Chapter 32

The DNA of Supply Chains

An Inventory Problem

A pharmaceutical supply firm inventories cases of a perishable drug for which demand is uncertain, as represented by 36 months or historical data. The average demand has been 5 cases per month, so this is the number the firm currently stocks.

The operating cost of maintaining the inventory has two components:

• If at the end of the month the demand has been less than the number stocked, the excess cases will have expired and must be destroyed at a loss of $50 per unit.

• If the demand is greater than the number stocked, the additional units must be air freighted at additional cost. The air freight rate fluctuates depending on the capacity of the carrier. Although good records have not been kept, the shipping clerk indicates that it is most likely $150 per unit.

This situation is modeled in INVNTORY.xls, which you should open now. Try plugging some of the numbers from the demand column into cell A2 to see how the total cost is affected.

The Bullwhip Effect

A spreadsheet model of the bullwhip effect created by Stefan Scholtes of the Cambridge University Judge Business School, which was used to generate Figure 32.5.

Bullwhip.xls