Business Modelling and Simulation in Supply Chains

Introduction

The business environment is constantly changing. This constant change has presented new challenges to businesses. Businesses have to adapt to the new trends and changes in the business environment to remain relevant and successful. One aspect that has brought considerable challenges to businesses is globalization. Over the last two decades, many businesses have globalized. Specifically, globalization and the changing business environment have made supply chain management more complex, disintegrated, and costly (Laura & Johnson, 2003, p. 28; Lamberti, Costello & Getz, 2012, p. 37; Lis et al., 2009).

Businesses are considering adopting effective strategies to address these new challenges in their supply chains. One of the possible strategies for addressing these new challenges in the supply chain management is simulation.

Supply Chain Management

Supply chain management is the process of ensuring that there is a good flow of raw materials and finished products across different players. The typical supply chain involves different players including suppliers of raw materials, manufacturers of finished goods, distributors of the finished goods, and the consumers who use the finished goods. The complete supply chain has to ensure that there is an efficient flow of materials down from the supplier to the end consumer.

The fact that each player in the supply chain has demands and expectations complicates supply chain management. For example, the manufacturer expects to receive the raw materials in a timely manner to manufacture the finished goods on time. Likewise, the distributors expect the manufacturers to manufacture the finished goods on time so that they can deliver them to end consumers immediately. If the supply chain were simple, the supply chain management would be easier and straightforward. However, the long and complex nature of the supply chain has resulted in several problems that are facing many businesses currently (Wang & Ingham, 2008, pp. 124-125; Groznik & Trkman, 2012, pp. 1003-1006).

One of the major challenges in managing the current supply chain is high costs. Businesses are incurring high costs of managing suppliers because of the expansion of the supply chain from domestic markets to regional and global markets. Businesses have to cater for the additional costs of transporting raw materials and goods for longer distances. Apart from the direct costs of transport, other additional costs also contribute to the overall increase in the cost of managing the supply chain.

One of these is the increase in insurance costs, cost of raw materials, and other indirect costs. However, a significant part of the increased cost of managing the supply chain emanates from losses due to delays. For example, delayed delivery of consumer orders may cause consumers to cancel the orders. When this happens, the business will have to bear the costs (Manuj & Mentzer, 2008; Nathan, 2008).

Another major challenge in supply chain management is poor information management. As already discussed, the supply chain involves different players. Therefore, effective information sharing and communication between these players is of paramount importance. When there is a breakdown in information flow, problems in the supply chain are bound to come up. For example, when there is a breakdown in communication between the manufacturer and suppliers, delay in delivery of raw materials is likely to result. Apparently, the entire supply chain is integrated. This implies that the end consumer who will also feel the delay in delivery of raw materials (Venkateswaran & Son, 2004, p. 2972).

Additionally, inventory management has become a challenge in the current supply chain management. Inventory management entails ensuring that raw materials and finished products are delivered safely and on time. However, challenges in information flow and increased complexity of the current supply chain has made inventory management difficult. For example, a manufacturer will have trouble in managing many suppliers, some of whom also supply to other manufacturers (Manuj & Mentzer, 2008).

Ultimately, the planning and design of supply chains has become more complex and difficult. Businesses have to consider all the players in the supply chain (Venkateswaran & Son, 2004, pp. 2991-2992). Considering the expansion of supply chains, there are many entities involved in a typical modern supply chain. Coordinating and controlling of these entities has become more demanding for the supply chain personnel (Manuj & Mentzer, 2008, p. 132; Kohli, Alexander & Gupta, 2008, p. 73). What this means is that there is a critical need to find a solution to these current problems in the supply chain management. Simulating the supply chain is a possible solution.

Modeling and Simulation

A model represents a real system in its design and working. However, the model should not be confused with the system. The model is typically used to mimic a real system such that we are able to forecast how the real system may respond to various changes or situations. As such, a good model should be as close as possible to the real system in terms of the relevant features and parameters. Models use pre-installed mathematical formulas to predict the possible outcome when different conditions or variables are introduced. The best models are designed prudently so that they are a trade-off between simplicity and complexity. Modeling is the actual process that produces a model. Simulation refers to the operation of the model to mimic a real system (Syntetos et al., 2011; Maria, 1997, p. 7).

Modeling and Simulation in Supply Chain Management

Modeling and simulation in supply chain management enhances the decision-making processes. Decision-making relies on having the relevant information and accurate data about the current and potential strengths, weaknesses, and possible scenarios.

When simulating the supply chain, it becomes easier to predict the possible scenarios that may affect the supply chain in the future. Therefore, it becomes easier to make better decisions that are based on these predictions. Simulating the supply chain will solve the current problems and challenges in managing the complex supply chain. To elaborate this, we will discuss the benefits of using simulation models in the supply chain.

First, simulating the supply chain will provide a better understanding of the entire supply chain (Chang & Makatsoris, n.d., p. 27). As we have already discussed above, the current supply chain is complex because it involves different players and processes. Identifying all these factors is not easy without using simulation models. The first step in simulating the supply chain entails identifying and incorporating all players and processes.

While this may appear simple and straightforward, it is not. Some important processes or entities may be left out because of human bias. When this happens, the decisions made regarding management and coordination of these elements will not be comprehensive. However, simulation models provide a graphical and animated representation of the entire supply chain that is easy to understand. Decision makers in the supply chain can use these graphical and animated representations to make better decisions about coordination of processes and players (Ebrahimy & AbouRizk, 2010).

Second, using simulations in the supply chain enables better decision-making because it allows for making predictions. The supply chain is constantly changing. Factors such as demand and supply keep fluctuating. Businesses need to predict and adapt to these changes effectively. Making such predictions without simulations is difficult (Long, Lin & Sun, 2011, p. 1242). However, using simulation models makes it possible to predict future changes and fluctuations in a statistically significant manner. Therefore, it is possible to make better decisions in the supply chain management based on these projections.

For example, decisions regarding the quantities of raw materials or finished goods to hold in the warehouse will be sound using predictions made from simulations (Maria, 1997, p. 12; Chang & Makatsoris, n.d., p. 27).

Third, simulation will enable the identification of specific areas that need improvement in the supply chain. Using simulation models to follow the flow of information and inventory across the entire supply chain will illuminate specific areas where gaps exist. Therefore, businesses can target specific areas in the real supply chain for improvements. Apart from improving the effectiveness and efficiency of the supply chain, this will help in reducing wastes that result in additional costs (Maria, 1997, p. 12; Nelson & Gerhardt, 2011).

Conclusion

In conclusion, the constant changes in the business environment have complicated the management of supply chains. As a result, businesses are experiencing new challenges in the supply chain including high costs, poor coordination, and dissatisfied consumers. To overcome these, businesses have to adopt simulation models that will improve the integration, coordination, and efficiency of the overall supply chain. Simulation models improve decision making by providing accurate information about the current bottlenecks and possible changes in the future.

References

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