A Flexible and Generic Approach to Dynamic Modelling of Supply Chains

Author(s): W. Y. Hung, S. Kucherenko, N. J. Samsatli, N. Shah

Source: The Journal of the Operational Research Society, Vol. 55, No. 8 (Aug., 2004), pp. 801813
Published by: Palgrave Macmillan Journals on behalf of the Operational Research Society
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Journal of the Operational Research Society (2004) 55, 801-813

O2004 OperationalResearchSociety Ltd.All rights reserved.0160-5682/04 $30.00

www.palgrave-journals.com/jors

flexible

and

modelling

of

approach
generic
chains
supply

to

dynamic

WY Hung, S Kucherenko, NJ Samsatli and N Shah*

ImperialCollege,London,UK
In this paper,we presenta new modellingapproachfor realisticsupplychainsimulation.The modelprovidesan
forinformedcomparisonbetweendifferentsupplychainpolicies.A basicsimulationmodel
environment
experimental
for a genericnode, fromwhicha supplychainnetworkcan be built,has beendevelopedusingan object-oriented
of the information
and physicalsystemsanddecision-making
approach.Thisgenericmodelallowsthe incorporation
policies used by each node. The object-oriented
approachgives the flexibilityin specifyingthe supply chain
and operationdecisions,andpolicies.Stochasticsimulationsareachievedby applyingLatinSupercube
configuration
Samplingto the uncertainvariablesin descendingorderof importance,whichreducesthe numberof simulations
to a real-lifesituationfordynamicstochastic
Wealsopresenta casestudyto showthatthemodelis applicable
required.
studies.
Journal of the Operational Research Society (2004) 55, 801-813. doi:10.1057/palgrave.jors.2601740

Published online 14 April 2004

Keywords:supply chain management;simulation;stochastic;system dynamics

Introduction
It is said that the only constantin today's dynamicbusiness
environmentis change.' Regulatorychanges, globalization,
increasingintensity in competition,increasinglydemanding
customers, new information technology, and mergers and
acquisitions have been promptingimprovementsin supply
chains of various industries,includingthose of the process
industries,in orderto stay aheadof the competition.Thereis
even an axiom highlighting its importance: 'a 1-cent
reduction in supply chain costs can have as much as a
5-cent improvement on operating profits'.2 Supply Chain
Management(SCM) has thus drawna lot of attentionin the
academicand businessworld. In practice,efficientconsumer
response in the grocery industry, efficient healthcare
response in the healthcareindustry, and quick response in
the textileindustryare examplesof SCM tailoredto meet the
needs of the particularindustries.
The term SCM has been broadly used in the literature
with various meanings due to the development of the
philosophy from various perspectives: purchasing and
supply; transportationand logistics; marketing;and level
of coordination.Although differentin origin, these theories
have now merged into a holistic and strategicapproachto
operations,materialsand logisticsmanagement.A definition

*Correspondence.:N Shah, Centre for Process Systems Engineering,

Department of Chemical Engineering, Imperial College, London SW7
2AZ, UK.
E-mail:n.shah@
aimperial.ac.uk

given by the SupplyChain.com(http://www.thesupplychain.

com) is
'SCMis a strategywherebusinesspartners
jointlycommitto
workcloselytogether,to bringgreatervalueto theconsumer
and/ortheircustomersfor the leastpossibleoverallsupply
cost. This coordinationincludesthat of ordergeneration,
of products,
ordertakingand orderfulfilment/distribution
Effectivesupplychainmanagement
services,or information.
enables businessto make informeddecisions along the entire
supply chain, from acquiringraw materialsto manufacturing

At
finishedgoodsto the consumers.
productsto distributing
eachlink,businesses
needto makethebestchoicesaboutwhat
theircustomersneedand how they can meetthoserequirementsat the lowestpossiblecost.'
In other words, the purposeof SCM is to deal effectively
with external strategicchanges, such as globalization,and
operational uncertainties,such as demand fluctuations,in
order to take advantageof any new opportunities,and to
drive down the overall supply costs. Since the cost of
changinga businessstrategyand operationalpolicies can be
huge, it would be wise to have a simulationmodel of the
supply chain network concernedso that various strategies
and policies can be evaluated and comparedquantitatively
before being implementedon the real business.
Since the time correlationof upstreamand downstream
operationsis key to the successof SCM, dynamicstudiesare
particularlyimportantin supply chain improvements.With
dynamicstochasticmodels, it is possibleto assess the effects
of various uncertaintieson the overall performancemeasures, discover where the real bottleneck is and avoid

802 Journal
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investingunnecessarily.These models also allow the design

of more responsiveyet easy to implementproduction and
inventory managementsystems to accommodateinevitable
external changes and uncertainties, without making the
systems too lean and hence fragile.
Furthermore, according to Lambert and Cooper,3 the
supply chain structurecan be changed by decision-making.
Examples are that moving from multiple- to single-source
supplierswill narrow the supply chain, or that outsourcing
logistics,manufacturing,marketingor productdevelopment
activities may increase the length and width of the supply
chain. They also found that the overall supply chains look
different from each company's perspective, since the
management of each company sees its firm as the focal
point of the supply chain and views the membershipand
network structuredifferently.Hence, it will be useful if the
model is flexibleenough to allow easy reconfiguration.
This paper presentsa new modelling approachbased on
object-oriented dynamic modelling to enable dynamic
stochastic studies on supply chains. The remainderof this
article is organizedas follows. The second section gives a
review of the literature on supply chain modelling
approaches.The thirddescribesthe new modellingapproach
developed. The fourth outlines the simulation procedures
with the use of the new modellingapproach.The fifth shows
the benefits and insights achieved with this modelling
approachin a case study. Finally, the last section concludes
the work and presentsthe future steps planned.
Literature review on supply chain modelling approaches
Analytical models versus simulation models
There are two main categories of supply chain modelling
approaches that help decision-making:(1) analytical, or
mathematical,models, and (2) simulationmodels.
The purpose of analyticalmodels is to maximizecertain
benefits by optimizing some aspects of the supply chain.
Previouswork on analyticalmodels can be furtherclassified
into two main categoriesin terms of what they optimize:(i)
the strategicdesign, and (ii) the operation. Strategicdesign
can involve the determination of suppliers and market
segmentsto serve,the number,location, capacityand type of
a company's facilities, the amount of various materials to
produce and hold at different supply chain members and
shippedamong them, and/or the routing of materialflows.
With regard to operation optimization, the aspects concernedcan be inventorymanagementat variouspoints along
the supply chain network, and/or productionplanning and
scheduling.For more informationon analyticalsupplychain
models, see the reviews of Vidal and Goetschalckx4and
Beamon.5
Although analyticalmodels can be useful in many cases,
there are some instanceswhere they are too simplisticto be
of practical use for complex supply chains. Simulation

models allow a more realistic capture of the supply chain

characteristicsand providea means to evaluatethe impactof
policy changes carried out by one or more supply chain
members.Therefore,simulationmodels can be used to verify
changes in the supply chain or its policies, and as an
important first step towards realistic optimization. This
paper is concernedwith simulationmodels only.

Previous work on simulation models

Slats et a16 propose the building of logistic laboratoriesto
conduct various experimentsregardingthe integrationand
design or redesignof logistic chains, so as to improve the
performanceof the total logistic chain. Theirmodel involves
linking buildingblocks together to give the structureof the
logistic chain. However, the laboratories proposed are for
simulatingand designing only the distributionnetwork for
end-customergoods, and do not consider the supply chain
network as a whole. Moreover, the laboratoriesare in the
form of softwarepackagesthat are not easy for the user to
alter or to extend the functionalityof the models.
Alfieri and Brandimarte7presenta small case study using
an object-orientedmethodology to extend the idea of the
logistic laboratoryproposed by Slats et al.6 They claim that
the object-orientedapproachis well suited to the modularity
requirementsin the logistic laboratory, because there is a
better transitionfrom modellingconcepts to actual software
implementationsince objects have a natural match in the
real world. Although theirmodel illustratesthe usefulnessof
multiple inheritance and dynamic method binding in
developingthe buildingblocks in a logistic laboratory,it is
too simplisticto representreal-worldsituations.
Yu et a18 introduced a more sophisticated, reusable
enterprisemodel, called a factory data model (FDM), based
on an object-orientedapproach.The model is claimedto be
reusable,becausewhen the informationcontent is overtaken
by fast changingmarketconditions,new models can still use
part or all of the information from previous models. Five
essential information classes are identified: strategy, resource, process, flow, and token, each of which heads a
hierarchyof subclasses.However,their primaryaim is to aid
business process redesign only within one enterprise,and
hence they do not consider activities in other parts of the
supply chain.
A dynamicmodellingapproachfrom the Process Systems
Engineering viewpoint is proposed by Perea et al9 and
claimed to enable the design of systematicdecision-making
processes for the supply chain. They capture the supply
chain dynamics by the balance of inventories and the
balanceof ordersin termsof ordinarydifferentialequations,
together with the definition of shipping rates to the
downstreamproduct-nodes,subjectto some physicalbounds
and initial conditions for the inventory and order values.
The drawbackof this simulationmodel is that it assumesthe

WYHung
et a/l--Dynamic
ofsupply
chains 803
modelling

material and order flows to be continuous;in reality, they

are often discreteevents.
van der Vorst et al 10presenta discrete-eventsupplychain
model based on timed coloured Petri-nets, a graphicalorientedlanguagewith concurrency.Their model comprises
four types of component: business processes, performance
indicators,design variables,and businessentities (similarto
the token class mentionedabove). Discrete-eventsimulation
is employed to model the dynamics of the supply chain.
Despite the detailedmodelling,the model considersonly the
distributionof end-customergoods and does not take into
account other upstreamsupply chain processes.
Gjerdrum"presentsa stochasticdiscrete-eventsimulation
model for a supply chain with three echelons: primary
manufacturing, secondary manufacturing, and demand
management. The model also considers uncertainties in
market demand and machinebreakdownsvia Monte Carlo
(MC) sampling. Each echelon is modelled separatelyand
differentlyto simulatethe real situation. Since the model is
tailor-madefor one particularsupply chain, it is not easily
modified.
Research objectives
While detailed,realistic,dynamic,flexiblesimulationmodels
are needed to analyse the complex situation across supply
chain members,existingmodels are limited by a numberof
assumptions,focus on only one certainpart of supplychain,
or are not sufficientlyflexible to allow easy explorationof
innovative policies. This paper presentsa new supply chain
modelling approach that allows easy and quick model
building for exploringvarious supply chain options. Using
this approachyields models that are flexibleand sufficiently
detailed to enable realisticsimulationof stochasticdiscrete
events.

Description of the modelling approach

Modelling concepts
To give the flexibilityin the model supply chain configuration, a supply chain network is modelled as a group of
connected 'nodes', each of which resembles an individual
physical facility, such as plants, warehouses,or retailers.A
generic node is developed that can representeach type of
facility with its attributes characteristicto the individual
node to be specifiedby the user.Therefore,the genericnodes
are viewedas the buildingblocks of a supplychain network,
connected to each other with a customer-supplierrelationship, which resemblesthe real physical situation.
Each node can be composed of three main components:
Inbound Material Management,Material Conversion,and
Outbound MaterialManagement.These three components
are equivalentto the material control, production control,
and finishedgoods stockpilesubmodelsdescribedby Cohen

and Lee.12 While they regardthe three submodelsas having

fixed control mechanisms to obtain optimal values of
parameters for total cost minimization, here the three
components simulate the policies employed within one
physical facility, and are specified by the user. The user
can opt for selecting only the Inbound Material Management and MaterialConversionif the outboundmaterialsare
shippeddirectto anotherfacility(ie the node concerneddoes
not hold any outboundmaterialinventory),or selectingonly
the Inbound MaterialManagementif thereis no conversion
process within the facility. Between the nodes a list of
materials flows downstream and a list of orders flows
upstream.This concept is shown in Figure 1.
The function of the Inbound/OutboundMaterial Managementis to control the stock levelsof a group of inbound/
outbound materials such that their requirementsby the
Material Conversion/downstreamnodes can be met (ie no
stock out) without holding excessivestocks. The stock level
of each material is to be controlled by a particular
replenishmentcontrol policy due to different item profit
contributionsas a result of sales popularity,importanceof
the specificitem to the overallproductline, profitabilityand
the value of the merchandise,and becauseof differentpolicy
administrativecosts.1,13,14The Inbound Material Management replenishesthe stock levels by issuing ordersto one or
more upstream nodes, whereas the Outbound Material
Management does so by issuing orders to the Material
Conversioncomponent within the same node. The various
replenishmentcontrol policies found in the literature(see
Table 1) can be implementedin the MaterialManagement
components.
The function of the MaterialConversioncomponent of a
node is to plan productionand determinewhen the orders
can be fulfilled,subjectto some specifiedresourceconstraints
and manufacturing logic. It implements a process that
convertsa certainamount of inboundmaterialsto a certain
amount of outbound materials, based on a recipe. This
can represent a production or packaging process in a
plant, a packaging breakdown and/or sorting process in

Generic Node

Material
flow

IMM

MC

OMM

Order
flow

where

Material
IMM= Inbound
Management,
MC= Material
Conversion,
Material
OMM= Outbound
Management.

Figure1 Genericnode concept.

804 Journal
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a warehouse, or a transportationprocess that alters the

location of the items. Before processing the orders, a
priority-sequencingrule, such as earliest-due-date(EDD)
or first-come-first-served
(FCFS), is employed to sort the
orders.For the processitself, optimizedproductiontechnology (OPT)or any otherplanningalgorithmmay be adopted.
In the case of outsourcingthe process to a contractor,the
resourcesavailableto the parentcompanymay be treatedas
limitless.

other nodes are not shown here for clarity. For the generic
node in Figure 2, the associations among the components
are describedin the Appendix.The upstreamorderflows are
simulated by order objects being created by the replenishment control policy concernedand accessedby an upstream
node or component. The downstream material flows are
simulated by updating the related stock levels after the
orders are processedby an upstreamnode component.

Replenishmentcontrol policies

Generic node model structure

Replenishmentcontrol policies are used in the Inbound and

Outbound Material Management components of a supply
chain node to control the stock levels of various SKUs kept
in the node. The various replenishmentcontrol systemsthat
can be modelledare shown in Table 1. They can be classified
accordingto whetherthey are instantaneousor time-phased
(dynamic), whether they consider only local inventory or
integral inventory (including stock in transit and at other
nodes downstream),and whether they are push (based on
demand forecasts) or pull (based on actual customer
demands) systems. Here we describe the more common
replenishmentcontrol policies, which have been incorporated into our model: re-orderpoint techniques(ROP) and
material/distributionrequirementsplanning (MRP)/(DRP).
ROP techniques consider the inventory position of a
materialat one location at one point in time. Hence, they are
instantaneous,local inventory,pull systems.ROP techniques
can be divided into four types; further categorized as
continuous reviewand periodic review.The two continuous
review policies are:

To design the model structure, an object modelling

technique(OMT) object model class diagramof the generic
node is written.OMT is a solution designmethodologythat
comprises object models, dynamic models, and functional
models. The object model is used here as it describesthe
structure of the system.'5 Classes are generalizationsof
certain objects that share the same data structure and
behaviour.
The OMT object model class diagramof a genericnode,
consisting of the three main components of Inbound
MaterialManagement,MaterialConversionand Outbound
Material Management, which in turn comprise other
components,is presentedin Figure 2. The associationsthat
allow for the two- and one-componentnodes to interactwith
Table1

Variousreplenishment
controlpolices
controlpolicies
Replenishment
(a)
(b)
(c)
(d)
(e)
(f)

Re-orderpoint (ROP)techniques
Material/distribution
requirements
planning(MRP/DRP)
Basestock control(BSC)
Linerequirements
planning(LRP)
Vendormanagedinventory(VMI)
Just-in-time(JIT)

* Reorder-point, reorder-quantity(s, Q) system: a fixed

quantity Q is orderedfrom an upstreamnode when the
inventoryposition drops to or below the reorder-points.

Generic node

Inboundmaterial
management

consumes/

Material
conversion
,

Resource

Recipe

replenishment

Outboundmaterial
management

expected

produces
dueddces
ke ps

customer Inbound SKU

computes

OutboundSKU

supplier

replenishment

issues
Replenishment
control
policy

maintains
triggers

Inventory

FROP

MRP/DRP

SKU

Order

Internalordercontainer

ID

External

by

Internal-m
Externalordercontainer

Figure2 OMT objectmodelclass diagramof the genericnode.

chains 805
ofsupply
WYHung
eta/-Dynamic
modelling

* Reorder-point,reorder-up-to-level(s, S) system: a variable size replenishmentis made to raise the inventory

position to the reorder-up-to-levelS when the inventory
position drops to or below the reorder-points.
The periodicreviewpolicies are:
* Periodic-review,reorder-up-to-level(R, S) system: for
every R units of time, enough is orderedto replenishthe
inventoryposition to the reorder-up-to-levelS.
* (R, s, S) system:this is a combinationof (s, S) and (R, S)
systems.
MRP and DRP deal with the managementof currentand
future inventory levels, based on demand forecasts at one
location. Therefore, they are time-phased,local inventory,
push systems. MRP and DRP work by the same mechanisms; their differenceis that MRP is employed to manage
raw materialsfor productionplanning,while DRP is used to
manage finishedgoods.16 Consideringthe existingcustomer
orders, forecast demand, process recipe, current inventory
levels, planned inventory receipts and lead time requirements, it producesa scheduleof plannedordersto be issued.
Closed loop MRP includescapacity checks as an enhancement to produce feasible plans. ManufacturingResources
Planning (MRP II) has the same inventory management
approach as closed loop MRP, with the additional
enhancementsto convertthe outputsof productionplanning
and control into financial terms and to draw on forecasts
from other departmentswithin the firm.13
The basic principleof MRP is as follows. The demands
for each materialare forecastedon a discretetime and these
demand forecastsare called the gross requirements.For an
outbound material,its gross requirementsare the sum of the
demand forecastsfrom all of its customers.With regardto
an inbound material,its demandforecastsare derivedfrom
the demand forecasts of those outbound materials that
consume it in the associated process recipes, offset by the
conversionlead time. The net requirementsat variousfuture
time steps for a materialare estimatedfrom the equation:
N,=max (0, G,+ SS,-It1-PR,), where N, is the net
requirementsat period t, Gt the gross requirementsfor
period t, SSt the safety stock (reorder)level at period t,
where It-1 the inventoryat period
Itt1 being max {0,
It-l},
t-1, and PRt the proposed
receipt at period t. Ordersare
issued in advance for the periods with non-zero net
requirements.In practice the order quantities are discrete
values (eg minimum order quantity+ n order increments).
This resultsin a masterschedule,which is reviewedat every
time step.
Simulation
Overall simulationprocedure
In the initializationstep, the supplychain structureis defined
by specifyingthe facilitiesinvolvedas nodes and then linking

them together. Within the simulation loop, stochastic

dynamicsimulationsare carriedout to computethe expected
performancemeasures,by sampling the uncertainproduct
demands from their respectiveprobabilitydistributionsfor
each time period within the planninghorizon, and creating
orders with regard to the policies employed and their
parametersas well as pullingthe materialsaccordinglyalong
the supplychain. The overallsimulationprocedureis shown
below.
* Initialization:
o Define the node structurefor the supply chain.
o Specifythe initial states of each node such as the SKUs
it holds, the corresponding replenishment control
policies for these SKUs and so on.
o Specifydemandforecastsfor each SKU, if requiredby
the particularreplenishmentpolicy.
* Start of simulation loop (n=l to the number of
simulations)
o Create 'real' demands for final products by sampling
from their respective probability distributions (eg
normallydistributedabout the forecastvalue).
o Specifyinitial ordersfor t = 1.
o Startof time loop (t = 1 to the planninghorizon length)
- End-customerspull the final products.
- Examine the stock level of each SKU held within
each node and issue replenishmentorders according to the correspondingcontrol policy.
- For each productionsite, sort the receivedorders,
produce the requiredSKUs and deliverthem to its
customers.
- Record the stock level for each SKU at this time
step and performstock carryoverto the next time
step.
- Increasethe time by one (t t + 1).
o End of time loop
o Reinitializethe nodes (eg clearorders,resetSKU stocks
to initial values etc.).
o Increasethe simulationcounterby one (n = n + 1).
o End of simulationloop
Sampling techniquefor the stochastic very high
dimensional simulations
Dynamic supplychain models often involvemany uncertain
variables, such as the varying demands of a number of
products at many future time periods. The number of
uncertainvariablescan easily reach the range of hundreds.
Stochastic simulation of such a high-dimensionalproblem
often consumes a lot of computation time because of the
large number of samples required,and thus the need for
efficientsamplingis pressing.
It has been recognizedthroughtheoryand practicethat a
variety of uniformly distributed deterministic sequences
provide more accurateresults than purely random samples

Vol.55, No.8
806 Journal
oftheOperational
Research
Society

of points. The low-discrepancy sequences (LDS) are

designedspecificallyto place sample points as uniformlyas
possible. Unlike random numbers, successive low-discrepancy points 'know' about the position of theirpredecessors
and fill the remaininggaps. LDS have been used instead of
random numbers in evaluating multi-dimensionalintegrals
and simulationof stochasticprocesses- in the areaswhere
traditionallyMC methods were used.17,18It has been found
that methods based on LDS, known as quasi-MC (QMC)
methods,have performancesuperiorto that of MC methods
on certain integrals. The improvementin time-to-accuracy
using QMC can be as large as severalorders of magnitude.
However, it is generallyreportedin the literaturethat for
high-dimensionalfunctions (ie number of dimensions > 12
or 15) QMC methods lose their advantageover MC (quoted
by Owen'9 and Sobol'20). For very high-dimensional
problems, Owen21 introduces Latin Supercube Sampling
(LSS), which uses an MC technique to improve QMC. In
LSS, the input variablesare groupedinto subsets,and within
each subsetQMC points are appliedin randomorder. Some
numerical experiments are conducted to compare the
accuracy of LSS with those achieved with MC, using two
integrals from Morokoff and Caflisch.21 The low discrepancy quasi-randomsequence used in LSS subsets is the
Sobol' sequence22and the pseudo-randomsequenceused in
MC is the improved initializationversion of the Mersenne
Twister23 algorithm (http://www.math.keio.ac.jp/-matumoto/emt.html). The results show that for 360 equally
important dimensions, the accuracy of LSS can be
significantly better than MC for the same number of
sampling points (Figures 3 and 4). Therefore, for very
high-dimensionalproblems,LSS is a good samplingmethod
for faster convergence.
In the case of supply chain modelling, unlike simple
mathematical integrals, the true values of the mean and
varianceof the outputs for a particularset of supply chain
policies within the specific supply chain structureare often
unknown. Since we are interested in the expected output
values, we take a fixed numberof samples in an attempt to
approximatethe probability distributionsof the uncertain
input variablesand compute the mean output values. This
process is then repeatedover a number of runs to obtain a
numberof mean values for the outputs concerned.With the
mean values from a number of runs we calculate the
standard error of the mean and an overall mean for each
output value. When the standarderror of the mean is less
than 1% of the overall mean of the output value, we
consider the mean output value to have converged.
Model validation

The case study is based on an actual supply chain of a

leading pharmaceuticalmanufacturer.Prior to the studies
describedin the next section, a pilot studywas performed,in
which the model was tested against historicaldata from the

-6
9

11

13

-8

-10

S-12o0
.E0
MC

-16

log2 of number of sampling points

3 Root-mean-square integration error

Figure

for

F-= -I= 1(1+ 1/s)x!Is, where s = 360.

-6
9

11

13

-8

, -10
c u, -12

2 -14o-

-16
-.-

MC
...........

-20
log2 of number of sampling points

Figure

4 Root-mean-square integration error

F= H]f=l(s-xi)/(s-0.5),

TYPES
PLOT

for

where s - 360.

A 1C~r

Hookstack:
i12.tJ
UPLIF
I:UU
[SIMU~llIr4:AVLPAGE
1084
a4
?71
Gi
F,1?
SS
19
(1UG5
77
79
S7
69
71
73
7&
29
31
33
3?
47
49
S3
59
23
27
39
41
43
45
51
21
25
37
Turntidayts)
Figure5 Modelvalidationin a pilot study;the faint lines are
actualdata and bold lines aremodelpredicteddata.

real supply chain. The comparisonof the model predictions

and actual data is shown in Figure 5. In general,the model
fits the data quite well. The discrepanciesare thought to be
mainly due to human factors in the implementationof the
business processes.

ofsupply
chains 807
WYHung
et al-Dynamic
modelling

Case study
Description
To demonstrate the applicability of the new modelling
method, the supply chain network of a fairly vertically
integratedmultinationalpharmaceuticalcompany is simulated. Based on its existing inventory management and
productionpolicies,the aim is to estimatefor two of its final
products to its external customers:customer service level
(CSL); probability of stock out (PSO); average inventory
(INV), and stock levels over a time horizon of 2 years. In
particular,the customerservicelevel (CSL)is takento be the
fill rate, which is the total quantity sold over the total
quantity ordered,for that SKU market for the whole time
horizon (104 weeks)averagedover all the simulations.When
the stock level is lower than the order quantity, only the
stock availableis sold with no backordersallowed.
Figure 6 shows the simulated supply chain network
configurationand the locations of the various inventories.
There are two marketsand four final products:Packs A and
B are to be sold in the Japanmarket;Packs C and D are to
be sold in the USA market. All of these final products are
made from an Active Ingredient(AI). Packs A and B are
producedin a plant in Asia, while the productionof PacksC
and D are carriedout in a plant in America.The production
of Packs A and B is simulatedas two steps:(1) AI is used to
produce Tablet A, Tablet B, Tablet EurExp, and Tablet
GenExp, then (2) TabletsA and B are packagedto give the
final SKUs PacksA and B, respectively.TabletsEurExpand
GenExp are bulk productsto be exportedwithout packing.
AI, the ingredientfor the Tablets, is in turn producedin a
plant in Europe throughfive synthesisstages. Stockpilesof
the intermediatematerials produced from each stage are
kept in the Europeanplant as buffer stocks.

With the generic node modelling approach describedin

the previous section, the supply chain structureis simulated
using nine nodes in total, each representinga distinctfacility.
Each Demand Managementactivity and reaction is represented by one node, the Asia SecondaryManufacturingby
two nodes due to the separate simulation of tablet
production and packaging,the America SecondaryManufacturingby one node, and the Europe PrimaryManufacturing by four nodes due to its four trainsof equipment.
The policies and parametersof each component in the
individualnodes are listed in Tables 2 to 8. In particular,
the replenishmentpolicy type for the intermediateswithin
the nodes in the Europeanprimarymanufacturingsite is a
customisedtype calledDynTarget,in whichthe stock level is
monitoredcontinuouslyand ordersare issued wheneverthe
stock level is below the specifiedtargetstock level. The order
quantityis proportionalto the differencebetweenthe stock
level and the target stock level. MRP/DRP are used for the
replenishmentcontrol policies of the tablets and the final
products.Here, a dynamicsafetystock point is used for each
MRP/DRP managedmaterialto cover the demand forecast
(or gross requirements)for a numberof time steps, d, ahead,
such that the safety stock point at period t, SS,, is given by
SSt
t+d-1 G . Ordersare then issued in advance if the
estimatedstock level is below the safety stock point at that
futuretime, or cancelledif the forecastedstock level is higher
than the maximumlevel to preventoverstocking.The time
horizon is divided into three periods as shown in Figure 7:
frozen, scheduling,and planning.No orderswith a requested
due date within the frozen period can be issued unless they
are 'emergency'orders. Orderswith a requesteddue date
within the scheduling period can be issued or cancelled
dependingon how the estimatedstock level changes due to
the actual demand being different to the forecast. Orders

Asia1

Asia2Jan
0

2AII

Europe 4/5

Europe

RM

I week

Iweek
C

IAl

Euroe3

PB
eek PA,

TA,wTB,
T

P, PB

'

ds TGE
demands

TAATTEE,

Euroe 2

0m
O
14

13

Demand
Management

Secondary Manufacturing

Primary Manufacturing

weeks

America
C

USA
1 weel

PCPD

PC,

PD

demands
.

Key:
I = InboundMaterialManagement,C = MaterialConversion,O = OutboundMaterialManagement
RM = raw material,In = Intermediaten, AI = active ingredient,TA = TabletA, TB = TabletB, TEE= TabletEurExp,
TGE= TabletGenExp,PA = PackA, PB = PackB, PC = PackC, PD = Pack D

Figure6 Supplychainnetworkconfigurationfor the case study.

808 Journal
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Table 2

Replenishment control policies for the final products

Node

USA

Japan

SKU stock

Pack A

Pack B

Pack C

Pack D

DRP
4
3000
3000
9000
145
15000

DRP
4
2000
2000
8000
145
15000

DRP
4
5000
5000
45 000
145
60 000

DRP
4
20000
20 000
40 000
145
60 000

Replenishment policy type

Safety stock level (weeks)
Minimum order quantity (packs)
Order increment (packs)
Maximum order quantity (packs)
Maximum stock level/safety stock level (%)
Initial stock level (packs)

Table 3

Replenishment control policies for the tablets in Asia Secondary Manufacturing

Node

Asia 2

SKU stock
Replenishment policy type
Safety stock level (weeks)
Minimum order quantity (packs)
Order increment (packs)
Maximum order quantity (packs)
Maximum stock level/safety stock level (%)
Initial stock level (tablets)

Table 4

Tablet A
MRP
3
10000
10 000
200 000
135
2 x 106

Replenishment control policies for AI in Asia and

America Secondary Manufacturing

Node
SKU stock
Replenishment policy type
Safety stock level (kg)
Minimum order quantity (kg)
Order increment (kg)
Order-up-to-level(kg)
Initial stock level (kg)

Asia 1

America

AI
ROP: (s, S)
200
10
10
300
200

AI
ROP: (s, Q)
150
130
0
180

with a requesteddue date within the planningperiodare not

consideredin detail.
Demandforecastsfor a horizon of 104weeks are available
for the final products Packs A, B, C and D, as well as for
Tablets A, B, EurExp and GenExp. The real demand for
each final product at each time step (ie week) is uncertain
and can be represented as any appropriate type of

Table 5

Tablet B
MRP
3
10000
10000
200 000
135
2 x 106

Tablet EurExp
MRP
3
10 000
10 000
200 000
135
2 x 106

Tablet GenExp
MRP
3
10 000
10 000
200 000
135
2 x 106

probabilitydistribution.In this case it is taken to be of a

normaldistributionwith the meany being the forecastvalue
G, and the coefficientof variationc being a functionof y and
the maximum forecast value for that product over the
horizon, (Mmax - maxt G,) : c = 1.0 - 0.8(P1/Mmax). Therefore, the demand is N(u, cyl).Market demands for Tablets
EurExp and GenExp are assumed to be the same as the
forecasts, which in real life can correspondto having fixed
supply agreementswith some customers, such as Government bodies. There are 4 x 104=416 uncertain variables
(ie the market demands of the four final products at 104
weeks). This is a very high-dimensionalproblemand LSS is
applied for the stochasticsimulations.
Simulation cases
In addition to the base case described above, we have
simulatedtwo more cases to test the system'sresponsiveness
to inaccurateforecasts and one more case to examine the

Replenishment control policies for the intermediates in Europe Primary Manufacturing

Node
SKU stock
Replenishment policy type
Target stock level (kg)
Order proportional constant
Intial stock level (kg)

Europe 1

Europe 2

Europe 3

Raw material

Intermediate 1
DynTarget
1200
1
1000

Intermediate 2
DynTarget
1200
1
1000

9 x 106

Europe 4/5
Intermediate 3
DynTarget
2000
1
2000

Intermediate 4
DynTarget
2000
1
2000

AI
DynTarget
1600
1
1500

WYHung
et a/-Dynamic
ofsupply
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modelling

Table 6

Details of the conversion processes for the final products

Node

Asia 2
12 Tablet A in
one Pack A

Recipe
Production rate (packs/h)
Nominal production time (h/week)
Overtime allowed (h/week)

America
30 Tablet B in
one Pack B

600 mg AI in
one Pack C

600
40
20
0.1
3

Unavailabilitya

Downtime multipleb

900 mg AI in
one Pack D
1200
60
15
0.1
3

is the probabilityof equipmentbreakdownbasedon historicaldata.

aUnavailability
bDowntimemultiplerepresentshow manytimeslongerto processan orderduringthe equipmentbreakdownor downtime.

Table 7

Details of the conversion processes for the tablets in Asia Secondary Manufacturing

Node

Asia 1
20 mg AI in
one Tablet A

Recipe

30mg AI in
one Tablet B

30mg AI in
one Tablet
EurExp
40 000 tablets/h
10h/week
0 h/week
0
0

Production rate
Nominal production time
Overtime allowed
Unavailabilitya
Downtime multipleb

30 mg AI in
one Tablet
GenExp

is the probabilityof equipmentbreakdownbasedon historicaldata.

aUnavailability
bDowntimemultiplerepresentshow manytimeslongerto processan orderduringthe equipmentbreakdownor downtime.

Table 8

Details of the conversion processes for the intermediates in Europe Primary Manufacturing

Node
Recipe
Production capacity
(kg/week)
Unavailabilitya
Downtime multipleb

Europe 1

Europe 2

Europe 3

1 kg raw material
gives 1 kg
intermediate 1
150

1 kg intermediate 1
gives 1 kg
intermediate 2
150

1 kg intermediate 2
gives 1 kg
intermediate 3
250

1 kg intermediate3
gives 1 kg
intermediate4
250

0
0

0
0

0
0

0
0

Europe 4/5
1 kg intermediate 4
gives 1 kg Al
500
0
0

is the probabilityof equipmentbreakdownbasedon historicaldata.

aUnavailability
bDowntimemultiplerepresentshow manytimeslongerto processan orderduringthe equipmentbreakdownor downtime.

impact of quality control (QC) after production processes.

The details of the cases are as follows:

Frozen
period

Scheduling
period

Planning
period

Case (a): consistent and increasing under-forecast of Packs

A and B such that
1/H
Dn,t= Dn,t+ H '
-

t
100

Case (b): consistent and increasing over-forecast of Packs A

and B such that
1 H

Dn,t =
Dn,

Gjj20
j=1
2

t = currenttime
Time,t

in the MRPcontrolpolicy.
Figure7 Timeperiodclassification
wheret correspondsto the time step. For these two cases, we
also investigate the effects of replacing the forecast
dependent DRP policies with one of the ROP techniques,
(s, Q), whichis forecastindependent.This can be easily done

of the Operational
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Table9

Comparisonof the performancemeasuresfor variouscases

CSL (%)

Basecase
Case (a): consistentlyunderforecast
(DRP)
Case (a): consistentlyunderforecast
(s, Q)
Case (b):consistentlyoverforecast(DRP)
Case (b):consistentlyoverforecast(s, Q)
Case (c): QC considered

Pack C (USA)

Pack A (Japan)

Experiments

100
84
93
100

PSO (%)

INV (packs)

CSL (%)

3.2 x 104
0.0
1.9x 104
1.8
0.9
2.5 x 104
4.3 x 104
0.0
Sameas base case
Sameas base case

with the object-orientedmodel. The safety stock point, s, is

set to be the average of the safety stock points over the
horizon in DRP, and the fixed orderquantity,Q, is set to be
150% of the average forecast demand during the lead-time
period.
Case (c): QC of 2 weeks after each intermediateproduction
process within Primary Manufacturingand QC of 1 week
after the tablet production process within Secondary
Manufacturing.
In addition, the parametersof the replenishmentcontrol
policies can be varied to examine their impact on the
performance measures. As an example, we illustrate the
results of the variation of the safety stock cover period for
Pack A in the base case.

0.0
8.1 x 104
Sameas basecase
Sameas base case
Sameas base case
Sameas base case
7.7 x 104
6.4

100

88

120000

------mean quantity
safety stock

100000 -

95c0 upperconfidence
950o lowerconfidence

80000 x

60000 -

<

40000

o.

20000

0
0

20

80

40
60
Time I weeks

100

Figure8 Basecase:PackA meanstockleveloverthe horizon.

Results and discussions

The performancemeasuresobtained for the final products,

PacksA and C, are listedin Table 9 and displayedin Figures
8 to 16. It is found that applying LSS to the uncertain
variables in descending order of importance halves the
number of simulations required for the same accuracy
comparedto traditionalMC.
For Case (a), in which Pack A is consistently underforecast, the forecast-dependent DRP is shown to be
unsatisfactorywith merely an 84% customer service level,
while the forecast-independent(s, Q) gives a bettercustomer
servicelevel of 93%.
For the consistently over-forecastCase (b), the forecast
dependentDRP keeps a 34% higheraverageinventorylevel,
whereas the forecast-independent(s, Q) results in the same
average inventory level as in the base case. These results
show the necessityof switchingreplenishmentcontrol policy
when the market gives a response different from the
company'sforecasts.
Case (c) considersthe impact of QC on the supply chain
performance.Owing to resourcesharing and prioritygiven
to the Asian plant, the performancemeasuresfor Pack A are
unaffected but those for Pack C suffer, with its customer
servicelevel loweredto 88%. This illustratesthe undesirable
impact resultingfrom lengthyQC processes,which needs to
be overcome.

INV (packs)

PSO (%)

400000
3
350000

mean quantity
35~0000
safety stock

m.300000 -

950 upperconfidence
950. lowerconfidence

Z 250000
o,

-.

200000 -

?x 100000-

a. 50000
0

20

40

60

80

100

Time / weeks

Figure9 Basecase:PackC meanon-handstockleveloverthe

horizon.
Figures 14 to 16 show that the optimum safety stock
cover for Pack A in the base case is 3 weeks instead of 4
weeks, as 100%customerservicelevel and 0% probabilityof
stock out are achieved with a 25% reduction of average
inventory holding, which can significantly reduce the
amount of working capital if Pack A is an expensiveitem.
In all, the above cases show the convenienceofferedby the
object-oriented modelling approach that evaluation of
different situations and decisions can be achieved easily

chains811
ofsupply
WY
etal-Dynamic
modelling
Hung
120000
---

-mean quantity
stock
95% upper confidence
- .safety
95% lowerconfidence

120000a100000
- -80000

.2 100000

95% lowerconfidence

80000

, 60000

60000

40000
a.

mean quantity
safety stock
-- 95% upper confidence

- - - -

CO

20000

. 20000+
20

40

100

80

60

Time / weeks

40

20

60

80

100

Time / weeks

Figure 10 Case (a) consistently under-forecast (DRP): Pack A

mean on-hand stock level over the horizon.

Figure 13 Case (b) consistently over-forecast (s, Q): Pack A

mean on-hand stock level over the horizon.

120000
mean quantity

---

" 100000 - o.

98

safety stock
-- 95% upper confidence

95% lowerconfidence

80000

>-

S96
o 94

60000-

o 92

,O

40000

90
88

20000

-YI:...

Safety stock cover for Pack A / weeks

0-

20

40

60

80

100

Time / weeks

Figure 14 Variation of customer service level against safety

stock cover for Pack A.

Figure 11 Case (a) consistently under-forecast (s, Q): Pack A

mean on-hand stock level over the horizon.
1.8
1.6
1.4
1.2

120000
1-)-

safety stock

y 100000
o

a.

95% upper confidence

.-

95% lowerconfidence
-

80000
60000

CA-

1
0.8
%b
0.6

mean quantity

---

20

40

60

Safety stock cover for Pack A / weeks

40000
a. 20000-

0.4

0.2

--

Figure 15 Variation of probability of stock out against safety

stock cover for Pack A.

- -

I-

80

100

Time / weeks

Figure 12 Case (b) consistently over-forecast (DRP): Pack A

mean on-hand stock level over the horizon.

with the reuse of code. It also allows the development of

dynamic operating decisions to suit the dynamic external
environment, such as switching between replenishment
control policies when the demand deviation from forecasts
goes beyond a certain range.

812 Journal
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Vol.55,No.8
Society
45000

40000
c 35000
< 30000S25000

0 20000
z 15000
100002
3
4
5
Safety stock cover for Pack A / weeks

Figure16 Variationof averageinventoryagainstsafetystock

coverfor Pack A.
Conclusions
As supply chain managementbecomes increasinglyimportant for improvinga firm'sperformancein today's dynamic
and competitivebusinessenvironment,it is beneficialto have
a simulationmodel to explore and evaluate various supply
chain improvementpolicies before theirimplementation.An
object-orienteddynamic simulation model is developed for
this purpose.The model developedis genericin that all kinds
of supply chain nodes can be representedby specifyingthe
informationand physicalsystemsit possessesand utilizes,as
well as its decision-makingpolicies. Then by connectingthe
modelled supply chain members together it can simulate a
supply chain network.
The performanceof the supplychain networkis evaluated
by dynamic stochastic simulation of how the members
behave and react to discrete events, as in the real-life
situations.
A case study has been considered to illustrate the
applicabilityof the model developed.Work is underwayto
improvethis model furtherby incorporatingoptimalproduction schedulingto give a moredetailedproductionsimulation.

Each Inboundand OutboundSKU Replenishmentunit

contains a ControlPolicy to managean SKU stockpile.
The Control Policy can be any one of the techniquesin
Table 1 or a customizedpolicy.
o There is an External Order Container for each
customer-supplierpair for one type of SKU, which
deals with the ExternalOrderspassingbetweenthe two
nodes.
o An Outbound SKU Replenishment unit also issues
InternalOrdersto triggermaterialconversion.
o An Internal Order Container is thus maintained
between an Outbound SKU Replenishmentunit and
the Material Conversion component within the same
node.
o The Material Conversion component can be used to
simulate production, packaging, or transportation.Its
characteristicsare
o

to keep an Inventorythat containsall the materials

within the nodes, and has access to an individual
SKU Stock via its SKU identity,
to consume and produce a variety of SKU types,
to hold a numberof Resources(eg equipmentunits,
human operators, utility) and a set of conversion
Recipes,
to sort the Internal Orders within the Internal
Order Containerbefore conversionaccording to a
priority-sequencingrule that can be either EDD,
FCFS, or a customizedrule, and
to give a conversionlead-timeestimatefor Internal
Orders.

References
The
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3 LambertDM and Cooper MC (2000). Issues in supply chain

Acknowledgements-We thank the Engineeringand PhysicalScience

ResearchCouncil(EPSRC)for the researchstudentshipthat provides
financialsupportfor this project.

4 Vidal CJ and Goetschalckx M (1997). Strategic production-

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Received 26 November 2002,

accepted 9 February 2004