1. Lean Supply Chains: The Foundation
System’s Perspective
Understand supply chain dynamics and adopt a holistic view.
Consider the business ecosystem in which you are operating.
Supply Chain Dynamics
Enterprises can experience huge variations at each step in the chain, with variations typically more pronounced the further upstream the enterprise is from the ultimate user.

2. Simulation Settings Overly simplified supply chain Roles
Selling kegs of beer
Roles
Factory (warehouse)
Distributor
Wholesaler
Retailer

3. Supply Channels From shop floor Transport delays Order Order Order
processing
delays
Order To
Consumers

4. Retailer Order beer from wholesaler Manages inventory levels
Sells/ships beer to fill end-consumer’s orders

5. Wholesaler Order beer from distributor Manages inventory levels
Sells/ships beer to fill retailer’s orders

6. Distributor Order beer from factory warehouse Manages inventory levels
Sells/ships beer to fill wholesaler’s orders

7. Factory Schedule beer production in factory
Manages finished goods inventory levels
Sells/ships beer to fill distributor’s orders

8. Leadtimes Order processing delay Transportation delay
Unit cycle time: 2 weeks

9. Cost structure Inventory holding cost: Lost of sales cost
$1 for each keg of beer in the inventory at the end of each week
Lost of sales cost
$2 for each keg of beer that is backlogged at the end of each week

10. What you should do every week
Receive beer from upstream supplier
Receive order from downstream customer
Ship the beer to fill the demand as much as possible, as inventory permit
Backlogged orders must be filled in subsequent week, as inventory permit
Send an order to your upstream supplier
Objective: Minimize your total cost

11. Bebrief

12.  The Beer Game
Underscores the importance of understanding supply chain dynamics and applying systems thinking to coordinate activities within and between enterprises.
Explains the crucial role lead times play in enhancing or inhibiting competitiveness
Elaborates on the role of information systems in the lean supply chain.  

13. Assumptions Assumes a linear SC, 4 enterprises, one type of beer
Goal is to manage demand as imposed by it’s customer
Each enterprise has only one manager
Runs for 36 wks.
Retailer
Factory
Distributor
Wholesaler

14. Assumptions
Each week, an enterprise receives an order from downstream customers and places an order upstream.
Two week lead time between when an order is placed and when it is received.
Each enterprise starts with 12 cases of beer.

15. Playing the game
Everyone acts in their own self interest on the basis of their own forecasts
The system is in a steady state with demand at four cases each week.
In week 5, demand is disrupted to 8 cases a week and remains constant.
Player’s ordering policy?

16. Bullwhip Effect
Fluctuations in orders increase as they move up the supply chain from retailers to wholesalers to manufacturers to suppliers
Distorts demand information within the supply chain
Results from a loss of supply chain coordination

17. Demand Distortion Results in: Larger inventory carrying costs
Lost sales from stock outs
Lack of responsiveness to customer demand

18. Demand at Different Stages

19. Bullwhip Effect
Most demand distortion is caused by the supply chain itself, not by the customer.
Results in:
excessive inventory investment
poor customer service
lost revenues
misguided capacity planning
ineffective transportation
Ineffective production schedules.

20. The variation doubles at each stage.
Retailer
Wholesaler
Distributor
Factory
200%
1,600%
400%
800%
The variation doubles at each stage.
However, of the xx-case increase in the factory's orders, only four cases were directly attributable to a change in consumer demand.
The lead times present in this value stream created 94 percent of the variation observed in the factory’s orders.

21. The Implications of Lead Time on the Bullwhip Effect
Retailers
Warehouses/
Distributors
Manufacturers
Lead times significantly exacerbate the bullwhip effect
Reducing lead time, in combination with improved visibility along the supply chain, can significantly and positively relieve the bullwhip effect 21

22. The Impact of Information on the Bullwhip Effect
Perfect forecasting does not eliminate the bullwhip effect
Lesson: The bullwhip effect is present even if there is perfect information about the future that is shared among all channel partners. 22

23. The Impact of Lead Time on the Bullwhip Effect
Lead times can multiply the variation in demand and so everyone in the supply chain should be working to reduce lead times.
The implications of Little's Law are that when inventory in the supply chain is high, lead times increase, and, conversely, longer lead times result in more inventories in the pipeline.
This problematic and cyclical relationship between lead times and inventory is a powerful reason for reducing lead times. 23

24. Structure Drives Behavior: Causes of the Bullwhip Effect
Lack of visibility
Long lead time
Many stages in the supply chain
Lack of pull signals
Order batching
Price discount and promotions
Forward buying
Rationing 24

25. Other Behaviors that Cause the Bullwhip Effect
Over-reaction to backlogs
Neglecting to order to reduce inventory
Demand forecast inaccuracies
Attempts to meet end-of-month metrics 25

26. Ways to Mitigate the Bullwhip Effect
Reduce lead times
Use/sharing of POS data
Smaller orders
Work with suppliers on more frequent deliveries of smaller order increments
Use stable pricing, “everyday low prices”
Levels out customer demand
Allocation based on past sales 26

27. Coordination in a Supply Chain

28. Lack of Supply Chain Coordination and the Bullwhip Effect
Supply chain coordination – all stages of the chain take actions that are aligned and increase total supply chain surplus
Requires that each stage share information and take into account the effects of its actions on the other stages
Lack of coordination results when:
Objectives of different stages conflict
Information moving between stages is delayed or distorted

29. Incentive Obstacles
Occur when incentives offered to different stages or participants in a supply chain lead to actions that increase variability and reduce total supply chain profits
Local optimization within functions or stages of a supply chain
Sales force incentives

30. Information Processing Obstacles
When demand information is distorted as it moves between different stages of the supply chain, leading to increased variability in orders within the supply chain
Forecasting based on orders, not customer demand
Lack of information sharing

31. Operational Obstacles
Occur when placing and filling orders lead to an increase in variability
Ordering in large lots
Large replenishment lead times
Rationing and shortage gaming

32. Operational Obstacles

33. Pricing Obstacles
When pricing policies for a product lead to an increase in variability of orders placed
Lot-size based quantity decisions
Price fluctuations

34. Pricing Obstacles

35. Behavioral Obstacles
Problems in learning within organizations that contribute to information distortion
Each stage of the supply chain views its actions locally and is unable to see the impact of its actions on other stages
Different stages of the supply chain react to the current local situation rather than trying to identify the root causes
Different stages of the supply chain blame one another for the fluctuations
No stage of the supply chain learns from its actions over time
A lack of trust among supply chain partners causes them to be opportunistic at the expense of overall supply chain performance

36. Managerial Levers to Achieve Coordination
Aligning goals and incentives
Improving information accuracy
Improving operational performance
Designing pricing strategies to stabilize orders
Building strategic partnerships and trust

37. Aligning Goals and Incentives
Align goals and incentives so that every participant in supply chain activities works to maximize total supply chain profits
Align goals across the supply chain
Align incentives across functions
Pricing for coordination
Alter sales force incentives from sell-in (to the retailer) to sell-through (by the retailer)

38. Improving Information Visibility and Accuracy
Sharing point of sale data
Implementing collaborative forecasting and planning
Designing single-stage control of replenishment
Continuous replenishment programs (CRP)
Vendor managed inventory (VMI)

39. Improving Operational Performance
Reducing replenishment lead time
Reducing lot sizes
Rationing based on past sales and sharing information to limit gaming

40. Designing Pricing Strategies to Stabilize Orders
Encouraging retailers to order in smaller lots and reduce forward buying
Moving from lot size-based to volume-based quantity discounts
Stabilizing pricing
Building strategic partnerships and trust

41. Continuous Replenishment and Vendor-Managed Inventories
A single point of replenishment
CRP – wholesaler or manufacturer replenishes based on POS data
VMI – manufacturer or supplier is responsible for all decisions regarding inventory
Substitutes

42. Collaborative Planning, Forecasting, and Replenishment (CPFR)
Sellers and buyers in a supply chain may collaborate along any or all of the following
Strategy and planning
Demand and supply management
Execution
Analysis
Retail event collaboration
DC replenishment collaboration

43. Achieving Coordination in Practice
Quantify the bullwhip effect
Get top management commitment for coordination
Devote resources to coordination
Focus on communication with other stages
Try to achieve coordination in the entire supply chain network
Use technology to improve connectivity in the supply chain
Share the benefits of coordination equitably