Journal of Food Engineering 70 (2005) 351364 www.elsevier.

com/locate/jfoodeng

A system dynamics modeling framework for the strategic supply chain management of food chains
Patroklos Georgiadis *, Dimitrios Vlachos, Eleftherios Iakovou
Department of Mechanical Engineering, Aristotle University of Thessaloniki, Division of Industrial Management, P.O. Box 461, Thessaloniki 541 24, Greece Received 3 October 2003; received in revised form 22 December 2003; accepted 23 June 2004 Available online 25 November 2004

Abstract The need for holistic modeling eorts that capture the extended supply chain enterprise at a strategic level has been clearly recognized rst by industry and recently by academia. Strategic decision-makers need comprehensive models to guide them in ecient decision-making that increases the protability of the entire chain. The determination of optimal network conguration, inventory management policies, supply contracts, distribution strategies, supply chain integration, outsourcing and procurement strategies, product design, and information technology are prime examples of strategic decision-making that aect the long-term protability of the entire supply chain. In this work, we adopt the system dynamics methodology as a modeling and analysis tool to tackle strategic issues for food supply chains. We present guidelines for the methodology and present its development for the strategic modeling of single and multi-echelon supply chains. Consequently, we analyze in depth a key issue of strategic supply chain management, that of long-term capacity planning. Specically, we examine capacity planning policies for a food supply chain with transient ows due to market parameters/constraints. Finally, we demonstrate the applicability of the developed methodology on a multi-echelon network of a major Greek fast food chain. 2004 Elsevier Ltd. All rights reserved.
Keywords: System dynamics; Supply chain management; Food logistics; Capacity planning

1. Introduction Supply chain management (SCM) has been met with increased recognition during the last decade both by academicians as well as practitioners. However, despite its signicant advances and dramatic improvements in information technology (IT), the discipline of SCM remains incapable of addressing satisfactorily many practical real-world challenges. One key reason for this inadequacy is the interdependencies among various operations and the autonomous partners across the chain, which renders all traditional myopic models invaCorresponding author. Tel.: +30 2310 996046; fax: +30 2310 996018. E-mail address: geopat@eng.auth.gr (P. Georgiadis). 0260-8774/$ - see front matter 2004 Elsevier Ltd. All rights reserved. doi:10.1016/j.jfoodeng.2004.06.030
*

lid (Iakovou, 2001; Tayur, Ganeshan, & Magazine, 1999). Rather, strategic decision-makers need comprehensive models to guide them in the decision-making process so as to increase the total protability of the chain. A critical shortcoming of most of the existing strategic models is their inability to take into account the impact of regulatory legislation within todays already volatile environment. This is particularly important for food supply chains because of their unique characteristics, stemming among others from product storage and transportation specications (Hobbs & Young, 2000; Van der Vorst, Beulens, De Wit, & Van Beek, 1998). For example, product perishability creates uncertainty for the buyer with respect to product quality, safety and reliability (i.e. quantity) of supply. It creates

352

P. Georgiadis et al. / Journal of Food Engineering 70 (2005) 351364

uncertainty for the seller in locating a buyer, as perishable products must be moved promptly to the marketplace to avoid deterioration, leaving sellers unable to store the products awaiting favorable market conditions. This further leads to the need for frequent deliveries, through dedicated modes of transportation (e.g. refrigerators). Moreover, food products usually exhibit high seasonality in raw materials availability and in end-products demand, and therefore they need eciently designed storage facilities to further ensure their quality. In addition, food safety issues have profound ramications on the design of the supply chain. For instance, proper monitoring and response to food safety problems requires the ability to trace back small lots, from retailer to processor or even back to the supplying farm. Another feature of food chains is that few products are transformed from commodity to dierentiated branded foods, while others undergo packaging but remain essentially intact in character. All these characteristics along with the dynamically evolving legislative framework further hinder the task of managing eciently food supply chains. The motivation behind this research is (i) to facilitate the decision-making process for capacity planning of multi-echelon supply chains in such uncertain environments by studying the long-term behavior of supply chains and (ii) to further oer a generic methodological framework that could address a wider spectrum of strategic SCM related problems. Most of the standard methodologies for the analysis of supply chains study the steady state of the system, i.e. they assume that all transient phenomena have been diminished. This assumption may be valid in several supply chains, where product demand exhibits a smooth pattern, i.e. demand has a low coecient of variation (functional items, in (Fisher, 1997)). However, there is an increasingly important family of products with shorter life cycles and larger demand variability, for which the utilization of the traditional methodologies may lead to considerable errors (innovative items, in (Fisher, 1997)). While focusing on the latter, we employ the system dynamics (SD) methodology, well known and proven in strategic decision-making, as the major modeling and analysis tool in this research. Forrester (1961) introduced SD in the early 60s as a modeling and simulation methodology for the analysis and long-term decision-making of dynamic industrial management problems. Since then, SD has been applied to various business policy and strategy problems (Sterman, 2000). The version of the well-known Beer Distribution Game, an experiential educational game presented in (Sterman, 1989), is a role playing SD model of a supply chain originally developed by Forrester. Towill (1995) uses SD in supply chain redesign to gain added insights into SD behavior and particularly into its underlying casual relationships. The outputs of the

proposed model are industrial dynamics models of supply chains. Minegishi and Thiel (2000) use SD to improve the understanding of the complex logistic behavior of an integrated food industry. They present a generic model and then provide practical simulation results applied to the eld of poultry production and processing. Sterman (2000) presents two case studies where the SD methodology is used to model reverse logistics problems. Georgiadis and Vlachos (2004) use the SD methodology to estimate stocks and ows in a reverse supply chain providing specic mechanisms with a xed remanufacturing capacity change per year. Sterman (2000) introduced a generic SD model of the stock management structure which is used to explain the sources of oscillation, amplication and phase lag observed in supply chains. Haez, Griths, Griths, and Nairn (1996) describe the analysis and modeling of a two-echelon industry supply chain encountered in the construction industry, using an integrated system dynamics framework. Simulation results are further used to compare various re-engineering strategies. In this work we develop an SD-based holistic model of the entire supply chain, which may be used as decisionmaking aid tool, mainly for strategic decision-making. More specically, we design generic single-echelon inventory systems that incorporate all state variables (stocks on-hand and on order) and policies for both inventory control and capacity planning. Using this single-echelon model as a basic module we demonstrate how generic multi-echelon supply chain models can be constructed. Although such an analysis may dier from one product (or stock keeping unit, SKU) to another, we keep the proposed model as generic as possible to facilitate its implementation on a wide spectrum of real-world cases. The next section presents the problem under study and the modeling approach along with the major underlying assumptions. In Section 3 we demonstrate the applicability of the developed model on a multi-echelon network of a major Greek fast food chain. Finally, we wrap-up with summary and conclusions in Section 4.

2. Problem and model description Strategic supply chain management deals with a wide spectrum of issues and includes several types of decisionmaking problems that aect the long-term development and operations of a rm, namely the determination of number, location and capacity of warehouses and manufacturing plants and the ow of material through the logistics network, inventory management policies, supply contracts, distribution strategies, supply chain integration, outsourcing and procurement strategies, product design, decision support systems and information technology.

P. Georgiadis et al. / Journal of Food Engineering 70 (2005) 351364

353

The methodological approach developed in this paper, could potentially be used for capturing most of the above strategic SCM problems. However, since each of the problems has its unique characteristics, we present guidelines for the methodology and further analyze in depth a specic strategic management problem, that of long-term capacity planning; this is the problem of identifying dynamically (at strategic time instances), optimal levels of vendor sourcing, production, warehousing, distribution and transportation capacity. Our approach utilizes a well-proven methodological tool for strategic decision-making, that of SD. 2.1. System dynamics methodology A supply chain being the extended enterprise that encompasses vendors, manufacturers/producers, distributors and retailers is characterized by a stock and ow structure for the acquisition, storage, and conversion of inputs into outputs and the decision rules governing these ows (Forrester, 1961; Sterman, 2000). The ows often create important feedbacks among the partners of the extended chain, thus making SD a well-suited modeling and analysis tool for strategic supply chain management. The structure of a system in SD methodology is exhibited by causal loop (inuence) diagrams; a causal loop diagram captures the major feedback mechanisms. These mechanisms are either negative (balancing) or positive feedback (reinforcing) loops. A negative feedback loop exhibits a goal-seeking behavior: after a disturbance, the system seeks to return to an equilibrium situation. In a positive feedback loop an initial disturbance leads to further change, suggesting the presence of an unstable equilibrium. Causal loop diagrams play two important roles in SD. First, during model development, they serve as preliminary sketches of causal hypotheses and secondly, they can simplify the representation of a model. The structure of a dynamic system model contains stock (state) and ow (rate) variables. Stock variables are the accumulations (i.e. inventories), within the system, while ow variables represent the ows in the system (i.e. order rate), which are the byproduct of the decision-making process. The model structure

and the interrelationships among the variables are represented by stock-ow diagrams. The mathematical mapping of a SD stock-ow diagram occurs via a system of dierential equations, which is numerically solved via simulation. Nowadays, high-level graphical simulation programs (such as i-think, Stella, Vensim, and Powersim) support the analysis and study of these systems. 2.2. Single-echelon model In Fig. 1 we present the stock and ow structure for a single-echelon inventory system in its corresponding causal loop diagram. The verbal descriptions coincide with the variables of the model. The arrows represent the relations among variables. The direction of the inuence lines displays the direction of the eect. Signs + or at the upper end of the inuence lines exhibit the sign of the eect. When the sign is +, the variables change in the same direction; otherwise they change in the opposite one. The structure of the systems internal environment consists of the stock variables Supply Line and Inventory. Supply Line monitors the accumulation of unlled orders, i.e. orders that have been placed but not received yet, while Inventory monitors the accumulation of products on hand. Orders increase the Supply Line. The rate of Order Fulllment is determined by the Orders after a time delay equal to Lead time. Order Fulllment reduces the stock of products in Supply Line and increases Inventory. The variable Inventory is depleted by Sales. This process takes time equal to the Response Time to Customers Demand. The clear denition of the boundaries between the system under study and its external environment is an essential step of SD; thus, the model and its analysis are kept as simple as possible while capturing all necessary elements for the analysis of the system under study. In the simplistic model exhibited in Fig. 1, producers (a term used for vendors, suppliers or manufacturers) and customers represent the external environment of the system (source and sink in SD nomenclature, respectively); thus, the SD underlying assumption is that producers and customers do not aect the behavior of the system under study. However, in a dierent model

Fig. 1. Causal loop diagram of an open-loop single-echelon inventory system.

354

P. Georgiadis et al. / Journal of Food Engineering 70 (2005) 351364

producers and/or customers could potentially be included in the system boundaries and thus, the eect of their particular attributes in stock and ows determination would be captured. The mathematical equations that describe the stock and ow structure of the single-echelon inventory system are the following: Supply Linet Supply Linet 0 Z
0 t

The rst term is a forecasted value for demand, calculated from a rst order exponential smoothing of the past values of Customers Demand with a smoothing factor equal to 1/aDL. Hence: Expected Demandt Expected Demandt dt Expected Demandt dt: 1 Demandt aDL

Orderst

Order Fullfilmentt dt; Inventoryt Inventoryt 0 Salest dt; Salest minInventoryt=Response Time; Customers Demandt; Order Fullfilmentt Orderst Lead Time: Orders are governed by a decision rule to adjust the stocks both in Supply Line and the Inventory to the desired values. This decision process converts the openloop structure of Fig. 1 into the closed-loop structure of Fig. 2. Specically, Orders is dened as the sum of two terms, namely: Orderst Expected Demandt Inventory Position Adjustmentt: Z
0

The second term is a periodical adjustment, which is proportional to the dierence between Desired Inventory Position (which is a decision variable) and actual Inventory Position (Inventory Position expresses the sum of Supply Line and Inventory over time):
Inventory Position Adjustmentt Desired Inventory Positiont Inventory Positiont ; Inventory Position Adjustment Time

Order Fullfilmentt

where Inventory Position Adjustment Time represents how quickly the rm tries to correct the discrepancy above and bring the inventory position in line with its goal. Such a policy for Orders determination is an anchor and adjustment policy that is standard in modeling specically inventory systems in the SD literature (Sterman, 2000). Naturally, Orders are limited by the inventory level of the producers, which is considered adequate as in this model it is an external variable. The closed-loop structure of Fig. 2 restricts the endless accumulation of inventory (that occurs in the model of Fig. 1) whatever the demand level may be. This occurs due to two negative feedback loops displayed in Fig. 2. Loop #1 is dened by the sequence of the variables OrdersOrder FulllmentInventoryInventory

Fig. 2. Causal loop diagram of a closed-loop single-echelon inventory system.

P. Georgiadis et al. / Journal of Food Engineering 70 (2005) 351364

355

PositionInventory Position Adjustment, while Loop #2 is dened by the variables OrdersSupply lineInventory PositionInventory Position Adjustment. To explain the negative feedback mechanism, we follow the route around Loop #1. An increase in Orders will increase the Order Fulllment and thus, Inventory and Inventory Position will also increase. This causes Inventory Position Adjustment to decrease, since the Desired Inventory Position changes slowly and it can be assumed to be constant for the next time step. Finally, the decrease in Inventory Position Adjustment restricts Orders. Therefore, Orders will stabilize at a nite level and eventually the system will reach an equilibrium (steady) state. 2.3. Multi-echelon supply chain model A supply chain being the total extended enterprise that captures all partners including vendors, manufacturers, producers, distributors and retailers, extends over multiple echelons. Each partner of the chain typically manages his/her own inventory (operating as an autonomous linkage of the chain), which is replenished from the upstream echelon, while using a control policy to determine the frequency and magnitude of the orders. We can design generic multi-echelon food supply chains that t real-world cases by linking the appropriate number of single-echelon inventory models. For example, Fig. 3 depicts a supply chain with three echelons, where the causal loop diagram of each actor at each echelon is equivalent to the causal loop diagrams shown in Fig. 2. Using the SD approach we can expand these generic multi-echelon supply chains adding strategic supply chain management issues. Capacity planning and manpower planning are examples of such issues with the former being the focus of the rest of the paper. Capacity may refer to all operations of a supply chain, e.g. stock space, manpower, production facilities, transportation means, etc. In the remainder of this paper we concentrate on transportation capacity and we examine ecient ways to dynamically determine their levels. Generally, capacity determination is quite simple

in a steady-state situation; however, in a evolving environment, as in the case under study, it is important to consider a dynamic capacity planning policy. To develop a decision-making system for capacity planning, a rm needs to carefully balance the tradeo between customer service maximization and maximization of capacity utilization. This is done by either leading capacity strategies, where excess capacity is used so that the rm can absorb sudden demand surges, or trailing capacity strategies, where capacity lags the demand and therefore capacity is fully utilized (Martinich, 1997). A third form of capacity planning is the matching capacity strategy, which attempts to match demand capacity and demand closely over time. The three strategies are depicted in Fig. 4. In all three cases the rm is making decisions to acquire new capacity or not, at equally spaced time intervals with length equal to the review period. It appears that a decision-maker could determine capacities for all these operations once in the beginning of the planning horizon, and that this could be done using a standard management technique that incorporates steady-state conditions. However, this is not the case in the environment under study since product ows can change dramatically for several reasons; for example

Capacity leading matching trailing

Demand forecast

2P

Time

Fig. 4. Alternative capacity expansion strategies.

Fig. 3. Generic causal loop diagram of a three-echelon supply chain.

356

P. Georgiadis et al. / Journal of Food Engineering 70 (2005) 351364

promotion activities or price variation strategies of the competitors. Although, such demand shifts take time to materialize, they have to be considered for the development of ecient capacity planning policies. Thus, it is evident that an appropriate modeling methodology needs to be able to capture the transient eects of ows in a food supply chain. SD has this capacity and moreover, it easily describes the diusion eects related to market behavior. In addition, an operation may be performed using either owned capacity or additional leased capacity. The problem of determining the optimal ratio of owned to leased capacity units (buy or lease problem) is also typical for supply chain operations. The causal loop diagram of Fig. 5 illustrates the generic single-echelon system embellished with a dynamic loop that expresses a capacity planning decision-making mechanism. Specically, we assume that an operation may be performed using owned and leased (if needed) capacity units. This control mechanism is modeled as a negative feedback loop. More specically, Capacity Needed is determined by a variable of the supply chain model. For example, if we study the capacity of the transportation system, this variable may be the Orders, while if we study the necessary warehouse space this variable may be the on hand Inventory. Capacity Needed is compared with the Actual Capacity. In case there is a Capacity Shortage, capacity is then leased to achieve the Desired Service Level. Capacity Expansion Rate determines the rate of change of capacity towards the desired value. We as-

sume that capacity is reviewed periodically (every P time units) and then a decision is made whether or not to invest on capacity expansion and to what extent. We have found this policy typical for most of the food supply chains we have encountered, including the one we discuss in the next Section. Capacity Expansion Rate is modeled by pulse functions, which may be positive for times that are integer multiples of P. The pulse magnitude is proportional to the Smoothed Capacity Shortage (obtained from Capacity Shortage using rst order exponential smoothing to avoid unnecessary oscillations) multiplied by a control variable K. The variable K represents alternative capacity expansion strategies. Values of K < 1 represent trailing capacity expansion strategies, values of K > 1 represent leading strategies, and values close to 1 represent matching strategies. Naturally, a serious lead time elapses between a decision epoch of increasing capacity and the actual operation of the corresponding capacity units. The Capacity Acquisition Rate captures this time and is determined by delaying the values of the Capacity Expansion Rate. Moreover, Actual Capacity has a useful life time (Capacity Life-Time), which regulates the Capacity Disposal Rate. A decision-maker and/or regulator could further employ the developed model to capture the impact of various policies using various levels of the above parameters; in other words, the model can be used for the conduct of various what-if analyses. For example, the impact of dierent leading strategies on the new or unexpected demand satisfaction and the capacity

Fig. 5. Capacity planning decision-making structure.

P. Georgiadis et al. / Journal of Food Engineering 70 (2005) 351364

357

utilization subject to a given capacity review period P can be evaluated. On the other side, a decision maker could investigate the impact of dierent values of capacity review periods for a given capacity expansion policy. More advanced what-if analyses may be further conducted to develop a long-term capacity planning strategy with the optimal values of P and K. In the following Section we demonstrate how the above generic single-echelon supply chain model with capacity planning can be used to model a real-world food supply chain.

3. An illustrative real-world case study 3.1. A fast-food supply chain We applied the research approach and modeling methodology in the food supply chain of a major fastfood restaurants chain in Greece. The supply chain of the form is comprised of a central producer and warehouse (CW) located in Thessaloniki, which then supplies directly sixty restaurants in northern Greece (NR). The rm also owns a distribution centre (DC) in Athens, which supplies sixty nine restaurants located in the southern and coastal Greece (SR). These organizations maintain a chain partnership (based on franchising contracts) to improve business performance via responsive operations combined with better utilization of resources. The franchising contracts cover various issues such as quality, customer service levels, etc. A major component of the replenishment contracts is related to food distribution (inventory replenishment policies, lead times, required storing space and conditions, delivery times, etc.). The specic characteristics of the system are the following: The desired ll rate of the restaurants is 100%. To maintain this goal the safety stocks at CW and the restaurants are considerable, even though the lead times are short. For the same reason both the inventory and the production capacity of CW in Thessaloniki is practically innite. The demand for each restaurant is generally high and further ts to a normal distribution, the parameters of which are estimated applying standard statistical techniques on real data (tting the sample mean and variance to the unknown parameters l and r2 of the distribution). The DC in Athens and each restaurant employ an (R, S, s) policy for inventory replenishment. Thus, inventory is inspected every R periods. If it is found to be at a level less than or equal to s then an order up to the desired inventory level, S is placed. This policy is formulated as an anchoring and adjustment process (described in Section 2.2). The review period

R is set to 1 day. The optimal parameters S and s for each restaurant are determined using classical inventory management techniques (see Nahmias, 2001). The maximum acceptable lead time for an order is 24 h. This implies that the central warehouse CW, or the distribution center DC, must adjust their delivery schedules to satisfy all orders within this time window. Deliveries may occur any time during day or night. Both the CW and DC maintain two independent eets of trucks. When the number of the company-owned trucks is inadequate to satisfy demand, CW and DC currently lease third party trucks (usually trucks of a 3PL, third party logistics company) to accommodate increased demand. There is no additional delay in the acquisition of leased trucking capacity since the contractual agreements between the company and the 3PL guarantee immediate response for tracks and drivers. Naturally, there are constraints in leased capacity volume, but based on historical data these limits never became active in the past. In other working environments for which the last assumption is not valid one would have to tackle the potential delay resulting from leasing capacity and limited leased-capacity resources and thus, the model would have to be extended using delays functions to capture the delayed availability of leased capacity. Such a model, despite its increased complexity, could easily be developed with the appropriate changes in our Powersim code. In our manuscript, we present the simpler instance, since it is actually more reective of the working environment that we encountered for the fast food company that we worked with. In such a dynamic environment with an absolutely strict ll rate the company has to simply decide if it should invest in increasing its eet size or if should continue the current practice of using few owned trucks and leasing 3PL trucks to cover its needs. Thus, the objective of this case study is the development of ecient decisions regarding the chains transportation capacity (company-owned eet size), that minimize total transportation cost. 3.2. The simulation model We rst developed the causal loop diagram of the entire chain, taking into consideration the inventory control policies used by the restaurants and the DC. The entire diagram, which includes all system variables and the regulating feedbacks, is exhibited in Fig. 6. To develop the causal loop diagram, we used the following assumptions, the validity of which was thoroughly checked with the CW and the restaurants:

358

P. Georgiadis et al. / Journal of Food Engineering 70 (2005) 351364

Northern Greece Restaurants

sNR + Orders NR

Supply line NR

Inventory NR +

Demand NR Sales Response Time NR +

delay

Order Fulfillment + NR + Lead Time NR Inventory position NR Inventory Position Adjustment NR +

+ + Order Handling Time NR +

+ Desired Inventory Position NR

SNR

Expected Demand NR

Inventory Position Adjustment Time NR Desired Fill Rate NR Transportation Capacity Leasing NR Smoothing + Smoothed Transportation Capacity Shortage NR
Southern Greece Restaurants

+ Capacity Life Cycle NR Transportation Capacity NR + + Transportation Capacity Acquisition Rate NR Transportation Capacity Needed NR + Transportation Capacity Shortage NR Transportation Capacity Expansion delay Rate NR +

Inventory CW

Transportation Capacity Disposal Rate NR

Order Handling Time CW +

Distribution Center

sSR Supply Line DC Inventory DC + + + Supply Line SR + Inventory SR + Sales SR + + Inventory Position Adjustment SR Expected Aggregate Orders SR Order Handling Time SR + Inventory Position Adjustment Time SR + + Transportation Capacity Shortage SR Transportation Capacity Expansion delay Rate SR + Transportation Capacity Leasing SR Smoothing + Smoothed Transportation Capacity Shortage SR + Lead time SR Inventory Position SR Expected Demand SR Desired Inventory Position SR + SSR + Response Time SR Demand SR +

Orders DC + + sDC -

delay +

Order Fulfillment DC +

Orders SR

+ delay

Order Fulfillment SR

Lead Time DC Inventory Position DC SDC

Inventory Position Adjustment DC + +

Desired Inventory Position DC

Capacity Life Cycle SR Transportation Capacity SR + +

Transportation Capacity Needed SR Transportation Capacity Acquisition Rate SR

Desired Fill Rate SR +

Transportation Capacity Disposal Rate SR

Fig. 6. Causal loop diagram of the fast-food chain.

No order is greater than the capacity of a single truck. Each truck serves one restaurant at a time. This is generally true for restaurants that are in the vicinity of the CW facilities. For the other ones each truck serves two restaurants at a route. Therefore, this assumption easily makes sense, assuming that the lead time is half of the loadingtransportation unloading time.

There are no emergency deliveries. There is no collaboration (no lateral movements) among restaurants. The next step of the SD methodology involves the mapping of the causal loop diagram into a dynamic simulation model using specialized software. We used the Powersim 2.5c software for this purpose. The

P. Georgiadis et al. / Journal of Food Engineering 70 (2005) 351364

359

embedded mathematical equations are divided into two main categories: the stock equations and the ow equations. Stock equations dene the accumulations within the system through the time integrals of the net ow rates. Another typical form of stock equations is used to dene the smoothed stock variables that are expected values of specic variables usually obtained from their past values using exponential smoothing (e.g. the smoothed stock variable Expected Demand NR in Fig. 6 is obtained from Demand NR using rst order exponential smoothing). Flow equations dene the ows among the stocks as functions of time. Converters and Constants form the ne structure of ow variables. The holistic model includes 260 state variables and a considerable number of converters and constants. The mathematical equations for the specic model, as they are provided by Powersim, are included in Appendix A. It should be noted that the output of Powersim 2.5c uses the qualiers init for initial stock (level) equations, ow for stock (level) equations, aux for smoothed stock equations and for ow (rate) equations and converters, const for constants and dim for the dimension of vector variables (single-dimension arrays in Powersim). The units of each variable are also included in brackets. Data has been scaled to respect corporate condentiality. In the following subsection we present the results of our simulation runs. 3.3. Simulation results The model presented thus far includes a periodically reviewed capacity planning policy. Therefore, the model may be used for long-term capacity planning with dynamic adjustments occurring at the review points. In addition, if the length of review period is set to innity then the model prescribes optimal truck capacity once, without the ability of future adjustment. To proceed with the capacity planning process we need to obtain an understanding of the transportation demand characteristics. We rst estimate the probability distribution of the transportation demand (Transporta14% 12% 10% 8% 6% 4% 2% 0% 10 20 30 driver-shifts 40 NR SR

tion Capacity Needed NR, Transportation Capacity Needed SR in Fig. 6) measured in vehicle-hours or in driver shifts. Transportation demand can be calculated from orders since the busy time of a truck is equal to two times the lead time (one to deliver and one to return to the DC) minus the loading and the unloading time (the lead time includes loading, transportation and unloading times). Thus, we conducted the simulation experiment using the model of the previous subsection and then logged the transportation demand for NR and SR. The procedure was repeated for 1000 times to obtain accurate estimates of the transportation demand distribution. Fig. 7 depicts the probability density function (p.d.f.), f(), and cumulative distribution function (c.d.f.), F(), of the transportation demand in driver shifts per day for both NR and SR. The transportation demand pattern ts a normal distribution. The current numbers of driver shifts per day is 16 for the CW in Thessaloniki and 22 for the DC in Athens. To determine the optimal eet size which minimizes the total system cost, we needed to identify the costs of the alternative strategic decisions (own or lease). The cost of using a company-owned truck for one driver shift is used as a reference cost and it is set to 100 units. This cost includes variable costs (cp = 60 monetary units) which are charged per shift a truck is employed, and xed costs (cf = 40 monetary units) which are incurred whether the truck is used or not. The cost of leasing a truck is c1 = 180 monetary units per driver shift. If x is the demand then the total cost per day, TC, as a function of capacity A (number of driver shifts per day) is given by: Z 1 Z A TCA Acf cp xf x dx cp A f x dx A Z 1 0 c1 x Af x dx:
A

The problem of determining the optimal number of driver shifts A* has the form of the well-known newsvendor problem (Nahmias, 2001) and thus its solution is given by
100% F(.) 80% 60% 40% 20% 0% 10 15 20 25 30 driver shifts 35 40 NR SR

f(.)

Fig. 7. pdf f() and cdf F() of transportation demand for northern and southern Greece.

360

P. Georgiadis et al. / Journal of Food Engineering 70 (2005) 351364

A F 1

  c1 cp cf : c1 cp

Hence, the optimal policy, prescribes 21 driver shifts for the CW in Thessaloniki and 26 for the DC in Athens. This indicates that the transportation capacity of both the CW warehouse in Thessaloniki and the DC in Athens has to be increased by ve and four driver shifts units respectively. Moreover, the model may be used to perform whatif analyses regarding the results and the policy parameters. For example, we can use the model to answer the following questions: How should we ne-tune the inventory control policy parameters S and s in order for the currently existing transportation capacity to be optimal? What is the impact of increasing or decreasing the inventory control policy parameters S and s on the optimum eet sizes? Using the model we may address the rst question; in this case the rm decides to ne tune operational parameters, so that the current eet size is optimal. Specically, the current transportation capacity turns out to be optimal if we decrease all the reorder point (s) values by 25% or the base stocks (S) by 10% for the restaurants in northern Greece and if we decrease the order point values by 15% or the base stocks by 6% for the restaurants in southern Greece. Naturally, such decisions must be checked with other problem constraints (e.g. the perishability and the life time of the food products, storage space, etc.). To address the second question we may vary all reorder points parameters (s) of the NR restaurants; for example, by a specic percentage and then repeat running the simulator. The results are exhibited in Fig. 8. We note that the optimal number of driver shifts per day changes from 21 to 26 when s is increased by 20% (17 when is decreased by 20%). Moreover, if we repeat the experimentation with the base stock quantities (S)

we notice that the optimal number of driver shifts per day changes from 21 to 14 when S is increased by 20% (37 when S is decreased by 20%). Therefore, it is evident that the optimal capacity is more sensitive to base stock quantity adjustments. The above procedure that calculates the optimal capacity appears to be static since the problem seems to be reduced to the newsvendor problem based on the empirically derived distributions of necessary drivershifts. First, we should note that simulation is needed to obtain the distribution of transportation demand to be used in the closed form solution of the newsvendor problem. On a second hand, the following question needs to be answered: why should we employ SD to obtain F(), instead of using the classical discrete event simulation method? The answer is quite straightforward. If the customers demand is stationary, then the transportation demand would also be stationary and the optimal capacity may be obtained using either discrete event or SD simulation. However, if any input variable or parameter (e.g. demand, inventory policy parameters, etc.) evolves with time, then the only appropriate methodology is that of the SD, since this dynamic behavior cannot be captured by discrete event simulation. To this end we conducted another experimentation assuming that the mean demand exhibits a 10% increase per year. In that case we assume that the initial transportation capacity would be equal to the optimal found in the previous paragraphs, specically 21 driver shifts for the CW in Thessaloniki and 26 for the DC in Athens. The capacity review period is set to half a year. Fig. 9 depicts the optimal expansion of owned capacity measured in driver shifts for a ve year period. Other possible what-if scenarios that could be further investigated include among others: The impact of sudden demand spikes/valleys on the systems transportation capacity. In such a case it would be interesting to measure the length of the transient phase of the ows or to measure what is the impact on total system cost. Moreover, if such a

38

s driver shifts per day

40

37 SR NR 28 26 29 30 26 22 23 24 27 28 32 33 34 35

38 39 33

Owned driver shifts

33 28 23 18 13 -30% -20% -10% 0% 10%

35 30 25 21 20 0

32 29 30

20%

30%

10

% change in parameter value

half-years
Fig. 9. Transportation capacity planning of owned-trucks if demand exhibits an annual increase of 10%.

Fig. 8. Sensitivity of the optimal capacity while varying operational parameters.

P. Georgiadis et al. / Journal of Food Engineering 70 (2005) 351364

361

disturbance occurs frequently, it would be interesting to investigate a modied capacity planning policy which allows for emergency capacity reviews (on time instances dierent for the multiples of review period) when the percentage demand variation in a short period exceeds a specic level (decision variable). The impact of potential state regulatory interventions for food storage and distribution on various operational parameters (inventory control parameters, transportation capacity). SD is a methodology that allows for capturing the diusion eect of regulatory interventions, since SD can map eciently the time necessary for the manifestation of these interventions in the system. The merit of alternative inventory management and control policies. For example, we can employ similar methodologies to investigate the impact of a continuous review inventory management policy following the appropriate information technology investments (such as Electronic Data Interface, EDI or XML) that allow for real time communication between CW and all its restaurants.

4. Summary/Conclusions We presented a system dynamics-based methodological approach for mapping and analyzing multi-echelon food supply chains. The methodology constructs supply chain models by linking single-echelon models as modules. The holistic model can be used to identify eective policies and optimal parameters for various strategic decision-making problems. The methodology has been implemented for the transportation capacity planning process of a major Greek fast-food restaurant supply chain. The developed model can be further used to analyze various scenarios (i.e. to conduct various what-if analyses) and answer questions about the long-term operation of supply chains using total supply chain prot as the measure of performance. The model can further be tailored and used in a wide range of food supply chains. Thus, it may prove useful to policy-makers/ regulators and decision-makers dealing with a wide spectrum of strategic food supply chain management issues.

Appendix A Stock equations: init INVENTORY_CW = INFINITY ow INVENTORY_CW = dt * Orders_DC dt * ARRSUM(Orders_NR) [items] init INVENTORY_DC = 40000 ow INVENTORY_DC = +dt * Order_Fulllment_DC dt * ARRSUM(Orders_SR) [items] dim INVENTORY_NR = (D = 1 .. 60) init INVENTORY_NR = [. . .] ow INVENTORY_NR = dt * Sales + dt * Order_Fulllment_NR [items] dim INVENTORY_SR = (D = 1 .. 69) init INVENTORY_SR = [. . .] ow INVENTORY_SR = dt * Sales_SR + dt * Order_Fulllment_SR [items] init SUPPLY_LINE_DC = 0 ow SUPPLY_LINE_DC = dt * Order_Fulllment_DC + dt * Orders_DC [items] dim SUPPLY_LINE_NR = (D = 1 .. 60) init SUPPLY_LINE_NR = 0 ow SUPPLY_LINE_NR = + dt * Orders_NR dt * Order_Fulllment_NR [items] dim SUPPLY_LINE_SR = (D = 1 .. 69) init SUPPLY_LINE_SR = 0 ow SUPPLY_LINE_SR = dt * Order_Fulllment_SR + dt * Orders_SR [items] init Transportation_Capacity_NR = 0 ow Transportation_Capacity_NR = dt * Trans_Cap_Disposal_NR + dt * Trans_Cap_Acquisition_NR [trucks] init Transportation_Capacity_SR = 0 ow Transportation_Capacity_SR = + dt * Trans_Cap_Acquisition_SR dt * Trans_Cap_Disposal_SR [trucks]

Flow equations: aux Order_Fulllment_DC = DELAYPPL(Orders_DC,Lead_Time_DC,0) [items/hour] dim Order_Fulllment_NR = (D = 1 .. 60) aux Order_Fulllment_NR = DELAYPPL(Orders_NR(D),Lead_time_NR,0) [items/hour]

362

P. Georgiadis et al. / Journal of Food Engineering 70 (2005) 351364

dim aux aux dim aux dim aux dim aux dim aux aux aux aux aux

Order_Fulllment_SR = (D = 1 .. 69) Order_Fulllment_SR = DELAYPPL(Orders_SR(D),Lead_time_SR,0) [items/hour] Orders_DC = IF(Inventory_Position_DC < s_DC,MIN(INVENTORY_CW/Order_Handling_Time_CW, Expected_Aggregate_Orders_SR + Inventory_Position_Adjustment_DC),0) [items/hour] Orders_NR = (D = 1 .. 60) Orders_NR = IF(Inventory_Position_NR < s_NR,MIN(INVENTORY_CW/Order_Handling_Time_NR, Expected_Demand_NR + Inventory_Position_Adjustment_NR),0) [items/hour] Orders_SR = (D = 1 .. 69) Orders_SR = IF(Inventory_Position_SR < s_SR,MIN(INVENTORY_DC/Order_Handling_Time_SR, Expected_Demand_SR + Inventory_Position_Adjustment_SR),0) [items/hour] Sales = (D = 1 .. 60) Sales = MIN(INVENTORY_NR/Response_Time_DC, Demand_NR) [items/hour] Sales_SR = (D = 1 .. 69) Sales_SR = MIN(INVENTORY_SR(D)/Response_Time_SR, Demand_SR) [items/hour] Trans_Cap_Acquisition_NR = DELAYPPL(Trans_Cap_Expansion_NR,Acquisition_Time_TC_NR,0) [trucks/hour] Trans_Cap_Acquisition_SR = DELAYPPL(Trans_Cap_Expansion_SR,Acquisition_Time_TC_SR,0) [trucks/hour] Trans_Cap_Disposal_NR = Transportation_Capacity_ NR/Capacity_Life_Cycle_NR [trucks/hour] Trans_Cap_Disposal_SR=Transportation_Capacity_ SR/Capacity_Life_Cycle_SR [trucks/hour]

Converters: aux Aggregate_Orders_SR = ARRSUM(Orders_SR)[items/hour] dim Demand_NR = (D = 1 .. 60) aux Demand_NR = NORMAL(m_NR,sd_NR)[items/hour] dim Demand_SR = (D = 1 .. 69) aux Demand_SR = NORMAL(m_SR,sd_SR)[items/hour] aux Expected_Aggregate_Orders_SR = DELAYINF(Aggregate_Orders_SR,a_AO_SR,1,Aggregate_Orders_SR) [items/hour] dim Expected_Demand_NR = (D = 1 .. 60) aux Expected_Demand_NR = DELAYINF(Demand_NR(D),a_D,1,Demand_NR)[items/hour] dim Expected_Demand_SR = (D = 1 .. 69) aux Expected_Demand_SR = DELAYINF(Demand_SR(D),a_D_SR,1,Demand_SR)[items/hour] aux Inventory_Position_Adjustment_DC = MAX(S_DC-Inventory_Position_DC,0)/Inventory_Position_ Adjustment_Time_DC[items/hour] dim Inventory_Position_Adjustment_NR = (D = l .. 60) aux Inventory_Position_Adjustment_NR = MAX(S_NR-Inventory_Position_NR,0)/Inventory_Position_ Adjustment_Time_NR[items/hour] dim Inventory_Position_Adjustment_SR = (D = 1 .. 60) aux Inventory_Position_Adjustment_SR = MAX(S_SR-Inventory_Position_SR,0)/Inventory_Position_ Adjustment_Time_SR[items/hour] aux Inventory_Position_DC = INVENTORY_DC + SUPPLY_LINE_DC[items] dim Inventory_Position_NR = (D = l .. 60) aux Inventory_Position_NR = INVENTORY_NR + SUPPLY_LINE_NR[items] dim Inventory_Position_SR = (D = 1 .. 69) aux Inventory_Position_SR = INVENTORY_SR + SUPPLY_LINE_SR[items] dim Trans_demand_NR = (D = l .. 60) aux Trans_demand_NR = IF((Orders_NR * TIMESTEP) > 0,(2 * Lead_time_NR * 24-1),0)[hour] dim Trans_demand_SR = (D = 1 .. 69) aux Trans_demand_SR = IF((Orders_SR * TIMESTEP) > 0,(2 * Lead_time_SR * 24-1),0)[hour] aux Smoothed_Tran_Cap_Shortage_NR = DELAYINF(Transportation_Capacity_Shortage_NR,a_TC_NR,1, Transportation_ Capacity_Shortage_NR)[trucks] aux Smoothed_Tran_Cap_Shortage_SR = DELAYINF(Transportation_Capacity_Shortage_SR,a_TC_SR,1, Transportation_Capacity_Shortage_SR)[trucks] aux Total_trans_demand_NR = ARRSUM(Trans_demand_NR)/Hours_per_Shift_NR[driver-shifts]

P. Georgiadis et al. / Journal of Food Engineering 70 (2005) 351364

363

aux aux aux aux aux aux aux aux aux

Total_trans_demand_SR = ARRSUM(Trans_demand_SR)/Hours_per_Shift_SR[driver-shifts] Trans_Cap_Expansion_NR = INT(K_NR * (PULSE(Smoothed_Tran_Cap_Shortage_NR,4000,Pr_NR))) [trucks/hour] Trans_Cap_Expansion_SR = INT(K_SR * (PULSE(Smoothed_Tran_Cap_Shortage_SR,4000,Pr_SR))) [trucks/hour] Transportation_Capacity_Leasing_NR = Transportation_Capacity_Shortage_NR * Desired_Fill_Rate_NR [trucks] Transportation_Capacity_Leasing_SR = Transportation_Capacity_Shortage_SR * Desired_Fill_Rate_SR [trucks] Transportation_Capacity_Needed_NR = Total_trans_demand_NR/Driver_Shifts_per_Truck_NR[trucks] Transportation_Capacity_Needed_SR = Total_trans_demand_SR/Driver_Shifts_per_Truck_SR[trucks] Transportation_Capacity_Shortage_NR = MAX(Transportation_Capacity_Needed_NRTransportation_Capacity_NR,0)[trucks] Transportation_Capacity_Shortage_SR = MAX(Transportation_Capacity_Needed_SRTransportation_Capacity_SR,0)[trucks]

Constants: const a_AO_SR = 12 [hour] dim a_D = (D = 1 .. 60) const a_D = 12 [hour] dim a_D_SR = (D = 1 .. 69) const a_D_SR = 12 [hour] const a_TC_NR = 12 [hour] const a_TC_SR = 12 [hour] const Acquisition_Time_TC_SR = 720 [hour] const Acquisition_Time_TC_NR = 720 [hour] const Capacity_Life_Cycle_NR = 40,000 [hour] const Capacity_Life_Cycle_SR = 40,000 [hour] const Desired_Fill_Rate_NR = 1 [ ] const Desired_Fill_Rate_SR = 1 [ ] const Driver_Shifts_per_Truck_NR = 3 [driver-shifts/truck] const Driver_Shifts_per_Truck_SR = 3 [driver-shifts/truck] const Hours_per_Shift_NR = 8 [hour/driver-shifts] const Hours_per_Shift_SR = 8 [hour/driver-shifts] const Inventory_Position_Adjustment_Time_DC = 1 [hour] dim Inventory_Position_Adjustment_Time_NR = (D = 1 .. 60) const Inventory_Position_Adjustment_Time_NR = 1 [hour] dim Inventory_Position_Adjustment_Time_SR = (D = 1 .. 69) const Inventory_Position_Adjustment_Time_SR = 1 [hour] const K_NR = 1 [1/hour] const K_SR = 1 [1/hour] const Lead_Time_DC = 9 [hour] dim Lead_time_NR = (D = l .. 60) const Lead_time_NR = [. . .] [hour] dim Lead_time_SR = (D = 1 .. 69) const Lead_time_SR = [. . .] [hour] dim m_NR = (D = 1 .. 60) const m_NR = [. . .] [items/hour] dim m_SR = (D = 1 .. 69) const m_SR = [. . .] [items/hour] const Order_Handling_Time_CW = 1 [hour] const Order_Handling_Time_NR = 1 [hour] const Order_Handling_Time_SR = 1 [hour] const Pr_NR = 4320 [hour]: NR transportation capacity review period const Pr_SR = 4320 [hour] : SR transportation capacity review period

364

P. Georgiadis et al. / Journal of Food Engineering 70 (2005) 351364

dim const dim const const dim const dim const const dim const dim const dim const dim const

Response_Time_NR = (D = l .. 60) Response_Time_NR = 0.1 [hour] Response_Time_SR = (D = 1 .. 69) Response_Time_SR = 0.1 [hour] S_DC = . . .[items] S_NR = (D = 1 .. 60) S_NR = [. . .] [items] S_SR = (D = 1 .. 69) S_SR = [. . .] [items] s_DC = . . .[items] s_NR = (D = 1 .. 60) s_NR = [. . .] [items] s_SR = (D = 1 .. 69) s_SR = [. . .] [items] sd_NR = (D = 1 .. 60) sd_NR = [. . .] [items/hour] sd_SR = (D = 1 .. 69) sd_SR = [. . .] [items/hour]
Martinich, J. S. (1997). Production and operations management. Wiley. Minegishi, S., & Thiel, D. (2000). System dynamics modeling and simulation of a particular food supply chain. SimulationPractice and Theory, 8, 321339. Nahmias, S. (2001). Production and operation analysis (4th ed.). McGraw-Hill. Sterman, J. D. (2000). Business dynamics: Systems thinking and modeling for a complex world. New York: McGraw-Hill. Sterman, J. D. (1989). Modeling managerial behavior: Misperceptions of feedback in a dynamic decision making experiment. Management Science, 35(3), 321339. Tayur, S., Ganeshan, R., & Magazine, M. (1999). Quantitative models for supply chain management. Kluwers International Series. Towill, D. (1995). Industrial dynamics modeling of supply chains. International Journal of Physical Distribution & Logistics Management, 26(2), 2342. Van der Vorst, J. G. A. J., Beulens, A. J. M., De Wit, W., & Van Beek, P. (1998). Supply chain management in food chains: Improving performance by reducing uncertainty. International Transactions in Operational Research, 5(6), 487499.

References
Fisher, M. L. (1997). What is the right supply chain for your product? Harvard Business Review(MarchApril), 105116. Forrester, J. W. (1961). Industrial dynamics. Cambridge, MA: MIT Press. Georgiadis, P., & Vlachos, D. (2004). The eect of environmental awareness on product recovery networks design. European Journal of Operational Research, 157, 449464. Haez, K., Griths, M., Griths, J., & Nairn, J. (1996). System design of a two-echelon steel industry supply chain. International Journal of Production Economics, 45, 121130. Hobbs, J. E., & Young, L. (2000). Closer vertical co-ordination in agrifood supply chains: A conceptual framework and some preliminary evidence. Supply Chain Management: An International Journal, 5(3), 131142. Iakovou, E. (2001). A new framework for supply chain management: Review concepts and examples. In Proceedings of the Third Aegean International Conference on Design and Analysis of Manufacturing Systems, Tinos, Greece, 2736.