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Abstract
The development of a successful demand plan is typically a joint effort between different functional units such as Logistics, Marketing,
Sales and executive management at one hand and between different business units on the other. Starting a project to structurally improve
the demand planning often requires convincing all parties involved in such an effort. The key is to quantify the bottom-line impact of an
increased demand planning reliability in the supply chain. This paper proposes a system dynamics simulation modeling framework that
allows different managers to examine how improvements in their demand reliability will impact the overall corporate bottom-line. For
example, supply chain managers can investigate how proposed changes in the supply chain demand forecasting structure, different
suppliers, different logistics routes, or alternative inventory methods, may increase the overall protability. The simulation model has
been tested, validated with a real-life case of LG. Philips Displays Europe.
r 2006 Elsevier Ltd. All rights reserved.
0736-5845/$ - see front matter r 2006 Elsevier Ltd. All rights reserved.
doi:10.1016/j.rcim.2005.11.010
ARTICLE IN PRESS
J. Ashayeri, L. Lemmes / Robotics and Computer-Integrated Manufacturing 22 (2006) 550556 551
dynamics, a more reliable sales plan can be generated. The chain using SD simulation and discuss issues that have
inuence of a more reliable sales plan is not negligible. evolved, and presents a taxonomy of research and
Amongst many benets the following are the highlights: development in SD modeling in supply chain management.
Of the early work we can refer to Towill et al. [6] and
1. The sales volume increases, because of the higher Wikner et al. [7] who simulated different supply chain
customer service level. improvement strategies on demand amplication. Ashayeri
2. Reduction of the operational costs, like less obsolete and Keij [8] model a large European distribution chain
inventory and less capital costs for holding inventory, using SD simulation. Affeldt [9] describes why simulation
less obsolete inventory and a lower required safety and why SD. He argues that SD simulation illuminates for
inventory. its users: systemic feedback loops, systemic delays, and
3. The weighted average cost of capital (WACC) percen- unintended consequences. He adds that development of a
tage decreases. The company will have a lower risk simple, yet relatively robust, causal loop diagram (CLD)
prole for shareholders leading to a lower WACC encapsulates a portion of the business in which these three
percentage. effects were uncontrolled, and therefore shows the real
business (market) dynamics.
The goal of this paper is to construct a generic A general discussion on supply chain using simulation
simulation model that measures the bottom line nancial can be found in Bansal [10]. They identify the potential
consequences of an improved demand planning reliability. promise of simulation domain and provide a brief review of
The term generic refers to the fact that different supply this domain and modeling methodologies as applied to
chains can use this model to measure the nancial supply chain systems. Sterman [11] details the SD applica-
consequences as an effect of improved demand (sales) tions in dynamic business environments. Ganeshan [12]
planning reliability for their supply chain. It is crucial to studies the impact of selected inventory parameters on the
point out the added value of such a tool is in processing the performance of an expanded and comprehensive retail
results in a language understood by a typical marketing supply chain using simulation. The study concludes that
and sales representative. This way, in some cases, market- information sharing between echelons in the supply chain
ing and sales can even function as a trigger for the changes yields a higher level of service. Ritchie-Dunham et al. [13]
needed in the supply chain. describe a simulation game designed to quantify the
The remainder of the paper is organized as follows. benets of an ERP system coupled with the balanced
Section 2 reviews briey the relevant literature on supply scorecard framework in an extended enterprise. Results
chain simulation using system dynamics (SD) approach. from this game outlines the benets of strategies such as
Section 3 explains few details of the simulation model. systems integration, data and process standardization,
Section 4 describes the results expected from the simulation visibility across the business enterprise, improved decision
using data from a real-life case situation, and nally support system. Anderson et al. [14] present a similar paper
Section 5 presents the conclusions. for service supply chain environment.
More recent works include Pundoor and Herrman [15],
2. Literature review who present a simulation framework that follows the
Supply Chain Operations Reference (SCOR) Model. The
The use of SD modeling in supply chain has been very simulation approach is rather limited as it is discrete and
limited but recently given complexity in supply chains has spreadsheet based. However, it is useful for management
gained increased popularity. The dynamic nature of supply training and development. Umeda and Lee [16] describe a
chain systems and their behavior depends on the un- design specication for a generic, supply-chain-simulation
certainties of customers demand, different suppliers, system. The proposed simulation system is based on
different logistics routes, or alternative inventory methods, schedule-driven (pull) and stock-driven (push) control
etc. In fact uncertainty rules the supply chain. Therefore, it methods to support the supply chain management. The
is natural to apply SD simulation. Perhaps the most well approach is also discrete-event simulation and does take
known supply chain being simulated using SD concepts is into account the hidden dynamics of supply chain. Kamath
the Beer Game, dating back to early 1960s. Of the more and Roy [17] present a system SD based experimental
contemporary works in the literature one can refer to the method for designing a supply chain structure for a volatile
Cooperative Supply-Chain System Dynamic Process Flow market of short lifecycle product. Here the capacity
Model (DPFM) [2]. constrained supply chain is simulated to improve product
Over the last decade, more attention is paid to the use availability and customers service.
SD simulation for analyzing different aspects of supply Other related studies include Swaminathan et al. [18]
chain management. Given the limited space available, here who discuss a supply chain simulation modeling using the
only very few papers are referenced. For a more recent SD concepts and agent-based simulation framework.
overview of literature see Terzi and Cavalieri [3], Kleijnen A similar approach is the work of Schieritz [19], Schieritz
[4], and Angerhofer and Angelides [5]. The latter paper and GroXler [20], and Borshchev and Filippov [21].
gives an overview of research work in modeling supply Baumgaertel and John [22] develop also an agent-based
ARTICLE IN PRESS
552 J. Ashayeri, L. Lemmes / Robotics and Computer-Integrated Manufacturing 22 (2006) 550556
supply chain
statistic input simulation meters, the demand planning reliability has been the focus
parameters parameters of this study. Given the demand planning settings, different
scenarios can easily be simulated for instance:
Model simulation
Powersim
Results
The model calculates the bottom-line nancial conse-
quences of the different scenarios. Results are reported in
Fig. 1. General structure of the simulation model. terms of the economic value added (EVA), which is
ARTICLE IN PRESS
J. Ashayeri, L. Lemmes / Robotics and Computer-Integrated Manufacturing 22 (2006) 550556 553
Sales
Contribution
Margin
Cost of
Goods sold EBIT
WACC
Capital Cost
Woring
Capital
Sales C 2.7M
Contribution
C 1.7M Margin C 2.4M
Cost of
Goods sold C 0.3M EBIT C 1.8M
EVA
10%
WACC
C 0.7M
Capital Cost
+ C 7M
Working
Capital
Burns and Ulgen [23] in a recent paper on delays in EVA improvement in relation to the base scenario
dynamic supply chain systems use causal loops and Demand planning reliability +3% point
3
substantiate that reduction of delays in the transmission
of information and in the delivery of goods along supply
chains, coupled with changes in inventory ordering policy
EVA improvement in Euro (Mln)
can substantially reduce the amount of inventory in the Less capital costs
pipeline and save rms millions of dollars. Here we can
2
clearly quantify such issues and present results that has Less stock costs
been rarely seen at the top management level. By
quantifying costs and returns in very detail, we can Less price erosion
measure how, for example, demand-planning reliability
improvement can increase EVA (see Fig. 6). In this EVA Less depreciation
1 obsolete stocks
tree per element the positive delta is calculated in relation
to the basic scenario. In this example, the EVA improve- Less loss of sales
ment of h2.5 million of Fig. 5 is further illustrated. This
would allow the decision maker to choose the right
option(s) for improving the supply chain performance.
0
Another way to present the results is shown in Fig. 7. In EVA improvement
this chart per underlying business issue the positive deltas
in relation to the base scenario are given. Here the EVA Fig. 7. Example 3 standard results of the simulation model.
improvement of h2.5 million of Fig. 5 is further analyzed.
Overall the simulation results show that by different
demand (sales)-planning improvement strategies the cur-
rent planning reliabilities (ranging from 28% to 87% for of the operational costs is a consequence of a reduction of
different sales organization units, and factories) can be the inventory holding costs. The WACC percentage is not
increased to 60% with a maximum limit of 90%, resulting simulated in the model, so some assumptions with respect
in the EVA to increase, approximately with h4.6 million. to this percentage are made. In the extreme case, where the
The improvement of the sales-planning reliability has an sales planning reliabilities for the different manufacturing
inuence on at least three important facts, the delivery plants are improved with 60% and the WACC decreased
service provided to the customer, reduction of the from 11.7% to 10%, the EVA increases with almost h6
operational costs and the decrease of the WACC percen- million with respect to the current situation.
tage. Note these results are derived from a large number of
The higher customer service level results in a decrease of simulation runs after reaching the steady-state situation.
stock-outs and consequently less lost sales. The reduction Although most of these numbers are not the exact savings
ARTICLE IN PRESS
556 J. Ashayeri, L. Lemmes / Robotics and Computer-Integrated Manufacturing 22 (2006) 550556
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