METHODOLOGY FOR DESIGN OF SIMULATION MODEL FOR EFFECTIVE

SUPPLY CHAIN MANAGEMENT

Associate Professor Dr. Khalid bin Hasnan

Mohd Nurhanif bin Hashim

Azli bin Nawawi

Chua Yik Yen

Zaliati bin Jaafar

Universiti Tun Hussein Onn Malaysia

khalid@uthm.edu.my

Supply Chain Management

ABSTRACT

Supply chain is a series of linked suppliers and customers where every customer is also a
supplier for the next downstream organization until a finished product reaches the ultimate end
user. In this project, computer simulation model will be used to propose solutions for two supply
chain problems, shrinkage and bullwhip effect. Simulation modeling can assist manufacturers to
establish supply chain performance and making early decision for upcoming problems. A
simulation model of a paperbased industry was developed using Arena software. Shrinkage has
been identified to occur at the transportation and assembly process module. The bullwhip effect
could be seen to occur even at primary supplier as it tries to adapt to the consumer demand
fluctuation. Dynamic process simulation allows organizations to study their process from a
system perspective, providing better understanding of cause and effect.

1. INTRODUCTION

Nowadays, manufacturers face a very tough challenge: To deliver the right product, to the
right customer and the most crucial is at the right time with the most minimum cost and
absolutely with the highest products’ and services quality. In overcoming this big challenge,
rather than turning their head to production processes enhancement, manufacturers usually
‘take a look’ in their supply chain operations. As a result, extensive effort and researches were
done to establish the satisfactory level of Supply Chain Management (SCM). Supply Chain
Management (SCM) is a process focused on integrating/utilizing suppliers, manufacturers,
warehouses, and retailers, so that products are manufactured and delivered at the right
quantities and at the right time, while minimizing cost as well as satisfying customer requirement
(Robert, et al., 1999).

The traditional supply chain (refer Figure 1) consists of sources, suppliers, processors,
distributors, retailers and consumers. To be more precise, SCM will work on integrating all
elements in the supply chain and makes them work together in order to achieve a higher
‘visibility’ in the supply chain itself. Moreover, a higher visibility in supply chain system will
enable all supply chain actors (sources, suppliers, processors, distributors and retailers) to offer
maximum customer service at the lowest possible costs. This will result to raising number of
happy customers and a very decent position in the market share.

Supplier Processor Market

Sources Distributors Retailers
s s
 Figure 1: Traditional Supply Chain Actors (Vieira, G.E., 2001)

In today’s scenario, there are two main problems in supply chain which are shrinkage
and Bullwhip effect. These problems initiated many research projects and unfortunately, based
on a discussion with members of Federation of Malaysian Manufacturers (FMM) held on 17
March 2008, shrinkage is the biggest supply chain problem suffered by Malaysia’s retail
industries.

To be more precise, shrinkage (refer Figure 2) can be defined as a losing stock through
inefficient processes, poor stock accounting or theft and an age-old problem for retailers (Alex
Reeves, 2006).

On the other hand, Bullwhip effect is a not an issue that can be taken for granted.
Bullwhip effect is the key to ‘waste’ generation in the supply chain. Bullwhip Effect is a
deformation in information when it goes upstream in the supply chain. More precisely, the
demand of the customer is put out of shape each time it goes from a company to another.

Figure 2: Shrinkage review by Alex Reeves (2006)

In order to overcome shrinkage and Bullwhip effect problems, one can see that the visibility
in the supply chain needs to be improved. To do that, every actor in the supply chain must be
highly integrated so that the supply chain system can be managed holistically to achieve
strategic advantages (Arntzen, et al., 1995).

Furthermore, computer simulation can play an important role in this scenario, since it can be
used to evaluate the impact of the integration in the chain. For that reason, this project used the
development of a computer environment in Arena (Rockwell Software Inc.) to aid the
responsible for operations to better analyze and test new ways to improve supply chain
performance (increase its profitability), under the idea of having all of its chain members
collaborating. Secondly, the overall project showed that the bullwhip effect can be more easily
studied with computer simulation instead of spreadsheets, which can perform very limited
analysis of dynamic and stochastic systems like supply chains.

2. RESEARCH METHODOLOGY

Modeling construction started from simple stages to complex stages. According to

methodology flowchart (please refer Appendix A), this project began with problem formulation
stage. During this stage, it is very important to clearly understand a particular problem and put
together some assumptions for the model. The next stage was setting some objectives and
overall project plan. This stage required some more detailed information about the project which
includes time to complete, number of workers, hardware and software requirements, cost
needed and others. Then the next concurrent stages were model conceptualization and data
collection. These two stages were important in order to develop a model that excellently
‘imitates’ the real world manufacturing industry. Due to global compatibility, this model utilized
SCOR concepts during the model development stage. The SCOR (Supply Chain Operations
Reference) model has been developed and endorsed by the Supply-Chain Council (SCC), an
independent not-for-profit corporation, as the cross-industry standard for supply-chain
management.

Kimberly-Clark Corporation agreed to act as a case study for this research. To ensure the
model was compatible with ARENA simulation software, the model was translated and coded
into computer familiar form and to make sure this model is feasible, verification process was
executed on the developed model. Lastly, documentation and reporting was carried out. This
stage is crucial so that the model can be reused by other simulation analyst and to embed all
results from performed analysis.

3. LITERATURE REVIEW

(Please refer Appendix B)

4. FINDINGS
 The developed simulation model was based on a paperbased company. Based on the
company (Kimberly-Clark Corporation) data, it was noted that shrinkage has been identified to
occur at the transportation and assembly process module. On the other hand, the bullwhip
effect could be seen to occur even at primary supplier as it tries to adapt to the consumer
demand fluctuation. Furthermore, due to the wide recognition of SCOR model, researchers took
this chance to develop several simulation sub models that based on SCOR concept using
ARENA. In addition, these SCOR-based sub models were embedded and utilized in the supply
chain simulation.

5. CONCLUSION

Supply chain system is one complex dynamic system and it is possible to develop a
simulation model that can ‘imitate’ such complex system. The developed simulation model will
allow the related companies to study their system’s process from a system perspective. This will
provide a better understanding of cause and effect of shrinkage and Bullwhip effect and at the
same time, it will give way for a better prediction of outcomes. Besides, the developed
simulation model was also embedded with SCOR-based sub models. Besides, the developed
supply chain model was approved by Kimberly-Clark Corporation. The model is not the best
model but it can be used as a reference for future researches.

ACHIEVEMENT

i. Name of articles/ manuscripts/ books published

Title of Thesis Name of Author Year

published

Simulation Model for

Effective Supply Chain
Mohd Nurhanif bin Hashim 2009
Management Using
ARENA

Improving Supply Chain

Traceability using FRID Chua Yik Yen 2008
Technology

ii. Title of Paper presentations (international/local)

Title of Paper Name of Journals / Books Year

published
 RFID Technology and International conference on
Zigbee Network in instrumentation, communications,
Improving Supply Chain information technology and biomedical 2009
Traceability engineering (ICICI-BME) 2009, Bandung
Indonesia

International conference on recent and

Improving Supply Chain
emerging advanced technologies in
Traceability using RFID 2009
engineering (iCREATE 2009) KL,
Technology
Malaysia

iii. Human Capital Development

Name Relation / Contribution Status

Mohd Nurhanif bin Hashim Thesis for Master of Completed

Mechanical & Manufacturing
Engineering

Chua Yik Yen Thesis for Degree of Completed

Mechanical Engineering

Azli bin Nawawi Doctor of Philosophy in On-going

Manufacturing Engineering

Zaliati binti Jaafar Research Assistant Completed

REFERENCES

Alex Reeves, (2006). “Plugging The Leaks.” (U.K): Trade brochure.

Arntzen, B.C., Brown, G.G., Harrison, T.P. & Trafton, L.L.(1995), "Global Supply Chain
Management at Digital Equipment Corporation.”Interfaces, 69-93.

Guilherme Ernani Vieira (2004). “Ideas for Modeling and Simulation of Supply Chains with
ARENA.” The 2004 Winter Simulation Conference, Curitiba, PR, Brazil.

Jack G.A.J. van der Vorst, Seth Tromp and Durk-jouke van der Zee. (2005). “A Simulation
Environment For The Redesign Of Food Supply Chain Network: Modeling Quality
Controlled Logistics.” Proceedings of the Winter Smulation Conference, 1658-1667.

Robert B. Handfield and Ernest L. Nichols, JR. (1999). “Introduction To Supply Chain
Management.” Prentice Hall, Upper Saddle River, New Jersey.
Seung- Kuk Paik and Prabir K. Bagchi (2007). “Understanding the Causes of the Bullwhip Effect
in a Supply Chain.” International Journal of Retail & Distribution Management. 35. 308 –
324.

Verma, A. K. (2006). “Improving Agility of Supply Chains Using Base Stock Model and
Computer Based Simulation.” International Journal of Physical Distribution & Logistic
Management. 36. 445 – 454

Yoon Chang and Harris Makatsoris (2002). “Supply Chain Modeling Using Simulation.” Institute
for Manufacturing, University of Cambridge, UK.

APPENDIXES

Appendix A: Methodology Flowchart

 Appendix B: Literature Review Table
Supply Chain Computer
Author, Title, Year Application Comment
Issues Modeling

- Guilherme Ernani Vieira - Bullwhip - Using - Industry - Only two performance

effect Arena measure- Inventory level &
- Ideas For Modeling And Simulation Of - System service level.
Supply Chain With Arena. Engineering
Graduate
-2004 Program

- Jack G.A.J. van der Vorst, et al. - Effective & - Using - Industrial - Focus on food supply
efficient in ALADIN partner. chain.
- A Simulation Environment For The supply chains
redesign Of Food Supply Chain - Food in - Models for Quality
Networks: Modeling Quality Controlled supply chain. Controlled Logistics
Logistic.

- 2005

- Yoon Chang, et al. - Issues in - Using any - Industry - Discuss more about
supply chain simulation simulation in supply chain
- Supply Chain Modeling Using management modeling.
Simulation and
requirement for
- 2002 supply chain
 modeling.

- Bullwhip
Effect

Alok K. Varma - For efficient in - Using - Industry - The model focus on total
supply chain mathematical inventory cost and lead-time.
- Improving Agility of supply Chin Using model.
Base Stock Model and Computer Based
Simulations. - Using Base
Stock Model
- 2006

- Seung-Kuk Paik, et al. - Bullwhip - Using any - Industry - Discuss bullwhip Effect and
Effect simulation the impact of Vendor-
- Understanding of The Bullwhip Effect Managed Inventory (VMI)
in Supply Chain.

- 2007

Appendix C: The developed supply chain model