The Bullwhip Effect

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Yesterday for class, we played the Beer Distribution Game, which is a game developed by the Systems Dynamic Group at MIT back in the early 1960′s. This game simulates what can happen in a traditional supply chain and exposes some interesting dynamics that happen in real-world supply chains.

The players of this game take on the role of Retailer, Wholesaler, Distributor, and Factory. The retailer sells barrels of beer to a consumer and orders barrels of beer from the wholesaler, the wholesaler sells barrels of beer to the retailer and orders barrels of beer from the distributor and the distributor sells barrels of beer to the wholesaler and orders beer from the factory (brewery). The factory brews the beer. The beer supply chain is shown below:

Each player is directly linked, and beer cannot skip the adjacent position. For example, the Wholesaler orders beer from the Distributor, and ships beer to the Retailer. The goal of the game is to minimize team total costs — each barrel of beer has a cost, which is calculated at the end of the game. Information Flow proceeds from Retailer to Factory; Material Flow proceeds from Factory to Retailer.

 

Beer Game Definitions

1. Orders received: This is the demand vor the current period at this position. For the Retailer the demand is determined by the Computer itself. For all positions, this demand reflects an order placed by the downstream position in the supply chain during the previous period.
2. Backlog: This is the demand that has not been met to date at this position. When a position does not meet demand by shipping barrels of beer, the backlog amount is increased. At no time should there be inventory items and a backlog simultaneously.
3. Current Costs: This is the total cumulative costs for the position (barrels * $).
4. Order: This is the field to insert the order for the actual round for each position.

The order quantities of the retailer was the same after week 4. From week 1 – 4, the order quantities was 4 barrels. From week 4 until the end of the game, the order quantity was 8 barrels. But, the players didn’t know this fact. This is what the order quantity chart looked like:

Despite the contant order quantities for the entire game, the results are very surprising — this is what demonstrates the Bullwhip Effect:

Supply Chain Observations

1. Variation os Stocks and Orders increases up the supply chain from customer to supplier.
2. The longer the lead time of information and material, the more exaggerated the bullwhip effect is.
3. The system is to blame: (a) If customer demand sinks or levels, then supplier needs to empty pipeline in order to minimize costs; (b) if customer demand increases, then supplier pipeline needs to be filled in order to avoid a backlog. The phenomena produces a feast/famine scenario in the supply chain.
4. Procurement or purchasing in batches adds variability.
5. Changing forecasts lead to a change in safety stocks. This creates variability in the system.
6. Promotions impact variability of demand.
7. In times of a shortage, tier x suppliers tend to order more than actual demand in order to avoid a backlog.
8. Related to (7), customers tend to order more in times of shortage; when shortage is over, cancellations occur adding stock variability to the system.

How to Manage the Bullwhip Effect

I’ve experienced the Bullwhip Effect, and I can tell you that I have not learned to effectively manage it or avoid it. But, below are some true and tried principles for how to manage the Bullwhip Effect:

1. Reduce lead time of information (orders, demand and capacity forecasts, point-of-sale data for the entire supply chain).
2. Reduce lead time of material.
3. Reduce variability with effective use of the Heijunka and one-piece flow.
4. Cooperation and good relationships with your supply chain partners.

Bullwhip Effect: History

The Bullwhip Effect (or Whiplash Effect) is an observed phenomenon in forecast-driven distribution channels. The concept has its roots in J Forrester’s Industrial Dynamics (1961) and thus it is also known as the Forrester Effect. Since the oscillating demand magnification upstream a supply chain reminds someone of a cracking whip it became famous as the Bullwhip Effect.

Beer Game: Hansei, Reflection

Yesterday was a fascinating study into human behavior. As I walked around the room, I heard phrases such as “let’s assume orders will always be between 5 and 15 barrells” or “let’s make more now so that we won’t run out so fast” or “let’s order double each time so that we will always have inventory.” Without knowing it, the players yesterday over and under forecasted; they over-compensated on inventory; they tried to “rush” production and didn’t follow pace — system and human behavior that is so classic in real Operations and Supply Chains.

Beer Distribution Game, Applications

There are many applications for this simulation:

1. Obviously, to simulate material flow in a supply chain
2. To simulate information flow in software development
3. To simulate information flow in marketing
4. To simulate information flow in Advertising, Creative, and Marketing
5. To simulate information flow in the Legal Profession
6. Many others…

Videos on Supply Chain Beer Game

Below are a few videos that show how to simulate supply chain shocks and issues that arise in managing supply chains. Below is the Beer Distribution Game.

Beer Distribution Game, Introduction

The Beer Distribution Game (The Beer Game) is a simulation game created by a group of professors at MIT Sloan School of Management in early 1960s to demonstrate a number of key principles of supply chain management. The game is played by teams of at least four players, often in heated competition, and takes from one to one and a half hours to complete. A debriefing session of roughly equivalent length typically follows to review the results of each team and discuss the lessons involved.

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. Players can see each other’s inventory but only one player sees actual customer demand. Verbal communication between players is against the rules so feelings of confusion and disappointment are common. Players look to one another within their supply chain frantically trying to figure out where things are going wrong. Most of the players feel frustrated because they are not getting the results they want. Players wonder whether someone in their team did not understand the game or assume customer demand is following a very erratic pattern as backlogs mount and/or massive inventories accumulate. During the debriefing, it is explained that these feelings are common and that reactions based on these feelings within supply chains create the bullwhip effect.

Beer Distribution Game, Part 1

Beer Distribution Game, Part 2

Beer Distribution Game, Part 3

Beer Distribution Game, Part 4

Beer Distribution Game, Part 5

Beer Distribution Game, Part 6

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