Pangea Simulation Report

Pangea Simulation Report Contents Executive summary……………………………………………. How we played the game……………………………………… How we should play the game ………………………………… Appendix……………………………………………………….. Executive Summary: This game allows the team to expand and manage network of factories and warehouse for Jacob industries to supply market in new regions on the fictional continent of pangea. This fictional continent includes Calopeia(NW), Sorange(NE),Entworpe(SW),Tyran(SE) and Fardo(islandSW). Production Factory: The cost of building a factory is $2500000.The cost of adding a unit of capacity a day is $25000. The factory can produce only one batch per day to the maximum extent of its full capacity. The capacity once adeed cannot be retired. The cost to produce one batch of production costs a fixed price of $1500 and a variable cost of $1000. Therefore, the cost of producing a batch of production is 1500+(no.of units)*1000. Warehouse Parameters The Construction of a new warehouse costs $50000. A warehouse can store unlimited number of units . The holding cost for a drum for one year is $100 whether the drum is in store in warehouse or the drum is in transit The Warehouse fulfils the customer order either partially or in full. The order fullfillment from the warehouse happens via mail at the following cost:$150 if the customer is in the same region as the warehouse $$200 if the customer and warehouse are in different region . The time taken to ship for both the situations by mail takes one day. $400 if the client is found in Fardo and also the warehouse is on land or vice-versa TRANSPORTATION PARAMETERS Finished merchandise production from the works square measure shipped to the warehouse as shortly as production is completed. The drums may be shipped by either trucks or by mail. • By Truck — the value per truckload for activity to a warehouse t $15000 if each square measure within the same region and $20000 if they're on completely different regions. most of two hundred units per truckload may be sent. If a batch is a smaller amount than two hundred units, than partial-truckload are going to be used. The time taken to provide for each is seven days. • By Mail — the value of shipping by mail is directly proportional to the amount of units being shipped. the value to ship a drum within the same region t $150 and to completely different regions is $200. The time taken to ship for each the things by mail takes in the future How WE PLAYED THE GAME The simulation game we had to play involved making production, inventory and distribution decisions for Pangea where we were given a factory and warehouse in one of the locations and we had to make decisions based on demand of product from different areas. The game started on day 730 and ended on day 1456. The team had to primarily make decisions on capacity, transportation mode, safety and maximum inventory and make descisions based on marginal revenue. Firstly, one must determine the general trend of demand for the different regions. A simple analysis of demand of the different regions reveals the following — 1) Calopeia — Periodic nature of demand (almost predictable rise and fall, approaching seasonal) 2) Entworpe —0.-time demand of 250 units every once in a while 3) Sorange —Long-term demand is not seasonal and average demand increases linearly 4) Tyran —Almost constant demand 5) Fa.— Long-run demand is non-seasonal nor is the trend moving upwards or downwards Since adding capacity, building a factory or adding a warehouse requires lot of days to materialize, it t cogent to take these decisions as early as possible to ensure that we can extract maximum benefit out of these. STRATEGY Step 1: Analyze the demand trends of various regions Step 2: Add capacity to cover for Average Demand Step 3: Stock inventory for peak-season Step 4: Ensure adequate safety stock to cover for abnormal demand but not too much The above strategy is applied to each city separately wrt to their demand characterstics as shown belowCALOPEIA Since Calopeia has a periodic demand, it t important to optimize it supply chain so as to avoid overstocking and understocking to the most optimum extent. In the first few days we realized that the maximum and minimum demand was 70 & 10 units respectively. This led to an average demand of 40 units. Also, we know that if we use transportation by truck, the average cost of transportation per unit is 515000/200 = 575 per unit This leads to a holding cost of 10%(1000+ 75). 5107.5 .5100 (Physical Stock) = 5207.5/unit Therefore, Marginal Revenue = Revenue —Production Cost— Transportation Cost - Holding Cost— Fulfillment Cost = 1450-1000— 75 —4 -150 Marginal Revenue = 5221 The cost to increase capacity is 550000. Therefore, the breakeven occurs when the number of drums of drums we are able to .11 from this extra capacity is greater than or equal to 500300/221 (Cost to Increase Capacity/Marginal Revenue) = 50000/221 = 226 Drums Therefore, we need to ensure that by the use of extra capacity, we need to satisfy at least 226 drums of demand to recover the cost of capacity addition. It is cognizant to construct new capacity as early as possible so that we are able to recover the cost much faster. To determine the optimal capacity needed, we use a corollary of the newsboy model as follows-Cost of overstocking = 550000 (From the capacity addition) Cost of Understocking = 365 • 221= 587715 CR = Cost of Understocking/ (Cost of Understocking ...Cost of Overstocking). 0.64 Therefore, since CR is slight, greater than 0.5, we decided to set capacity slight, above the average demand. Also, to determine the optimal order size, we use, =root of 2d,/ Where, D = average of 40/day S=51500 H = 541500 per year = 51137/day Therefore, we get Q• = 2.29 truckloads on average. We use this to decide to use 2 truckloads of order size. ENTWORPE The demand of Entworpe is sporadic and very high (250 units at a time). If the demand is not satisfied, then it will result in a huge amount of lost sales. To avoid this, the team thought it to be cognizant to build a warehouse in Entworpe early on and a warehouse was scheduled on day 769. This also reduced the fulfilment costs. Initially, to ensure that all demand is satisfied, the Entworpe warehouse was made to service only Entworpe customers. The order point was set to 0 units and the order quantity was set as 250 units out of the Calopeia factory. Mail was used for transportation to save time and to reduce the in-transit inventory. With time, we saw that mail was very costly and we gradually changed our strategy. To able to service the customers of Calopeia and Entworpe efficiently, we split the holding inventory between Calopeia & Entworpe. So, later in the game, the order quantity for Entworpe was reset to 125 units and Calopeia warehouse given the capability to service both. This increased the order point and order quantity of Calopeia but overall it reduced the holding costs incurred by the Entworpe warehouse due to this huge inventory. Towards the end of the game however, the .m observed that this strategy did not work as planned. This was because of the added demand strain from Calopeia & limited capacity of the Calopeia factory. Because of this, we observed increased number of lost sales from E./gorge. To arrest this rise in .t sales, we raised the order point of Entworpe warehouse to 250 units and the order quantity to 250 units. ih is increased the holding costs but also ensured that we. not suffer .t sales from the region. SORAN GE The demand in this region was increasing almost linearly with time. The extent of this increase was not foreseen by the team very well and this led to the incorrect decision of not building a warehouse in the region. The team should have reviewed the previous demand data before playing the simulation game. The lack of this insight led to the mismatch between capacity and demand. The capacity of 100 units in Tyran was only sufficient to satisfy the demand in Sorange and Tyran upto the mid-point in the game. However, in the latter half of the game, the combined demand of both the regions became high enough which could not be satisfied by one factory. Therefore, we had to change settings to ensure the unsatisfied demand of Sorage is satisfied by the Calopeia warehouse. TYRAN The demand of Tyran was fairly constant over the region with minor variations. The team decided to make a factory in Tyran so as to cater to the customers of Tyran and Sorange. Initially this did not pose any issues since the demand of Sorange was low. Therefore, we sought to make a warehouse and factory in Tyran itself. The capacity of Tyran factory was buik to be the same as that of the Calopeia factory. This decision was not made on mathematical calculations but on the basis of symmetry and expected demand of four regions to be roughly equal to 4 times the average demand of one region. However, during the course of the game, the demand of Sorange increased very much. Due to the lack of foresight of the tear, this demand was not anticipated and we fek a shortfall of capacity at the Tyran factory. FARDO The demand of Fardo is almost constant and not trending in upwards or downwards direction. Since it is located on an island, the fulfilment costs are very high i.e. from the Calopeia warehouse, it is approximately 5400. During the start of the game, we decided to fulfil the demand from Fa. from the Calopeia warehouse. Since the demand was not very high, we did not think of making a warehouse in Fa.. Building a warehouse would've reduced these fulfilment costs. However, we did not calculate these. After some time, we realized that the marginal revenue earned from supplying to Far. from the Calopeia warehouse was actually negative. Marginal Revenue = Revenue —Production Cost— Transportation Cost Holding Cost— Fulfillment Cost = 1450-1000— 75 —4 —400 Marginal Revenue turns out to be therefore negative. Therefore, it does not make any sense to continue to supply to Fardo How WE SHOULD HAVE PLAYED THE GAME The team should have eruu red to be thorough with the demand characteristics of all the five regions prior to playing the game. A lack of knowledge in this aspect probably led to most number of mistakes during the game or could have avoided a lot of mistakes. For the game we should've split up our work between the group members for eg. Each member should've been responsible for an individual geographical area or each member should've been responsible for one factory or one warehouse each. The team believes the simulation could've been played a lot better if we followed the following for the different areas CALOPEIA The team had performed mathematical calculations based on the demand curve of Calopeia to determine the optimal capacity for the factory and the number of batches to produce and the inventory levels to be maintained in the warehouse. The team believes this was the ideal strategy to deal with the seasonal demand of Calopeia and if given the opportunity to play again, the team would still make the same decisions with respect to Calopeia. ENTWORPE The demand in Enwtworpe should be satisfied properly. However, whenever the inventory is depleted, it takes us too long to refill the warehouse. To ensure this does not happen and in anticipation of higher demand to be expected in the future, we must increase the capacity of the Calopeia factory to 200 units. Anything between 100 and 200 units would be suboptimal since we intend to use truck and using partial truckload will not be optimal use of resources. The order point of the Entworpe warehouse would be kept as 250 units and the order quantity as 400 units. This warehouse would dedicatedly cater to Entworpe's customers. FARDO Since costs to supply to or from Fardo are very high, we must make it self sufficient by constructing a factory with the average capacity of the island i.e. 40 units and a warehouse which would cater to customers of Fardo SORAN GE The demand of the region linear, increases with time. Therefore, it is important to construct a factory and warehouse in this region which would take care of the rising demand from this region and the demand of Tyran. A factory with the capacity of 100 units would be sufficient to take care of the demand of this region. Tyran Tyran had a constant demand with unchanging trend. This makes the treatment of Tyran simple. The average demand of Tyran must be added to the capacity of the factory in Sorange and a warehouse must be constructed in Tyran as soon as possible. The construction of a warehouse will ensure low fulfilment costs and provision for safety buffer of finish. goods. Appendix: Demand Plot: Lost demand plot: Cash flow plot: