1. Quality Management Solutions, Inc. APICS Hampton Roads: 10-17-06 The Beer Distribution Game G. L (Jerry) Kilty, CFPIM, CIRM, CSCP  2519 McMullen Booth Road  Suite 510 Q  Clearwater, FL 33761  727 725-7674  QMSJerry@ij.net

2. Quality Management Solutions, Inc. Purpose of the Game The Beer Distribution Game Introduce the principle that structure produces behavior Experience the pressure of playing a role in a complex system and understand the impact of collective decisions on system performance Show the impact and importance of information flow on the supply chain

3. Quality Management Solutions, Inc. Objectives for Your Teams The Beer Distribution Game Minimize total supply chain costs -- watch your inventory levels Achieve high order fill rates -- keep your customers happy and keep their business The team with the lowest total cost wins Cost of inventory: $1.00/case/wk Out-of-stock cost: $2.00/case/wk

4. Quality Management Solutions, Inc. Rules of the Game The Beer Distribution Game 1Pick a team name Each company fills out Record Sheets – Inventory/ Backlog and Orders No communication between positions Retailers -- do not reveal what customers actually order Play for 50 weeks 2 3 4 5

5. Quality Management Solutions, Inc. Overview of the Game - The Supply Chain The Beer Distribution Game RetailerWholesalerDistributorFactory Customer Maximize customer loyalty and sales Back orders mean high customer dis- satisfaction, loss of sales, and loss of market share Track record of high service levels One of a few select suppliers Poor service = loss of business Pretty good customer service On notice: in danger of losing business if fail to achieve required fill rates Strategy = quality and on time Distributor cross docks so needs high service level Charge-back penalties if late

6. Quality Management Solutions, Inc. Let the Game Begin The Beer Distribution Game We will walk through the first few weeks slowly until you get the hang of it For the first two weeks, order four cases/wk As the facilitator calls the weeks, follow the Instruction sheet Good Luck!!

7. Quality Management Solutions, Inc. The Beer Distribution Game About Week 8 or 9... Back orders appear Back orders are cumulative Orders to fill this week = New orders this week + Back orders from last week ….and explain

8. Quality Management Solutions, Inc. Debriefing: Purpose of the Game The Beer Distribution Game  Experience the pressures of a complex system  Understand the impact that the collective results of many individual decisions can have on system performance  Recognize that internal structure -- not external events -- causes system behavior  Highlight the importance of coordination in an organization in meeting customer and company objectives

9. Quality Management Solutions, Inc. Debriefing: Lesson #1 The Beer Distribution Game Even though different people working in the same structure act exercise their own free will, the qualitative patterns of behavior are the same:  Oscillation -- Orders and inventories are dominated by large amplitude fluctuations, with an average period of about 20 weeks  Amplification -- The amplitude and variance of orders increases steadily from customer to retailer to factory. The peak order rate at the factory is on average more than double the peak order rate at retail.  Phase Lag -- The order rate tends to peak later as one moves from the retailer to the factory. Retailer Orders Factory Orders Time Lag

10. Quality Management Solutions, Inc. …And the winner is…. The Beer Distribution Game

11. Quality Management Solutions, Inc. Debriefing: Lesson #1 continued The Beer Distribution Game 1. Consumer Sales Time Order Quantity 20 0 3. Wholesaler Orders to Manufacturers Time Order Quantity 20 0 2. Retailer Orders to Wholesalers Time Order Quantity 20 0 4. Manufacturer Orders to Supplier Time Order Quantity 20 0 Source: Prof. Tom Davis, “The Role of Variability in the Supply Chain” Seminar, Stanford University, Sept., 1996. The “Bullwhip Effect” in Action

12. Quality Management Solutions, Inc. The Forrester Effect Demand Time Demand Time Demand Time Demand Time Retailer Manufacturer Distribution Supplier Consumer Demand Time Demand Time Demand Time IMPACT Increased Variability Poor communication Lack of visibility Human error Process constraints (e.g., capacity, batch sizes) Time lags Small Change in Demand

13. Quality Management Solutions, Inc. Debriefing: Lesson #1 continued The Beer Distribution Game Weeks Quantity Actual Customer Orders

14. Quality Management Solutions, Inc. Debriefing: Lesson #2 The Beer Distribution Game Internal Structure -- Not External Events -- Causes System Behavior  Although each player was free to make his or her own decisions, the same patterns of behavior emerge in every game, demonstrating the powerful role of the system in shaping our behavior.  Understanding how well-intentioned, intelligent people can create an outcome no one expected and no one wants is one of the profound lessons of the game.

15. Quality Management Solutions, Inc. Group Exercise The Beer Distribution Game What would you do to improve the supply chain? Take 20 minutes Presentations

16. Quality Management Solutions, Inc. Wrap Up The Beer Distribution Game  Integrated planning and scheduling processes  Demand-pull manufacturing systems  Integrated supply chain (VMI, CRP, etc.)  Enterprise-wide information systems  Process-based organizational structure  Co-location of functional departments  Other? Supply chain improvements…..

17. Quality Management Solutions, Inc. The Beer Distribution Game THE END

18. Quality Management Solutions, Inc. THANK YOU! The Beer Distribution Game G. L (Jerry) Kilty, CFPIM, CIRM, CSCP  2519 McMullen Booth Road  Suite 510 Q  Clearwater, FL 33761  727 725-7674  QMSJerry@ij.net