APPENDIX B The Risk Pool Game B.1 INTRODUCTION One of the most important concepts in supply chain management is risk pooling. Recall that risk pooling involves the use of centralized inventory to take advantage of the fact that if demand is higher than average at some retailers, it is likely to be lower than average at others. Thus, if each retailer maintains separate inventory and safety stock, a higher level of inventory has to be maintained than if the inventory and safety stock are pooled. Therefore, the system with risk pooling has less overall inventory and is thus cheaper to operate with the same service level. We developed the Risk Pool Game, included with this text, to illustrate risk pooling concepts. In the game, you simultaneously manage both a system with risk pooling (we also call this a centralized system) and a system without risk pooling (a decentralized system). The system records the profits of both systems, so you can compare performance. Windows 95 or later is required to operate the game. To install the software, place the included CD in your CD-ROM drive. If the installation program doesn t run automatically, open Windows Explorer, select the CD, and double click on the setup program. B.2 THE SCENARIOS The Risk Pool Game models the following scenarios. The top half of the screen, the centralized game, consists of the following supply chain: A supplier serves a warehouse, which in turn serves three retailers. It takes two time periods for material to arrive from the supplier at the warehouse. This material can be shipped out during the same period or held in inventory. Once shipped, it takes an additional two periods for material to arrive at the retailers. The retailers then fill all the demand that they can. If demand cannot be met at the time it arrives, it is lost. The bottom half of the screen represents the decentralized system. Three retailers order separately from the supplier, and the supplier ships material directly to each retailer. This takes four periods from the time the order is placed, the same length of time as the minimum total lead time in the centralized system. As in the centralized 334
APPENDIX B: THE RISK POOL GAME 335 system, the retailers fill as much demand as possible demand that if not met is lost. In each system, total holding cost, materials costs, and revenue are tracked. The goal in both systems is to maximize profit. B.3 PLAYING SEVERAL ROUNDS In this section, we describe how to play several rounds of the Risk Pool Game using the default settings. In the next section, we describe each of the menu settings and options so that you can customize the game play. B.3.1 Introducing the Game When the Risk Pool Game software is started, the following screen appears: Order of Events During each period or round of the game, several events occur. Step 1. To start this step, press the Start Round button. The inventory is advanced. In the centralized game, this means that inventory four periods away moves to three periods away, inventory three periods away is added to the warehouse inventory, inventory two periods away is moved to one period away, and inventory one period away is added to retailer inventory. In the decentralized game, inventory four, three, and two periods away is moved, respectively, three, two, and one period away. Inventory one period away is added to retailer inventory. Step 2. This step starts automatically. Demand is met. Each retailer experiences demand and fills as much as possible. Note that the top retailer in both the centralized and decentralized systems faces the same demand; the same is true for the middle and bottom retailers. Also, demand is not back ordered. Demand that cannot be met immediately is lost.
336 DESIGNING AND MANAGING THE SUPPLY CHAIN Step 3. Place orders. In the centralized system, enter an order for the supplier in the box closest to the supplier. Allocate the warehouse inventory to the three retailers in the three boxes closest to the retailers. Note that the allocation amount must be less than or equal to the total warehouse inventory. In the decentralized system, enter an order for each retailer. The system will present a default selection for each entry. You can keep the default or type in new values. As we describe in the next section, you have control over how the system selects default values. When entries are completed (or the decision has been made to keep the default values), press the Place Orders button. Step 4. This step starts automatically. Orders are filled. The amount ordered is moved into the inventory slots four weeks away. In the centralized system, the amount allocated to each retailer is moved into the inventory slots two weeks away. Step 5. This step starts automatically. Cost, revenue, and service level: A holding cost is charged for each unit in inventory, revenue is realized for each unit sold, and the cost of each item sold is subtracted from revenue. Service level is calculated as the fraction of demand met over total demand. For that reason, we refer to service level in the game as the fill rate. Lead Times Note that in both systems, it takes a minimum of four periods for material that has been ordered to reach the retailer. In the centralized system, it can take longer if inventory is held in the warehouse. B.3.2 Understanding the Screen At the start of each round, the screen looks like this:
APPENDIX B: THE RISK POOL GAME 337 On the top half of the screen, the supplier is represented by the box at the left. The two vertical dotted lines labeled 4 and 3 have boxes on them representing inventory at least four or three periods away from the retailers, respectively. The large middle box represents the warehouse. The top line in the warehouse indicates the inventory contained there; the other boxes are used to enter an order from the supplier and allocation to the warehouse when appropriate. Note that the button in the lower righthand corner of the screen initially says Start Round. This indicates that it is not the appropriate time to enter the orders and allocation. The two vertical dotted lines to the right of the warehouse are labeled 2 and 1, indicating inventory two and one period from the retailers, respectively. Note that unlike the 3 and 4 lines to the left of the warehouse, lines 1 and 2 can have up to three inventory boxes, representing inventory going to each of the three retailers. To the right of these lines are the three boxes representing the retailers the numbers in these boxes represent retailer inventory. The right-hand side of the screen contains cost and profit data. Holding costs and cost of goods sold (COGS) are subtracted from revenue to get profit. Service level and period number are also indicated. The bottom half of the screen is similar to the top half, except that there is no warehouse. Also, when appropriate, orders are entered directly at the retailers. The button in the lower right-hand corner initially reads Start Round. After the round has started, it looks like this: B.3.3 Playing the Game The game follows the order of events listed above. To start each round, press the Start Round button. Inventory is advanced, and then as much demand as possible is met. At this point, the button in the lower right-hand corner of the screen will change to read Place Orders. Do so either by accepting the default choices that are displayed or by typing in new ones. Recall that in the centralized game, you can allocate up to the total amount of inventory in the warehouse to the retailers. Once orders are placed, press the Place Orders button. Orders are filled, and cost, revenue, and service level are calculated. You can continue playing for any number of rounds. B.3.4 Other Features The game has several other features, which we discuss in detail in the next section. The Play menu has options that allow you to set various game parameters. The Reports menu allows you to display lists of demands and orders for all of the periods up to the current one. B.4 OPTIONS AND SETTINGS This section follows the menu in the Risk Pool Game and describes the function of each of the parameters and options that can be set by the user or instructor. In the
338 DESIGNING AND MANAGING THE SUPPLY CHAIN following subsections, the convention menu selection item is used to describe menu selections. B.4.1 File Commands These commands are used to stop and reset play and exit the system. File Reset. lost. File Exit. This command resets the game. All data from the previous game are This command exits the game. B.4.2 Play Commands These commands control game play and allow various parameters to be set. Play Start Round. This command duplicates the Start Round button on the lower right-hand corner of the screen. Selecting it starts each round. Play Place Orders. This command duplicates the Place Orders button on the lower right-hand corner of the screen. Select it after entering orders and allocations. Play Options. This command displays a submenu with the following choices: Initial Conditions. This command displays the following dialog box: This enables you to select starting inventories throughout both systems. Note that in the centralized system, each retailer must have the same initial inventory level, and the inventory in transit from the warehouse to the retailer must be the same level for each of the retailers and for both periods. Similar restrictions exist for the decentralized system. After making changes, enter OK to accept the changes or Cancel to keep the current levels. Note that this option can only be used before the first round is played.
APPENDIX B: THE RISK POOL GAME 339 Demand. This command displays the following dialog box: This enables you to control the demand faced by each of the retailers. The demand is normally distributed, with the mean and standard deviation that can be entered on the dialog box. The slider control at the top of the box enables you to control the correlation of the demand at the retailers. If the slider is in the center of its range, demand will be independent. At the right, demand is strongly positively correlated while at the left, demand is strongly negatively correlated. Intermediate positions allow correlation between these extremes. 1 After making changes, select OK to accept the changes or Cancel to keep the current levels. Note that this option can only be used before the first round is played. Inventory Policy. This command displays the following dialog box: 1 If demand is positively correlated, it is likely that if one retailer has high demand, all of them will; if one retailer has low demand, all of them will. If demand is negatively correlated, it is likely that if one retailer has high demand, at least one other will have low demand.
340 DESIGNING AND MANAGING THE SUPPLY CHAIN This enables you to control the inventory policy that displays the default order and allocation quantities. Note that you can always override the default suggestions when you are playing, but having good defaults speeds up game play. There are two types of default policies, the Safety Stock policy and the Weeks of Inventory policy. Select between them using the radio buttons at the top of the dialog box. The Safety Stock policy allows you to select order-up-to levels for the warehouse and retailers in the centralized system and the retailers in the decentralized system as a function of demand mean and standard deviation. There are three input boxes for each level: the first box is the mean multiplier, and the second and third are multiplied by the standard deviation. These quantities are then summed to get the final order-up-to level. When the Weeks of Inventory policy is used, a single value multiplied by the mean demand is used to determine the order-up-to level. To determine default orders, the system does the following: For the centralized system, warehouse echelon inventory (i.e., inventory in transit to the warehouse, inventory at the warehouse, inventory in transit to the retailers, and inventory at the retailers) is subtracted from the order-up-to levels to determine order quantity. Inventory at the retailers and in transit from the warehouse to the retailers is subtracted from the retailer order-up-to level to determine allocations. If insufficient inventory is available at the warehouse, the available inventory is allocated so that the same fraction of desired level is sent to each retailer. For the decentralized system, inventory at each retailer plus inventory in transit to the retailer is raised to the order-up-to level. After making changes, select OK to accept the changes or Cancel to keep the current levels. Note that this option can be used at the start of any round. Costs. This command displays the following dialog: You can adjust costs using this dialog. Holding cost is per item per period; cost and revenue are per item. After making changes, select OK to accept the changes or Cancel to keep the current levels. Note that this option can only be used before the first round is played. B.4.3 The Reports Commands These commands display game-related information.
APPENDIX B: THE RISK POOL GAME 341 Reports Orders. This command displays the following report, which lists orders placed by the warehouse in the centralized game and retailers in the decentralized game: Select Done to hide the report. Reports Demands. This command displays the following report, which lists demand faced by the retailers since the start of the game: Select Done to hide the report.