Beer Game Debrief © Thomas F Gattiker

For each chain…. Service Level at Retail=(cases sold) / (cases sold + lost sales) Could a retailer survive with this service level? Factors that make this game easier than real SCM: Only 1 kind of beer; Unlimited capacity; Total visibility of pipeline Raw Material Provider & Manufacturer, how would you characterize retail demand based on what you experienced?

Capture on white board for several teams: Week Raw Matl orders received from factory Factory orders received from Distributor Distributor orders received from Wholesaler Wholesaler orders received from Retailer Retailer “orders” received from consumer 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Range

How many people were surprised at the stability of customer orders? Referring to the previous table(s), what is the general pattern in variability (range) of orders as we move back the supply chain from the consumer level to the raw material level? In other words, what happens to information quality as we move up the chain? What are some of the reasons that cause this-- in the game? In real supply chains?

Bullwhip Effect The tendency of small changes in demand to become amplified and/or distorted as they are transmitted through the supply chain

Bullwhip Effect in Aggregate

What are some of the reasons that cause the bullwhip effect-- In the game? In real supply chains?

Customer Demand Increase of One in Beer Game Sales to consumer are basis for Retailer’s forecast Orders/Sales to retailer are basis for Distributor’s forecast Forecast by naïve method (exponential smoothing, α=1.0) Target safety stock = 4 Retailer Distributor Actual Fcst. Order Actual Fcst. Order 4 4 4 4 5 5 6 6 6 8 SS= 4 3 SS= 4 2

Other Causes of the Bullwhip Effect Other policies/practices that translate relatively smooth & predictable demand to lumpy, less predictable demand ? Full truck load order policy Shortage gaming by customers Focus on ordering costs Quantity discounts Periodic specials

Final Thoughts on Beer Game If this were just a matter of internet enabled inventory & forecast visibility, we would have solved this by now Bad decision making within the system or good decision making within a bad system

(Really) Final Thoughts on Beer Game “The invisible hand may be invisible because it is not there.” --Joseph Stiglitz, Nobel prize-winning economist “There are worse things than ending up with a bunch of extra beer” --Cooper Kalisek, former student

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Bullwhip Effect “May be attributed to irrational decision-making” “However the effect is actually a result of rational behavior within the supply chain infrastructure” “Companies wishing to control the bullwhip effect have to focus on modifying the chain’s infrastructure” Lee, H “Bullwhip Effect in Supply Chains, Sloan Mgt. Review

“Despite the increased efficiency of many companies’ supply chains, the percentage of products that were marked down in the United States rose from less than 10% in 1980 to more than 30% in 2000, and surveys show that consumer satisfaction with product availability fell sharply during the same period.” HBR “In the U.S. food industry poor coordination among supply chain partners wastes $30 billion annually.” AT Kearny

Order Batching Blue: Consumer demand Pink: Retailer’s orders to wholesaler

The Great Inventory Write-down of 2001 (Cisco) Comp1 CM1 100 200 Cisco 100 100 200 100 Customer Comp2 CM2 200 100 100 100 HP 100 Comp3 CM3 “Inside Cisco’s 2$ Billion Blunder” Paul Kaihla, Business 2.0 March 2002.

Causes of the Bullwhip Effect in Supply Chains Occurs when each company in the supply chain forecasts and plans based on the orders received from its immediate customer Causes of the Bullwhip Effect in Supply Chains Lot sizing Borrowing against future demand Demand forecast updating Order batching Price fluctuation / forward buying Rationing and shortage gaming Periodic trade discounts or Anticipated price increases Over-order from one supplier Redundant order with multiple suppliers

Causes of the Bullwhip Effect in Supply Chains Lot sizing Borrowing against future demand Demand forecast updating Order batching Price fluctuation / forward buying Rationing and shortage gaming Occurs when each company in the supply chain forecasts and plans based on the orders received from its immediate customer Based on periodic trade discounts or anticipated price increases Over-order from one supplier Redundant order with multiple suppliers