CASE STUDY CONCEPT: Supply Chain Managers Need Good Mental Models for Effective Decision Making.
You’ve worked in the business for years and learned the olive oil trade. Your uncle just retired, and now you run the show. It’s your time to show what you can do. The family expects you to make money and grow the business – their livelihoods depend on it. Let’s take a look at the operations you manage. (This article picks up where the first article in the series, Supply Chains of the Roman Empire, left off.)
When you think about the business, you’ve learned to think about the products, facilities, vehicles and routes that combine to make it all happen. Over the years you’ve come to know a lot about the products. And you’ve visited the facilities and traveled on the vehicles and routes that move products between facilities. You can picture them all in your head as you think about how the company operates. You think of the business as what results from the interaction of these four entities.
You view products from the perspective of one responsible for handling them efficiently and making a profit. That means you consider their prices, weights and shipping volumes. It’s standard in the trade to refer to quantities of 100 amphorae of oil so that’s how you measure your inventory (dialog box below shows this data for olive oil).
(click on screenshots to see larger images)
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The price for 100 amphorae of olive oil is 380,000 denarii. It is one of the most valuable commodities in the empire next to gold itself. Olive oil is used for everything: for cooking and eating; as fuel for lighting; and as an ingredient for all sorts of balms and cosmetics and paints. Whoever can produce oil and get it to market can make a lot of denarii. (See footnote at end of article for more on Roman products and prices)
It’s early May and the summer season is in full swing. Here’s how things look at your warehouse in the harbor at Leptis Magna; so far so good (dialog box below shows data on the Leptis Warehouse – storage capacity, costs and on-hand inventory).
(menus on right side of screen show the four entities, Facilities menu is open – click to see larger image)
And here’s how things are out in the Desert Valley Farms facility that your family owns. The family has made considerable investments in building the low dams and waterworks shown here to open up these desert valleys for growing olive trees (dialog box below on left shows data for Desert Farms facility).
(menus on right show the Facility selected, and the Vehicle and Route selected)
VEHICLES and ROUTES
It takes 5 to 10 years for trees once planted to start bearing fruit, and during that time your money is tied up waiting for the oil to flow. So when it does start flowing, you want to make sure it gets delivered to Leptis and shipped on to Rome. In this case that means lots of ox carts to haul in oil from the estates and desert farms (in screenshot above, dialog box in upper right shows data on a group of 120 Ox Carts – carry volume and weight, speed and cost).
Oil is heavy and bulky so it takes a lot of ox carts to move it. Those 120 ox carts combined can deliver 6 units of 100 amphorae on each trip they make. And they pick up 6 units of manufactured goods to bring back to the Desert Valley Farms (dialog box in lower right shows data on route – distance, time, stops on route and delivery and pick up quantities).
SUPPLY CHAIN OPERATIONS
As the days roll by, you start to notice something – your on-hand product inventories at the warehouse in Leptis are trending downward (daily trend lines for Leptis Warehouse are shown in chart on right side of screen). You aren’t getting products delivered soon enough to meet demand. When will the next shipments of manufactured goods from Rome arrive? How come there aren’t more deliveries of oil from the estates?
(simulation shows daily results data in graphic and numeric displays on right side)
Then after 10 days, in mid-May, you run out of manufactured goods at your warehouse in Leptis (dialog box above shows that status). Customers are angry and going elsewhere. You need to bring in more manufactured goods from Rome and Carthage. The ships delivering olive oil to those facilities need to pick up and return with larger quantities of manufactured goods.
Thinking about the business, you first consider what’s happening at the Desert Valley Farms. There are long lead times to get deliveries of oil from that facility and others out in the desert and to send back the manufactured goods they need. You’ve gotten reports that the on-hand quantity of olive oil (shown in screenshot below – red line) is building up. Maybe you need more ox carts out there to bring in the oil.
(menu on right shows Facility data, accumulated operating costs are shown in bold)
But that will increase transport costs and also demand for grain and fodder to feed the oxen (yellow trend line for wheat is good indicator of grain and fodder – it’s already going down, let alone when demand increases because of more animals to feed).
When you consider the other end of the supply chain at the Emporium in Rome (shown below), the news you have and your own estimate of what is happening is actually pretty good. Olive oil (red line) is rising because you need to ship a lot of oil during the summer and fall so it that exceeds demand and a reserve builds up to be used during the winter months when the seas are too stormy for your ships to sail.
You also figure inventory of manufactured goods (blue line) is going down as it gets picked up and shipped back to Carthage and on to Leptis. You could even acquire more manufactured goods in Rome since now you know demand exists in Leptis for more.
GETTING THINGS BACK ON TRACK
What are you going do to get things back on track? You need to make decisions and act in the next day or two and send your instructions to the managers at the estates and warehouses. The long travel times for messages and deliveries make it important to act now. Delays in decision making are magnified by the days and weeks it will take for your orders to arrive and for those actions to show results.
And if you decide wrong, then there will be further delays of additional days and weeks before you get it right, during which time the business will be underperforming or even losing money. You begin wondering why you wanted to be in charge of this business…
We’ll use more simulations to explore possible courses of action in the next article.
(See the last article in this series: Supply Chains of Rome — Mental Models)
There is a working model of this supply chain available in the SCM Globe library. You can import it into your account and explore the issues discussed here in greater depth.
We know about the prices used in this supply chain model because at the time of this case study (circa 300 AD) the Emperor Diocletian issued an edict on maximum prices. He covered everything from services to products. He set prices for day laborers, skilled laborers, scribes and lawyers; he decreed prices for manufactured goods from lady’s shoes to wool cloaks and farming tools; and for food items from wheat to cabbages and beef to olive oil. He had these edicts and prices engraved on stone tablets that were erected in the forum of every town and city in the empire. You can see more on prices from the Emperor’s Edict here in an article “What Things Cost in Ancient Rome” – http://ancientcoinsforeducation.org/content/view/79/98/.
A section of Diocletian’s edict on maximum prices is shown on the stone tablet below.
For some perspective on prices, one amphora of finest quality oil is worth 6,300 denarii and second quality oil is still worth 3,800. A volume of wheat comparable to one amphora of oil is worth about 1,200 denarii, or less than a third the price of the lowest cost olive oil. That compares to other prices such as a day’s wages for a farm laborer of 25 denarii; or 50 – 60 denarii for a skilled laborer; or 1,000 denarii for a lawyer to plead a case. Manufactured goods such as ladies boots cost 60 denarii, a woolen cloak 500 denarii, and double-soled sandals for farm workers 80 denarii.
You currently price your oil at 3,800 denarii per amphora because it is early in the season and the olives on your estates haven’t ripened yet, so you’re shipping oil from last year that you stored over the winter when your ships couldn’t sail (second quality oil). As the season progresses, you’ll start shipping the freshly pressed, finest quality olive oil for 6,300 per amphora. That’s were the best profits are. But you still need to ship the rest of last year’s oil before that inventory goes bad and you can’t sell it at all.
Learn more about Roman units of weights and measures from Wikipedia article “Ancient Roman units of measurement”
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