Tuesday, April 7, 2009

Beer Game

I was reading an article from the Washington Post about how “The sea of new cars, 57,000 of them, stretches for acres along the Port of Baltimore. The customers who once bought them by the millions have largely vanished, and so the cars continue to pile up.” This reminded of the

Beer Game

we once played at the university. OK, we played many beer drinking games, but this one, The Beer Distribution Game is a simulation game created at MIT Sloan School of Management in early 1960's to demonstrate a number of key principles of supply chain management.

The purpose of the game is to meet customer demand for cases of beer, through a multi-stage supply chain with minimal expenditure on back orders and inventory. Communication is against the rules so feelings of confusion and disappointment are common. There are three players in the game including a retailer, a wholesaler, and a marketing director at the brewery. Each player's goal is to maximize profit.
A truck driver delivers beer once each week to the retailer. Then the retailer places an order with the trucker who returns the order to the wholesaler. There's a four week lag between ordering and receiving the beer – just as there is weeks or months lag between ordering and receiving a car.

The following represents the results of a typical beer game as described by Peter Senge in Chapter 3 of his 1990 classic, The Fifth Discipline: The Art & Practice of The Learning Organization

Lover’s Beer is not very popular sells four cases per week on average at the retailer who attempts to keep twelve cases in the store by ordering four cases every week. On week 2 the retailer's sales of Lover's beer doubles to eight cases, so he orders 8 cases.

From week 3 onwards he weekly sells all the beer in stock (5-8 cases), receives less than ordered and orders extra to be on the safe side.

The wholesaler is the only distributor of Lover's beer and delivers to several retailers. The wholesaler's policy is to keep 12 truckloads in inventory, and he orders 4 truckloads from the brewery each week and receives the beer after a 4 week lag.

From week 6 onward he is out of stock, while the retailers are ordering 3 to 4 times more Lovers' beer than their regular amounts. Also the wholesaler receives less than ordered and orders extra to be on the safe side.

The brewery is small but has a reputation for producing high quality beer. Lover's beer is only one of several products produced at the brewery. Orders begin to increase, but it takes two weeks to brew the beer. Even during week 14 orders continue to come in and the brewery has not been able to catch up on the backlogged orders. The marketing manager begins to wonder how much bonus he will get for increasing sales so dramatically.

The suddenly, on week 16,
  • The brewery catches up on the backlog, but orders begin to drop off.

  • The wholesaler received zero orders from all retailers – “What is wrong with these people? Four weeks ago, they were screaming at you for beer, now, they don’t even want any.”

  • The retailer is receiving the beer he has ordered earlier, but demend is down. The pop song that made the beer popular - Cheap Credit by SubPrime - no longer tops the charts.
At this point all the players blame each other for the excess inventory. Conversations with wholesale and retailer reveal an inventory of 93 cases at the retailer and 220 truckloads at the wholesaler. The brewery marketing manager figures it will take the wholesaler a year to sell the Lover's beer he has in stock.

Car industry used to be the example for supply chain management. But something went terribly wrong. In the game the brewery keeps on sending beer nobody wants, in real life “new cars nobody wants to buy continue to pile up in Baltimore and at ports around the globe. Last month, when space filled up at one Swedish port, Toyota was forced to lease a cargo ship as a sort of floating parking garage for 2,500 unsold cars.”

The problem is an observed phenomenon in forecast-driven distribution channels. Since the oscillating demand magnification upstream a supply chain reminds someone of a cracking whip it became famous as the Bullwhip Effect. The solution for this problem is Lean manufacturing, which Toyota should have mastered.

Beer bubbles photo by Tambako
New cars photo by