15.1: Introduction

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A supply chain integrates the efforts of geographically dispersed production and distribution facilities that acquire raw material, make intermediate or finished products, and deliver finished products to customers. Transportation links provide for product and raw material movement between facilities. Integration is accomplished by information technology that shares production, inventory, and customer demand data among the facilities.

Integration implies that the operation of each facility affects the operation of all other facilities. The volume of production at a facility is determined by the need for its products at subsequent facilities in the supply chain. The fundamental purpose of the supply chain is to meet customer demand for finished products. Thus, customer demand drives all of the work of the supply chain.

A simple two facility supply chain is shown in Figure 15-1. At the right side of the figure, customer demand is satisfied from finished goods inventory at facility B. Facility B production levels are set so that the finished goods inventory is replenished. Facility B production requires an intermediate product made by facility A that is stored in an inventory at facility B. Facility A ships the intermediate product to facility B so that just enough inventory is available to meet production requirements at facility B. Shipments are made from an inventory at facility A that is replenished by production at facility A. Thus, customer demand indirectly drives production at facility A. Facility A needs to be constantly knowledgable about customer demand, production levels, and inventory levels at facility B to set its own production levels.

Many supply chains are much more complicated than the one shown in Figure 15-1. There are multiple kinds of facilities: some for production only and some for movement or transfer of materials like the facilities that will be discussed in a later chapter. More than one finished product may be delivered to customers. Facilities may supply products to and receive many products from many other facilities. More than one mode of transporation may be involved. The expected demand of a customer for a product may vary over time, that is be subject to seasonal variations.

Modeling an integrated supply chain involves modeling the flow of information from the end of the supply chain where product is delivered to customers to the beginning of the supply chain where the first intermediate product is produced from raw materials. The flow of product between facilities must be modeled as well as inventory management and production. Understanding and modeling of customer demand is essential.

This case study shows the simulation approach to evaluating integrated supply chain performance and how all aspects of a supply chain are integrated into one model. It is based in part on the work described in Standridge and Heltne [2000].