Simulations show the best way to support a continuous flow of merchandise on the ancient Silk Road was to have large stocks of inventory at key locations. They would act as buffers to absorb the fluctuations in product supply inevitably created by the bullwhip effect. Two such locations are shown in the screenshot below. [This article picks up where the second article “Taming the Bullwhip on the Silk Road” left off]
And this observation raises a big question: Who would have owned and operated the facilities where these huge inventory buffers were located? It required someone with a lot of money to store and protect the inventory, and It required someone who looked to the long term to make money, not just from one year to the next. Let’s see what emerges.
CASE STUDY FOCUS: Timeless Supply Chain Challenges (Master Distributors and their Inventory Buffers Stabilize Product Flow)
Simulations of different options show there needs to be sizable inventory buffers in four large cities to absorb fluctuations in product supply and to stabilize product flow. It is best to have these buffers in cities where routes divide or come together. Big on-hand inventories in these cities then serve to contain supply chain disruptions to the smaller cities in between the four large ones.
This way disruptions do not spread across the whole supply chain. There is always enough inventory on-hand at each large city to maintain the flow of products going west, even if deliveries to those cities from the east did not keep up with demand. The locations that work best in the simulations are shown in the screenshot below: (1) Dunhuang; (2) Kashgar; (3) Merv; (4) Ctesiphon (near modern Baghdad).
The need for these large inventory buffers suggests there had to be big players in the supply chain who could handle the costs of keeping such big onhand inventories. It seems likely that the inventory in Dunhuang belonged to the Imperial Chinese government or well connected Chinese exporters. Dunhuang was on the western border of the Chinese Empire at that time (Han Dynasty, circa 200 A.D.). So they were one of the big players. But who could afford to maintain inventory in the other three locations?
Master Distributors Facilitated Commerce
Over the years certain practices probably developed to manage business on the Silk Road. It probably started with the Chinese government or the big Chinese exporters of silk and jewelry communicating their prices and their product availability early each year to a small group of influential merchants. Those merchants then used that information to manage their own businesses.
Today we would call these influential merchants “master distributors”. Master distributors buy large amounts of products direct from the manufacturers, and because of their large purchase quantities, they get the best prices. Master distributors do not sell to the general public; they only sell to other distributors who order in quantities bigger than what an average customer would buy. And they fill those orders they get from other distributors immediately from their own onhand inventory (http://distributorwire.com/blog/who-is-a-master-distributor/).
Given the widespread fame of their family name (as explained in the previous article), the Barmakids were probably the biggest master distributor, operating from the largest city on the Silk Road (https://en.wikipedia.org/wiki/Merv). The inventory buffer in Merv most likely belonged entirely to them, and in the other two cities the inventory was probably owned by partnerships the Barmakids formed with powerful players in those cities.
This meant they had to tie up a lot of money in inventory, so they needed to protect their investment by maintaining price stability. To do that, they used information from the Chinese and did some calculations of their own based on inventory they already had on-hand, and what they expected demand to be in the coming year. They used mental models their family had developed over generations to see how new supplies and expected demand would affect their inventory buffers (see screenshot below). They would then set their prices accordingly, and announce those prices to all the other merchants on the Silk Road.
Barmakid prices were in turn used by the many smaller merchants on the Silk Road to calculate the prices they would charge their own customers, knowing they would purchase from the Barmakids or a Barmakid merchant partner. And in years when things went well everyone made money (what a balancing act it must have been).
Inventory Management was Different for Different Sized Merchants
Smaller merchants on the Silk Road (and in the present day as well) would manage risk and hold down their investments in inventory by turning their inventory as quickly as they could each year. The more times they bought inventory at one price and sold it at a higher price, the more money they made.
At the end of each year small merchants did not want to be left holding much inventory because they didn’t want the risks of price fluctuations from one year to the next. They also wanted to reduce inventory related transport and storage costs as well as the risk of having their inventory stolen by raiding tribes and bandits. This selling down of inventory is shown in the onhand inventory graph of a smaller merchant in the screenshot below.
Merchants operating from cities in between the big cities could focus on buying from the Barmakids at predictable prices and selling the products in their local markets at higher prices they calculated for themselves. By specializing in certain routes and specific geographical markets, they would reduce their risk, and position themselves to maximize sales by knowing their markets in detail.
The merchants who owned the inventory buffers in the four large cities earned their money over a period of years because their inventory turns would be measured over a period of years due to the high levels of inventory they had to keep on-hand. The wealth of the Barmakids grew slowly but steadily over the centuries. The supply chain management insights and understanding they originally acquired as administrators of the largest Buddhist monastery in Central Asia served them well in their role as master distributor for the Silk Road.
Mental Models Affect Our View of the World
Mental models that the Barmakids developed and passed on from one generation to the next enabled them to continuously adjust their inventories, their prices and their supply chain operations over the years to respond as commerce and situations changed. Their family and their fortune thrived for some 800 years (http://www.britannica.com/topic/Barmakids).
Then in the year 803, the family fell from grace. The Abbasid Caliph in Baghdad had most of the family members imprisoned or executed and their property was confiscated. It happened suddenly at the peak of their fame. There are many stories about why this happened, but maybe there was a simple explanation: their skills in supply chain management had made them fabulously wealthy, and thus they aspired to sit on the throne instead of just serve the throne.
In the model and simulations of Silk Road operations presented in this series, there are further details that can be deduced even if not explicitly seen. Here are a few (you can probably think of others):
- The Chinese manufacturers most likely communicated their plans and prices for the coming year by sending sealed or coded messages to the Barmakids and their partners on the last caravans that departed from Dunhuang on the western frontier of China each year just before the snows came and halted traffic for three or four months during the winter.
- In Merv over the winter, safe and warm behind strong walls as the snow came down, one can imagine the merchant families and craftsmen of Merv celebrating the end of a prosperous year. There was probably a lot of calculating and discussing going on between the Barmakids and their partners to forecast demand and set product prices for the coming year. These prices were likely communicated to the other merchants on the Silk Road via messages carried by the first caravans of the new year.
- The Barmakids and their partners must have had standing yearly orders for silk, jewelry, spices and other popular products at each of the three inventory buffer locations under their control. All other merchants and caravan leaders on the Silk Road would have known what the Barmakid purchase price was at each of these locations, just as they knew what the sell price was. When merchants went out of business they most likely liquidated their inventory by selling to the Barmakids. The Barmakids and their partners were always on the look-out for bulk purchase opportunities to replenish their inventory buffers.
- Each of the four cities where inventory buffers were maintained (especially Merv) had to have large populations of skilled artisans and manufacturers who could rework or modify products such as silk garments and jewelry to keep up with the latest fashions. For instance, if silk gowns with long sleeves went out of style, then artisans would rework the gowns to have short sleeves instead, and they would use the excess silk they cut from the sleeves to make other products that could be sold that year, so nothing went to waste. This would have been an important part of protecting and maintaining the value of inventory held over a period of years at the four buffer locations.
The first article in this three-part series is “Ancient Silk Road – First Global Supply Chain”
ANCIENT SILK ROAD CASE STUDY CHALLENGE
After reading the previous article, “Taming the Bullwhip on the Silk Road”, you ran simulations and found ways to get the Silk Road supply chain to run for about 36 weeks. Now run some simulations and find ways to improve the operation of this global supply chain – that means keep it running and find ways to lower overall amounts of inventory and lower the facility and transportation costs.
What happens when you begin simulations with increased on-hand inventory amounts at the four buffer facilities? Does it enable you to reduce on-hand inventory at the other facilities? Let this article guide you in figuring out how to improve operations (consider political and social issues as well as economics and logistics). Then summarize what you learned in a short presentation using screenshots and data from the simulations to illustrate your findings.
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