Computational Perspectives IV

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Market Supply Chain And Bullwhip Effect

Note: in order to run the simulation referred to in this slide, go here, to the Java Applet version. You will be directed to download the latest version of the Java plug-in.

We designed the simulation to your left to represent a typical market supply chain. Its driving force is the right-most Consumer unit. In order to satisfy Consumer demand, the other three units pass order information from right to left, and ready-made goods - in the opposite direction.

Each of the non-Consumer units displays three internal state measurements at any given time:

Below the simulation, we plot two graphs: the goods held by the Retailer, and the order she is trying to fulfill, i.e. current consumer demand.

Here's what happens during the first few clicks of the "Go" button. At time steps 0 and 1, the system is in a stable state: each element of the supply chain is guided by the order of 4 items per time step - an amount equal to consumer demand. As a result, each of them produces this amount just in time for the next unit to the right to pick up the goods.

At step 2, consumer demand suddenly jumps from 4 to 6, a minor disturbance in the force driving the system. How does the market react? To find out, click "Go" a few more times. At step 3, Retailer records a relatively higher order than other units, the value she received from Consumer. At step 4, that order is not fulfilled, because the Wholesaler's supply was too low at step 3. As a result, Retailer accumulates a back order (shown in red). Finally, at step 5, the original jump in consumer demand reaches the Production unit, which immediately starts producing a greater amount of goods. By step 7, this increased supply comes back to Retailer, and we see a jump in the amount of goods she provides to Consumer.

By step 26 or so, it becomes clear that the market cannot handle the original disruption. Around step 50, deterministic yet chaotic oscillations establish themselves firmly in the system. These oscillations are associated with a lingering inefficiency: at almost all times, Retailer fails to meet consumer demand.

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