Bullwhips and Beer: Why Supply Chain Management is so Difficult
The basic concept behind supply chain management is simple: customers order products from you; you keep track of what you're selling, and you order enough raw materials from your suppliers to meet your customers' demand. So why is it that, in a recent article, the Economist claimed that, "Managing a supply chain is becoming a bit like rocket science?"
The problem turns out to be one of coordination. Suppliers, manufacturers, sales people, and customers have their own, often incomplete, understanding of what real demand is. Each group has control over only a part of the supply chain, but each group can influence the entire chain by ordering too much or too little. Further, each group is influenced by decisions that others are making.
This lack of coordination coupled with the ability to influence while being influenced by others leads to what Stanford's Hau Lee refers to as the Bullwhip Effect. Decisions made by groups along the supply actually worsen shortages and overstocks.
The bullwhip effect is illustrated by a story Prof. Lee tells about how Volvo found itself with extra inventories of green cars. To get them off the dealers' lots, Volvo's sales department offered special deals, so demand for green cars increased. Production, unaware of the promotion, saw the increase in sales and ramped up production of green cars.
Cisco faced a similar problem last year that resulted in a $2.2 billion inventory write-down. Only a few months before the write-down, Cisco wasn't able to get its products to customers quickly enough. Quoting a supplier to Cisco interviewed in CIO Magazine, "People see a shortage and intuitively they forecast higher. Salespeople don't want to be caught without supply, so they make sure they have supply by forecasting more sales than they expect. Procurement needs 100 of a part, but they know if they ask for 100, they'll get 80. So they ask for 120 to get 100."
Delays Wreak Havoc
But coordination isn't just about communication. Even in supply chains where communication is perfect, manufacturing and procurement delays can wreak havoc. That's because while customers are asking for increased orders, backlogs are building, and it is oh-so-easy to confuse backlogged orders with increases in demand.
Thousands have felt the frustration of supply chain management in a simulation developed at MIT's Sloan School of Management called the beer game. The simulation is run as a board game in teams playing the roles of retailers, wholesalers, distributors, and brewers of beer. As the backlog for orders increase, players order too much inventory, forcing their teammates into severe backlogs further down the supply chain. The game can be emotionally intense. John Sterman, Director of MIT's System Dynamics Group writes, "During the game emotions run high. Many players report feelings of frustration and helplessness. Many blame their teammates for their problems; occasionally heated arguments break out."
The Near Beer Game Simulation
You can try a version of the beer game called the Near Beer Game. It's called the Near Beer Game because, although it's not identical to the original beer game, it teaches many of the same lessons. It also teaches one extra lesson not in the original game: even with perfect information, even when there are no breakdowns in communication, you'll still feel the bullwhip effect due to procurement and manufacturing delays.
Here's how the Near Beer Game works: at the beginning of the simulation your supply chain is in perfect equilibrium. Customers are ordering ten cases of beer each week, you have ten cases in inventory, ten cases are brewing, and ten cases worth of raw materials are arriving from your vendors. In week two, demand increases to fifteen cases per week and remains at fifteen cases for the remainder of the simulation. The game ends when you manage to get your supply chain back in equilibrium for fifteen cases of beer.
Sounds easy right? Try it out and see how many weeks it takes you. See if you can bring the supply chain back into equilibrium without the bullwhip oscillations of stock-outs followed by over-supply.
How to Reduce the Bullwhip Effect
One way to reduce the bullwhip effect is through better information, either in the form of improved communication along the supply chain or (presumably) better forecasts. Because managers realize that end-user demand is more predictable than the demand experienced by factories, they attempt to ignore signals being sent through the supply chain and instead focus on the end-user demand. This approach ignores day-to-day fluctuations in favor of running level.
Another solution is to reduce or eliminate the delays along the supply chain. In both real supply chains and simulations of supply chains, cutting order-to-delivery time by half can cut supply chain fluctuations by 80%. In addition to savings from reduced inventory carry costs, operating costs also decline because less capacity is needed to handle extreme demand fluctuations.
In addition to cycle time reductions throughout the supply chain, Hau Lee, V. Padmanabhan, and Seungjin Whang recommend the following actions to reduce the supply chain management bullwhip effect:
- Focus on end-user demand through point-of-sale (POS) data collection, electronic data interchange (EDI), and vendor-managed inventories (VMI) to reduce distortions in downstream communication.
- Work with vendors to create smaller order increments and reduce order batching. Order batching exacerbates demand fluctuations.
- Maintain stable prices for products. Price fluctuations encourage customers to over-purchase when prices are low and cut back on orders when prices are high, leading to large demand fluctuations.
- Allocate demand among customers based on past orders, not present orders to reduce hoarding behavior when shortages occur.
Additional reading:
- "The Bullwhip Effect in Supply Chains," Sloan Management Review
- The Beer Game, Prof. John Sterman, MIT Sloan School of Management
- "Chain Reaction: Managing a Supply Chain is Becoming a Bit Like Rocket Science," The Economist
- "What Went Wrong at Cisco," CIO Magazine
Posted by Michael Bean
October 31st, 2007 at 8:32 am
[...] 31st, 2007 · No Comments Who hasn’t played the beer game in a basic SCM class? (which is btw also dubbed the“flight simulator for management education“…) It’s so much more effective to play it than to explain the Forrester effect over and over… Back from my undergrad times, I will never forget learning how to write an algorithm while trying to figure out how “Settlers” worked. Or playing “Transport Tycoon” over and over again. Nerdy? Perhaps. But also effective for the learning process. And there is no more fun than to discuss the existence of transportation companies in Second Life with students (which is, however, still a mystery to me; why use, say, a plane, or a sailboat, if you can teleport yourself?). [...]
December 18th, 2007 at 7:31 am
[...] Om Fario menjelaskan bahwa untuk mengurangi ‘bullwhip effect‘ bisa dengan komunikasi yang baik antar rantai. Akan tetapi, dalam permainan ini, informasi bersifat tertutup sehingga agaknya strategi yang dimaksud Om Fario sulit diterapkan dalam permainan. Namun, di lapangan langkah ini bisa ditempuh juga. [...]
February 2nd, 2008 at 1:39 am
[...] Reducing inventory reduces the working capital cost , reduces warehousing costs and obsolescence costs . To reduce inventory, demand fluctuation will have to be reduced, reliability of inventory replenishment will have to increased, Inventory Record Accuracy will have to be above ~95% and supply chain length will have to be reduced. [...]
September 2nd, 2008 at 9:14 pm
hi ,im from brazil and i i would like to know how can i get the user name and a password to play the near beer game,im a student of production engeniering and i m doing my final projecct of graduation about beer game
thnaks and sorry for my english
September 6th, 2008 at 5:52 am
Dear Sir,
How could I request a userid and password to play the Near Beer game? Please advise. Thanks.
Best Regards,
Terence
September 11th, 2008 at 11:10 am
Would like to register to use beer game in class - how do I register??
September 11th, 2008 at 2:16 pm
Hi,
Thanks for the various inquiries on the simulation. You can find more info on subscribing here:
http://forio.com/subscriptions.htm?sim=nearbeer
Will Glass
Forio
November 22nd, 2008 at 11:50 pm
"The BeerGame is a logistics game that was originally developed by MIT in the 60s and has since been played all over the world by people at all levels, from students to presidents of big multinational groups."
interesting game
December 3rd, 2008 at 8:14 pm
I wish to play the game, please.
I need user name and a password to login.
Thanks,
Henry.
December 8th, 2008 at 6:08 am
Hi there,
Very intriguing ... can you tell me how long the game typically takes? Are there ways to condense the game to at most 1.5 hours?
Thanks!
cmm
December 10th, 2008 at 10:30 pm
It is an interesting game. The end-user (the consumers) are the dictators of the processes; the processes of manufacturing, merchandazing/marketing, promotion, and the design.It takes good leadership to know when market is fluated, and when not; that is, when to slow down on inventory, and when to increase it.
December 17th, 2008 at 3:20 pm
How do I get a user name and password?
December 18th, 2008 at 1:33 pm
You can find out more here about how to subscribe:
http://forio.com/nearbeer.htm
December 18th, 2008 at 1:36 pm
@Coach Cyndi: The online Near Beer Game takes about 10 to 20 minutes to play, though it can serve as the basis for a substantial class discussion. The board version of the game (with much more detail and mechanics) takes about 2-3 hours for full play and debriefing.
Note that we're in the process of releasing our own online multiplayer version of the simulation with can be played in 45-60 minutes followed by 30-60 minutes of debriefing.