current supply chain ■ Task D2
strategic plan and its initiatives ■ Create an action plan to respond to potential
■ Collaborate with functional leaders scenarios
across the supply chain organization to ■ Review the results of the pressure-testing
determine whether their planned exercise to articulate the adjusted strategy
initiatives to support the strategic plan and goals for each scenario and define the
are robust enough to ensure that the ownership and timelines.
supply chain can stay on course to
achieve the strategic plan objectives
under each scenario.

■ Task D3
■ Prioritize action plan responses
■ Look for similarities across the action plans
for each scenario and prioritize executing
those plans that cut across multiple
scenarios to maximize response efforts.

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Step D: Use Scenarios to Facilitate and Refine Supply Chain Strategy

Scenario Action Plan Prioritization

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Supply Chains Network Scenario Planning

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SYSTEM NERVOUSNESS

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System Nervousness

Systems Nervousness

• Refers to the phenomenon where small changes in one part of a

system can result in significant fluctuations or disruptions
throughout the entire supply chain network.

Nervousness in Supply Chain

Management
• Refers to the variability or instability observed in the supply chain
due to demand fluctuations, supply disruptions, lead time
variations, or other factors.
• This can lead to inefficiencies, increased costs, and challenges in
meeting customer demand effectively.

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The Source of Nervousness

The external sources

• like natural disasters, manmade disasters, and

technological crises.

The internal sources

• like inside the organization and the global supply chain.

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Some Common Causes of Nervousness in Supply Chains

Demand Variability: Fluctuations in customer demand can create uncertainty in the supply chain, leading to
overstocking or stockouts of products.

Supply Disruptions: Unexpected disruptions in the supply chain, such as delays in shipments or production
issues, can cause fluctuations in inventory levels and affect the flow of goods.

Lead Time Variability: Variations in lead times for raw materials, components, or finished products can
result in uncertainties in production and delivery schedules.

Bullwhip Effect: The bullwhip effect is the amplification of demand fluctuations as they move up the
supply chain, leading to increased nervousness at higher levels.

Lack of Information Sharing: Insufficient communication and collaboration among supply chain partners
can lead to uncertainty in demand forecasting and inventory planning.

External Events: Natural disasters, geopolitical events, economic fluctuations, and other external factors can
introduce uncertainty and nervousness into the supply chain.

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Demand Variability - SCN

■ Demand Variability in the Supply Chain is a measurement of how much variability

can occur in the demand from customers. In other words, it is the variability
between what is expected to happen and what really happens.

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Demand Variability - SCN
■ Demand Variability is a significant source of nervousness in supply chains. When customer demand
fluctuates, it becomes challenging for organizations to accurately predict the exact quantities of
products they need to produce or have in stock. As a result, they may face two common challenges:

Overstocking
• If an organization overestimates customer demand and produces or purchases more goods than
needed, it can lead to excess inventory. Overstocking ties up valuable resources increases holding
costs, and may result in products becoming obsolete or perishable before they are sold. This
inefficiency can negatively impact a company's profitability and cash flow.

Stockouts
• On the other hand, if an organization underestimates customer demand and does not have
enough inventory on hand to meet customer orders, it can lead to stockouts. Stockouts can result
in lost sales, dissatisfied customers, and potential damage to a company's reputation. Additionally,
stockouts may force companies to expedite production or shipping, incurring higher costs and
putting stress on the supply chain.

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Demand Variability - SCN
❑ Coefficient of Variability
❑ The most common method of classifying items based on demand variability is to use the
coefficient of variability:

𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑

𝑪𝒐𝑽 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑒𝑚𝑎𝑛𝑑

❑ The higher the 𝑪𝒐𝑽, the higher the variability.

❑ For example, if the average monthly demand for a product is 𝟏𝟎𝟎 units, and the standard
deviation is 𝟐𝟎 units, the 𝑪𝒐𝑽 is 𝟎. 𝟐. This means that the demand varies by 𝟐𝟎% around the
average.

❑ Similarly, if the average monthly supply for a product is 𝟏𝟎𝟎 units, and the standard deviation is
𝟏𝟎 units, the 𝑪𝒐𝑽 is 𝟎. 𝟏. This means that the supply varies by 10% around the average.

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Demand Variability - SCN
Strategies to Reduce Nervousness – Demand Variability

Improve Demand Forecasting

Safety Stock Management

Flexibility in Production

Effective Inventory Management

Collaboration in the Supply Chain

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Supply Disruptions - SCN

■ Build Agility and Resilience in the End-to-End Supply Chain

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Supply Disruptions - SCN
❑ Supply Disruptions can significantly impact the flow of goods and inventory levels. Some of the key
types of supply disruptions include:

Transportation Delays
• Delays in transportation, such as port congestion, weather-related disruptions, or strikes, can lead to delayed
deliveries of goods and affect the timely replenishment of inventory.

Production Issues
• Delays in transportation, such as port congestion, weather-related disruptions, or strikes, can lead to delayed
deliveries of goods and affect the timely replenishment of inventory.

Supplier Issues
• Problems with suppliers, such as delayed shipments of raw materials or components, financial difficulties, or
changes in product quality, can cause disruptions in the supply chain.

Natural Disasters
• Problems with suppliers, such as delayed shipments of raw materials or components, financial difficulties, or
changes in product quality, can cause disruptions in the supply chain.

Geopolitical Events
• Political instability, trade disputes, or changes in regulations can lead to disruptions in the supply chain,
particularly for organizations with global supply networks.

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Supply Disruptions - SCN
Challenges due to Supply Disruption
• Disruptions may cause fluctuations in inventory levels,
Inventory Fluctuations leading to overstocking or stockouts depending on the
severity and duration of the disruption.

• Expediting shipments or sourcing materials from alternative

Increased Costs suppliers to mitigate disruptions can result in higher logistics
and procurement costs.

• Supply disruptions can lead to delays in delivering products to

Customer Service Impact customers, affecting service levels and customer satisfaction.

• Limited visibility into supplier networks may make it

Supply Chain Visibility challenging to identify and address potential disruptions
proactively.

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Supply Disruptions - SCN
Strategies to Reduce Nervousness – Supply Disruption

Risk Assessment and Mitigation

Diversification of Suppliers

Supply Chain Resilience

Collaborative Relationships

Technology and Data Analytics

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Lead Time Variability - SCN

❑ 𝑳𝒆𝒂𝒅 𝑻𝒊𝒎𝒆 = (𝑷𝒓𝒆 − 𝑷𝒓𝒐𝒄𝒆𝒔𝒔𝒊𝒏𝒈 𝑻𝒊𝒎𝒆) + (𝑷𝒓𝒐𝒄𝒆𝒔𝒔𝒊𝒏𝒈 𝑻𝒊𝒎𝒆) + (𝑷𝒐𝒔𝒕 − 𝑷𝒓𝒐𝒄𝒆𝒔𝒔𝒊𝒏𝒈 𝑻𝒊𝒎𝒆)

❑ 𝑳𝒆𝒂𝒅 𝑻𝒊𝒎𝒆 𝒇𝒐𝒓 𝑴𝒂𝒏𝒖𝒇𝒂𝒄𝒕𝒖𝒓𝒊𝒏𝒈 𝑪𝒐𝒎𝒑𝒂𝒏𝒚 = (𝑷𝒓𝒐𝒄𝒖𝒓𝒆𝒎𝒆𝒏𝒕 𝑻𝒊𝒎𝒆𝒇𝒐𝒓 𝒓𝒂𝒘 𝒎𝒂𝒕𝒆𝒓𝒊𝒂𝒍𝒔 ) + (𝑴𝒂𝒏𝒖𝒇𝒂𝒄𝒕𝒖𝒓𝒊𝒏𝒈 𝑻𝒊𝒎𝒆) + (𝑺𝒉𝒊𝒑𝒑𝒊𝒏𝒈 𝑻𝒊𝒎𝒆)

❑ 𝑳𝒆𝒂𝒅 𝑻𝒊𝒎𝒆 𝒇𝒐𝒓 𝑹𝒆𝒕𝒂𝒊𝒍 𝑪𝒐𝒎𝒑𝒂𝒏𝒚 = (𝑷𝒓𝒐𝒄𝒖𝒓𝒆𝒎𝒆𝒏𝒕 𝑻𝒊𝒎𝒆𝒇𝒐𝒓 𝒇𝒊𝒏𝒂𝒍 𝒑𝒓𝒐𝒅𝒖𝒄𝒕𝒔 ) + (𝑺𝒉𝒊𝒑𝒑𝒊𝒏𝒈 𝑻𝒊𝒎𝒆)

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Lead Time Variability - SCN
Challenges due to Lead Time Variability

• Fluctuating lead times can make it challenging to plan production

Production Planning schedules accurately. Longer lead times may result in excess inventory,
while shorter lead times may lead to stockouts and production delays.

• Lead time variability can impact inventory levels and carrying costs.
Inventory Management Longer lead times may require higher safety stock levels, tying up working
capital, while shorter lead times may allow for lower inventory levels.

• Inconsistent lead times can affect customer service levels, as customers

Customer Service may experience delays in receiving their orders.

• Lack of visibility into lead times at various stages of the supply chain can
Supply Chain Visibility make it difficult to anticipate and address potential issues proactively.

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Lead Time Variability - SCN
Strategies to Reduce Nervousness – Lead Time Variability

Supplier Collaboration

Safety Stock

Agile Manufacturing

Performance Monitoring

Supply Chain Optimization

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Bullwhip Effect- SCN

■ The bullwhip effect is a supply chain phenomenon describing how small fluctuations in demand at
the retail level can cause progressively larger fluctuations in demand at the wholesale, distributor,
manufacturer, and raw material supplier levels.

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Bullwhip Effect- SCN
❑ The bullwhip effect is typically observed in multi-tier supply chains and can be
caused by various factors:

Demand Forecasting
• Inaccurate demand forecasts at the retailer level can lead to larger variations in orders placed with
distributors or manufacturers. As each entity in the supply chain adjusts its orders based on demand
forecasts, the cumulative effect results in larger demand fluctuations upstream.

Order Batching
• When retailers or distributors consolidate orders into larger batches to reduce ordering costs or take
advantage of discounts, it can lead to more significant variations in production and replenishment quantities
upstream.

Lead Time Variability

• Variability in lead times for raw materials or finished products can exacerbate the bullwhip effect. Longer
lead times may prompt entities to place larger orders as a hedge against potential delays.

Lack of Information Sharing

• Limited visibility and communication between supply chain partners can hinder the accurate sharing of
demand information, contributing to the bullwhip effect.

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Bullwhip Effect- SCN
Challenges due to Bullwhip Effect
• The bullwhip effect can lead to large and costly swings in
Inventory Fluctuations inventory levels as each entity in the supply chain reacts to
perceived changes in demand.

• Upstream entities may overproduce or over-purchase goods

Excess Inventory in response to amplified demand signals, resulting in excess
inventory and increased holding costs.

• Conversely, large fluctuations in demand can lead to

Stockouts stockouts as upstream entities may not be able to meet the
suddenly increased demand.

• The bullwhip effect disrupts the smooth flow of goods in the

Reduced Efficiency supply chain, leading to inefficiencies in production planning
and distribution.

Copyright©2024-S.P.Toufighi
Bullwhip Effect - SCN
Strategies to Reduce Nervousness – Bullwhip Effect

Collaborative Planning

Smoothing Orders

Demand Signal Processing

Vendor-Managed Inventory (VMI)

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Operational and Disruption SC Risks
Operational (Recurrent) Risks / Bullwhip Effect

Demand Lead Time

Fluctuations Variations

Supply Chain
Risks

Structural
Lean Structure and
Complexity and
Processes
Connectivity

Disruption (Exceptional) Risks / Ripple Effect

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Bullwhip Effect- SCN
❑ Measuring the Bullwhip Effect

𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒 𝑜𝑓 𝑂𝑟𝑑𝑒𝑟𝑠
𝑩𝒖𝒍𝒍𝒘𝒉𝒊𝒑 =
𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒𝑜𝑓𝑑𝑒𝑚𝑎𝑛𝑑

• Implies that the order variance is equal to the demand variance, or in other words, there is no variance
𝐵𝑊𝐸 = 1 amplification.

• Indicates that the bullwhip effect is present(amplification)

BWE>1

• Refers to a "smoothing” or “dampening ”scenario, meaning that the orders are less variable than the
BWE<1
demand.

Copyright©2024-S.P.Toufighi
 Operational (Recurrent) Risks / Bullwhip Effect
𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒 𝑜𝑓 𝑂𝑟𝑑𝑒𝑟𝑠
𝑩𝒖𝒍𝒍𝒘𝒉𝒊𝒑 =
𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒𝑜𝑓𝑑𝑒𝑚𝑎𝑛𝑑

BWE Description
= 1 order variance = demand variance
> 1 order variance > demand variance
< 1 order variance < demand variance

The Bullwhip Effect Measure (BEM) :

❑ A cumulative expression of the impact of individual
period fluctuations.
𝐵𝐸𝑀𝑡−1 𝑖𝑓 𝑜𝑟𝑑𝑒𝑟𝑡 − 𝑠𝑎𝑙𝑒𝑠𝑡 = 0
𝑩𝑬𝑴𝒕 = ቐ 𝑂𝑟𝑑𝑒𝑟 𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒
𝐵𝐸𝑀𝑡−1 + 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒
𝑆𝑎𝑙𝑒𝑠 𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒

𝑥𝑛 2 𝑥 2
𝑛−1 − 𝑛 + 𝑥𝑛 − 𝑛𝑛
𝑉𝑎𝑟𝑜𝑟𝑑𝑒𝑟 =
𝑛−1

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Operational (Recurrent) Risks / Bullwhip Effect - Example
■ Consider the following table and calculate:
■ Orders Variances
■ Sales Variances
■ BEM

Time 0 1 2 3 4 5 6 7 8 9 10

Sales 0 1 1 2 2 1 2 1 1 2 1

Orders 0 1.60 1.48 2.98 2.79 1.03 4.37 0.25 0.25 2.75 0.25

Receptions 0 0 0 1.60 1.48 2.98 2.79 1.03 4.37 0.25 1.60

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Operational (Recurrent) Risks / Bullwhip Effect - Example

Order Variance:
=IF(E3<>0, ((A3 * POWER(C3 / (A3 + 1), 2)) +
POWER(C3 - (C3 / (A3 + 1)), 2)) / A3, 0)

Sales Variance:
=VAR(B$2:B3)

BEM:
=H2+IF(E3=0,0,(F3/G3))

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Operational (Recurrent) Risks / Bullwhip Effect – Group Assignment – 15 min
■ Consider the following table and calculate:
■ Orders Variances
■ Sales Variances
■ BEM
Time

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Sales

0 17 18 38 43 58 28 4 6 37 41 33 20 12 15 22
Orders

0 22 35 57 54 70 45 8 10 53 59 47 37 23 25 30
Receptions

0 0 0 22 35 57 54 70 45 8 10 53 59 47 37 23

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 How Demand Non-transparency Leads to the Bullwhip Effect
■ Example: Due to slight demand variation, a fast-moving consumer goods company aims to
minimize capital commitment by adjusting production rates, with a focus on the impact of a 10%
decrease in customer demand on the manufacturer.

■ Safety stock is 25% of demand and is therefore able to cover the demand of 1 week.

Initial Data Demand Old Order Old Safety Stock Old

Customer 1200 1200 300

Supplier #1 1200 1200 300

Supplier #2 1200 1200 300

Supplier #3 1200 1200 300

■ Now demand decreases by 10%.

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How Demand Non-transparency Leads to the Bullwhip Effect
■ For any supplier calculate the production rates:

𝑵𝒆𝒘 𝒐𝒓𝒅𝒆𝒓/𝒑𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒐𝒏 𝒓𝒂𝒕𝒆 = 𝐷𝑒𝑚𝑎𝑛𝑑 𝑛𝑒𝑤 − 𝑆𝑎𝑓𝑒𝑡𝑦 𝑠𝑡𝑜𝑐𝑘 𝑜𝑙𝑑 + 𝑆𝑎𝑓𝑒𝑡𝑦 𝑠𝑡𝑜𝑐𝑘 𝑛𝑒𝑤

Cusomer Manufacturer Supplier # 1 Supplier # 2 Supplier # 3

Order Demand Demand Demand Demand

Old 1200 1200 1200 1200 1200
New 1080 1080 1050 1013 966
Safety Stock Safety Stock Safety Stock Safety Stock
Old 300 300 300 300
New 270 263 253 241
Production Rate Production Rate Production Rate Production Rate
Old 1200 1200 1200 1200
New 1050 1013 966 907

Reduction Percent 10.00 12.50 15.63 19.53 24.41

Implications of the demand fluctuations on production rates

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How Demand Non-transparency Leads to the Bullwhip Effect
■ Each player in the supply chain assumes that the demand forecast (or orders) for the next period is
the same as in the current period. Following this assumption, each supplier will be the same as in
the current period.
■ Following this assumption, each supplier will be planning their production rate to cover the
demand/order for the next period, which will be equal to the demand/order for the current period
(e.g., new demand of supplier #3 orients itself by new production rate of supplier #2).
■ The problem will be that only the manufacturer can see the changes in demand on the customer
side. Other players in the supply chain cannot see the changes in demand because of non-
transparency. For that reason, the players will change their production rate and safety stocks
because the predecessor changed his order without pre-informing other supply chain partners.
■ We can observe that demand non-transparency affects the shortage. For example, Supplier #3 will
not produce the right amount of pieces for customers’ orders to satisfy their demand.
■ It can be concluded that changes on the customer side increase order quantity through the supply
chain if demand is non-transparent. In general, communication, validation of demand, information
sharing, computer-aided ordering, and better pricing strategy can help reduce the bullwhip effect in
this situation.
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Ripple Effect Definition
Disruption propagation in the supply chain

■ The ripple effect in the supply chain occurs if a disruption cannot be localized and cascades downstream
impacting supply chain performance such as sales, stock return, service level, and costs

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Ripple Effect Definition

■ The Ripple Effect describes the impact of disruption on SC performance, disruption

propagation, and disruption-based scope of changes in the SC structures and parameters.

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Ripple Effect Definition

■ The Ripple Effect refers to structural dynamics and describes a downstream propagation of
the downscaling in demand fulfillment in the supply chain due to severe disruption.

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Reasons for the Ripple Effect in the Supply Chain

Reasons Counter-measure
Complexity • Simplification of supply chain structure
• Structures with necessary conditions of observability and controllability
Leanness • Inventory and capacity buffers
• Postponement
• Supply chain design extension
Geographical specialization • Multiple sourcing
• Contingency plans
IT-failures • Decentralization
• Cloud services
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Mitigation Strategies for Ripple Effect
■ Different Reserves (material inventory, capacities) - Robustness
■ New strategies such as leagile, agile and responsive supply chains - Flexibility
■ Better coordination in supply chains – collaborative planning, forecasting and replenishment.
■ Set of postponed decisions (product postponement, rolling/adaptive planning) – SC Excessiveness

SYSTEM
SYSTEM
Redundancy in capacity and
Coordination / integration
inventory, multiple sourcing
outsourcing

Flixibility

PRODUCT PROCESS
Modularization / standardization, Flexible and real time-based
postponement production / warehousing system

Supply chain flexibility

Robustness, flexibility, and performance

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Ripple Effect and Bullwhip Effect

Feature Ripple Effect Bullwhip Effect

Risks Disruptions (e.g. Explosion) Operative (e.g. Demand Fluctuation)

Structures and Critical Parameters (such Operative Parameters Such as Lead-Time

Affected Area
as Service Level and Total Costs) and Inventory

Middle – and Long Terms; Significant Short Ter, Coordination to Balance

Recovery
coordination Efforts and Investment Demand and Supply

Decreased Output Performance Such as Annual Mainly Current Performance Such as

Performance Revenues Daily/Weekly Stock-out/Overage costs

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Lack of Information Sharing - SCN

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Lack of Information Sharing - SCN
Challenges due to Lack of Information Sharing
• Inadequate sharing of sales and demand data between retailers, distributors, and
Demand Forecasting manufacturers can result in inaccurate demand forecasting. As a consequence, each
entity in the supply chain may make decisions based on limited information, leading
Inaccuracy to discrepancies in inventory levels and production planning.

• As mentioned earlier, the lack of information sharing can contribute to the bullwhip
Bullwhip Effect effect, where small fluctuations in customer demand get amplified as they move up
the supply chain, leading to increased nervousness and inefficiencies.

• Without proper visibility into inventory levels and demand patterns at different
Inventory Imbalance stages of the supply chain, overstocking or stockouts can occur, causing inefficiencies
and increased costs.

• When supply chain partners do not share crucial information, they may have to
Reactive Decision-Making make reactive decisions based on sudden changes in demand or supply
conditions. This can lead to suboptimal decisions and increased nervousness.

Copyright©2024-S.P.Toufighi
Lack of Information Sharing - SCN
Strategies to Reduce Nervousness – Lack of Information Sharing

Collaboration and Trust

Data Sharing Technologies

Vendor-Managed Inventory (VMI)

Collaborative Planning, Forecasting, and Replenishment (CPFR)

Copyright©2024-S.P.Toufighi
External Events - SCN

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External Events - SCN
Natural Disasters
• Events like earthquakes, floods, hurricanes, wildfires, and tsunamis can disrupt transportation networks,
damage production facilities, and interrupt the flow of goods.

Geopolitical Events
• Political instability, trade wars, changes in regulations, and tariffs can lead to disruptions in global supply
chains, affecting the sourcing of raw materials and finished products.

Economic Fluctuations
• Economic downturns, inflation, currency fluctuations, and changes in consumer spending patterns can cause
demand volatility and impact supply chain operations.

Public Health Crises

• Global health crises, such as the COVID-19 pandemic, can result in supply chain disruptions due to
lockdowns, travel restrictions, and shifts in consumer behavior.

Supplier or Customer Bankruptcy

• The financial instability or bankruptcy of key suppliers or customers can lead to sudden supply or demand
disruptions.

Labor Strikes and Protests

• Labor strikes, protests, and social unrest can affect manufacturing operations, distribution centers, and
transportation networks.

Copyright©2024-S.P.Toufighi
External Events - SCN
Challenges due to External Events
• External events can lead to disruptions in the supply of raw
Supply Disruptions materials, components, or finished goods, affecting
production schedules and inventory levels.

• Transportation disruptions or production facility damage can

Capacity Constraints result in capacity constraints, limiting the ability to meet
customer demand.

• Addressing external event-related disruptions may require

Increased Costs additional investments, expedited shipments, or alternative
sourcing, leading to increased costs.

• Supply chain disruptions can lead to delays in delivering

Customer Service Impact products to customers, affecting service levels and customer
satisfaction.

Copyright©2024-S.P.Toufighi
External Events - SCN
Strategies to Reduce Nervousness – External Events

Risk Management

Supply Chain Resilience

Collaboration and Visibility

Continuous Monitoring

Scenario Planning

Copyright©2024-S.P.Toufighi
SUPPLY CHAIN NETWORK DYNAMICS AND DESIGN

Copyright©2024-S.P.Toufighi
Supply Chain Network Dynamics and Design
❑ Network Dynamics and Design involve analyzing and optimizing the structure and
configuration of the supply chain network, including the placement of facilities,
transportation routes, and distribution channels.

Copyright©2024-S.P.Toufighi
Supply Chain Network Dynamics and Design
❑ Supply network dynamics refer to the constantly changing relationships and
interactions between organizations in a supply chain.

Copyright©2024-S.P.Toufighi
Supply Chain Network Dynamics and Design
❑ Supply network dynamics can significantly impact an organization’s ability to
acquire the resources and capabilities it needs to achieve its performance
objectives.

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Supply Chain Network Dynamics and Design
SCND Aspects
Between SCO

A High Level of
Integration
(Strategic Partnership or Joint Ventures)

A High Level of
Competition

A High Level of Trust

Copyright©2024-S.P.Toufighi
Supply Chain Network Dynamics and Design
1. Lead Time Variability Factor
■ Description: The level of variability in lead time, or the time it takes for a product to be
delivered from the supplier to the manufacturer.

Copyright©2024-S.P.Toufighi
Supply Chain Network Dynamics and Design
2. Product Variety Factor
■ Description: The number and types of products produced by the manufacturer and
required from suppliers.

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Supply Chain Network Dynamics and Design
3. Product Demand Volatility Factor
■ Description: The level of unpredictability in product demand.

Copyright©2024-S.P.Toufighi
Supply Chain Network Dynamics and Design
4. Supplier Dependency Factor
■ Description: The extent to which the manufacturer is dependent on suppliers for critical
components or materials.

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Supply Chain Network Dynamics and Design
5. Technology Complexity Factor
■ Description: The level of technical complexity of products and processes in the supply chain.

Copyright©2024-S.P.Toufighi
Supply Chain Network Dynamics and Design
In conclusion:
A high level of integration, competition, and trust can provide organizations with
access to specialized expertise and resources, improved coordination and
communication, innovation, and cost savings.

However, it can also increase the risk of conflicting interests, decrease trust and
control over the partnership or joint venture.

By effectively managing the supply network dynamics, organizations can ensure

that they have the resources they need to achieve their performance objectives
and maintain a competitive advantage.

Copyright©2024-S.P.Toufighi
Network Design - Example
❑ Problem Statement: Consider the six stores and five factories producing product X. The production and
transportation costs from each factory to a customer, and also the fixed cost for each factory, as shown in
the table. Calculate the supply amount from each factory to the customers.

Store 1 Store 2 Store 3 Store 4 Store 5 Store 6 Maximum Supply

Factory 1 1675 400 685 1630 1160 2800 180

Factory 2 1460 1940 970 100 495 1200 240

Factory 3 1925 2400 1425 500 950 800 270

Factory 4 380 1355 543 1045 665 2321 220

Factory 5 922 1646 700 508 311 1797 310

Maximum Demand 100 80 140 60 70 110

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Network Design - Example
𝐶11 𝑛 𝑚
𝐶𝑎1 𝐶21 1 𝐷1
𝑋11
𝑋21 𝑀𝑖𝑛 𝑍 = ෍ ෍ 𝐶𝑖𝑗 . 𝑋𝑖𝑗
1 𝐶12 𝑖=1 𝑗=1
𝑋12 𝐶𝑛1
𝑋𝑛1 𝑆. 𝑡𝑜:
𝐶𝑎2 𝑛
𝐶22
2 2 𝐷2
෍ 𝑋𝑖𝑗 = 𝐷𝑗 𝑖 = 1,2, … , 𝑚
𝑋22
𝑖=1
𝐶𝑛2
𝑚
𝑋𝑛2
෍ 𝑋𝑖𝑗 ≤ 𝐶𝑎𝑖 𝑗 = 1,2, … , 𝑛
𝐶𝑎𝑛 𝑗=1
𝐶2𝑚 𝐶1𝑚
n 𝑋2𝑚 𝑋1𝑚 𝑋𝑖𝑗 ≥ 0

𝐶𝑛𝑚 m 𝐷𝑚
𝑋𝑛𝑚

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Network Design - Example
𝑛 𝑚

𝑀𝑖𝑛 𝑍 = ෍ ෍ 𝐶𝑖𝑗 . 𝑋𝑖𝑗

𝑖=1 𝑗=1
𝑆. 𝑡𝑜:
𝑛

෍ 𝑋𝑖𝑗 = 𝐷𝑗
𝑖=1
𝑚

෍ 𝑋𝑖𝑗 ≤ 𝐶𝑎𝑖
𝑗=1

𝑋𝑖𝑗 ≥ 0

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Network Design - Example
𝑛 𝑚

𝑀𝑖𝑛 𝑍 = ෍ ෍ 𝐶𝑖𝑗 . 𝑋𝑖𝑗

𝑖=1 𝑗=1
𝑆. 𝑡𝑜:
𝑛

෍ 𝑋𝑖𝑗 = 𝐷𝑗
𝑖=1
𝑚

෍ 𝑋𝑖𝑗 ≤ 𝐶𝑎𝑖
𝑗=1

𝑋𝑖𝑗 ≥ 0

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