Int. j. econ. manag. soc. sci., Vol(3), No (11), November, 2014. pp.

724-731

TI Journals

International Journal of Economy, Management and Social Sciences

www.tijournals.com

ISSN:
2306-7276

Copyright 2014. All rights reserved for TI Journals.

Simulation Based Evaluating and Improving Performance of a MultiEchelon Supply Chain Inventory System
Saeed Kolahi-Randji
Department of Industrial Engineering, Najafabad Branch, Islamic Azad University, Isfahan, Iran.

Seyyed Mohammad Hadji Molana

Department of Industrial Engineering, Science and Research Branch, Islamic Azad University, Tehran, Iran

Seyed Mojtaba Sajadi*

Faculty of Entrepreneurship, University of Tehran, Tehran, Iran

Babak Ziyae
Faculty of Entrepreneurship, University of Tehran, Tehran, Iran
*Corresponding author: msajadi@ut.ac.ir

Keywords

Abstract

Supply Chain Management

Simulation Based Improving
Inventory Control

In this paper, a discrete simulation model of a detergent supply chain has been developed by using Arena
Software in order to evaluate and improve inventory system performance. Mentioned supply chain
consists of three-echelon, which are: a manufacturer, a central warehouse and four local distributors. All
participants use (s, S) inventory control system, a single item has been considered, and also, back order
and partial lost sale is allowed in local distributors. According to experts experiences and
recommendations, different scenarios have been developed for adjusting inventory control parameters in
each echelon. Two categories of financial and operational measures are considered in order to evaluate
and improve the supply chain performance. The simulated model clarified complicated aspects of
mentioned multi echelon inventory system and helped practitioners to improve their decision makings.

1.

Introduction

In the current competitive world, any active company must be able to reacts to external stimuli as fast as possible. It means that no company can
be active in the competitive market independently. So, supply chain and its proper management is a vital factor for successful participation in the
competitive market which is considered as a competitive advantage for the companies [1],[2]. In the new model of companies' compete, they do
not compete as a company vs. company, but as a supply chain vs. supply chain. So, those companies are successful whose supply chains are
more economical than their competitors. Supply Chain Management (SCM) synchronizes the company's operations with the suppliers and
customers' operations. It causes the customers to have products with maximum quality and minimum cost. Within a supply chain, there are three
types of actions including materials, information and financial affairs. It should be noted that in each case, the action is a two-sided process.
Actually, the objective of supply chain management is improving the whole network's operation which is done by making a series of
synchronized actions, and the efficient control and management of the three mentioned actions throughout the supply chain network. Supply
chain is considered as an integrated approach for the proper management of materials, item, information, and financial affairs which is
responsive under different conditions.
Today, the old methods of production management with less integration in their processes do not work anymore. Sabath (1995) stated that there
are at least two objections to a traditional supply chain (non-integrated). First, it is not able to have an accurate prediction of the demand which
usually leads to an excess inventory for the suppliers and the manufacturers. Second, a traditional supply chain reacts slowly to demand's
changes, because business processes are not linked with integration throughout the supply chain. In order to succeed in the new business
environment, supply chain needs continuous improvement. So, the supply chain operation must be assessed and the operational indexes must be
extracted. Today, senior managers should not merely focus on their companies' operations. But, they have to consider the supply chain operation
or concentrate on the network which their companies are of the partners. In order to manage and control the process of operational systems, it is
essential to have an integrated supply chain. Therefore, valuable efforts are done in order to assess the supply chain operation.
Three methods are considered for assessing the supply chain operation [3]:

Analytical methods such as Queuing Theory,

Monte Carlo method such as simulation and emulation (modeling),
Physical experiences such as laboratory operating systems or industrial-experimental implementations.
Analytical methods are non-empirical, because they are similar to mathematical models and are difficult to solve in real situations. Also, it is
obvious that physical experiments are due to operational and budgetary constraints. So, simulation is the only method for modeling and
analyzing the operations in a large-scale. Simulation, both provides the design of the supply chain, and does the assessment of the supply chain
before system operation for executing the What-IF analysis which leads to a decision.
As there are too many variables in real systems such as supply chain, subjective judgment cannot be done regarding the fluctuation of variables.
But, systems' behavior can be predicted by the help of simulation. In this regard, the science of system dynamics is a managing tool which is
able to simulate complex systems for decision support. By the help of this simulation, uncertain consequences of decisions will become obvious.
Actually, the main goal of simulation is expediting and facilitating the process of learning how the systems work in the present and future
conditions. The system dynamics method is an object-oriented and a feedback-based simulation which is able to describe complex systems based
on real situations while the user can intervene in developing the model. However, throughout the process of modeling, the user can rely on the
method.

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Simulation Based Evaluating and Improving Performance of a Multi-Echelon Supply Chain Inventory System
International Journal of Economy, Management and Social Sciences Vol(3), No (11), November, 2014.

2.

Literature Review

In 2010, Yuan Fan et al. considered a simulation model by the system dynamics approach to study bullwhip effect in the system of maintenance
chain of military weapons. Their study assesses the main problem of maintenance chain system of military weapons which affects the manpower
efficiency. By bullwhip effect of supply chain system which leads to military inefficiency, Fan means the lack of military power and failure to
win the war. This dangerous situation will lead to the loss of own soldiers in the battle. Therefore, the central argument of their paper is
management the military supply chain, improving it, and reducing the bullwhip effect[4].
In 2011, Hoa Vo &Thiel presented a paper which aimed at studying a food supply chain while considering two innovations; one of which is a
unique structure and the other is the customer's demand and concerns that root in health issues. This is the first approach to the study of chain
management mechanism in which there is no possibility to understand accurately the chain behavior under environmental perturbation. The
paper has focused on simulation based on system dynamics in a chicken meat supply chain infected by bird flu[5].
Carvalho & et al. presented an article in 2012 which focused on the stimulation of the real supply chain of the automotive industry in
Portuguese. The subset of the case study of a single automaker includes two first-level suppliers and two second-level suppliers. The objective of
the study is surveying the alternatives of supply chain for improving the flexibility of the chain and understanding the strategies for reducing the
risks which threat the supply chain. Two strategies were considered widely to reduce the negative effects of disturbance in the supply chain.
Also, six scenarios are designed in this regard. In order to study the designed scenario two types of operation assessment are defined for supply
chains: total cost and time lead duration[6].
In 2013, Sandhu & et al. presented an article aimed at studying the stimulation of "steel supply chain" for representing how inventory
management and variation in demand will decrease the bullwhip effect. The study has shown that designing the experiment will lower the
bullwhip effect. Also, information sharing which leads to a lower level of bullwhip effect in the steel supply chain is recommended besides
expanding the distance and minimizing the batch size. This provides a proper way for measuring the desired level of inventory while there is a
limited level of demand uncertainty. Thus, companies will be able to synchronize the supply chain[7].
Mobini et al. in an article presented in 2013, defined a stimulation model to improve and facilitate the studies regarding the designing and
analyzing the supply chain of wooden pallets. The supply chain contains from the sources of raw materials to product ready to delivery to the
final customer. The model includes uncertainty, the interdependency of different stages of supply chain and limitation of resources. The model
has been used in the supply chain of BC located in Canada. Distribution of pallets to the customers causes 30.65% reduction in total cost[8].
In 2014, Ramanathan did a research to assess the collaborative operation as a test tool for recognizing the favorable terms of cooperation. Real
industrial data and simulation are used for better management of the decisions regarding the numbers of cooperation partners, investment level
and participation in the processes of supply chain. Actually, this approach will help to obtain the maximum benefit from mutual relations[9].
Also, in 2014, Siqulini et al. did a research to analyze the interdependency of supply chain's operations. As an example, they studied the amount
of inventory and its shortage, decision parameters of the supply chain management, the chain configuration and the number of sources. The
relationships among these variables are studied by using scenario design method, discrete event simulation and data analysis[10].

3.

Methodology

Generally, different stages of the present research are as follows:

Figure 1. The proposed approach for designing the simulation model of supply chain

3.1 Hypothesis
1. The supply chain of the present research includes three echelons. The first echelon contains one distributor, the second echelon includes
a central storehouse, and the third one has four distributors which are named as: A, B, C, and D.
2. Demand at the retail level has been considered as the data which is distributed uniformly and is probable.
3. The production rate is considered as the output of each manufacturer and is set as the data which is distributed uniformly and is probable.
4. Simulation has been done during a period of 90 days.
5. Manufacturers send their extra produced items to the central storehouse based on the (R, Q) approach.
6. The capacity of central storehouse and storing of distributors' items has no limitation.
7. Distributors fulfill the storehouse based on continuous review policies (S, s).
8. The priority is fulfillment of distributors' item supply who has supplied the total required batch of the manufacturer (direct shipment). If
the inventory amount of the manufacturer's storehouse is lower than the required batch amount, the distributor's demand will be send to
the central storehouse.
9. The lead-time of the orders' delivery from manufacturers to distributors and from central storehouses to distributors is considered as zero.
10. Having shortage and lost sales is permissible.

Saeed Kolahi-Randji, Seyyed Mohammad Hadji Molana, Seyed Mojtaba Sajadi *, Babak Ziyae

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International Journal of Economy, Management and Social Sciences Vol(3), No (11), November, 2014.

3.2 Description of the problem

First, the demand has been raised in local distributors. If the inventory amount of the distributor is more than the required amount, the distributor
will meet the demand. Then, the inventory amount of the distributor will be updated. After meeting the customer's demand, the distributor will
check the upcoming ordering time. Actually, he will request some items if needed.at the first stage, it is tried to meet the distributors' needs by
the direct shipment from the manufacturers. At the second stage, if the manufacturer cannot respond to the distributor, the item will be send to
him by indirect shipment from the central storehouse. It should be noted that the cost of loading, dock, and transportation will be decreased for
direct shipment.
However, if the inventory amount of the distributor is lesser than the required amount, the distributor will order the item from the related
manufactory. The manufacturer will notify if he could meet the need or not. If the manufactory is ready to deliver any amount of the items, they
will be sent to the distributor. But, if the manufactory has none of the items, the distributor should refer to the central storehouse. If the
storehouse is out of the total order, the distributor will order the items which are present in the storehouse and are ready-to-delivery.
In a condition that both the manufacturer and storehouse are out of the related items, they will check their ready-to-delivery items. If the sum of
their ready items is equal to the distributor's demand, the items will be sent to him. In such a case, the customer's demand will be considered as
shortage. However, if the numbers of ready-to-deliver items both from the manufacturer and the storehouse- is lesser than the required amount,
it will be considered as lost sales.
The parameters of the problem
LS: The level of inventory for ordering
BS: The number of items the distributor demands
NDd: The number of daily demands for each distributor
NP: The number of daily production for manufacturer
Dependent and independent variables
ILDd: Inventory level for related to each distributor
ILS: Inventory level of storehouse
ILF: Inventory level of factory
S: The inventory level for sending the items from factory to central storehouse
R: The number of ready items for sending to central storehouse
IADd: The average inventory of each distributor
IAS: The average inventory in storehouse
IAF: The average inventory in factory
IMDd: Maximum inventory for each distributor
IMS: Maximum inventory of storehouse
IMF: Maximum inventory of the factory
RDLSd: The rate of lost sales for each distributor
RDSd: The rate of shortage for each distributor
HCDd: The cost of holding in each distributor
HCS: The cost of holding the storehouse
HCF: The cost of holding the factory
SCd: Shortage cost for each distributor
LSCd: Lost sales cost for each distributor
The indexes
d:The numbers of the distributors in the chain

4.

Model simulation by using Arena Software

Considering the items in the present case study, an initial simulation of the supply chain model is presented in the software. In fig1 an initial
design of the supply chain is shown based on the basic scenario.
In the present research, the simulation of the supply chain is done back to front. It means that from the customer to the manufacturer. At the
beginning of the model simulation, the echelon of the first distributor is simulated for a product which includes two parts: 1, 2.
The part 1 is related to the number of daily demands for each distributor (NDd). The part2 is related to the controlling of the inventory level of
distributors. Based on the information, fig 1 shows simulations of the four distributors. In part 1, at first, a character is produced for each day
which enters into the ReadWrite module. Then, the demanded amount related to each day will be recalled from the Excel file and entered into
the Decide module. If the inventory level is equal or more than the demanded amount, the related character will pass the stage of True. When
there is a positive response to the customer's demand, the inventory level of the distributor will be up to dated. But, if the inventory level of the
distributor is lesser than the demand amount, the character will pass the False stage and enter into the Assign module. Based on the difference
between the customer's demand and the inventory level of the distributor, a new order will be issued. The request for the new order will be sent
to the manufacturer which in case of inventory shortage, the storehouse will be inquired. if the demanded item is delivered by the participation of
the manufactory and the storehouse, the demand will be considered as shortage. However, if there is a negative response to the demand by the
manufacturer and the storehouse, it will be considered as the lost sales. A character is produced daily and the part2 has been started which enters
into Decide module. In this module, the distributor's inventory level will be compared with the level of inventory for ordering (LS). Then, based
on the difference between the demanded amount of item by the distributor (BS) and the distributor's inventory level, the order will be issued.
The production section is simulated as it is shown in the figure below. At first, based on the number of production (NP), the daily output will be
recalled from the Excel file and then, the factory's inventory level will be up to dated. When the inventory level reaches to a certain point (S), a
certain amount of produced items (R) will be sent to the storehouse.

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Simulation Based Evaluating and Improving Performance of a Multi-Echelon Supply Chain Inventory System
International Journal of Economy, Management and Social Sciences Vol(3), No (11), November, 2014.

Figure 2. distribution simulation done by Arena software based on the scenario

Figure 3. manufacturer simulation done by Arena software based on the scenario

5.

Validation & Verification of the Model

The inventory level of distributors, central storehouse and the factory will be checked at the beginning and at the end of each period to assess the
validity of the model. Besides, the inputs and the variables' changes will be controlled step by step. Simulated scenarios are repeated in the
software which leads to relatively similar results with low distribution.
The following figures show the simulation of the inventory level of item during 90 days. The inventory levels are low at the beginning of the
simulation and during the period the inventory amount has been increased. This action causes positive responses to the customers' demands
when the factory has no production at the ending days of the period. As it is mentioned above, the level of maximum inventory is limited in the
manufacturers and distributors' storehouses. So, central storehouses will save the extra items. The policy of inventory boosting is based on (S,s)
system.

Figure 4. Inventory level of manufacturer for basic scenario

Saeed Kolahi-Randji, Seyyed Mohammad Hadji Molana, Seyed Mojtaba Sajadi *, Babak Ziyae

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International Journal of Economy, Management and Social Sciences Vol(3), No (11), November, 2014.

Figure 5. Inventory level of central storehouse for basic scenario

Figure 6. Inventory level of distributors for basic scenario

Figure 7. Inventory level of the whole supply chain for basic scenario

6.

Case Study

The parameters of existing costs in the supply chain related to the present research are as follows:
Table 1. holding costs, shortage costs, and lost sales costs

12

12

15

100

Lost sales
cost per
box a day

14

Shortage
cost per
box a day

Holding
cost for
distributor
D

16

Per item
Holding
cost in the
factory

Holding
cost for
distributor
C

30

Holding
cost in the
central
store
house

Holding
cost for
distributor
B

Product 1

Holding
cost for
distributor
A

Per unit of item in per unit of time

6000

After modeling the chain by Arena simulation, two groups of indexes are determined for assessing the supply chain operation. The first group
includes 5 financial indexes and the second group contains 8 operational indexes which are as follows:

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Simulation Based Evaluating and Improving Performance of a Multi-Echelon Supply Chain Inventory System
International Journal of Economy, Management and Social Sciences Vol(3), No (11), November, 2014.

Table 2. Indicators of Performance Evaluation of Supply Chain

Operational cost
Average inventory in distributors

Financial indexes
Distributors' holding costs

Average inventory in storehouses

Warehouse's holding costs

Average inventory in manufacturers

Manufacturers' holding costs

Maximum inventory in distributors

Shortage costs

Maximum inventory in storehouses

Lost sales costs

Maximum inventory in manufacturers

Shortage percent
Lost sales percent
These indexes are extracted from researcher's studies of other scientific researches.

7.

Discussion

Experts suggested three other scenarios beside the basic one. After obtaining related information for modeling, assessing, and improving the
parameters or operational indexes, the supply chain models of each scenario will be simulated in Arena software. All the scenarios are repeated
10 times during a 90 day-period. As meeting the needs of customers is of effective parameters in the network's operation, studying the effect of
demand, production rate and ordering policies are focused on within different scenarios.
In basic model and scenario 1 and 2, ordering policies are considered fixed and the uncertainty effect has been surveyed. However, in scenario 3,
the customer's demand rate and the production rate are considered too be the same with the basic model and ordering policies effect are studied.
Table 3. designing different scenarios for simulation

Scenario
Basic scenario
Scenario 1
Scenario 2
Scenario 3

Range

Demand-probable
Production-probable
Demand-probable
Production-probable
Demand-probable
Production-probable
Demand-probable
Production-probable

90-110
90-110
80-120
90-110
80-120
80-120
90-110
90-110

Policy

Data

s=MAX D
S=2s
s=MAX D
S=2s
s=MAX D
S=2s
s=0.7 MAX D
S=2s

650
1300
650
1300
650
1300
455
910

250
500
250
500
250
500
175
300

200
400
200
400
200
400
140
280

130
260
130
260
130
260
91
182

Table 4. Show the simulated output per scenario

Row
1
2
3
4
5
6
7
8
9
10
11
12
13

Index
Holding costs of distributors
Holding costs of storehouses
Holding costs of manufacturers
Shortage costs
Lost sales costs
Average inventory in distributors
Average inventory in storehouses
Average inventory in manufacturer
Maximum inventory in distributors
Maximum inventory in storehouses
Maximum inventory in manufacturer
Shortage percent
Lost sales percent
Total costs

Basic Scenario
190435200
1096053800
1043528900
372100
0
14036
33260
7260
14494
11502
25960
0
0
2330390000

Scenario 1
191404300
1096053800
975522000
19600
0
14062
33260
17371
14494
64410
24054
0
0
2262999700

Scenario 2
190570500
1096053800
1063289700
924500
0
14041
33260
19640
14499
64410
26599
0
0
2350838500

Scenario 3
134448900
1096053800
1049330800
1263600
0
13469
33260
20647
14212
64410
30940
0
0
2281097100

In this part, the results of operational indexes obtained from doing different scenarios are simulated in Arena software after time-dynamic
execution. According to the table above, the costs can be considered separately and analyzed based on average index. The diagram below has
shown the analysis in which it is obvious that the highest cost is related to the holding cost of central storehouses and holding cost of
manufacturer.

Saeed Kolahi-Randji, Seyyed Mohammad Hadji Molana, Seyed Mojtaba Sajadi *, Babak Ziyae

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International Journal of Economy, Management and Social Sciences Vol(3), No (11), November, 2014.

Figure 8. the costs rate based on scenario division

In this part, at first, the average inventory of each echelon is shown. Besides, the holding cost of each echelon is presented too. According to the
diagrams below, the average inventory in the central storehouses is more than the other echelons. Also, the average total costs of holding the
central storehouses are more than the holding costs of other echelons. Table1 has shown the holding cost of each item per a box. Actually, the
average holding cost of echelon2 (central storehouse) is more than the holding cost of echelon 3 (distributors). Therefore, senior managers
should define policies to hold the big share of items in distributors 2, 3, and 4. In this case, the total holding costs can be decreased. However, it
should be noted that such a policy has contradiction with a series of limitations.

1.2E+09
1E+09
800000000
600000000
400000000
200000000
0

35000
30000
25000
20000
15000
10000
5000
0
Average
inventory in
distributors

Figure 9. average inventory in each echelon

Average
Average
inventory in inventory in
Warehouses manufacturers

Figure 10. total holding cost in each echelon

Finally, considering the total cost, scenario 2 is selected as the best one with the lowest cost. When the scenario 2 is executed, an improvement
of %3 will be applied into the total costs, which is a considerable amount for a 3-month period.
Table 5. total cost by scenario division

8.

Scenario
1

Total cost
2330390000

2262999700

2350838500

2281097100

Conclusion

The supply chain network has been modeled by simulation. The system operation has been analyzed by considering some of the operation key
factors. Then, three scenarios have been designed by focusing on different aspects of the supply chain. Afterward, the system's operational
factors are measured and have been compared with the basic model at the last stage.
All the scenarios have surveyed the effect of demand changes, production rate, upcoming order point, and the size of the order on the network's
operation. The results show that as the uncertainty (standard deviation) increases, the inventory of the whole supply chain will increase to satisfy
the customer. Also, when uncertainty increases in the demand and production, changes will happen to the upper echelons of the supply chain
(index8). Besides, as the upcoming order point and the order size is decreased, the amount of distributors' inventory will be lowered too, which
leads to lower level of customer's satisfaction. On the other hand, the holding costs in distributor will reduce, so that the total customer's
demands will get positive response. Also, the effect of the inventory control policy has been studied which causes a %3 reduction in costs.
So, it could be concluded that if uncertainty in demand and production has increased, the support inventory for the members of the supply chain
must be increased too. As another alternative, inventory control policies can be checked continuously throughout the supply chain. In such a
case, the system will not face with shortage and costs will remain at the lowest level as much as possible. The present paper is a single-item

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International Journal of Economy, Management and Social Sciences Vol(3), No (11), November, 2014.

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