Taking Care of Business on the Silk Road

CASE STUDY FOCUS: Timeless Supply Chain Challenges (Master Distributors and their Inventory Buffers Stabilize Product Flow).

Simulations show the best way to support a continuous and predictable flow of merchandise on the ancient Silk Road was to have large stocks of inventory at key locations. They would act as buffers to absorb the fluctuations in product supply inevitably created by the bullwhip effect. Two such locations are shown in the screenshot below. [PART 3 — this article picks up where the second article “Taming the Bullwhip on the Silk Road” left off]

This observation also raises a big question: Who owned and operated these facilities where huge inventory buffers were located? It required someone with a lot of money to store and protect the inventory, and someone who could look to the long term to make money; not just from one year to the next. Let’s run some simulations and see what emerges.

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Inventory Buffers on the Silk Road

Simulations of different options show there needs to be sizable inventory buffers to absorb fluctuations in product supply, and to stabilize product flow. Supply chain practice over the centuries shows it is best to have these buffers in cities where major transportation routes divide or come together. Large on­-hand inventories in these locations then serve to contain supply chain disruptions to the smaller cities in between the inventory buffers.

This supply chain structure prevents disruptions in one part of the supply chain from spreading across the whole supply chain. There is always enough inventory on­-hand at the buffer locations to maintain the flow of Silk Road products going west, even if deliveries from the east do not always keep up with demand. Locations for these inventory buffers that work best in simulations are shown in the screenshot below: (1) Dunhuang; (2) Kashgar; (3) Merv; (4) Ctesiphon (near modern Baghdad). Note that they are positioned at approximately equal distances from each other, and at locations where transportation routes converge or divide.

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The need for these large inventory buffers suggests there had to be big players in the supply chain who could handle the costs of keeping large on-hand inventories. It seems likely that the inventory in Dunhuang belonged to the Imperial Chinese government or to well connected Chinese exporters. Dunhuang was on the western border of the Chinese Empire at that time (Han Dynasty, circa 200 AD). So they were one of the big players. But who could afford to maintain inventory in the other three locations?

Master Distributors Facilitated Commerce

Over the years certain practices most likely developed to manage business on the Silk Road. It probably started with the Chinese government or the big Chinese exporters of silk and jewelry communicating their prices and product availability early each year to a small group of influential merchants on the Silk Road. Those merchants then used that information to plan and manage their own businesses.

Today we would call these influential merchants “master distributors”. Master distributors buy large amounts of products direct from the manufacturers, and because of their large purchase quantities, they get the best prices. Master distributors do not sell to the general public; they only sell to other distributors who order in quantities larger than what a retail customer would buy. And they fill orders they get from other distributors immediately from their own on-­hand inventory (http://distributorwire.com/blog/who-is-a-master-distributor/).

Given the widespread fame of their family name (as explained in the previous article), the Barmakids were probably the biggest master distributor of them all, operating from the largest city on the Silk Road (https://en.wikipedia.org/wiki/Merv). The inventory buffer in Merv most likely belonged entirely to them, and in the other two cities the inventory was probably owned by partnerships the Barmakids formed with powerful players in those cities.

This meant they had to tie up a lot of money in inventory, so they needed to protect their investment by maintaining price stability. To do that, they used information from the Chinese and did some calculations of their own based on inventory they already had on-hand, and what they expected demand to be in the coming year. They used mental models their family had developed over generations to see how new supplies and expected demand would affect their inventory buffers (see screenshot below). They would then set their prices accordingly, and announce those prices to all the other merchants on the Silk Road.

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Barmakid prices were in turn used by the many smaller merchants on the Silk Road to calculate the prices they would charge their own customers, knowing they would purchase from the Barmakids or a Barmakid merchant partner. And in years when things went well everyone made money (what a balancing act it must have been).

Inventory Management was Different for Different Sized Merchants

Smaller merchants on the Silk Road (and in the present day as well) would manage risk and hold down their investments in inventory by turning their inventory as quickly as they could each year. The more times they bought inventory at one price and sold it at a higher price, the more money they made. This is what modern merchants and distributors call, “turn and earn.”

At the end of each year small merchants did not want to be left holding much inventory because they didn’t want the risks of price fluctuations from one year to the next. They also wanted to reduce inventory related transport and storage costs as well as the risk of having their inventory stolen by raiding tribes and bandits. This selling down of inventory is shown in the on­hand inventory graph of a smaller merchant in the screenshot below.

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Merchants operating from cities in between the big cities could focus on buying from the Barmakids at predictable prices and selling the products in their local markets at higher prices they calculated for themselves. By specializing in certain routes and specific geographical markets, they would reduce their risk, and position themselves to maximize sales by knowing their markets in detail.

The merchants who owned the inventory buffers in the four large cities earned their money over a period of years because their inventory turns would be measured over a period of years due to the high levels of inventory they had to keep on-­hand. The wealth of the Barmakids grew slowly but steadily over the centuries. The supply chain management insights and understanding they originally acquired as administrators of the largest Buddhist monastery in Central Asia served them well in their role as master distributor for the Silk Road.

Mental Models and Silk Road Reflections

Mental models that the Barmakids developed and passed on from one generation to the next enabled them to continuously adjust their inventories, their prices and their supply chain operations over the years to respond as commerce and situations changed. Their family and their fortune thrived for some 800 years (http://www.britannica.com/topic/Barmakids).

Then in the year 803, the family fell from grace. The Abbasid Caliph in Baghdad had most of the family members imprisoned or executed and their property was confiscated. It happened suddenly at the peak of their fame. There are many stories about why this happened, but maybe there was a simple explanation: their skills in supply chain management had made them fabulously wealthy, and thus they aspired to sit on the throne instead of just serve the throne.

In the model and simulations of the Silk Road presented in this series, there are further interesting details that can be deduced as happening behind the scenes even if not explicitly seen in the simulations. Here are a few of those interesting details (you can probably think of others):

Chinese manufacturers most likely communicated their plans and prices for the coming year by sending sealed or coded messages to the Barmakids and their partners on the last caravans that departed from Dunhuang just before winter set in and halted traffic for the next three or four months. They probably sent multiple copies of those coded messages to make sure some got through, and to prevent the messages from being distorted. The Barmakids and their partners would compare the messages they received from these manufacturers. Some messages may have been deliberately altered by bad actors, and some maybe damaged in transit. But almost always, there would be only one copy of those distorted messages. The messages that had the most matching copies where the ones that could safely be assumed to be the correct and undistorted ones.

Safe and warm behind strong city walls as the snows came down, you can imagine merchant families and craftsmen of Merv celebrating the end of a prosperous year. Over the winter there must have been a lot of calculating and discussing going on between the Barmakids and their partners as they forecast product demand, and set prices for the coming year. Those prices were likely communicated to other merchants on the Road via messages carried from Merv by the first caravans of spring. Or maybe special couriers were paid to brave the late winter storms to deliver these messages to key players in other cities on the Road.

The Barmakids and their partners must have had standing yearly orders for silk, jewelry, spices and other popular products at each of the three inventory buffer locations under their control. All other merchants and caravan leaders on the Silk Road would have known what the Barmakid purchase price was at each of these locations, just as they knew what the sell price was. When merchants went out of business they most likely liquidated their inventory by selling to the Barmakids. The Barmakids and their partners were always on the look-out for bulk purchase opportunities to replenish their inventory buffers.

Each of the four cities where inventory buffers were maintained (especially Merv) had to have large populations of skilled artisans and manufacturers who could rework or modify products such as silk garments and jewelry to keep up with the latest fashions. For instance, if silk gowns with long sleeves went out of style, then artisans would rework the gowns to have short sleeves instead, and they would use the excess silk they cut from the sleeves to make other products that could be sold, so nothing went to waste. This would have been an important part of protecting and maintaining the value of large inventories held over a period of years at the four buffer cities. It would have given those cities an artistic and “high-tech” culture that would have distinguished them as centers of commerce, learning, and craftsmanship.

[ The first article in this three-part series is “Ancient Silk Road – First Global Supply Chain” ]

 

SILK ROAD CHALLENGE — PART 3

Find ways to improve the operation of this global supply chain – that means keep the supply chain running for about 36 weeks and find ways to lower overall amounts of inventory across the supply chain and lower facility operations and transportation costs. In the previous challenge, “Taming the Bullwhip on the Silk Road”, you ran simulations and found ways to get your Silk Road supply chain to run for about 36 weeks. Now find ways to make it run more efficiently while still always meeting demand.

Experiment with the best places to stockpile inventory. What if you begin simulations with increased on-hand inventory amounts at the four buffer facilities? Does it enable you to reduce on-hand inventory at the other facilities? This is one of those times when it does make sense in a case study to simply enter larger on-hand amounts for products at the facilities where you decide to create inventory buffers. Let ideas in this article guide you in figuring out how to improve operations. Find more ideas in the online guide section “Reducing Inventory and Operating Costs”

As head of the House of Barmakid you also need to consider political and social issues (just like CEOs of global corporations today). The Silk Road stretched from the Middle Kingdom to the Roman Empire; and there were many different tribes, cities and cultures in the 4,000 miles between those two powers. To help you imagine what the people and politics were like at that time, here are snapshots of the Silk Road at different points in time from ancient to modern:

1. Here is an interesting video about the people and cultures along the ancient Silk Road
2. Marco Polo journeyed on the Silk Road and in China about a thousand years after the time of this case study. He was there between 1271 and 1295 (50 years after the destruction of Merv by the son of Genghis Khan). You can look at what Marco Polo wrote in his book about the people and places he encountered.
3. China is currently working with countries and companies across Africa, Europe, and Central Asia to build the modern Silk Road. This video provides an engaging overview of the modern Silk Road. It is the world’s largest infrastructure project, and is officially known as the Belt and Road Initiative or BRI. The BRI connects the factories of China with the markets of Africa, Europe, Central Asia, and the Middle East.

In some ways people’s behavior doesn’t change that much; the cultures and people we see today along the Silk Road still have much in common with those that came before them. After looking through the videos and articles in the links above, what do you think were two or three main political and cultural issues affecting operations on the Silk Road at the time of this case study (circa 200 AD)? Are there similar political and cultural issues affecting operations on the modern Silk Road?

Summarize what you learned in a short presentation using screenshots and data from the simulations to illustrate your findings and recommendations.

• What did you do to smooth out the flow of products and reduce costs?
• What political and social issues do you think most impacted Silk Road operations at that time?
• How does your supply chain operating model address those issues as well as manage product flow and costs — what is your supply chain risk management strategy?
• How will you combine responses to cultural and political issues with improvements to supply chain operations to create a strong business model that will enable the House of Barmakid to survive and thrive over the long term?

REPORTING TEMPLATE for use with this case study: Import your simulation data into the template and create monthly profit & loss reports as well as generate key performance indicators.  The reporting template is set up for the S&J Trading Company, but look at how the reports read the simulation data and you will see how to change the spreadsheet as needed. There are already three products so just change their names. You can add more facilities to accommodate this case study, or you may decide to only monitor and report on a smaller number of key facilities under the direct control of the House of Barmakid such as: Kashgar; Bactra; Merv; and Ctesiphon – Download copy of Multi-Product P&L Reporting Template here

[If you are using SCM Globe Professional version, these reports can be generated automatically by clicking on the “Generate P&L Report” button on the Simulate Screen]

 

CONGRATULATIONS! 

If you have worked through all three challenges in the Silk Road case study, you have acquired a deep appreciation of the world’s first global supply chain, and learned important skills to prosper in any supply chain — then or now! And in the process, you also got a glimpse of the modern Silk Road or BRI emerging as an even larger global supply chain. Aside from the camels, what you learned about doing business on the ancient Silk Road is still relevant today. The same techniques (powered by modern technologies) are still used to manage modern supply chains, and run wholesale distribution businesses.

To share your changes and improvements to this model (json file) with other SCM Globe users see “Download and Share Supply Chain Models”

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