Religious-pilgrimage system

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Lecture Notes 2.2 HRV KFSC, Fall 2020

I. Introduction a. This unit addresses the concept of networks as a method for

representing systems. b. It turns out that this is an extremely effective way to analyze how

individual production assets interact with each other to maximize their profits.

c. This can be seen from the perspective of “supply chains” and “demand chains,” where supply chains seek to push down the production cost function, and the demand chains seek to push up the sales revenue function.

d. Once we understand how these business networks work, we can analyze how they can be vulnerable to hazards.

e. But for this unit, our focus will be on understanding the nature of these network systems.

II. Review of Business Economics

III. Supply Chain Networks a. Let’s now turn out attention to how businesses actually achieve their

Total Cost, TC, functions. b. Let’s look at the example of an American vegetable farm that grows

wheat, vegetables, chickens and cows that it uses to make “farm- fresh” pizzas that it sells.

c. It takes those raw materials it grows, and first turns them into the basic components of its pizzas

i. Processes the vegetables cultivated in the field into cleaned and cutup chunks of vegetables that can be paced directly on the pizza.

ii. It does the same with the living chickens and cows and turns them into chunks of meat, sausages or salamis that can be sliced up and placed directly on the pizza.

iii. This process involves transforming the raw materials into components of the final product that people purchase.

iv. The same goes for transforming wheat into flour, tomatoes into pizza sauce, and cow’s milk into cheese.

v. All these components get produced so that the farm can them assemble them all together into a pizza that gets baked and then sold to customers.

d. It turns about that very few manufacturers operate with this strategy of making for themselves all the components of the products they manufacture and sell.

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i. They have discovered that it is far less costly to purchase such components from other manufactures who specialize in developing the skills and investments to make them as inexpensively as possible.

ii. It is hard for a single business to develop the skills and investments to manufacture all its components as inexpensively as more specialized firms can.

iii. Why? Because the production rate he requires generates costs that are too high. The investment cannot pay for itself.

iv. Specialized manufacturers, however, can produce at higher rates for many customers, thus they can invest in lowering their production costs.

v. So, most pizza restaurants will buy their components of vegetables, meats, cheese, and flour from other manufacturers, and make their pizzas from them only in the restaurant.

vi. Some may make their own pizza sauce, while others will make them, as well.

vii. But this production system only drives down the total variable cost function when the cost of shipping these components via transportation infrastructure is low enough, relative to the cost of producing the component in house by the business.

e. Supply-Chain Networks

i. Raw Material: grain, iron ore, sand, stone, raw chemicals, petroleum, vegetables, livestock, sand, clay, trees, coal, cotton…

ii. Subcomponents: flour, meat, glass, bricks, lumber, metals, threads, cheese, generated or transformed energy…

Raw material

Sub- components

Components System (product)

Supply-Chain Network

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iii. Components: bread, salami, sausages, windows, walls, frames, metal parts, wires, electronic elements (resistors, capacitors), microprocessors, shredded cheese, fabric…

iv. Product (System): clothing, pizzas, houses, computers, cell phones, hamburgers…

f. So, the supply-chain comprises nodes and links.

i. Nodes: where the commercial items gets process, assembled, collected, or grown.

ii. Links: where the items get transported to towards the right. iii. But the links are two-way streets: they also convey information

and money gets transported to the left. iv. In other words, these are exchange links where purchased

items flow in one direction and money and information flows in the other.

g. Disruption of Supply Chains.

i. So, what happens if one of these nodes or links gets damaged, disrupted, or destroyed?

ii. It will cause a “ripple effect” on down the supply-chain that will cause the total cost, TC(q, P1) curves to shift upwards due to the new costs of finding new suppliers and loss of revenue due to delays in production due to that missing part.

h. Hazards and Threats to Supply Chains. i. Natural Hazards

1. Earthquakes 2. Solar flares 3. Hurricanes 4. Sand storms 5. Heat waves 6. Forrest/Brush/City fires 7. Landslides 8. Pandemics

ii. Intentional Threats

1. Hacking, computer viruses 2. Corruption 3. Biased justice that cannot be trusted 4. Theft 5. Terrorism 6. Wars, strategic bombing, “collateral damage”

iii. Accidental Hazards

1. Industrial disasters 2. Traffic accidents

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3. Poorly maintained roads, railroads and bridges 4. Blackouts

IV. Distribution Networks

a. Distribution Networks

i. Networks exist not just to push down the total cost function, they also get set up to push up the net revenue function.

ii. These are known as distribution or “demand-chain” networks, as opposed to manufacturing or supply-chain networks.

iii. These are the networks that not only seek to physical deliver products to customers, they also seek to provide detailed information about the cost and performance of the products to convince people to purchase them.

iv. So, they represent an important part of the advertising investment.

b. Economic logic of distribution networks i. Why are distribution networks beneficial in pushing up the net revenue function?

ii. Consumers purchase products to increase their utility or happiness.

iii. Purchase will be made when they think the benefits of acquiring the product will be greater than the total cost of purchasing it.

iv. Consumer NUG = Benefit of Product – Total Cost of Product v. But the total cost is not just the purchase price. It is also the

time required to make the purchase: driving to the store or searching on-line.

Manufacturer Wholesaler Retail Stores Consumers

Supply-Chain Network

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vi. Total cost of product = Sales Price + Purchase Effort (transportation, searching on-line…)

vii. So, the lower the purchase effort is, or greater the shopping convenience is, the higher the sales price can be.

viii. So manufacturers have a great incentive to create distribution networks that decrease the purchase effort of customers so they can boost up their net revenue function to increase their profits.

ix. How is this typically done? By selling their products not directly to consumers at their factory, but rather to wholesalers, who then sell to retailers who are located in convenient locations.

x. Why? By sharing some of the revenue with these other businesses, the manufacturer still has a higher revenue than they would selling directly out of their factory.

xi. These retailers don’t just lower the cost of transportation of the consumer, they also might provide information about the product directly to the consumer so they can make an informed decision about whether the product will enhance their utility sufficiently.

xii. As a result, a great deal of transportation, storage, communication, financial, and retail infrastructure gets developed to develop these distribution networks in a highly efficient manner.

c. Varieties of Distribution Networks

i. Utilities: Water and Electricity distribution directly to consumers

ii. “Brick and Mortar” Retail iii. Farmer’s markets: Direct selling by producers without

wholesalers or retailers iv. Mail order: delivery of ordered goods via mail network.

1. Sears Roebucks example v. Internet: shopping online

1. Amazon.com example

d. Vulnerabilities of Distribution Networks i. Crime: Stealing from warehouses or retail outlets ii. Physical destruction of shopping centers; malls iii. Physical destruction of delivery/transportation networks:

roads, bridges, railroads, harbors iv. Physical destruction of communication networks v. Hacking of the internet’s retail websites vi. Hacking of financial institutions; wireless financial networks vii. Fear: consumers becoming afraid to shop due to economic

worries/uncertainty or physical vulnerability when shopping.

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viii. Example: fear of terrorism collapsing tourism demand for a country.

ix. Pandemics affecting both employees of retailers and shoppers/consumers.

x. Corruption & Injustice: failure to protect property rights of retailers and wholesalers