CASE STUDY FOCUS: Timeless Supply Chain Challenges (managing the Bullwhip Effect).
How was it possible in the year 210 AD to maintain a continuous flow of merchandise on the Silk Road and to match supply with demand as conditions changed from one year to the next? How could people without telephones or any form of communication faster than the pace of a camel caravan figure out how to operate this vast supply chain without continuously running out of products in one city and building up too much somewhere else? [PART 2 — this article picks up where the first article “Ancient Silk Road – First Global Supply Chain” left off]
Based on simulations of Silk Road operations, and a bit of historical research, an interesting answer emerges. This answer cannot be absolutely verified, yet it fits the available facts and provides a simple and coherent explanation. Let’s start with the simulation results. In the initial simulation the supply chain runs for eight weeks and then silk inventory runs out in Palmyra (4), as shown in the screenshot below.
A Timeless Problem – The Bullwhip Effect
If inventory runs out in Palmyra it would take a week (given travel time of a camel caravan) to get word to Dura Europos to ship more silk and then another week for the silk to arrive. Then Dura Europos (on the Euphrates River) would send a message to Ctesiphon (near present day Baghdad) to deliver more silk and that message would take another week to arrive and an additional week for the increased deliveries to appear. And Ctesiphon would in turn ask for more silk, etc. Responses are slow with such long lines of communication.
As these changes are made, inventory continues to build up at different facilities and run out at others. And as people react to these stock-outs and over-stocks, more messages are sent and they just compound the confusion. This is a classic supply chain dynamic. It’s called the “bullwhip effect“. It is still one of the major obstacles to running an efficient supply chain.
The bullwhip effect happens because small changes in product demand by the consumer at the front of the supply chain translate into wider and wider swings in demand as experienced by companies further back in the supply chain. Companies at different stages in the supply chain come to have very different pictures of market demand and the result is a breakdown in supply chain coordination. Companies behave in ways that at first create product shortages, and then lead to an excessive supply of products (http://www.quickmba.com/ops/bullwhip-effect/).
Experience with modern supply chains shows the bullwhip effect is most pronounced under conditions where people try to keep on-hand inventory low and there is little or no communications or coordination up and down the length of the supply chain. It also happens when there are significant delays or lag times in the flow of information and products in a supply chain. Those conditions were certainly present on the Silk Road.
An Enlightened Player on the Silk Road
Now let’s introduce a bit of historical research. It centers on an influential and wealthy family who lived in the largest city on the Silk Road at that time. They are the Barmakid family from the city of Merv. For hundreds of years, “the Barmakids were highly educated, respected and influential throughout Arabia, Persia, Central Asia and the Levant.” (https://en.wikipedia.org/wiki/Barmakids). Those were the lands served by the Silk Road, and their fame was most likely due to the role they played in managing the flow of commerce on that road.
The family traced its roots back to the hereditary administrators of a Buddhist monastery established hundreds of years earlier (perhaps 200 BC) near a city called Bactra or Balkh, also on the Silk Road. The family name derived from the Sanskrit word “pramukha” meaning leader or chief administrator. This suggests that through generations of experience the Barmakids discovered and perfected techniques for managing complex supply chains. Their monastery was the largest in Central Asia, supporting up to 30,000 monks (https://en.wikipedia.org/wiki/Nava_Vihara).
The Barmakids had to develop practices for smoothing out the flow of products and stabilizing prices so they could plan and manage their purchases of food and other supplies for the monastery. And when they learned those practices they applied them to managing an even bigger supply chain — the Silk Road itself.
The first and most basic challenge they faced was to simply keep products available to meet demand along the Road. Until that problem was solved, the supply chain would be crippled by continuous supply shortages at various locations. These shortages would cause constant disruptions making it impossible to grow their business and difficult to even support existing customers. This inventory volatility is illustrated in on-hand inventory graphs on the screenshot below.
The amounts of on-hand inventory for products at different facilities fluctuates as shown in the graphs. Supply conditions are markedly different as you move from one facility to the next. Each point on the graphs represents a week (days stand for weeks in this model). Assume the active trading season is about eight months or 32 weeks. How can we get this supply chain to run for 32 weeks?
Uncoordinated Supply Chains are Unprofitable Supply Chains
In simulations, continuous adjustments are needed to delivery quantities at different facilities to fix the problems of running out of products at one place and building up too much in another place. Also, as these adjustments are made, what tends to happen is on-hand inventory builds up at facilities across the supply chain. So the amount of money tied up in inventory and the related costs of storage, transportation and protection keeps rising as well. This is not an efficient supply chain. Profits get squeezed for the merchants, and product availability and prices for customers become unpredictable.
By working with the Silk Road model and running these simulations, it quickly becomes clear how hard it is to synchronize deliveries and on-hand inventories to get the supply chain to run for 32 weeks. Just getting the supply chain to run for half that time takes a lot of work. And this assumes customer demand remains stable. What if demand is not stable?
An uncoordinated supply chain is inherently unstable because of the bullwhip effect. Without a way to promote communication and coordination between all the different parties, the flow of products on the Silk Road would be erratic and customers would never know what products were available at what locations. Prices would also experience wild swings as supplies in a given city suddenly spiked up and prices dropped, or ran out in another city and prices shot up. This is no way to run a business.
In the third and final part of this series, “Taking Care of Business on the Silk Road”, we match historical facts with findings from the simulations and present an answer to the question of how the Silk Road supply chain was organized and how the bullwhip effect was managed. It shows how that organization enabled it to work, and work well, for hundreds of years.
SILK ROAD CHALLENGE — PART 2
Find a way to get this supply chain to run for 32 – 36 weeks – this will be challenging… in the Silk Road model the time scale has been modified so each day represents a week. What you see in the simulations is a close depiction of what really would have happened on the ancient Silk Road. How did they ever figure out how to manage operations so as to get a reasonably smooth flow of products along the road?
At the end of the previous article, “Ancient Silk Road – First Global Supply Chain“, you explored the structure of this supply chain as defined by the products, facilities, vehicles and routes that combined to create the Silk Road. Then you ran the first simulation and found that a problem occurs on week 19 (days equal weeks).
Run more simulations now and make changes to the supply chain entities (products, facilities, vehicles and routes) so as to fix the problems that arise in the simulations. Notice how the different products flow through this supply chain and note where products build up and where they run out.
In exploring solutions to this problem you can type in increases to on-hand inventories of products at up to four different facilities before running a simulation to see how well that works. Look at the map of the Silk Road. Notice where routes come together and split apart. Do you see where certain facilities may have a large influence on the flow of products through this supply network? If you inventory available then you can add more vehicles and routes to move that product to where it is needed.
Many of the things you do to get this ancient supply chain to run for 30+ weeks are the same things you would do to keep a modern supply chain running. The difference is that modern technology makes things speed up (manufacturing, transportation, communication, etc.) so now we manage our supply chains day by day and hour by hour, instead of just week by week or month by month.
Summarize what you learned in a short presentation using screenshots and data from the simulations to illustrate your findings and recommendations.
- What where the biggest challenges you faced in getting this supply chain to run for 30+ weeks?
- How do these challenges relate to the way the Silk Road is structured and operated?
- What did you do to respond to these challenges?
- In what cities did you increase on-hand inventory amounts? Why did you select those cities?
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 such as: Dunhuang; Kashgar; Bactra; Merv; Ctesiphon; Palmyra – 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]
TAKE ON the final challenge – Taking Care of Business on the Silk Road
You will investigate ways to set product prices and ways to manage inventory across the supply chain. Your challenge is to create a stable and profitable business for The House of Barmakid, as well as the other merchants you trade with on the Silk Road.
To share your changes and improvements to this model (json file) with other SCM Globe users see “Download and Share Supply Chain Models”
SAVE BACKUP COPIES of your supply chain model from time to time as you make changes. There is no “undo”, but if a change doesn’t work out, you can restore from a saved copy. And sometimes supply chain model files (json files) become damaged and no longer work, so you want backup copies of your supply chain to restore from when that happens.
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