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Running Head: Operation and Supply Chain

Operations and Supply Management Simulation

Anita Souza

Davenport University

MGMT757
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Running Head: Operation and Supply Chain

1- Summary of Simulation

In today’s global market, supply chain management is one of the main areas of study within

an organization, whether small or large. Supply chain management (SCM) is an essential part of

an organization that ensures success by increasing business efficiency and contributing to

strategic planning to provide products and goods to the consumer.

Supply chain managers are responsible to the entire process flow from raw materials to

finished goods. One of their responsibilities is to optimize operations to produce more efficient,

and create a sustainable competitive advantage over other business. Throughout clear

communication along the chain, managers are capable of providing a balance between demand

and supply. The implementation of standard process within the business is vital and allows each

department inside the organization to focus their efforts towards a common objective.

Internet supply chain simulation game is becoming more popular because is a teaching tool

that replicate real world experience (Hunt, 2008). The Global Supply Chain Management

Simulation V2 from Harvard Business Publishing is a hands-on learning experience that

facilitates and enhances supply chain management business education. The game provides a

realistic setting in which you experience concepts of supply management in a simple and direct

way. Participants, in a controlled environment, actively make decisions and observe their impact

in response to the simulation results.

The simulation illustrates two lines of cell phones (Model A and B) where you have to

allocate resources across a global supply chain. During the simulation, you are responsible to

manage product design, and forecast total market demand. Additionally, you have to create a

balanced supply chain between suppliers to ensure products are delivered on time with the
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Running Head: Operation and Supply Chain

agreed price, and in compliance with quality standards. The game has a length over a four-year

period, at the end of each year the executive board provides advice and feedback regarding sales

and production cycle. The simulation shows how the market reacts based on your decision for

product design options, and forecasts. The cell phone models success at the end of each year is

measure by gross margin in dollars, gross margin percentage and number of votes from the

executive board members.

This paper will discuss my decision making process throughout the game, the various results,

and general understanding of key supply chain management concepts. Secondly, I will address

the different criteria, and trade-offs considered during the simulation. Then, discuss the changes

needed for improvement, and explain what worked well and what didn’t work. Finally, analyze

the results and reflect on this learning experience.

2- Strategies & Major Decisions

One major decision I made was to only select product options that increased profit margin.

Another strategy was choosing features with low standard deviation, to avoid big forecast

oscillation. Creating a strategic plan based on profitability to maximize resources for each model

was a secure and conservative plan, keeping production expenses low by only adding two or one

features at a time. Also, in order to increase demand I wanted to maintain model A selling price

lower than $200 per unit.

Selecting three different suppliers over the four years gave enough flexibility with lead time

to react to demand changes in the market. The option of choosing a low-cost country sourcing

was used to place the majority of model A production. The remaining orders were split in half

between two national suppliers due to zero lead time. The decision of producing through
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Running Head: Operation and Supply Chain

multiple suppliers was weighted on production cost versus lead time. After the third year, I

realized that sales for model B was unstable compared to model A. Thus, the option of selecting

Celldex show over the four years proved to be worth to get a better forecast, especially because

overproducing or running out of stock resulted in inventory expenses and high markdown.

It was difficult to calculate inventory excess cost, markdown, and compute lost sales from

stock out. Hence, flexibility to change production as demand shifted was crucial to achieve better

profit in the end of each year. For demand forecasting after the first year, instead of only using

the consensus from the executive board members, it was more effective to calculate the average

between consensus and previous demand to enhance success.

The Celldex annual show was a research from expert opinion that helped adjust production

and stay profitable. The trade-off when issuing order changes was choosing between $2 million

dollars per year cost versus holding inventory or running out of stock. It was difficult to

accurately forecast the future in the first two years since model B seemed to have an unpredicted

demand pattern. The decision of joining the Celldex show was very positive over the four years.

3- Simulation Challenges, Changes & Outcomes

Year One

Design Room: One of the biggest challenges in the game is choosing different features based on

limited information. Initially, I had to rely on the board team member’s opinion and my own

instinct. While choosing between different product options I studied each of the board members

discussion. I also analyzed the profitability of each option, since unit cost and selling price

changed according to the selected design option. For the first year, the different options were

upgraded communication, exterior, stylish, and storage capacity. The upgraded communication
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had a high standard deviation for model B which implies in large variation in forecast. Exterior

option increased significantly the unit cost with no impact on the overall profit. Stylish had a

positive outlook on profit margin with low standard deviation. Storage capacity showed an

improvement in the product margin as well as a low variation in forecast based on low standard

deviation. I selected stylish and storage capacity for year one due to higher profit margin, and

low standard deviation.

The decision was also based on market research regarding cell phone trends. A couple years

ago, cell phones were bulky and mainly used for phone calls and text messages. Companies used

to focus on functionally instead of aesthetics. As time passed by and with mobile technology

advancement phones started to get more compact with multiple functionalities. Gradually,

consumers were purchasing based on shape and color. In today’s world phones represent a

fashion statement and attract both genders. Storage is another relevant feature when consumers

are making a purchase decision. Consumers want additional room for different apps, as well as

save pictures, videos, and play music on their phone.

Forecast room: In the forecast room for the first year, I used the expert’s estimation average and

my own instinct. Model A reaches a larger audience because of its low price and good quality. I

estimated 54k close to the 52k demanded for the year, and for model B 35K. However, Model B

for year one had an unexpected 20% increase and I run short in inventory.

Production room: Firstly, I made the decision of getting more information through the annual

Celldex show. The conference allowed to obtain updates on demand for both phone models and

helped me make more confident decision and the necessary changes when required. Although
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Running Head: Operation and Supply Chain

participating in the event called for $2 million dollars investment which could impact

profitability in the long run.

The game had four different suppliers. VeryClose was convenient and near to my facility

within a few minutes away. The other supplier PrettyClose was close to my state. The other two

suppliers were located overseas. The farther away the suppliers are, the lower the unit cost labor

was. Capacity was higher and setup cost lower when offshoring production. However, they also

had the longest lead time. Over the four years I choose to work consistently with three suppliers

to build a long term business relationship: FarAway, PrettyClose, and VeryClose. Flexibility

was my priority when making the decision because allowed for immediate changes in production

if necessary. I allocated most of production for model B between the two national suppliers,

taking advantage of their lead time. The overseas supplier was helpful for model A production,

considering the amount of units were being ordered, and the lower unit price along with large

capacity.

Once production began, it was noted that demand for Model B was higher than anticipated.

Then, the Celldex show announced that Model B was expected to sell 20% more than expected.

Reacting from this announcement, I made a change of order from PrettyClose supplier to

increase production, and avoid losing business by stocking out.

Boardroom: Gross margin for year one ended with $41,184,200 and gross margin percentage of

26.18%. Positive feedback from members came from Carla, and Ankit for understanding the

difference between model A and B when it comes to overseas and domestic resource allocation.

Areas of improvement were regarding of inventory excess and markdown costs.

Year 2
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Running Head: Operation and Supply Chain

Design room: In result of a successful past year, I decided to use the same features since we had

a positive gross profit margin. Using the same attributes to continue to differentiate our business

from competitors, and validate sales strategy. Again, looking into high profit features and

avoiding high standard deviation were the main criteria used to choose between different phone

features. From a marketing standpoint, I taught about the importance of extended battery to avoid

the obligation of charging the phone overnight. However, the feature added $20 in unit cost and

the selling price wasn’t satisfactory to increase revenue. Durability in the other hand can be

achieved by protecting the phone with cell phone covers. The business wants to build a good

product reputation, but also a sustainable recurring consumption. Consequently, durability and

extended battery were not chosen for year two.

Forecast room: Since I had a sales history it was simpler to calculate the forecast, but not

necessarily accurate. I used the demand for Model A based on year 1 and multiplied that by 1.10

(Year 1, Model A Sales = 54 *1.10 = 59). The logic behind a 10% increase was due to the cost

benefit from model A compared to model B. Even though model B in the first year was a hit and

sold 20% more than expected there are some challenges when marketing to a high-end

consumer. Sometimes these consumers require greater innovation associated with a higher price

point. Model B calculation was based on the demand from the previous year. Therefore, Year 1,

Model B Sales = 35/1.25 =28. The sales strategy for year two was not hinge on new technology

and trends, but instead the strategy was to remain competitive and relevant in the market to

increase gross profit margin.

Production room: The production in the second year was lower by only 2k so it was necessary

to work with the same suppliers. I went again with FarAway, PrettyClose, and VeryClose as in

previous year. Keep in mind that in the real world is important to establish a strong mutually
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Running Head: Operation and Supply Chain

beneficial long term relationship, so we can work as a team and they can see us as an asset to

their business. Strategic relationship management is a key step in enhancing performance across

supply chain (Durrani, 2015). There are multiple benefits of working with a long-term supplier,

for example, companies can avoid initial set-up costs and have more flexibility when negotiating

costs. The longer a company provides a service to another, the better they understand each

other’s customer market, and business practices. Also, communication is more efficient when

suppliers understand the buyers need.

I invested in the Celldex show again because the information provided gave me

confidence in doing change order sooner when seeing a shift in demand. I tried to be mindful of

costs of carrying inventory, especially year two where I overestimated sales for model A. Once

production began, the forecast based on a simple math from previous year were satisfactory to

have a strong gross margin profit. However, I still issued a production change order for both

models because I was out of cell phones in the middle of sales season. The change orders made

the most sense versus potential lost in sales.

Boardroom: The overall goal of increasing gross percentage margin was accomplished. The

year ended with 29.55% of gross margin and $46,425,980 of gross revenue. Positive feedback

from board members included the same voters Carla and Ankit. Their votes were because I had

a good understanding of forecasting based on historical. Areas for improvement included

overseas lead time when manufacturing more than half of production.

Year 3

Design room: This year’s options included Extended Battery, Durability, GPS Anti-Theft

Tracking and Audio Quality. Again, I only selected the option that added high profit margin with
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Running Head: Operation and Supply Chain

a low standard deviation. Audio quality was the only option with a low cost that increased $5 per

unit of profitability for both models. I feel customers would not be willing to pay for the other

options. In addition, consumers could download the GPS anti-theft for free. I know for many

consumers cell phone battery is an important factor. However, for this year I did not perceived

value was worth the additional cost of the item.

The cell phone industry evolves as technology advances; this includes more research

development to offer faster processors, better displays, and high resolution camera in exchange

for a fair price. A Park Associates survey shows that 68% of US cell phone owners stream music

on a daily basis (Spencer, 2016). Therefore, I felt the mix of audio quality, low price, and high

profit margin would be a fantastic phone based on its performance.

Forecast room: The forecast in the third year was overly conservative. In a real business world,

forecasts are usually based on historical data, test markets, simulation, probabilities and

executive judgment. In this game, to make more accurate forecast I combined historical data, and

expert’s advices. For instance, I was forecasting for a cell phone with a new feature (audio

quality) compared to the two previous year which had the same features (stylish and storage

capacity). Because it was a new cell phone feature I didn’t have historical data. However, I used

the historical review accumulated from the previous year for a similar product which gave me

enough information to forecast.

In the previous year, model B only sold 90% of its sales forecast, and demand for model A was

higher than estimated. Therefore, based on the consensus data for each model the forecast for the

third year followed the predicting below:

Model A – Consensus 66 *1.15 = 69k

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Running Head: Operation and Supply Chain

Model B – Consensus 32/1.4 =23k

The price unit for Model B ($255) was $40 more versus Model A ($215). In the previous

year the difference from these models was only $20. So, since consumers are not enthusiastic

about paying a premium price for certain goods I predicted an increase in demand for model A

and a decrease in demand for Model B.

Production room: The production in the third year was higher than the previous year so I had to

allocate resources wisely. I went again with FarAway, PrettyClose, and VeryClose like in the

previous years. Since FarWay have 3 months lead time compared to 4 months lead time from

FarFarAway it made sense to order the majority of production through FarWay. In fact, the

greater the lead time the higher is the risk of holding inventory, because it’s likely the product

you needed when you ordered is no longer the demand you need when it arrives. Thus, working

with local suppliers was critical for immediate changes in production. Moreover, 70% of

American consumers value U.S made products (Aeppel, 2017).

Over the third year I lost revenue from both models because I did not meet the demand. I

was short by an average of 3k per month for model A, and stock out the first three months for

model B. Although, model B had a 37% decrease in sales from May to December. This rapidly

decrease in sales from model B increased our inventory expenses and I couldn’t avoid the end of

year high markdown. Figure 1 show the yearly production planning.

It did not make sense to issue a change order because demand only shifted towards the

end of sales season. I evaluated the potential of holding inventory costs, versus the $2 million

cost for a change order, and it only made sense to issue a change order early in the production

cycle. Therefore, I had to absorb costs associated with additional inventory.

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Running Head: Operation and Supply Chain

Boardroom: Gross margin for year three ended with $35,563,100, the lowest yet, and gross

margin percentage of 23.09%. Even though it was a lower year than anticipated, I received

positive feedback from three board members compared to two votes in the previous years.

Positive feedbacks were associated to comprehending the difference between model A and B.

Areas for improvement were related to the excess of inventory at the end of year.

Year 4

Design room: For year four I choose the options of Audio Quality and GPS Anti-Theft

Tracking. If I had to do it over again, I would have picked camera quality instead of GPS Anti-

Theft. Even though camera quality had a high impact per unit cost but still could turn into profit.

In this year, like the previous year I continued to make my decision based on high profit, low

standard deviation options. Unfortunately, I did not give much attention to new trends, and

market research. In the real world, I am aware that cell phones are the future of mobile

photograph but I decided to play safe, and follow logical progression. Unfortunate, I don’t feel I

made the best options for features during year four. Whereas, losing your phone can be the most

frightening experiences in the modern age, there are apps in place that helps in this situation.

However, I thought about producing a phone with a system in place to protect contact, personal,

and financial data; additionally to audio quality to take consumers audio experience up a notch.

Forecast room: As a starting point, I analyzed the previous sales according to our product t line

additionally to annual trend. My strategy was to improve sales during year four based on patterns

from the previous years. During year four, I disregarded the consensus opinion and instead used

the average of all forecasts. As a result, I conservative estimated model B and overestimated

model A based on the added features along with average forecast.

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Running Head: Operation and Supply Chain

Production room: The production in the fourth year was smaller than the previous year, yet I

still worked with three suppliers to continue to build a long-term supplier relationship. I tried to

play the game alike the real world, and that explains the reason for my strategy. Having strategic

partners in place, means determine the most efficient way to maximize profitability. Again, I

would like to emphasize the importance of change in production, and having two suppliers with

no lead time for flexibility in responding changes in the market. Selecting three suppliers

throughout the four years made me feel secure about cost savings and in ease with risks.

Over the four years I tried to be mindful of sales change. After the second year I realized

that sales for model B were more unstable versus sales from model A. So I outsourced most of

model A production overseas in order to escalate profitability since it was a lower unit cost. The

Celldex show proved to be valued when issuing orders early in the production cycle and I

invested throughout the four years. Model B had a 20% increase in demand and I was short in

inventory starting in May. Model A sold well within the first 3 months, then demand shifted and

I ended up having excess inventory. The cost of holding a high level of inventory can be a

bottleneck because it takes up business funds for other areas such as marketing or product

development. Additionally, storing excess inventory can potentially compromise the product

quality. I issue a change of order to increase production for model B by one of the suppliers with

zero lead time. Demand for model A was lower than expected so I had a big markdown in the

end of the year for this model.

Boardroom: Gross margin for year four ended with $40,569,737,940 and the lowest gross

margin percentage yet of 22.75%. I observed that positive feedbacks from the board members are

generally when following the consensus, and their discussion advice for product options. Positive

feedback for the fourth year came from Adele, Matheo, and Ankit about understanding stock out
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costs compared to markdown costs. It was important to learn that is more profitable to plan for a

small surplus over expected demand.

4- Operational Conditions & Outcomes

In today’s global economy business acknowledge the importance of a strategic supply

chain system and managers face many challenges to their job. Through the operational

strategies of this game I was required to access areas such as financial and accounting

planning, relationship development, market and product research, inventory management and

information technology. In the initial instance of the game, I realized the challenges of

managing a real-time operation.

Supply chain managers are hired to accurately allocate resources and make forecast

predictions. For the two cell phone lines (Model A and Model B) I had full control over the

design, forecasting, and production. During the four years in designing the phones I decided

to only add options that would increase gross profit and tried to avoid high standard deviation

because that implies in large disparity in forecast. I was confident about my selected design

options for the first three years based on profitability, but during year fourth I should have

tried a combination of new technology options for an increase in sales. Brand innovation is a

big selling point because provide a premium experience and consumers will pay more for

innovation in cell phone. But overall, I was able to find a balance for a combination of

market research and innovation with high margin products.

After finishing the design for both models the next step was forecasting. For forecasting,

after the first year I used historical data (average of previous forecasts) and took into account
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Running Head: Operation and Supply Chain

the consensus from the board members. I wish the game had more insights based on

consumer behavioral and trends.

Production planning turned out to be the most difficult strategy as cell phone lifecycles

are short-lived and we had little control over inventory. In the production approach I choose

to select multiple suppliers throughout the four years to take advantage of low cost and lead

time. The FarAway supplier overseas had shipping and deliver time of three months so I

decided to start production in February since sales started in May. The majority of our Model

A production was outsourced through FarAway because of low unit cost and sales stability.

Model B production was split between PrettyClose and VeryClose (domestic suppliers) to

minimize the risk of fluctuation in sales and have the flexibility of zero lead time. For every

year I made a decision to invest in the Celldex show to receive more accurate information

about demand. Over the four years I tried to be mindful to only issue production change for

the cost of $2 million if I had the Celldex information early in the production cycle. I noticed

the quantity limitation when requesting order change during Year 3. The production in the

third was overestimated and I had high markdown for both models in the end of year. Once

again, I should have figured out after the first round that over stocking the shelves are more

expensive than running out of phones towards the end of year. However, I believe the

simulation had a positive outcome since I was able to maintain over the four years an average

of $41k in gross margin and 26% of gross percentage.

For the majority of the simulation I followed the advice of the board which resulted in

positive responses with a total of 10 votes. As the fourth year came to an end the advice from

the board was generally related to risk-based on decision making, the difference of over
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Running Head: Operation and Supply Chain

producing and under producing and considerations about capacity allocation and costs

associated with markdown.

The simulation outcomes helped reinforce basic supply chain concepts, and gave better

understanding of how to adjust quickly to unexpected shift in demand and remain profitable

in the market.

5- Reflection

The simulation game is like a laboratory in which is possible to test strategies, make

decisions and evaluate its respective outcome. Just as biologists perform experiments in

laboratories or pilot that uses flight simulator; students and executives can use this game as a

training tool to expand their knowledge, and develop skills in different key areas of supply

chain. Similar to flight simulators, this game also simulate a real case alike business reality.

As a manager of the company, I was at the forefront of decision making. Like in the real

world many repercussions of my decisions were seen immediately and others later in the

production cycle.

One of the challenges of the game was choosing different product options since the game

does not provide information based on demographics and economy status. Understanding the

effects of marketing research would help the supply chain manager determine demand.

Research in my career is indispensable to decision making because it gives a picture of what

is happening and what is likely to occur in the future. Using research to support decisions is

not only important to understand the target market, but also to evaluate price elasticity,

competitive analysis, and advertisement opportunities. In the game, this is where the board

members advice helped the supply chain manager.

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Running Head: Operation and Supply Chain

The simulation was helpful because made me responsible for the outcome showing the

importance of carefully plan sales and operations planning (S&OP). The existing trade-offs

between multiple suppliers, lead time, investment in the Celldex and production changes

were fundamental to be evaluated. The performance of the game allowed me to experience

typical supply chain tasks and problems. At the end of year fourth, I was able to gain insights

about supply chain management, especially in the following areas:

 Product (consumers need, technology trends, price elasticity)

 Suppliers (capacity, lead time, set-up cost, and unit price)

 Relationship development (loyalty, word of mouth referrals, business

opportunities, build a strong internal team)

 Sales forecasting (demand, inventory control, financial planning, internal control)

 Storing data (gain insight, continuous improvement)

 Marketing research (customer behavior patterns, identify potential customers,

competitor analysis)

The final lesson is the need of every organization whether small or large to achieve a

sustainable strategy to maximize profitability. The success of a company depends on

supply chain management streamline from design, planning, forecasting, and monitoring

inventory. This game made me realize the impact of the supply chain management as an

integral part of most business, including personally, my profession as a manager. As a

relations manager of a tourism company it was important to see the value of supplier

relationship management. Long-term supplier relationship plays a central role to ensure

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Running Head: Operation and Supply Chain

quality, time delivery and flexibility in change of orders. The game was an interactive,

fun, and rich learning tool to enhance my knowledge and skills connected to supply chain

concepts.

References

Durrani, A. (2015). The Importance of Long-Term Supplier Relationships. LinkedIn.

Retrieved from https://www.linkedin.com/pulse/importance-long-term-supplier-
relationships-amjad-durrani/

Spencer, A. (2016). Two Thirds of US Smartphones Users Stream Music Daily. Mobile
Marketing. Retrieved from: http://mobilemarketingmagazine.com/music-streaming-
mobile-smartphone-daily-us

Aeppel, T. (2017). Americans want U.S goods, but not willing to pay more: Reuters/Ipsos
poll. Reuters. Retrieved from: https://www.reuters.com/article/us-usa-buyamerican-
poll/americans-want-u-s-goods-but-not-willing-to-pay-more-reuters-ipsos-poll-
idUSKBN1A3210
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Figure 1: Simulation – Production Room Year 3

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Figure 1. Operation and Supply Chain Management Simulation. Production Room Year 3

Appendix A

Summary for each year in the simulation

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