The Mexico‐China Sourcing Game: Teaching Global Dual Sourcing · 2010-03-03 · planning horizon....

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TheMexico‐ChinaSourcingGame:TeachingGlobalDualSourcing1

GadAllon&JanA.VanMieghemKelloggSchoolofManagement

NorthwesternUniversity2001SheridanRoad,Evanston,IL,60208

g‐allon@kellogg.northwestern.edu,vanmieghem@kellogg.northwestern.edu

Jul20,2009;RevisedNov9,2009;Jan18,2010;Jan252010;Feb10,2010Wedescribeathree‐hourclassonglobaldualsourcingbuiltaroundagamethatdemonstratesthechallengesinmakingoperationaldecisionsandtransfersrecentacademicinsightstotheclassroom.Studentteamsmanageafirmwithaccesstoaresponsivebutexpensivesupplysource(Mexico)andacheapbutremotesource(China).Eachteammustdetermineasourcingstrategytosatisfyrandomdemandthatisrevealedthroughoutthegame.Ineachperiod,teamsplaceorderstobothsourcesandmanagetwoassets:inventoryandtheirbankaccount.Thegoalistomaximizeeachteam’svalue(finalbankbalance).Duringthedebriefings,weanalyzethepoliciesusedbydifferentteamsalongbothfinancialandoperationalmetrics,presenttheoptimalstrategy,andsummarizetheexperientiallearningpoints.Keywords:dualsourcing,strategicsourcing,experientiallearning,inventorymanagement,totallandedcost,simulationgame.

1.IntroductionInmanyretailsettings,andbusinessingeneral,firmscansourcegoodsfrommultiplesuppliers.Weinvestigateatypicalchoicebetweentwosuppliers:Oneislowcostbuthaslongleadtimeswhiletheotherprovidesquickresponsebutathighercost.Thisclassicalproblemisfacedbymanycompaniesandmoststudentsunderstanditsrelevance.However,effectivemanagementofdualsourcingissurprisinglychallengingandconveyingitscomplexitythroughtraditionalmeanssuchasacasestudyoralectureisdifficult:Solvingadualsourcingcaserequiresanalytictoolsthatarenotreadilyavailabletostudentsorinstructors.Alectureondualsourcingrunstheriskthatstudentsmaynotappreciatetheaddedlevelofcomplexityinday‐to‐day,aswellasstrategic,dualsourcingrelativetosinglesourcing.Wehavedevelopedasourcinggameasanexperientiallearningtoolthataddressestheaboveshortcomings.Inthisgame,studentsplaytheroleofsourcingmanagerswhomustmakestrategicallocationdecisionsaswellasplaceday‐to‐dayorderstotwosuppliers.Duringthisprocess,theyexperiencetheoperational,financialandservicerelatedconsequencesoftheirdecisions.

1 Submitted to INFORMS Transactions on Education’s special issue on Teaching Service and Retail Operations Management

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Thesourcinggameisdesignedwithfourpedagogicalobjectivesinmind:1. Todevelopintuitiononpossiblesourcingstrategiesandtoappreciate

simple,robustpoliciestoguidesourcingdecisions.2. Tohighlighttheroleofworkingcapitalestimationintheconceptoftotal

landedcost.3. Toappreciatetheaddedcomplexityofmanagingasupplyportfolioover

singlesourcing.4. Tounderstandthefutilityofguessingandover‐reactingtodemand.

ThegamehasbeenusedwithMBAandexecutiveeducationstudentsandalthoughsomeknowledgeofbasicinventorymodelsisuseful,itisnotnecessary.Intheremainder,wewilldescribesequentiallythethree‐hourclasswehavetaughtinthreeparts:PartAintroducesglobalsourcingandrelatedtheory;PartBdescribesthegame;andPartCsummarizesthedebriefingphaseaswellasadiscussionofrecentacademicresearch.Weconcludethispaperbysummarizingstudentreactionsandpossibleextensions.

2.ClassPartA:IntroductiontoGlobalSourcing

Thissectiondescribesthefirstpartoftheclassthatintroducesglobalsourcingandrelatedtheory(about30to45minutesofclasstime).

2.1.TheMotivatingCaseAspreparationfortheclass,thestudentsareaskedtoreadtheMexico‐Chinamini‐caseinVanMieghem(2008,pp.230‐232).Thecasedescribesa$10billionhigh‐techU.S.manufacturerofwirelesstransmissioncomponents.Thecompanywasatacrossroadsregardingitsglobalnetwork;thecasefocusesonitstwoassemblyplants,oneinChinaandtheotherinMexico.WhiletheChinesefacilityenjoyedlowercosts,oceantransportationmadeitsorderlead‐times5to10timeslongerthanthosefromMexico.Withhighlyuncertainproductdemand‐‐coefficientsofvariationsofmonthlydemandforsomeproductswereashighas1.25‐‐solesourcingwasunattractive:MexicowastooexpensiveandChinatoounresponsive.Thefirmhadtodecidehowitcouldbestutilizethesetwosources.Atthestrategiclevel,thisamountstoproperlyallocatingproductdemandtoeachsource.Strategicallocationreferstotheexpectedcumulativedemandallocatedtoeachsourceovertheplanninghorizon.Atthetacticallevel,thefirmhadtochooseadynamicorderingpolicythatimplementsthatstrategicallocationatlowestcost.Inpractice,specifyingstrategicallocationsandorderingpoliciesarekeytasksofanysourcingstrategy‐‐beitglobalordomestic‐‐becauseitaffectscostsandsuppliermanagement.

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2.2.Discussiononpractice:Toconnectthegametorealsourcingpractices,andifstudentshavepriorexperiencewithsimilarsettings,westartwithanopendiscussioncoveringtwoquestions:1. Whatpolicieshaveyouusedinpractice?Thisdiscussiontypicallyrevealssomeofthe

followingpractices:a. Allocateproductstoplantsbasedsolelyuponhistoricallocations(e.g.,new

productswithinafamilyareallocatedtoplantsintheexactsamefashionasexistingproductsinthatfamilyregardlessofsupplyanddemandcharacteristics).

b. Allocateproductstoplantsbaseduponinternalpolitics(e.g.,“pet”productionfacilitiesgethighervolume,lowercomplexityproductstokeeputilizationhighandcoststructurelow).

c. Allocateproductstoplantsbaseduponbasicunderstandingofcosts(e.g.,China’scostbaseislower–thussourcefullrequirementsoffshore).

d. Productallocationsfollowasimpleprimary‐secondaryallocation(e.g.,ifprimarylocationcannotfulfilldemand–requirementscascadetothesecondarylocation).

e. Product‐to‐plantallocationdecisionsarerarelyre‐visitedoradjusted(e.g.,allocationdecisionisa“lifesentence”).

2. Whatdata/metricsareusedtomakesourcingdecisions?Thisdiscussionfollowsthepracticesaboveandhighlightsthetypicalcost,leadtimes,andserviceriskmetrics.Theinstructorthancanaskthenaturalquestion:“Howcanwecombinethesevariouscomponentsintoasinglemetric?”Thisbringsustotheconceptoftotallandedcost.

2.3.TheConceptofTotalLandedCost(TLC)Toaddressthemotivatingcase,thenaturalfirststepistocomparethetwoextremesolutions:single‐sourcingfromMexicoversussingle‐sourcingfromChina.Thisrequiresaccountingforthedifferenceincost‐of‐good‐sold,shippingcosts,duties,andworking‐capitalrequirements2.Forthatpurposewereviewtheconceptoftotallandedcost(TLC),whichrepresentstheend‐to‐endcosttotransforminputsatthesourcetooutputsatdestination.TheTLCcapturesnotonlythetraditionalcostofgoodssold,butalsoaccountsforsupplychaincostssuchastransportation,customs,duties,taxes,aswellasrequiredworkingcapitalcarryingcoststoachievedesiredservicelevelsandprotectagainstsupplyanddemandrisks;seeFig1.

2 It should be noted that working capital includes the pipeline inventory as well as the safety stock. The pipeline inventory depends on the transformation process, which takes place between the moment of ordering and the moment of receipt of the order. If part of the lead-time is caused by inflexibility in production due to set-up times, then there is no per-se investment in material during the lead-time period. Thus, in order to accurately assess the working capital requirements one needs to know the precise timing of material inflow to build a sequence of cash flows over time.

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Wewillrefertoallbutworkingcapitalcostcomponentsasthe“sourcingcost.”Computingthesourcingcostistediousyetstraightforward.Incontrast,workingcapitalisdrivenbypipelineandsafetyinventory,whichdependonlead‐times,volatilityandservicelevels.

Figure1:TotalLandedCost(TLC)isthetotalcostincurredfromsourcetodestination.

2.4.ComputingTLCforsinglesourcingWorkingcapitalandinventoryrequirementsareeasilyestimatedforsinglesourcingusingreadilyavailablestandardinventoryformulae.Beforemovingtodualsourcingandtothegame,weremindthestudentsoftheconceptofsafetystockandcomputethetotallandedcostforeachofthelocationsseparately.ThiscomputationrevealsthatsinglesourcingfromChinaappearstobethefavoritesolution.Askingthestudents’reactiontothisanalysisgeneratesadiscussionofthemeritsofsourcingfromMexicoandoftheexpectedbenefitsofdualsourcinginaquesttocombinethestrengthsofbothsources.Thisalsoleadstoadiscussionontheriskofusingasinglesource.Weusuallydiscusstwotypesofsupplyrisks:stochasticleadtimesandsupplydisruptions(suchasnaturaldisastersstrikes.)Thisnaturallyleadstothequestionofhowtodesignaneffectivedualsourcingpolicy,whichisthetransitionpointtothegame.

3.ClassPartB:TheMexicoChinaSourcingGameThissectioncoversthemainpartoftheclassbydescribingthedifferentstagesofthegame(about1to1½hourofclasstime).

3.1.Gamesetup(mostlydoneinadvanceofclass)

Theideabehindthegameisforstudentstoactassourcingmanagersofafirmmakingperiodicorderingdecisionsforanewproduct.Demandishighlyuncertainandaprobabilisticforecastisprovided.

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Setting:Aclasswithasfewas5orasmanyas60studentsdividedinto5to10groups.Props:Eachstudentgroupneeds(atleast)onelaptopcomputer.Eachgroupreceivesa

log‐incodefortheweb‐sitehostingthegame3.TheinstructorneedsalaptopthatisconnectedtotheInternetandtoaclassroomscreenprojector.

Setup:SimilartotheMexico‐Chinamini‐case,eachteamrepresentsanidentical

companythatisintroducinganewproductthatcanbesourcedfromChinaorMexico.Eachteammanagestwoassets:cashandinventory.

Thedemanddistributionfortheproductisknownandshowntoallgroupsinadvance.(ThespecificdistributionthatwehaveusedisGammawithmean10andstandarddeviation15,reflectingahighlyvolatiledemand.)Theactualdemandrealizationisidenticalforallgroupsandprojectedontotheclassroomscreendynamicallyovertime;seeFig2.

EachteamcanplaceanordertoMexicoandanordertoChinaineachperiod;sourcesdifferincostandinleadtimes.Specifically,ordersplacedtoMexicohaveasourcingcostof$8,000perunitandarriveatthebeginningofthesubsequentperiod.OrdersplacedtoChinahaveasourcingcostof$7,000perunitbutarriveonlyafter4timeperiods.Theproductislaunchedinthe4thperiod,allowingthegroupstobuildpipelineinventoryfrombothsourcesbeforesalesstart.Theproductsellsfor$10,000perunit.Thestartingversionofthegameassumesthatanyunitdemandedbutnotavailableon‐handisbackloggedforacostof$20thousandperunitandeachteamplaysinaseparateyetidenticalmarket.

Allteamsstartwithzeromoneyinthebankandcanborrowtofinanceinventory.Anybankbalance(bothnegativeandpositive)incursa1%interestrateperperiod.Allteambankbalancesareprojectedontheclassroomscreencontinuously(whichallowsteamstocomparetheirpositiontootherteamsandcreatesasenseofcompetitionandexcitement).Anyleftoverinventoryattheendofthegameisliquidatedatzerovalue(althoughtheinstructorcaneasilychangethesalvagevalue).

Theobjectivefortheteamsistomaximizetheirfirmvalue,whichistheirbankbalance,attheendofthegame.Theterminationtimeofthegameisdeterminedbytheinstructorbutisnottoldtostudentsinadvancetopreventend‐of‐horizoneffects).

3 For access to the game, please contact the authors.

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Figure2:Duringthegame,thetimeaswellascorrespondingdemandandbankbalancesareprojectedonthe

classroomscreen.

3.2.Kick‐offandBrainstorming(between15to30minofclasstime).

Thegoalofthisstageistoalloweachgrouptodevelopasourcingstrategy.EachgroupisgivenanExcelspreadsheetthatallowsstudentstosimulateandtesttheirstrategies.Specifically,thespreadsheetshowshowthepipelineinventory,sales,andbankbalanceevolvegivenuser‐enteredordersanddemand.Groupsareaskedtothinkthroughhowtheywouldreact(intermsofplacingorders)givenanewdemandrealizationandacertaininventorystatus.Tosteertheirthinking,eachgroupisalsoaskedtoestimatethefractionoforderstheywillplacetoChinaandtoMexicoandhandthisintotheinstructor.

3.3.Playingthedualsourcinggame(between45to60minofclasstime)

Thegamestartswithafourperiod“pre‐launchstage”duringwhichstudentscanfilltheirpipelinebeforesalesstart.Demandandsalesstartfollowingthepre‐launchstage.Duringeachperiod,allgroupsareinformedsimultaneouslyofthesameperioddemandasshowninFig.2.(Showing all students the same demand streamcreatesapositiveclassatmosphere,manifestedbystudentsshouting“YES!”or“OhJeez”etc.,whereallstudentstogetherexperiencethegame.)Ineachperiod,thetypicalinventoryactionstakeplace:(i) Teamsobservetheperioddemand(whichiszeroduringpre‐launch);(ii) Salesaredeterminedautomaticallyastheminimumofperioddemandandon‐

handinventory(seeFig.3forascreenshotoftheteam’swebbrowserinterface);(iii) Previousordersarereceivedautomatically;(iv) Teamsplaceorderstothetwosources;(v) Eachteam’spipelineinventorystatusanditsbankbalanceareupdated

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automaticallyforthenextperiod.Theinstructorterminatesthegameatatimeofhisorherchoosing.(Wehavetypicallyplayed30to35periods,forabout50‐60minutes.)Itiscriticalnottoinformstudentsoftheterminationperiodinadvancetopreventend‐of‐horizoneffects.

Figure3:Screenshotofateam'swebbrowserinterfacewherestudentscanplaceordersandtracktheir

performance.

4.ClassPartC:DebriefandConnectiontoRecentResearchThissectiondescribesthelastpartoftheclassduringwhichwedebriefthegameinsights,discussrecentacademicresearch,andsummarizetake‐aways(about30minofclasstime).

4.1.Debriefingthegame

Afterendingthegame,theinstructorasksdifferentgroups(includingthe“winning”team,the“runner‐up,”andalowperformer)fortheirsourcingstrategy.Teamsareencouragedtosharetheirthoughtsandexperiencesonthebenefitsoftheirstrategyandwhattheywoulddodifferentlynexttime.Duringthatdiscussion,everyargumentisvalidatedagainstmetricscompiledduringthegame.Theinstructorshowsa“dashboard”(Fig.4)thatsummarizestheperformanceofeachteamalongfinancialandoperationalmetrics:(i) Financialmetricsincludethevalueofeachteam’sfirm(bankvaluesattheendof

thegame),costs(totalnumberofunitssourced),andrevenues(thecumulativenumberofunitssold),and

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(ii) Operationalmetricsincludeeachteam’sactualstrategicallocation(fractionoftotalunitssourcedfromeachlocation),averageon‐handinventory,andservicelevelmeasuredbythefillrate(totalnumberofunitssolddividedbythetotaldemand).

Wearealsoabletoshowtheactualordersplacedovertimefromeachsourceforeachgroup.

Figure4:Adashboardthatsummarizesfinancial(toprow)andoperational(bottomrow)metricsofallteamsis

projectedontheclassroomscreenduringthedebriefingofthegame.

Thediscussionleadstotheobservationthatdifferentteamsmayperformequallywellfinanciallywhileemployingdifferentstrategies.Thegroupsusuallydifferwithrespecttoaverageon‐handinventoryaswellasthefractionofunitssourcedtoChinavs.Mexico.Thecommonthreadforall“successful”groupsistheabilitytoexecutethestrategyandnotchangeitinthefaceoflower(orhigher)thanexpecteddemandorinventories.Thisnaturallyleadstothefollowingquestions:Whatarethefeaturesofagooddualsourcingpolicy?Whatguidelinescanacademictheoryprovide?Answeringthesequestionsbringsustothenexttopic.

4.2.RecentAcademicResearch:TBSanddualindexpolicies

Theobjectivesofthegameincludeansweringthefollowingtwoquestions:(a)whatfeaturesdoeffectivedualsourcingpoliciesshare?And(b)howcanwedeterminenear‐optimalpoliciesandaveragesourcingallocation?Effectivedualsourcingpoliciestakeintoaccountnotonlytheon‐handinventoryandthecurrentdemand,butalsotheentirepipelinestatusaswellastheentiredemandforecast.Researchhasshownthatthestructureoftheoptimalpolicyisverycomplex.Therefore,thedualsourcingliteraturehastraditionallyfocusedondetermining

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sophisticateddynamicpoliciesthatapproachoptimalperformance.Typically,thesepoliciesarecharacterizedbyoneortwotargetinventorylevels(base‐stocklevels)andkeeptrackofoneortwoinventorypositions(indices).Forexample,VeeraraghavanandScheller‐Wolf(2006)showthatadual‐indexpolicywithtwotargetlevelsperformsclosetooptimally,whichrepresentsstate‐of‐the‐artdualsourcingresearch.Unfortunately,determiningthetargetlevelsofsophisticatedpoliciessuchasthedualindexpolicyrequiressophisticatedcomputationalwork(optimizationviasimulation).Inaddition,underthesepolicies,theassociatedstrategicsourcingallocationcanbedeterminedonlythroughsimulation.Forastrategicsourcingmanager,itwouldbedesirabletohaveasimplepolicywithsimpleguidelinesthatdeterminethestrategicallocationduringtheplanningphasewithoutsignificantlycompromisingperformance.Recently,AllonandVanMieghem(2009)havepresentedsuchapolicythatisusedinpractice:thetailoredbase‐surge(TBS)policy.Underthispolicy,aconstant(“standing”)orderisplacedtothelowcostsupplierineachperiod.Theresponsivesourceisusedonlytobringthetotalinventory(on‐hand+pipeline)toasingletargetlevel.TheTBSpolicythusechoesafundamentaltenetinstrategy:italignstheorderingpatternswiththecorecompetenciesofthesuppliers(Fig.5).TheconstantbaseallocationallowsChinatofocusoncostefficiencywhileMexico'squickresponseisutilizedonlydynamicallytoguaranteehighservice.

Figure5:ATailoredBase‐SurgePolicyordersaconstantfractionfromthelowcost

sourceandordersfromtheresponsivesourcetorespondtosurges.

Besidesitssimplicity,theTBSpolicydirectlydeterminesthestrategicallocation,whichequalsthestandingorderdividedbytheaveragedemand.JanssenandDeKok(1999)studyasimilarpolicytotheTBSandshowusingnumericalstudythatafirmshouldallocatecloseto90%ofitsdemandtothecheapersource.AllonandVanMieghem(2009)optimizedtheTBSpolicyanalyticallyandpresentasimplesquare‐rootformulatospecifythenear‐optimalstrategicallocation:

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,

wherehistheunitholdingcost,Δcistheunitsourcingcostdifferential,λisthedemandrate,andσisthesupply‐demandvolatility.4Simpleformulaealsoexistforthecorrespondingtargetinventorylevelandcost.Whenfocusingonlyondemandvolatility,theformulasimplifiesfurtherto:

whereCOVDisthecoefficientofvariationofthesingle‐perioddemanddistribution.Theformulaalsoprovidesinsightbyidentifyingthekeydriversofdualsourcingandquantifyingtheirinteraction.Specifically,theallocationtothelowcostsupplierishighwhen:1. Thekeymonetarytrade‐offΔc/hislarge,whichimpliesalargecostadvantageora

smallcostofcapital(smallcommercialrisk)2. Theexpecteddemandrateλishigh3. Thesupply‐demandvolatilityσissmall.Thisariseswithstableorhigh‐volume

products(inthematurityphaseoftheproductlifecycle)andrequiresstable(level)productioninChina.Thisfactoralsoshowshowthesourcingallocationshouldchangeasaproductmovesthroughitsproductlifecycle.

Studentsareaskedtocomputethestrategicallocationusingthesquare‐rootformulafortheparametersofthegame,whichiseasy:

• h=about$7,000*1%/period=$70/period• Δc=$1,000• COVD=1.5

sothatthenear‐optimalbaseallocationisapproximately1–√(.07/2)*1.5=1‐.28=.72(Asahome‐workassignment,theinstructorcanaskforasimilarcomputationforeachofthedifferentSKUsinthemini‐case.).Intheclasswealsocomparetheperformanceofdifferentclassicalpoliciesforafinitehorizonproblem,similartothegame.Table1comparestheprofitsof4strategies:singlesourcingfromMexico,singlesourcingfromChina,thetailoredbase‐surgepolicy,andadualbase‐stockpolicy.Foreachpolicy,wehaveoptimizedviasimulationoverthepolicyparameters.Forsinglesourcingpolicieswecomputedtheoptimalbase‐stockpolicy.FortheTailoredBase‐Surgepolicyweusedtheformulagiveninclass,andforthedualbase‐stockpolicyweused,again,simulation‐basedoptimizationtocomputetheoptimalthresholdlevels.Foreachpolicywepresentboththevalueafirmwouldhaveobtainedusingthatspecificpolicyandthespecificdemandsamplepathplayedinthegame,aswellastheexpectedvaluecorrespondingtothedemanddistribution.Wealsocomparethesepolicieswiththecaseinwhichthefirmhasperfectdemandinformation.Withperfectdemandforesight,theoptimalpolicyissimple:orderthe

4 Specifically, σ2 is the sum of the squared coefficients of variation of the interdemand times and the China supply times.

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exactdemandquantitiesfourperiodsearlyfromChina.Thecomparisonwithperfectinformationhighlightsthedramaticcostofuncertainty.Table 1

Strategy OptimalTargetInventoryLevels

ActualValue|gamedemand

ExpectedValue

SingleSourceMexico

23 $557 $422

SingleSourceChina 48 $423 $569

TailoredBaseSurge 18,standingordertoChina=5

$616 $547

DualBaseStock 10,45 $514 $586

Perfectinformation+SinglesourceChina

OrderexactdemandfourperiodsearlierfromChina

$2,321 $1,878

Asonemayexpect,theDualBaseStockpolicyoutperformstheotherpolicies,inexpectation.However,onthespecificsamplepathplayedinthegame,theTBSgeneratesahigherprofit.Itisimportanttonotethat,inexpectation,SingleSourcingfromChinainthisgamewouldresultinhigherprofitsthantheTBSpolicy.However,ouranalyticmodeloftheTBSdoesnotcapturedynamiccontrolfromChina,sinceitessentiallyassumestheleadtimesaretoolongtoallowforclosed‐loopcontrol.Therefore,asinglesourcingpolicythatdoesallowfordynamiccontrolmaydobetterthantheTBSpolicy.(Alsonotethatthesignificantdifferencesbetweentheexpectedvalueofapolicyandtheprofitunderthespecificrealizationofdemandareduetothehighvolatilityofdemand.)

5.SummaryandExtensions

Thissectiondescribeshowweconcludetheclassandsummarizesthecontributionsofthegameandpossibleextensions,aswellasstudentreactions.

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5.1.Summarizingkeytake‐away’softhegameWeendtheclassbysummarizingthekeyinsightsfromthegameas:1. Dualsourcingisasurprisinglycomplexmanagementproblemwithpotentially

highrewards.Thefirststepindetermininganeffectivedualsourcingpolicyistoconsideritsentiresource‐to‐destinationcost.Whileitisstraightforward(yettedious)tocomputemostcomponentsofthistotallandedcost,theimpactoninventoryandthusworkingcapitalisimportantyetdifficulttoassessunderdualsourcing.

2. Effectivedualsourcingusessupplierswithverydifferentstrengths.Inthisgame,wecombinedalowcost(butslow)supplierwithafast(butexpensive)source.Effectivedualsourcingpoliciesarealsotailoredtothestrengthsofeachsource.Thetailoredbase‐surgepolicyhasastandingorderwiththelowcostsupplier(allowingthatsuppliertoleveltheworkloadandreducecostsfurther)andordersfromthefastsourceonlytoreacttodemandsurges.Suchapolicyallowsthefirmtoreducetotalcostbyplacingthemajorityoforderstothelowcostsupplierwhileguaranteeinghighservicelevelsbyplacingoccasional,smallordersfromtheresponsive,yetexpensivesupplier.

3. Whiledeterminingoptimaldualsourcingpoliciesiscomputationallycomplex(andrequiressimulation),itisvaluable—andoftensufficientinpractice‐‐tohavesomeguidingformulaetosupportdualsourcingdecisions.Thesquare‐rootformulaprovidesasimplestartingpointwhendeterminingstrategicsourcingallocations.

4. Successfuldualsourcingoftenrequireshavingastrategyandstickingtoit.Havingasuboptimalpolicyistypicallybetterthancontinuouslychangingthedecisionprocess.Forexample,astrategyshouldallowthemanagertoreacttohighdemandsbyincreasingorders;however,reducingthetargetinventorylevel(base‐stock)whenobservingafewlowdemandperiodsusuallyleadstolowperformance.

Thegamealsoprovidesabackgroundtoillustratethebenefitsthatcompanieshaveexperiencedaftertransitioningfromsoletodualsourcing,including:

• Significantairfreightreduction–bymovingtodualsourcingsomecompanieshaveseen70%+reductionsinairfreight.

• Fasterresponsetochangesindemand,asopposedtomissingdemand.Undersinglesourcingfromalowcostsource,bythetimeademandchangewasrecognized,itwastoolateintheseasontorespond.

• Improvedabilitytomanagenewproductintroductions.Whenproductsweresolesourcedfromanoffshorelowcostsupplier,6to9monthsofproductwereinthepipelinebeforethecompanyrecognizedpoorsell‐throughwhichleftthemwithsignificantobsoleteinventory.

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5.2.PossibleCustomizationsandExtensionsoftheGameThegamecaneasilybeextendedalongseveraldimensions,inorderofsuggestedimportanceandeaseofimplementation:

• Customization:thegamesoftwarecurrentlyallowstheinstructortochangethenamesandlocationsofthesources.Forexample,thefastsourcecanbedomesticandtwolocationscouldbeFranceandPoland.Theinstructorcanalsomodifythedemandrealizationandanyotherparameters.

• Operationalextensions:Changingthebackloggingassumptioninthegameandallowingforlostsalesisastraightforwardmodificationtothegame.Soisaddingaphysicalholdingcosttothecurrentfinancialopportunitycostorafixedorderingcost.Inaddition,itiseasytomodifythesoftwareandallowforstochasticleadtimes(butwefoundthatthismakesthegamemuchhardertounderstandforstudentswithoutofferinganynewinsights).

• Financialextensions:Itisstraightforwardtohaveahigherinterestrateforborrowingthansaving.Onecanalsointroduceadefaultthreatbyaddingaconstraintonmaximalborrowing.

• Non‐stationaryparameters:Forexample,insteadofassumingi.i.d.demand,thedemanddistributioncouldreflectthedifferentstagesoftheproductlifecycleofintroduction,growth,maturity,anddecline.Thesamecanbedonewithprices,costs,exchangerates,andinterestrates.

• Competitivemarket:Forexample,anydemandunmetbyoneteamspillsovertotheotherteams.Thisaddsanotherlayerofcomplexity,evenforasimplesingle‐period,single‐sourcemodelwhereonecanchoosedifferentexcessdemandsplittingrules;seeLippmanandMcCardle(1997).

• Design‐marketing‐salesdecisions:Forexample,teamscanboostdemandbyspendingmoneyonmarketingcampaignsandsalesincentives.Thiswouldnecessarilyimplythatteamsnolongerobserveacommondemand.Anotherextensioncouldbetoincludeproductandsupplynetworkdesign,similartotheGlobalSupplyChainManagementSimulationofEnspireLearning.5Whilethatsimulationfocusesonthedesignoftheproductsandthesupplynetwork,itallowstheplayerstomodifythesourcingallocationinalimitedmanner.Incontrast,ourgameissimplerandfocusesonmanaginganexistingsupplynetworkinadynamicsetting,

• Multipleitemsormultiplestages:whilewedonotsuggestthis,onecouldextendtomultipleproductsortoamulti‐stagesupplychainalongthelinesofthefamousBeerGame.Inessence,thiswouldleadtoaBeerGamewithdualsourcing.

5 http://www.enspire.com/simulations/gscms. Also distributed by Harvard Business Publishing under Prod. #: 6107-HTM-ENG.

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Thegamecanalsobeusedtoconductexperimentstotestresearchhypotheses.Forexample,teamsmaystickclosertotheiroriginalplanandpolicyiftheyexperiencethegameasynchronouslyorarenotinformedofotherteams’bankbalances.Whilethisshowshowthegamecanbeextended,westronglyadvisetoplaythegameinitscurrentsimpleformatbecauseitallowsstudentstomaptheirdecisionstosubsequentresultsandthusenhancesthelearningfromthegame.

5.3.InstructorExperiencesofarSofar,theauthorshaveplayedthegameinabout10businessschoolclasssettings:withfull‐timeMBAstudentsinanoperationsstrategyelective;withfacultymembersataresearchconference;andinseveralexecutiveeducationcourses.Nextwewillplayitwithourdoctoralstudents.Webelievethegamewouldalsoworkwellwithgraduate,aswellasadvancedundergraduate,studentsinengineering.Theresponsehasbeenuniformlypositive.Executivesappreciatetherealismofthegameandthecomplexityinherentindualsourcing.Afterplayingthegameusingonlyintuition,theclassenhancestheirperceivedvalueoftheacademicresearchandsimpleguidelineformula.Studentsoftensuggestthatthegameshouldbeplayedwithacrossfunctionalteam,representingtheirmarketing,sales,financial,andoperationalgroups.Suchexperiencewouldconveytheimportanceofinter‐functionalcoordinationandcollaborativeforecasting.Fromaninstructor’sperspective,thegameiseasytoexplain,hasminimalrequirements(itneedsonlyafewlaptopsconnectedtotheInternet),andissimpletosetup.Asingleinstructorcaneasilyrunthegamewithasfewas5studentsorasmanyas60studentswithoutneedingadditionalassistantsordiminishingtheeffectivenessofthegame.Thegamenotonlysuccessfullyachievesthepedagogicalobjectives;italsohighlightsthevalueofacademicresearchforarealisticandimportantbusinessproblem.

AcknowledgmentsWearegratefultoCortJacobiandRuchirNandaofDeloitteConsultingforongoingcollaborationandinsightfuldiscussionsondualsourcing.References

Allon,G.andJ.A.VanMieghem(2009).“GlobalDualSourcing:TailoredBaseSurgeAllocationtoNearandOffshoreProduction.”ToappearinManagementScience.Lippman,S.A.andK.F.McCardle(1997)TheCompetitiveNewsboy.OperationsResearch45(1)54‐65.

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VanMieghem,J.A.(2008).OperationsStrategy:PrinciplesandPractice.DynamicIdeas,Belmont,MA.Veeraraghavan,S.andScheller‐Wolf,A.A.(2006)NoworLater:ASimplePolicyforEffectiveDualSourcinginCapacitatedSystemsOperationsResearch56,;850‐864.Janssen,F.anddeKok,T.(1999)“Atwo‐supplierinventorymodel”,InternationalJournalofProductionEconomics,59(1‐3);395‐‐403.