REQUIREMENTS FOR A SIMULATION-BASED TOOL TO AID IN THE CONTRACT-

COSTING PROCESS

The outsourcing of products and services is a growing trend globally. In the electronics industry, original
equipment manufacturers are increasingly focusing on high-value design and marketing aspects of their
business, while outsourcing the manufacture of their products to contract manufacturers. Due to this
increase in outsourcing, there is an increase in the number of request for quotations being issued by
companies to potential suppliers. These quotations can be difficult to cost as they can contain operational
details. This paper presents the reader with requirements for a tool to aid outsourcing enterprises in the
costing of contracts. As part of the requirements gathering phase, a conceptual design was carried out and
an initial prototype developed as a means for validating the interpretation of the requirements and for
eliciting new requirements for the tool, and this is also presented.

Keywords:
Contract Costing, Request For Quotation, Web-based Simulation

1 INTRODUCTION interpretation of the requirements and for eliciting new

Traditionally, the concept of logistics covered all activities
relating to transport, transshipment and storage of goods.
The modernization of logistics can be characterized by an
increasing degree of integration, having evolved from
physical distribution management incorporating
warehousing and transportation to include procurement,
manufacturing and order management functions, and this
evolution of logistics as an integrative concept is driving the
growth of outsourcing, and third and fourth party logistics,
[1]. The outsourcing of manufacturing and services was
one of the dominant business trends of the 1980s and
1990s and is continuing, [2].
According to [3], the types of industries where outsourcing
is growing include electronics, pharmaceuticals,
automotive, and food and beverage production. In the
electronics industry, original equipment manufacturers
(OEMs) are increasingly focusing on high-value design and
marketing aspects of the business, while outsourcing the
manufacture of their products to contract manufacturers
who have core-competencies in large-scale production of
mass customized products, [4]. In turn, these contract
manufacturers outsource some of their component
production and assembly to smaller suppliers. In 1990,
less than 5% of all manufacturing was outsourced, [5]. In
2000, OEMs outsourced $75 billion to Contract
Manufacturers (CMs) and the long term growth for
electronics contract manufacturing is projected to be 25%
per year, [3].
This has led to an increase in the number of Request For
Quotations (RFQs) being issued by companies to potential
suppliers, as well as an increase in the number of contracts
being entered into after a supplier has been selected.
Therefore there is an increasing requirement for the rapid
costing of contracts. These contracts can be difficult to cost
because they contain operational details. There is a need
for a tool to aid the contract manufacturer in costing
contracts, taking operational details into account.
As part of an ongoing project named SIMCT (A Simulation
based Contract Costing Tool for Outsourcing Enterprises),
this paper presents the reader with requirements for a tool
to aid outsourcing enterprises in the costing of contracts.
As part of the requirements gathering phase, an initial
prototype was developed as a means for validating the
requirements for the tool, and this is also presented.
Taking an iterative approach, this will lead into the design
for a second prototype.
2 THE LOGISTICS / SUPPLY CHAIN MANAGEMENT
SOFTWARE SECTOR
The logistics/supply-chain management (SCM) software
sector is growing rapidly. According to [6], worldwide
spending on logistics software, services, and recurring
revenues will grow to nearly $3 billion in 2006, close to
double the figure for 2001. Supply chain software sales
were one of the major drivers of the 1990s technology
boom. Analysts estimate that, between 1999 and 2002,
vendors sold more than $15 billion in supply chain software
licenses, [7]. The following six categories of software are
identified in the logistics management software sector, [1]:
 Transportation Management Systems (TMS)
 Warehouse Management Systems (WMS)
 Enterprise Resource Planning (ERP)
 Customer Relationship Management (CRM)
 Supplier Relationship Management (SRM)
 Supply Chain tools for Integration, Planning,
Execution and Analysis
From 1998 to the present day, developments have been
focused on linking these six software types, the intent
being to create packages as a continuum rather than in
individual stages. This approach has been the drive behind
the move to Web-based supply chains, or “e-supply
chains”. Software from companies like i2 Technologies,
Manugistics and integrated suites like mySAP and Oracle
have attempted to fully integrate the supply chain of a
company and bring improvements in its competitiveness,
[8]. Also, mergers have taken place between WMS and
TMS companies to offer a suite of software modules for
logistics operations. These packages are referred to by
industry as “Logistics Execution Software” (LES) packages,
[9].
From a detailed review of these tools, it was found that the
contract costing process is most closely related to the
areas of SRM and Supply Chain tools for Integration,
Planning, Execution and Analysis. Specifically in SRM, the
areas identified as being most relevant are Contract
Management tools and RFx-based Procurement tools, see
Figure 1.
Figure 1: The RFx Process in relation to RFx-based
Procurement tools and Contract Management tools
RFx-based procurement tools are used for the sourcing,
qualification and choosing of suppliers. These tools have
the features of: sending out a request for information,
sending out a request for quotation, setting up an on-line
auction, and scoring features to choose a supplier(s) for a
particular product. Once a contract has been awarded to a
supplier, Contract Management tools are used to create
the contract with that supplier, and manage the contract
throughout its lifecycle, until termination of the contract.
The tools being utilized by companies can be separated
into both the buyer and supplier side of contracts, see
Table 1. On the buyer side, it was found that for the
sourcing and selecting of potential suppliers, current
practise (if using a tool for the task) is to use RFx-based
procurement tools or in-house developed
spreadsheet/macro-based tools. For the creation, and
management of contracts through a contract’s lifecycle,
contract management software was found to be used.
On the supplier side, it has been found that current practice
for a company costing a response to an RFQ (if using a
tool for this task) is to use in-house developed
spreadsheet/macro-based tools. There is also evidence
that a small percentage of companies on the supplier side
use a contract management tool to manage their contracts
after the contract has been awarded to them.
Table 1: Tools on buyer and supplier sides of a contract
Buyer-side Supplier-side
RFx-based Contract Management
Procurement Tools Tools
Contract Management Spreadsheet/Macro-
Tools based tools
Spreadsheet/Macro-
based tools
From this review of solutions in the logistics / supply chain
management software sector, there was no tool identified
that allowed a supplier to quickly and accurately cost a
contract in response to an RFQ, taking operational details
and variability into account.
3 INITIAL REQUIREMENTS GATHERING AND
CONCEPTUAL DESIGN
Initial Requirements Gathering
Initial requirements for a contract-costing tool were elicited
from a number of companies, on both the buyer and
supplier sides of a contract. In summing up these
requirements, it was found that the following four factors
were identified as areas to be investigated for solutions in
the contract costing process:
 Accuracy of Data: The information needed to cost a
contract might not be supplied or available in a
standardised or electronic format, leading to potential
inaccuracies in information and slowing down the
contract costing process, therefore a tool that would
standardise the format of the information would provide
an advantage to the Contract Manufacturer.
 Greater visibility into where the operational costs
lie: Because contracts can contain operational details,
many of the costs associated with a contract are
variable, and this variability needs to be understood
and captured to provide more visibility into where the
costs lie.
 Ability to experiment with different supply chain
configurations: The complexity of supply chains and
possible supply chain configurations is increasing,
leading to more complexity and less visibility in the
costs associated with a product/service. Therefore
there is a need for the ability to experiment with
different supply chain configurations and for more
transparency as to where the costs fall across a supply
chain, not just inside the ‘4 walls’ of a company.
 Speed of Response: Due to the increase in
outsourcing, there is an increase in the number of
RFQs being issued by companies to potential suppliers,
as well as an increase in the number of contracts being
entered into after a supplier has been selected.
Therefore the timeframe for responding to an RFQ has
shortened. Also, in response to an RFQ, there is a
need for a supplier to have the ability to quickly cost
operational details accurately, a process which could
potentially take a relatively long time.
Solving the Initial Requirements
Discrete-event simulation can be used to model a supply
chain, giving the user the ability to experiment with different
supply chain configurations. It can also be used to model
operational details in a contract due to its ability to model
variation over time. If simulation is used in the tool, the
outputs from the simulation model can be used to cost the
contract, if all costs are taken into account in the model.
Greater visibility would be gained into where the
operational costs lie by modelling the system. By
automatically populating a simulation model from data in an
RFQ and CM’s cost data, this would speed up the contract
costing process.
Taking the four requirements outlined in section 3.1 into
consideration, the first option was whether to design the
prototype as a web-based or desktop-based application. It
was decided to design it as a web-based application for the
following reasons:
 The nature of the users of the tool. When costing a
contract, information is needed from the suppliers of
components for a product. Making the tool Web-based
gives the CM and potential suppliers the ability to log
into the tool to input their information in a standardised
format.
 Web-based applications eliminate the need to install
software on every workstation, simplifying set-up,
maintenance and upgrades, and supplying potential
 controlled access to the tool to all users with a
compatible Web-browser.
 If designed as a web service, the possibility exists for
CMs to use the tool without having to install the tool in-
house on their own server.
The requirement for the ability to experiment with different
supply chain configurations was weighed up against the
requirement for the speed of response, and it was
concluded that the supply chain being modelled should
include the RFQ data, a CM and potential suppliers to the
CM. Complex supply chain models take a relatively long
time to build, so it was deemed better to use a pre-built
simulation model that could be edited by the CM. There are
other tools out there for building a detailed model of a
supply chain, but these are difficult to use without
experience. It is assumed that the user of the tool will have
little or no experience in simulation modelling.
Conceptual Prototype Design
Figure 2 displays a diagram of a supply-chain network, with
a customer (OEM), a CM and a number of potential
suppliers. The CM controls the prototype, and both the CM
and potential suppliers have access to the prototype. The
prototype contains a simulation engine and model, used to
model this scenario, and is a web-based application.
Figure 2: Layout of access to the Simulation-based
Prototype
The following are the steps followed when using the
prototype:
1. The Customer (OEM) sends a Request for Quotation
(RFQ) to the Contract Manufacturer. This may be in
any format, such as a MS Word document or MS Excel
Spreadsheet, e-mail, etc.
2. The CM uploads the RFQ to the SIMCT tool and any
data needed for the simulation can be extracted and
entered into the tool.
3. The CM invites suppliers to enter their data into the
tool. This can be accomplished by sending an
automated request by e-mail.
4. Each supplier can log into the tool using a unique
ID/Password combination to fill in the data that they
were requested to supply by the CM.
5. At this stage the CM has all relevant data needed to run
the simulation model. The CM can now review all data
and update the data if necessary.
6. The CM can now edit and run the simulation model.
Using an interface to the model, the CM can add or
delete suppliers from the model, set the experimental
conditions, and run the model.
7. When the simulation model has finished running, a
costs results page can be viewed, and these results will
be used to cost the contract.
4 TECHNOLOGIES FOR DEVELOPMENT OF THE
PROTOTYPE
Options for developing a web-based application
Two approaches can be taken in developing the web-
based application – to develop it as a service, where
customers pay for the service, or to develop it as a product,
which would be installed in-house on the customer’s
server(s).
During the last six years, a paradigm shift in software
development is apparent. Traditionally, software is
developed as a product. Under the new paradigm, software
is treated as a service that runs on a server computer,
permitting the users to access the service over the Internet.
This paradigm shift has many advantages for the vendors
and users, [10], [11], [12]. Recently, application service
providers (ASPs) have begun marketing the ASP model,
which uses the Internet or other wide area networks to
provide online application services on a rental basis –
commercially delivering computing as a service. ASPs are
estimated to be growing at a compound annual growth rate
in excess of 80 percent, [12]. Software as a service (SaaS)
is another approach which differs from the ASP model in
providing software as a service [13].
There are two primary emerging standards for developing
web-based applications, and both of these can be used to
develop the tool whether it is developed as a service or a
product. These are Sun’s Java 2 Platform, Enterprise
Edition (J2EE) and Microsoft’s .NET, [14], [15]. Although
J2EE has a larger market share, it is facing strong
challenges from .NET, which has a superior integrated
development environment (IDE), [16]. There is little
otherwise to choose between the two in developing a web-
based application.
Options for developing the simulation
environment
Dominated by Java, web based simulation is at an early
stage of development. Simulation languages as well as
modeling environments are targeting the web. Some
packages and languages used by web based simulation
developers include SimJava, DEVSJAVA, JSIM, JavaSim,
JavaGPSS, Silk and WSE, [17]. These existing packages
and languages are difficult to use, [17].
There are three basic approaches to simulation and
animation (S&A) on the web, as detailed by [18], [19] and
[10]. These are remote S&A, local S&A, and remote
simulation/local animation.
Remote S&A relies on the remote server to execute the
simulation and create animation output, which is then sent
to the client. This approach works well for adapting existing
simulation products such as Arena or eM-Plant to a web-
based environment. Where remote S&A falls down is that it
does not function well for observing dynamic processes at
work or allowing the user to interrupt a running simulation.
A problem can also arise with the latency of long running
simulations as well as the server load under a large
number of users. The client could timeout by waiting too
long for a server response, [10].
Local S&A is where the client downloads both the
simulation and the visualization components to the user’s
local computer. This approach shifts responsibility for
execution completely from the server to the client, making
the server a central distribution point for the simulation, but
performing no real work. If this approach is used, the
latency between the user and the simulator is reduced to
nothing. However this approach relies on the power of the
client to execute the simulations efficiently, and some
users may lack the hardware needed for this. Packages
such as AnyLogic and SimJava use this approach, by
allowing the user to develop Java applets, [10].
Remote simulation/local animation is a hybrid between the
first two approaches, where the simulation is executed
remotely and sends animation commands to an animation
engine on the client. The advantage of this approach is it
allows the simulation to take advantage of more powerful
hardware and eases maintenance with a centralized
application. Latency is one of the drawbacks of this
approach, as the communication between client and server
is delayed by the network latency, which may be several
seconds on a WAN, [10].
For the development of the tool, one of the requirements is
that the simulation module of the tool should be quick to
use, the user should have minimal interaction with the
simulation model. Therefore, whatever method is used to
develop the simulation module in the SIMCT tool, ease of
use is a high priority. One way to solve this issue is to use
a pre-built model that the user can interact with, and this is
the method taken in the development of the initial
prototype.
5 INITIAL PROTOTYPE
Introduction
An initial prototype was developed to investigate the
conceptual design in Section 3.3. This prototype was
carried out as a means for validating the interpretation of
the requirements, as well as for eliciting new requirements
for the tool. Microsoft’s .NET was chosen for the
development of the prototype, the integrated development
environment (IDE) being Microsoft Visual Studio .NET
2003.
The database was developed using Microsoft Access.
ASP.NET is a technology that allows for the dynamic
creation of documents on a Web server when they are
requested via HTTP, and in this case it is used to create
HTML documents (or web forms), that a user of the tool
sees when the application is started using a browser. The
code driving each of these web forms has been set up as a
separate Visual C# file, creating a multi-layer model in
which the processing of the web forms takes place on the
server. Structured Query Language (SQL) has been used
with ActiveX Data Objects for .NET (ADO.NET) to provide
the capability to read from and write to the Access
database. Data is outputted to eXtensible Mark-up
Language (XML) to provide data for graphs used in the
application, which are developed using Macromedia Flash.
The simulation model was developed using eM-Plant and
the model is controlled by the CM using the simulation
control page. The simulation model is linked to the
database using an ODBC link. Figure 3 gives an
architectural layout of the initial prototype.
Figure 3: Architectural Layout of the Initial Prototype
As can be seen in Figure 3, the CM has access to a
simulation control page used for controlling the simulation
model, a set of data store pages to store supplier, CM and
RFQ data, and a results page used to display the results of
the simulation run. Each of the suppliers invited by the CM
to enter or store their details in the application can carry
this out using a supplier data page unique to each supplier.
Access is gained to the prototype by entering the correct
details into a password authentication page. The simulation
model is developed using eM-Plant and the model is
controlled by the CM using the simulation control page.
What follows is a more detailed explanation of each of the
pages in the prototype.
The Password Authentication Page
Upon opening the application, the first page that all users
of the tool see is the password authentication page, see
Figure 3. Users can log into the application using a ‘Login
Id’ and password. These Ids and passwords are stored in a
backend database. When a user enters an Id and
password, form-based authentication, a feature of .NET, is
used for authenticating the Id and password. These are
also checked against a domain. The domains are offered in
a dropdown list box and there are two domains available:
‘Contract Manufacturer’ and ‘Supplier’. Depending on the
domain, users are re-directed from the password
authentication page to the simulation control of the supplier
data pages respectively.
The Supplier Data Pages
Once a supplier submits the correct details into the
password authentication page, they are re-directed to the
supplier data page, see Figure 3. This page displays all
data relevant to the supplier who logged in. The supplier
data is presented using a data grid, and contains the
following fields: Component, Delivery Included, Min Lot
Size, Stock Held, Replenish Time, Transport Time, Base
Transport Cost, Unit Transport Cost and the overall Unit
Cost. This data can be edited and updated using the edit
and delete buttons one row at a time in the data grid, and
the data is then stored in a backend database. The
Contract Manufacturer can then view and edit the
suppliers’ data, and the supplier data can then be used to
automatically populate the simulation model.
The Data Store Pages
When the CM logs into the application, access can be
gained to the data store pages from the simulation control
page. There are three pages in the data store, and a tab
control is used to select between these. These three pages
contain an RFQ data page, a CM data page and a supplier
data page.
The RFQ data page contains all information for the RFQ.
The CM can upload the RFQ to the application, and a link
to it is displayed on this page. Data is extracted from the
RFQ by the CM, and this data is entered and edited on this
page using data grids. The type of data which can be
entered here includes the annual volume, bill of materials
and flexibility. This data is then used to automatically
populate the simulation model.
The CM data page contains all CM data necessary to
populate the simulation model, including the set-up time,
production time, production cost and production capacity
for the product. This data can be viewed, edited and
updated by the CM using this page.
The supplier data page is used by the CM to view, edit and
update information for all suppliers in the database.
Suppliers in the database are displayed in a list box. By
selecting a supplier from the list box, the individual
Figure 4: The Simulation Control Page
then be edited and updated using the buttons in the first 2
columns of the data grid.
Once the data is entered into the data store, it is used to
populate the simulation model from the CM Simulation
Control Page.
The Simulation Control Page
Figure 4 gives a screenshot of the Contract Manufacturer
Simulation Control page. Submitting the correct information
into the Password Authentication page re-directs the
Contract Manufacturer to this page. From here the data
store can be accessed, where the RFQ, Contract
Manufacturer and Supplier data for each of the suppliers
can be accessed and updated, as in Section 5.4. The data
updated in the Data Store is used to populate the
simulation model. Suppliers can be added to and deleted
from the model using the controls in Annotations 1, 7 and
8. Annotation 8 gives a list of potential suppliers in the
database and Annotation 1 gives a list of unsupplied
components in the simulation model. The buttons in
Annotation 6 allow the CM to add or delete suppliers from
the simulation model.
When all relevant suppliers are added to the model (see
Annotation 7), the simulation can then be started. Using
the list box in Annotation 3, four different experiment
conditions have been set for this prototype. Experiment 1,
‘Run Simulation with Level Demand’, sets the demand to
be uniform for one year, and the value for the demand is
dependent on the annual volume in the RFQ. Experiment
2, ‘Run Simulation with Demand Pattern’, applies a
demand pattern to the demand. Experiment 3, ‘Run
Simulation with Flexibility and Demand Pattern’, applies the
demand pattern and also allows flexibility to be taken into
consideration, as inputted into the RFQ Data page.
Experiment 4, ‘Run Simulation with Overtime Allowed’,
applies the demand pattern, allows flexibility and allows
overtime. Overtime is based on a percentage increase in
production capacity, and an associated percentage
increase in unit production cost. Note that this is set
directly in the underlying simulation model, and was
deemed to be a necessary feature in this prototype.
Once the experiment has been set, the simulation model
can be run. Clicking the Start Simulation button (see Figure
supplier’s data is displayed in a data grid. This data can
4, Annotation 4) triggers the simulation model to start
running. When the run has ended, a button appears which
can be clicked to view the Simulation Results page. This
page will open automatically if the checkbox in Annotation
5 is selected. The simulation can be run multiple times
using the simulation control page.
The Simulation Run Results Page
The results from each simulation run are outputted to the
simulation run results page. These results are explained in
Table 2. Referring to this table, result 1 is the ‘unit cost’,
which refers to the overall cost for one product at the end
of the simulation run. Result 2 is a bar chart, generated
using Macromedia Flash, displaying a breakdown of the
unit cost into: material, incoming logistics, storage,
administration, processing, outgoing logistics and
penalties. Result 3 displays a pie chart with the same
results. Result 4 displays the breakdown of the cost in
tabular format, and also the actual quantity outputted from
the simulation run with associated breakdown of costs.
Result 5 displays the percentage of products that were
delivered on time. Result 6 displays a multi-dimensional
line chart with Initial Demand, Final Demand and Supplied
products on the x-axis against Product Quantity on the y-
axis. Result 7 displays a list of components in the bill of
materials and which suppliers were chosen by the
simulation model to supply each component.
Table 2: Explanation of the Simulation Run Results
No. Result
1 unit cost
2 bar chart of component cost breakdown
3 pie chart of component cost breakdown
4 breakdown of component costs
5 percentage on-time
6 line chart of demand versus supply
7 suppliers of components in BOM
6 CONCLUSIONS AND FUTURE WORK
From analysis of the RFQ process, it was found that there
is a need for a tool to address the speed of the costing
process, the accuracy of the data, the identification of the
cost drivers and the ability to analyse the risk associated
with “what if” scenarios.
A means of incorporating this simulation capability into the
RFQ process has been explored through the development
of a web-based simulation prototype. This application
allows for data for the simulation to be inputted by both the
CM and the tier 2 suppliers, and provides a graphical user
interface for the simplified control of the simulation.
Therefore the Contract Manufacturer is provided with a tool
capable of costing a contract with more speed,
transparency and accuracy.
The prototype proves that it is possible to develop the
SIMCT web-based application using the remote S&A
approach. If the prototype is to be developed further using
this method, there is a need to make the simulation more
visual and interactive, possibly using animation software for
the Internet, i.e. Macromedia Flash, Scalable Vector
Graphics.
Taking an iterative approach, the prototype was developed
as a means for validating the interpretation of the
requirements, as well as for eliciting new requirements as
to what the tool will do. This leads into the design for a
second prototype. Therefore future work includes gaining
user feedback for this initial prototype, and the design of
the next prototype.
7 ACKNOWLEDGEMENTS
This work was conducted as part of a collaborative project
between the University of Limerick and the NITL, Dublin
Institute of Technology, and is funded by Enterprise Ireland
under project ref. no. TD/03/411 (SIMCT).
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