Inventory Control at Spiegel Grove Teaching Note

Transcription

1 Inventory Control at Spiegel Grove Teaching Note 1 Inventory Control at Spiegel Grove Teaching Note 1 Introduction Matthew J. Drake and John R. Mawhinney A.J. Palumbo School of Business John F. Donahue Graduate School of Business All supply chains are faced with the problem of uncertainty mainly because they are comprised of many different flows of products, funds, and information. Effective forecasting can mitigate some of the uncertainty, but the variability of supply chain processes can never be completely eliminated. Most supply chains buffer the uncertainty by carrying inventory that can be used to fulfill customer requirements if radically adverse conditions occur. Of course, this extra inventory, also known as safety stock, bears the opportunity cost of capital as well as additional holding costs such as obsolescence and shrinkage. Managers must, therefore, balance the cost of maintaining safety stock levels with the benefit gained from coping with supply chain variability. Typical stochastic inventory models taught in undergraduate business and industrial engineering courses such as base-stock and order-up-to policies accommodate uncertain customer demand and/or replenishment lead times. The major drawback of these models is that they concentrate on one supply chain echelon, typically a retailer who orders from an uncapacitated supplier. Most practical supply chains have several levels, each entity having its own supply capabilities. Multiechelon extensions of the basic stochastic inventory control models are too analytically complex for undergraduates (and many graduate students), however; so most students leave traditional courses with a dampened impression of the true problem of managing inventory in a stochastic, multi-echelon supply chain environment. In response to this pedagogical need, we have created the Inventory Control at Spiegel Grove classroom simulation. The exercise recreates the supply chain for commemorative medallions that are sold at the Museum Store at the Rutherford B. Hayes Presidential Center located in Fremont, Ohio. Through the completion of this activity, students actively engage in the inventory control function of a three-stage supply chain that has several sources of uncertainty with respect to product flows. Students gain an appreciation of the difficulty inherent in making decisions in an environment in which products do not always move according to their plan. They also discover the value of opportunities to reduce the variability of the supply chain. 2 Pedagogical goals The exercise utilizes several best instructional practices problem-based learning, simulation, and the ill-defined task in order to enhance students cognitive benefits (Svinicki, Hagen, and Meyer, 1996). These practices were chosen to achieve an optimal level of student synergy in the allotted classroom time.

2 Inventory Control at Spiegel Grove Teaching Note 2 Inventory decisions have implications on a multi-echelon supply chain s performance that can last far into the future. This can be difficult for students to see, however, when studying analytical inventory models. Like many other functions in supply chain management, inventory control must be experienced in order to establish true understanding of its complexity. Allowing students to assume the role of an inventory planner in a portion of the supply chain and making them responsible for ordering stock and fulfilling orders each period increases their appreciation of the difficulty of managing the uncertain flows of goods and helps them to generate additional insight about how their decisions interact with and affect other member of the supply chain. A great deal of educational research (see, e.g., Zappe (2004) and Macfarlane and Ottewill (2001)) has recommended the similar use of problem-based learning techniques to improve students post-course retention as well as to increase their general enthusiasm for the topic. The simulation presents a non-threatening but still competitive environment for students to test their own strategies and receive immediate feedback about their effect on the overall supply chain (McKeachie, 2002). By establishing the overall channel s performance as the most important metric, the exercise also provides an opportunity to see how their individual tasks contribute to the success (or failure) of the entire supply chain. The most pro-active students organically discover through the exercise how collaboration and coordination with the other members of the channel can create a competitive advantage. After reading the introductory case material and listening to the instructor s description of the activity s flow, students are often still unsure about their exact tasks to accomplish during the simulation. The activity may even seem too advanced for what they know about inventory control and supply chain management at the time. By engaging in the exercise without a firm definition for their responsibilities, the students are required to synthesize their (quite often significant) prior understanding of classroom material with the exercise instructions they have just read and/or heard in order to devise strategies that will accomplish their assigned goal of minimizing total supply chain costs. The students self-synthesis and self-clarification increases their cognition of the major concepts in inventory management that are embedded in the exercise design (Macfarlane and Ottewill, 2001). 3 Objectives and suggested use The main objective of this classroom simulation is to provide students with the tangible experience of the challenge of managing finished-goods inventory in a multi-echelon supply chain that suffers from transportation and product quality uncertainty. Even though the exercise recreates a simple supply chain for a single product, the uncertainty of product flows forces students to adjust their ordering strategies in response. The assessment structure of the exercise also places the emphasis on overall supply chain performance, which reinforces the shift in focus of the evaluation of supply chain effectiveness from local, functional-area optimality to global, supply chain optimality. One supply chain partner can perform her tasks extremely well, but it is likely for naught in the minds of the customer if the other portions of the supply chain are ineffective.

3 Inventory Control at Spiegel Grove Teaching Note 3 This exercise also reinforces the value created in products by different levels of the supply chain. As the product undertakes additional processing and transportation first as the Hayes Center logo is stamped onto the blank medallion and then as it is transported to the Hayes Center itself it becomes more valuable. This is reflected by higher inventory and quality costs at the manufacturer and the retailer compared with those at the supplier s facility. The relative value of the costs mimics that found in practice. The cost of the inability to satisfy customer demand (and, thus, experience a stock-out) is higher than the cost of keeping the good in inventory to buffer uncertainty. It is also more costly to identify a damaged or poor-quality unit and to repair it than simply to keep the good in inventory. This exercise could be successfully employed in a variety of educational environments. We designed it to be used in an undergraduate course in operations management or supply chain management that is taught in either a business school or an engineering department, basically wherever inventory control is discussed. It would also be appropriate for a general business or engineering survey course as an introduction to the difficulty of managing the supply chain under system uncertainty. Students do not need to possess a significant background in the study of inventory control to understand the flow of the game and to benefit from the introduction to the effects of uncertainty; if they are familiar with the major issues of inventory control, however, they stand to gain the most through the application and experience of the theory they have just covered in class. 4 Activity overview As discussed in Section 1, this exercise simulates the supply chain for collectable medallions that are sold at the Museum Store in the Rutherford B. Hayes Presidential Center located in Fremont, Ohio. The Museum Store, which is the retailer in this supply chain, obtains the medallions from a nearby manufacturer, Tilden Industrial Stamping. Tilden purchases blank medallions produced by Wheeler Metalworks, the supplier, and stamps the Hayes Center logo onto them before shipping them to the Museum Store. 1 Instructors can divide their classes into as many supply chains as they want. Each supply chain must have enough students to assume the three roles above plus a transportation provider that controls the flow of goods. One additional student is needed to staff the ERP system update form at the end of each round. For an average class of 25 students, we typically form only two supply chains. 2 This ensures that we have competition between the supply chains but also that each function has more than one student to necessitate group cooperation. 3 We recommend having two or three students at each supply chain echelon. If the groups are going to have four or five students, it makes sense to form an additional competing supply chain to ensure that each student has enough responsibility during the exercise. 1 Instructors may be interested to note that Tilden is named after Samuel Tilden, Hayes opponent in the Presidential Election of 1876, and Wheeler is Hayes Vice President, William Wheeler. 2 The ERP system update form contains space for two supply chains. If additional supply chains are formed, instructors can simply adjust the form by replicating the cells an appropriate number of times. 3 In a class of 15 students, we also formed two supply chains. This required that some of the functions be staffed by only one student. While not ideal, the single-student echelons were able to accomplish their tasks successfully.

4 Inventory Control at Spiegel Grove Teaching Note 4 We use poker chips to represent the medallions during the simulation. Any commerciallyavailable set of poker chips will suffice. It is helpful if each supply chain formed uses a different color of poker chip; most sets come with three or four colors, which should be enough for most class sizes. We also recommend that instructors utilize some kind of bags, boxes, or hats to facilitate the selection of the three sets of uncertainty cards (customer demand, product quality, and transportation performance) used in the exercise. The only other materials that are required for this exercise are printouts of forms in quantities that are listed in the Appendix of this teaching note. Each round of the simulation represents one day in the life of the real supply chain. Since all of the companies are located in northern Ohio, the lead time for shipments is one day. That is, shipments that are ordered one day are expected to arrive the next if the supplying company has enough inventory to fulfill the order, of course. Before any shipments are delivered at the beginning of a day, though, the shipment must be evaluated with respect to its quality and delivery performance. The following is a list of tasks that must be completed in sequence for each round of the simulation: 1. The transportation group delivers the shipments prepared during the previous round. Before delivering to the appropriate consignee, a member of that team will draw a shipment quality card and transportation performance card. 4 Most of the cards prescribe that the shipment can be delivered devoid of any problems, but if goods are either lost or damaged, the transportation group should remove the appropriate number of units from the shipment before delivering it. If the transportation card says that the shipment is to be delayed for a period, then the transportation group should hold onto the shipment until the next round of play. 2. The instructor, who acts as the retailer s customer, draws a random demand card and takes the appropriate number of units from the retailer if they are available. 5 (There is no uncertainty with respect to quality or transportation in the flow of products from the retailer to the end user). 3. The retailer analyzes his inventory position and places an order, using a purchase order form, to the manufacturer to be delivered next round. 4. If the inventory level is high enough, the manufacturer prepares a shipment to satisfy the retailer s order and completes the packing slip attached to the retailer s purchase order. The manufacturer then places his order to the supplier by filling out a purchase order. 5. If the inventory level is high enough, the supplier prepares a shipment to satisfy the manufacturer s order and completes the packing slip attached to the manufacturer s purchase order. The supplier then places his order for raw materials for the next period. 4 Students should be instructed to replace the card into the set after selection to ensure that the probabilities remain the same for each trial. 5 We typically announce the customer demand only to the retailer. The instructions given to the students intentionally say nothing about the ability to collaborate with the other members of the supply chain. This ensures that any collaborative efforts, such as relaying current inventory levels between the groups, are generated by the students. By proposing these collaborations, students display their understanding of the importance of companies working together to improve the performance of the supply chain.

5 Inventory Control at Spiegel Grove Teaching Note 5 6. The instructor, who controls the inventory of reserve units, prepares a shipment in response to the supplier s order. 7. After making a shipment to its customer and placing an order for the next period from its supplier, each group should prepare a daily status report and submit it to the ERP system administrator. The group can also keep track of the day s activities on its ERP input form, but this is mainly for the group s own use in future decision making. 8. Once the shipments are prepared for delivery, the next round begins. We typically have the ERP system monitor announce the total cost for each supply chain at the end of each round in order to let students know where they stand during the game and to increase the level of competition. 5 Strategies for successful classroom implementation This exercise was designed to supplement classroom coverage of classic inventory control in an undergraduate operations management or supply chain management course. Typical classes begin with a discussion of deterministic, fixed-quantity inventory models the traditional Economic Order Quantity (EOQ) and various extensions thereof such as the Economic Production Quantity (EPQ) and quantity discount pricing policies. Instructors then often introduce stochastic demands and/or lead times through the establishment of safety stock levels and corresponding reorder points for the original EOQ. See Bozarth and Handfield (2006), Heizer and Render (2006), Cachon and Terwiesch (2006), and Coyle et al. (2003) for examples of this treatment of inventory. Few introductory texts (see Chopra and Meindl (2007) and Ballou (2004) for examples) include detailed coverage of multi-echelon inventory control. This exercise works extremely well in introducing the important considerations of multi-echelon inventory control under uncertainty with or without explicit discussion of the models in class. In order to increase the level of competition between the students, which increases the level of effort they put into the exercise, we offer the winning team not only extra credit in the course but provide a small prize such as a bag of snack-size candy bars or a pile of nominal gift certificates. 6 We are always amazed at the level of enthusiasm and competition that such a small prize can induce in our students. We typically use this exercise in an 80-minute classroom session. The students read the case document for the first 10 minutes in order to get acclimated to the decision environment. We use the students reading time as an opportunity to set up the game by placing five units in each group s inventory and preparing in-transit shipments of three units for each group. We then assemble the students into their role within each supply chain and give them a few minutes to read their group instructions and responsibilities. After the students have read their instructions, we begin an explanation of the flow of activities in each round of the game; this normally takes around 15 to 20 minutes. Now the game is ready to begin. Even though the inventory sheets have space for 15 days, we usually only run 10 days in the exercise for two reasons. It typically takes about 30 minutes to 6 We typically give everyone who plays the game some extra credit points, but we give the winning supply chain additional points.

6 Inventory Control at Spiegel Grove Teaching Note 6 play 10 rounds, and we want to leave room in the class period for a wrap-up discussion. It is also important for students to think the game is going to last longer than it does so that they do not artificially deplete their inventory levels on purpose because they know the game is ending. Computer simulations often run players final-period strategies for several additional periods to address this issue; ending the game before students expect is the way we solve this problem in this manual activity. Even after the explanation, students are often still a little unclear about how the exercise actually works until they start playing a few rounds. Therefore, we take the students step-by-step through all of the activities in the first round. The learning curve for this simulation is very steep, and students often have a complete grasp of their responsibilities in the exercise flow after two or three rounds. We also find it important to keep both supply chains on the same schedule round by round. We always make sure that all of the ERP daily update forms are submitted to the ERP system administrator before beginning the next round. There should be plenty of time to complete 10 rounds of the game in 30 to 40 minutes, so this synchronization ensures that all groups keep up while not significantly impeding the flow of the game. 6 Follow-up discussion and exercise wrap-up In order to increase the level of cognition that students gain from this exercise, we strongly recommend that instructors initiate a short discussion and synthesis of the results of the game with the remaining class time (usually around 15 minutes). This discussion also reinforces, in the students minds, what they were supposed to take away from the exercise. The following are several important issues about effective inventory control within a supply chain that normally surface naturally within the simulation. 7 The importance of focusing on total supply chain performance The main performance metric in this exercise is the total supply chain cost. The losing supply chains will often have one echelon that outperforms its counterpart in the victorious channel. This is an opportunity for instructors to reiterate that it does not matter how well one function of the supply chain performs; if there are deficient members of the channel, then the total supply chain will suffer and will be at a competitive disadvantage compared to other supply chains. The impact of uncertainty on effective inventory control Throughout the course of the exercise, students always become frustrated when their orders and shipments are not executed according to what they planned. The exercise forces them to alter their decision making in response to the supply chain variability, often by holding extra inventory as safety stock. Instructors can ask the students what they did to cope with the variability and how the variation affected their supply chain s performance. This often leads into a discussion of the measures that companies can take to control the sources of variation in the supply chain (i.e., utilize more reliable suppliers and transportation providers). 7 This is, by no means, an exhaustive list of discussion topics because each implementation of the simulation behaves a little differently and generates slightly different results. Instructors should take note of interesting occurrences during the exercise to discuss them in this wrap-up session.

7 Inventory Control at Spiegel Grove Teaching Note 7 The value of communication and information sharing in the supply chain Even though the student instructions for the exercise intentionally contain no discussion of communication between the echelons of the supply chain, students who have a significant amount of knowledge of supply chain management will ask if they can share information about stocking levels with the other members of their channel. Supply chains that utilize effective communication typically outperform their counterparts in this activity because they only place orders that the suppliers have enough inventory to fill; thus, they incur lower stock-out costs. This result holds in practical supply chains as well. If companies share their inventory positions with their suppliers, the suppliers can anticipate orders more effectively. Often companies place large orders to satisfy demand over a long time period. In cases of constrained capacity, the suppliers can benefit from determining exactly how much of an order the customer truly requires by the due date. If the suppliers did not obtain the true requirements by communicating with the buyers, they would likely use expensive yet unnecessary overtime or outsourcing to obtain the required capacity to fill the entire order. Effective partnerships are a major determinant of supply chain success Students sometime complain that the randomness present in this exercise is unfair. These students do not like the fact that their supply chain s performance can be subject to different randomness than their competitors. It is possible by chance that one supply chain consistently picks cards that delay shipments or declare some units of poor quality. The students argue that each echelon, regardless of the supply chain, should choose a single card for each day of the exercise so that each supply chain s performance is only a function of the managers inventory acumen. We use this objection as an illustration of the importance of choosing the right supply chain partners. Many competing supply chains are completely comprised of different companies, each subject to their own sources of variation. Different manufacturers produce at their own levels of quality, and each transportation provider achieves a unique level of service. Even the best inventory control strategies can be neutralized by the actions or inactions of an ineffective supply chain partner. This is an excellent opportunity to remind students that appeals to fairness are not adequate responses when your customer does not receive an order because the transportation provider has lost or damaged a shipment. 7 Student feedback Student response to this inventory control exercise has been overwhelmingly positive. Most students tell us that the exercise seemed complex at the beginning, but that they caught on quickly as the rounds of the simulation progressed ( At first the game was really hard to understand/follow. However, after about the third round I really began to understand. ). The fact that the students quickly attained a grasp of their responsibilities shows that they understood how goods flow through the supply chain and the role of inventory control. They also showed an understanding of important inventory concepts ( It definitely improved my understanding of how stock-outs and things like that happen. ; It s easier and cheaper for me [the raw material supplier] to keep high levels of inventory that for you [the manufacturer and the retailer] to do it. ). The exercise also provides a break from traditional classroom activities like lecturing and problem solving, which tends to increase students general enthusiasm for the subject matter

8 Inventory Control at Spiegel Grove Teaching Note 8 ( This exercise was fun, and it helped me understand inventory management a lot more. It was nice to have a break from note taking. ) 8 References Ausubel, D. (1963), The Psychology of Meaningful Verbal Learning, Grune & Stratton, New York, NY. Ballou, R. (2004), Business Logistics/Supply Chain Management, Fifth Edition, Prentice Hall, Upper Saddle River, NJ. Bozarth, C. C. and R. B. Handfield (2006), Introduction to Operations and Supply Chain Management, Prentice Hall, Upper Saddle River, NJ. Cachon, G. and C. Terwiesch (2006), Matching Supply with Demand: An Introduction to Operations Management, McGraw-Hill / Irwin, New York, NY. Chopra, S. and P. Meindl (2007), Supply Chain Management: Strategy, Planning, and Operation, Third Edition, Prentice Hall, Upper Saddle River, NJ. Coyle, J. J., E. J. Bardi, and C. J. Langley (2003), The Management of Business Logistics A Supply Chain Perspective, Seventh Edition, Thomson South-Western, Mason, OH. Heizer, J. and B. Render (2006), Operations Management, Eighth Edition, Prentice Hall, Upper Saddle River, NJ. Huba, M. E. and J. E. Freed (2000), Learner-Centered Assessment on College Campuses: Shifting the Focus from Teaching to Learning, Allyn and Bacon, Boston, MA. Macfarlane, B. and R. Ottewill (2001), Effective Learning and Teaching in Business Management, Kogan Page, London. McKeachie, W. J. (2002), Teaching Tips: Strategies, Research, and Theory for College and University Teachers, Eleventh Edition, Houghton Mifflin, Boston, MA. Svinicki, M. D., Hagen, A. S. and Meyer, K. K. (1996), How research on learning strengthens instruction. In Menges, R.J. and Weimer, M. (1996). Teaching on Solid Ground: Using Scholarship to Improve Practice, San Francisco, CA: Jossey Bass, pp Zappe, C. (2004), A Primer on Active Learning, Presentation at the INFORMS Annual Conference Teaching Effectiveness Colloquium, Denver, CO.

9 Inventory Control at Spiegel Grove Teaching Note 9 9 Appendix The following table specifies the materials and their quantities that are needed to set up each supply chain for the Inventory Control at Spiegel Grove exercise. Group All Students The Museum Store (Retailer) Tilden Industrial Stamping (Manufacturer) Wheeler Metalworks (Supplier) Parcel Carrier (Transportation Provider) ERP System Administrator Materials Case Introduction Retailer Group Instructions (15) Daily Status Report Forms (15) Purchase Order / Shipping Forms (5) Units of Initial Inventory Manufacturer Group Instructions (15) Daily Status Report Forms (15) Purchase Order / Shipping Forms (5) Units of Initial Inventory Retailer Group Instructions (15) Daily Status Report Forms (15) Purchase Order / Shipping Forms (5) Units of Initial Inventory Transportation Group Instructions (1) Set of Transportation Uncertainty Cards (1) Set of Quality Uncertainty Cards Computer ERP System Excel Workbook *Note that instructors must also prepare shipments of 3 units that are in transit between each link in the supply chain at the beginning of the exercise.