Supply Chain Management Simulation Model

Mohammed Shahbazuddin

Mechanical Engineering Department,

University of Louisiana at Lafayette

Dr. Terrence. L Chambers

Mechanical Engineering Department,

University of Louisiana at Lafayette

Abstract
This paper discusses the major classes of software that help to manage the Supply Chain. It
describes where, how and what exactly each of the so-called silo software operates.This paper
intends to discuss the use of simulation for evaluating the supply chain to gain performance
improvements for their operations. It focuses on the benefits of using simulation as an effective
tool to manage and understand your supply chain. It also discusses the reasons why one would
want to use computer simulation as the analysis methodology to evaluate supply chains, its
advantages and disadvantages against other analysis methodologies where simulation can find
cost reductions that other methodologies would miss. The evolution of SCM software over a
period of time and its need for integration is explained in this paper. The paper briefly discusses
about the SCM software vendors and its selection procedure.

Introduction
Simulation (discrete-event) can be defined as creating a computer model of a real or proposed
system and conducting experiments on the model to describe observed behavior and/or predict
future behavior before investing any time or money. Supply Chain Management has been
defined by logistics professionals as the managing of the flow of materials and products from the
source to the user. Depending on the scope of the problem in the supply chain, there are typical
core methodologies – known as "solver technologies" – which include heuristics, constraint
management, linear programming, mixed-integer programming, and network programming that
provide the results or outputs of the APS tools. Conversely, simulation is not a "solver
technology" rather it is a methodology to evaluate detailed solutions and alternatives in the
supply chain. [1]

Proceedings of the 2003 ASEE Gulf-Southwest Annual Conference

The University of Texas at Arlington
Copyright  2003, American Society for Engineering Education
 Variability in Supply Chain
The key to understanding supply chain performance is to understand the variability in the
system. Following are some of the sources of variability in a typical supply chain:

Manufacturing:
Stock out situations
Parts not arriving on time for subassembly operations
Machines breaking and disrupting production
Labor problems
Machine set up/retoolings
New product line introductions
Warehousing/Distribution:
Automated material handling systems broken
Trucking/Shipping/Air/Rail systems deliver late
Labor problems
Spacing constraints
Information Technology:
Changing business processes due to mergers/acquisitions
Constantly changing business computer systems
Market Conditions:
Customer changing demand
Economic conditions
Currency conditions
All those items mentioned above clearly affect supply chain efficiency and effectiveness.

Other techniques and Simulation

The traditional approach has been to use a linear programming whose objective was to minimize
cost or maximize profit. In some problems, we may have used dynamic programming because
the problem had stochastic demand. For mutli-period, multi-product, multi-facility, multi-
resource nature of problem, which is usually the case, mixed-integer programming is used. But
these optimization techniques fail to take into consideration variance, which is a key driver in
Supply Chain. Consider a case where we have a demand variance or a forecast error. What does
the supply chain do in response? It starts moving material. If the demand forecast is up, the chain
tries to produce more products in order to fill inventories up to their proper levels. This can mean
overtime expenses, expediting charges, and other charges. If the demand forecast is down, then
manufacturing sites go idle, materials already in inventory go obsolete, and costs already in the
chain have to be absorbed. Optimization has no way of handling this problem. The reason is that
the plan that an optimization gives you may be a good one, but it is wrong. The assumptions that
go into the model will not play themselves out over time. The demand will be different, the cost

Proceedings of the 2003 ASEE Gulf-Southwest Annual Conference

The University of Texas at Arlington
Copyright  2003, American Society for Engineering Education
of materials will be different, the supply of key material will be different, and everything will be
different. In essence, you have optimized a problem that will never exist in reality. And because
of the nature of optimization, the optimal answer can change dramatically if there is a slight
change in the inputs. [2]

How Best To Use Simulation for Supply Chain Analysis

There are three areas where optimization and simulation compete – scheduling, tactical planning,
and strategic planning. These three areas have different advantages and disadvantages when it
comes to using simulation [2].

Scheduling is typically a short time horizon with a limited scope, possibly one plant, at part
number level. Resources are typically known and fixed. The demand either fixed, or known to an
extent that it could be considered “firm”. Variance, though critical, can usually be dealt with on
an exception basis. For scheduling applications that can be modeled with optimization
techniques, optimization is clearly the better choice. In this case, simulation should be used when
optimization cannot be used.

In tactical planning, time horizons are longer, perhaps up to several months in length. The scope
is at least regional, and perhaps corporate-wide. The tactical plan is either developed at the part
number level or an aggregate level, such as a family of products. Some resources, such as the
location of manufacturing facilities, are fixed. Others, including what products are produced in
which facilities, could be changed, but that would happen toward the end of the tactical planning
horizon. Some capital could be bought and deployed toward the end of the tactical planning
horizon. Most other resources are open to adjustment. Certainly, most materials have short
enough lead times so that they are ordered during the tactical planning horizon. Labor can be
hired, transportation can be procured, etc. But depending on your industry, the demand forecast
could be simply a best guess. If the demand forecast is a guess, and you want to be sure that the
supply chain will meet the demand without risking high amounts of obsolescence, then
simulation is the best choice. If the demand forecast is firm in this time horizon, perhaps an
optimization would be the best.

In strategic planning, time horizons are even longer, up to several years in length. The scope
corporate-wide. The strategic plan is developed at an aggregate level, perhaps at the level of
product divisions or product families. Basically, there are no fixed resources. Manufacturing
sites can be opened or closed, any capital can be procured, product deployments are completely
open, etc. The demand forecast is certainly a guess at this point. However, decisions with some
of the largest costs to a manufacturing operation must be addressed in this time horizon. Primary
among these decisions is manufacturing and inventory site locations, which includes the size of
the facility, and the basic logistics infrastructure (if it is not already in place). Based on site
location, future costs such as labor, taxes and tariffs are set. This is a point where optimization
and simulation can both play a role. Because of the level of abstraction at the strategic level, an

Proceedings of the 2003 ASEE Gulf-Southwest Annual Conference

The University of Texas at Arlington
Copyright  2003, American Society for Engineering Education
optimization can be used to help decide the location of new facilities and the closing of others.
Based on the output of the optimization, a supply chain simulation can then be used to be sure
the supply chain deliver product as expected. The simulation would help set inventory policies
based on demand variability and demand risk. The simulation can also give a more realistic
capital purchase plan, labor requirement, and a better overall cost estimate.

Case Study
The illustration of how Simulation can be applied to Supply Chain Management practices is
developed from the case study -Hypothetical organization called Global Food Manufacturing
(GFM) [3]. This case study presented is designed to analyze the manufacturing, distribution,
transportation, and retail aspects of the supply chain in which GFM operates. A simulation tool
[4] (The IBM Supply Chain Analyzer) is then used to quantify the effects of making changes
throughout the supply chain and the impact of those changes to their competitive performance in
the marketplace.

The DNA of SCM Simulation Model

The six primary components of future supply chain management (SCM) software packages
perform two primary functions[5]. One is planning (forecasts and schedules) and the other is
execution (dynamic management of activities) based on a plan. Enterprise resource planning
(ERP) and Supply Chain Planning (SCP) fit into the former category while Order management
systems (MES), Warehouse management systems (WMS), and Transportation management
systems (TMS) are on the execution side. Order management systems (OMS) fits somewhere in
between because it is both the last step in planning and the first step in execution.

Enterprise resource planning (ERP)

This high-level backbone has traditionally focused on enterprise-wide integration of a company's

financials, human resources, purchasing, payroll, order placement, and related administrative
functions. Many packages also include modules that address manufacturing. In fact, ERP is
generally considered to be the evolutionary next step from age-old materials requirements
planning (MRP) and manufacturing resource planning (MRP II) packages. More recently, ERP
offerings have added warehouse control as well as some order and transportation management
capabilities.

For all of this breadth, the generally recognized strength of ERP has been forecasting and
management of corporate financials. And that is likely to be to ERP's advantage in the future. To
be proficient on the financial side inevitably requires extensive databases, including costs,
revenue, assets such as warehousing and manufacturing facilities, and liabilities including
inventory.

Proceedings of the 2003 ASEE Gulf-Southwest Annual Conference

The University of Texas at Arlington
Copyright  2003, American Society for Engineering Education
Those databases provide the information needed to analyze and evaluate orders and what it will
take to fill them at the highest level. ERP can project costs to fill an order, determine sourcing
options, and figure order profitability. When these and related factors for one order are evaluated
against the same parameters for other orders, the ERP system ultimately forecasts the impact on
the bottom line.
Planning Execution

MES
ERP WMS
SCP OMS
TMS

Supply chain planning (SCP)

These packages are analytical tools that start with order demand and determine how and when
that demand can be satisfied. They plan at an enterprise level or at a facility level. To make those
determinations, some of the information will inevitably come from either an ERP system or
some other form of centralized database.

Of late, supply chain planning, as a stand-alone software package, has evolved into many new
forms. Originally, SCP was focused on the shop floor and known as advanced planning and
scheduling (APS). It is made up of multiple modules including inventory planning, supply chain
network design, manufacturing planning, demand planning, and available-to-promise, to name a
few.

As APS has expanded into the warehousing and distribution realm, new modules have come
along. These include supply chain inventory visibility, collaborative planning, forecasting, and
replenishment, as well as others.

Order management systems (OMS)

Sitting between planning software and execution software is OMS. An order management
system takes orders and determines inventory availability on an
enterprise wide basis to complete the planning side of the equation. The software then does some
execution-type tasks such as prioritizing and optimizing orders for hand off to the MES, WMS,
and TMS. Links to the customer service department are also common because OMS can develop
expected shipment and delivery dates based on availability of items.

Proceedings of the 2003 ASEE Gulf-Southwest Annual Conference

The University of Texas at Arlington
Copyright  2003, American Society for Engineering Education
An OMS is probably the perfect example of the need for integration between planning and
execution software. If it doesn't have access to database information upstream, it can't make
many decisions. And if it isn't connected to the execution software downstream, its decisions
don't go anywhere that they can do some good.

Manufacturing execution systems (MES)

To fill orders, an MES manages all resources (equipment, inventory, and labor) needed to create
a finished product in time for when it is needed by the customer. Capabilities include allocating,
reserving, scheduling, and dispatching those resources as needed.

Making this happen requires dynamic control using real-time data. This allows MES to deal with
changing conditions unlike its predecessors, MRP and MRP II. For instance, the software is able
to compensate for machine downtime by re-routing work pieces and resetting priorities.
Similarly, inventory availability can be factored into the work plan and production goals adjusted
to reflect reality, a critical step when trying to balance sometimes conflicting customer requests
for finished goods.

Warehouse management systems (WMS)

Much like an MES, a warehouse management system provides real-time control over resources
needed to fill orders. It manages inventory, people, and equipment from receiving to shipping.
That means inventory is put away at a particular location because the WMS selected that spot.
Orders are picked in a particular sequence by specific individuals using selected lift trucks or
other equipment because the WMS determined that was the most efficient way. And in the
shipping department, the WMS manages detail down to the level of matching carton size to an
order for maximum cost efficiency including cartons and carrier charges.

Benefits of a WMS include shorter order turnaround times, higher inventory accuracy, increased
order fill rates, and improved shipment accuracies.

Transportation management systems (TMS)

Beyond operational efficiencies, the real potential of TMS use is considerable cost savings. It is
generally estimated that more than 70% of a company's logistics costs are transportation related.
With a TMS, shipment inefficiencies, unnecessary costs, and excess labor are minimized on a
regular basis for the typical shipment.
This happens because the software automates the shipping and carrier selection process.
Functionality includes load planning as well as carrier selection, rating, and pick-up scheduling.
Other capabilities are shipment consolidation, freight payment, and claims
management.

Proceedings of the 2003 ASEE Gulf-Southwest Annual Conference

The University of Texas at Arlington
Copyright  2003, American Society for Engineering Education
A new element is also introduced by a TMS-flexibility. With it, companies can make
adjustments on the fly in the shipping department as priorities and carrier costs shift.

The evolution of supply chain software

PRE-1998

Until 1998, there were six major types of stand-alone planning and execution software. The six
are enterprise resource planning (ERP), supply chain planning (SCP), order management systems
(OMS), warehouse management systems (WMS), manufacturing execution systems (MES), and
transportation management systems (TMS). Each deals with the supply chain from its own silo
with few if any links to other types.

1998-2001

Current development efforts are focused on linking and integrating each of the six software
types. The intent is to create packages that deal with the supply chain as a continuum rather than
in individual stages. For instance, last year there was considerable focus on connecting WMS
with TMS packages. The next phase is building links between OMS and WMS. Additional
integration is underway too. Despite these efforts, each of the six is maintaining its pre-existing
identity.

Proceedings of the 2003 ASEE Gulf-Southwest Annual Conference

The University of Texas at Arlington
Copyright  2003, American Society for Engineering Education
2001-2004

Once all six of the current software types have been initially integrated, their names are likely to
still be in use. In part, this will be a reflection of the level of integration actually achieved. It will
also be a result of the relative strengths of various packages. In any regard, it will only be a short
term phenomenon.

BEYOND 2004

The ultimate goal is to create fully integrated supply chain management software packages. They
will perform all key planning and execution functions needed to take time, cost, and labor out of
the supply chain. As such, they will be complex and costly, some even think as challenging to
install as ERP is today. Nevertheless, leading companies will likely find them to be essential to
maintaining or improving their market position.

How hot is SCM software

According to the market research firm AMR Research, there will be a 48% compound annual
growth rate for supply chain management software between now and 2003. That will put annual
sales of these integrated suites at nearly $19 billion. [5]

Proceedings of the 2003 ASEE Gulf-Southwest Annual Conference

The University of Texas at Arlington
Copyright  2003, American Society for Engineering Education
SCM Vendors

Some of the SCM Vendors for the various components are as follows:
Enterprise resource planning (ERP) - Baan, Oracle, PeopleSoft, SAP
Supply chain planning (SCP) - IMI, American Software, Optum
Order management systems (OMS) - Kewill, McHugh Software
Manufacturing execution systems (MES) - AutoSoft Corp, SynQuest, Cube Tech
Warehouse management systems (WMS) - HK Systems, J.D Edwards, Cambar Software
Transportation management systems (TMS) - Intentia, EXE, C T Logistics

Leading Vendors: Manugistics & I2

Manugistics [6] offers the following software products, all of which are SCM products:
Demand Planning
Supply Planning
Manufacturing Scheduling
Transportation Management
Supply Chain Navigator
NetWORKS

The first four of these are typical SCM products. Supply Chain Navigator is a graphical SCM
modeling tool that allows the user to simulate supply chain changes, including cost analysis, and
to view the current status of all elements in the supply chain. After assessing alternatives,
changes to the supply chain can be made using drag-and-drop graphical tools.
I2 has a product line similar to Manugistics. Offered as the Rhythm product suite [6], it includes:
Demand Planning
Distribution Planning
Manufacturing Planning
Transportation Planning
Advanced Scheduling

Summary and Conclusion

Selecting software for supply chain management presents a daunting task in a large, multifaceted
organization - but also for a small, single process business. Typically, the software experts lack
supply chain expertise and the supply chain experts often possess limited understanding of
information technology. Furthermore, systems alone rarely provide the solution to supply chain
problems; instead, most system implementation efforts require process reengineering and
occasionally major organizational upheaval [7].

Proceedings of the 2003 ASEE Gulf-Southwest Annual Conference

The University of Texas at Arlington
Copyright  2003, American Society for Engineering Education
 References
[1] Matwijec, T; Buxton,K; Using Simulation in Supply Chain Management, Systems
Modelling; http://www.sm.com/overview/whitepapers/

[2] Ingalls, R,G; The Value of Simulation in Modelling Supply Chain, Proceedings of the 1998
Winter Simulation Conference
http://www.informs-s.org/wsc98papers/187.PDF

[3] Archibald, G; Karabakal, N; Karlsson, P; Supply Chain Vs Supply Chain: Using Simulation
to Complete Beyond the Four Walls, Proceedings of the 1999 Winter Simulation Conference
http://www.informs-cs.org/wsc99papers/175.PDF

[4] Demo of IBM’s Supply Chain Analyzer

http://www-1.ibm.com/industries/businesssolutions/scm

[5] Forger, G; The brave new world of supply chain software; Modern Materials Handling
http://www.manufacturing.net/magazine/mmh/archives/1999/mmh1001.99/10itreport.htm
[6] Allen, E; Supply Chain Management Software Vendor Comparison and Analysis
http://esallen.home.mindspring.com/erp/SCM.htm
[7] Laseter, T; Selecting Supply Chain Software, National Association of Purchasing
Management
http://www.napm.org/Pubs/PurchasingToday/supplements/1099TechGuidePage38.cfm

Proceedings of the 2003 ASEE Gulf-Southwest Annual Conference

The University of Texas at Arlington
Copyright  2003, American Society for Engineering Education