Case Study Caveats and Taboos

Things you SHOULD NOT DO in SCM Globe Case Studies
By Dr. Walter Kendall, Associate Professor, Tarleton State University

[Professor Kendall sent this advice to his students and we share it here because it is good advice for everyone working on SCM Globe case studies. It refers to the Cincinnati Seasonings case study, but applies to other case studies as well.]

I am learning fast, and one of the first things I have learned is some of you are doing things that I never anticipated you would do. So, here are some things you shouldn’t do…

1. DON’T CHANGE QUANTITY ON HAND! As shown below for the Ft. Wayne store, when the simulation starts, Ft. Wayne has a quantity of 800 on hand.  Basically, that is the starting inventory for the Ft. Wayne store. That inventory is already at the store, having been shipped there previously by your predecessor.

It simply isn’t possible to get rid of inventory or add to inventory by increasing or decreasing the initial on hand amount (blue arrow in screenshot below). That inventory is what it is. You can sell it, you could, conceivably ship it somewhere else, (in general, supply chain managers try not to ship things twice, as this is an additional expense), but you can’t just change the amount on hand by fiat.

If you have too much inventory in Ft. Wayne, as a supply chain manager, what can you do?

You could sell it… Yet demand is not something you have control over. (See below for a discussion of not changing demand.) Demand is set by market forces, and is fixed for all practical purposes.

You can increase warehouse space/capacity in Ft. Wayne so there is more room for the inventory to be stored.

You can also reduce future shipments of product to Ft. Wayne. There are several ways to do this:

  • Drop off less product from the truck serving Ft. Wayne
  • Reduce the number of trucks taking product to Ft. Wayne
  • Increase the delivery cycle time by increasing the delay between departure for the trucks

Taboo1

2. DON’T CHANGE PRODUCT DEMAND TO SOLVE SUPPLY CHAIN PROBLEMS! Demand is NOT something you control (red arrow in screenshot above), it is determined by market forces.Technically, you could change demand by raising or lowering prices, but that is a decision that is above your pay grade. So don’t change product prices either! This really stymies me, because it indicates a lack of business and economic sense. The ultimate objective of a Supply Chain Manager is to provide for customer needs (demand) at the lowest possible cost. Viewed another way, to design a supply chain that satisfies customer demand while maximizing company profit.

  • If    Profit = Revenue minus Costs
  • And   Revenue = Price times Units sold
  • And   Units sold is based on demand and availability of product
  • Then   it makes no business/economic sense to reduce demand, because we will reduce our profit by reducing demand for our product! That is like a physician prescribing arsenic tea to cure a cough. It cures the cough by killing the patient. We don’t want to kill the company to solve our supply chain problems.

3. YOUR TOOLS FOR INCREASING PROFITABILITY lie on the Cost side of the profit equation. You increase profits by designing an efficient (low cost) supply chain:

  • Lower inventories mean lower storage costs (keep no inventory above what is needed to satisfy demand and provide for safety inventory to compensate for occasional late or non-delivery of product).
  • Lower transportation costs come from delivering only enough products to meet demand, and from using the most cost efficient mode of transport to to deliver products.
  • Your only tool on the Revenue side of the equation is to make sure that you always have enough product on hand to fill all the demand for your product. Sales and the revenue it generates can only happen when there is enough product on hand to fill customer demand.

4. WHAT ELSE SHOULD BE KEPT IN MIND?

  • Don’t change Daily Operating Cost, this is a given beyond your control.
  • Don’t change Daily Rent Cost, this also is a given beyond your control.
  • [Note: Instructors can either use default costs that come with the case study, or ask students to research current costs and replace default costs with new numbers.]
  • You can change Storage Capacity as this is a supply chain variable within your control. When you do this at the store or factory, it represents using a private warehouse where you can increase or decrease storage space as needed.
  • You can change Production at factories. However, be careful. You may be better off using other supply chain tools at first. (Beware the Bullwhip Effect!) Remember you want to satisfy customer demand. When you reduce supply (by reducing production) you may create problems, so proceed with caution.

5. HOW DO YOU BALANCE SUPPLY WITH DEMAND?

  • Additional storage space can be added at a facility if necessary as a short term fix while you get inventory under control.
  • You can ship inventory to another facility. For instance, ship goods from the factory to the Distribution Center, where storage costs are lower than at the factory.  ($2 per square meter at the DC versus $3 at the factory or $4 at the stores)
  • Slow down shipments by increasing the cycle times of trucks (Delay time between runs.)
  • Slow down deliveries by decreasing drop quantities on routes used by delivery trucks
  • Use fewer trucks.
  • If demand EXCEEDS supply, then you need to do the opposite by speeding up deliveries
  • Decrease cycle times of trucks if you need to make more frequent deliveries
  • Increase drop quantities on delivery routes used by trucks (maybe even use multiple trucks or a different size of truck.)
  • You can also play with different transportation routes and modes of transportation (such as trains or airplanes) to see what happens to costs.

After each major change to the supply chain the simulation (the game) becomes one of analysis. Use the data you have on screen and data you download to Excel to look at how to reduce costs.  Experiment, run the numbers, let the numbers help you make good supply chain decisions! Once you get the supply chain to run for 30 days your goal is to analyze and experiment to reduce supply chain costs. What combination of Routes, Transport modes, types of vehicles, number of vehicles, storage facilities, etc. will enable the fulfillment of customer demand at the lowest cost?

Remember that supply chains support the 4 Ps of marketing (Product, Place, Price, Promotion). Marketers can produce the best product, stimulate demand and all the other wonderful things that marketers strive for, but if they cannot fulfill customer demand, the marketing effort is wasted and the company will fail.

As a supply chain manager, your job is to fulfill the promises that have enticed customers to demand your product. You need to figure out how to deliver the right product to the right place at a price that will make promotions successful and profitable!