Beer Game Analysis Essay
Beer Game Analysis
The beer game is a simulation first developed at the Massachusetts Institute of Technology’s Sloan School of Management in the 1960s. This game was made in other to experiment how real organisations functions, where the consequences of every decisions play out as clearly as possible in the game as they would in a real organisation (Senge, 1990). Narayanan Arunachalam (2006) described the game as a popular classroom exercise for business schools conceived at MIT with the primary purpose of demonstrating industrial dynamics. The beer game is a “laboratory replica” of a real organisational setting, helps to highlight the possible disabilities and their causes of an organisation. The beer game however in this case was created to fail and highlight possible problems which an organisation may face in its supply chain which is the bullwhip effect. The game includes four players which include the retailer, the wholesaler, the distributor and the factory which is in an uplink setting. After playing the game, below we will be giving a detailed report of the events that took place at the course of the game.
* Data analysis:
The objective of the beer game is to minimize the total cost for everyone in the supply chain by maintaining low stocks and managing to deliver all orders (http://supplychain.mit.edu/games/beer-game, 2011). However, the game was created to fail and below is a summary of events that took place during the game.
Figure 1: Inventory/Backorder of the supply chain
During the course of playing the game, we followed the zero strategy which stated that “place zero orders upstream when your individual inventory is higher than demand”. This rule was largely what shaped the game and influenced the results in terms of inventory and backorders. The retailer had a considerable good start in the game with a good record in inventories of 12 units till week 5 when demand rose from customers and this caused the inventory rate to fall. In week 6, due to no shipments and the bullwhip effect, the retailer started having back orders from the customers. Although the demand stayed the same from week 6, the retailer continued to experience backorders till week 21 when the wholesaler sent a lot of supplies at once; this made the inventories to rise to a peak of 113 units in week 24. The wholesaler started with an inventory of 12 units which remained the same in week 2.
However, due to incoming shipments from the distributor and a lack of demand from the retailer, the inventory rose to 16 units in week three and 20 units in week 4 and remained the same till week 6. Due to an increase in demand from the retailer and a lack of shipments from the distributor, the inventories fell to 6 units and in week 7 and at week 8, the wholesaler was having back orders. Backorders keep reoccurring and fluctuating until week 21 when it rose to 16 units of inventory and reached a peak of 136 units in week 25. The distributor during the game had the same inventory rate for the first two weeks. The distributor maintained similar inventory rates till week 9 when the distributor started recording backorders this was due to the inability of the distributor to meet the orders of the wholesaler.
The distributor continued to experience fluctuations in backorders until week 25 when it got a lot of supplies from the factory the inventories at the end of this week was at 40. The factory had started the game with an inventory of 12 units which remained the same till week 10. This was largely due to a lack of huge demands from the distributor. The factory however started experiencing backorders at week11. Backorder rates kept fluctuating during the weeks due to the inability of the factory to meet the needs of the factory on time. At week 25, the factory got a huge sum of supplies from the brewery which made its inventory to reach a peak of units. The high rate of back orders was caused by long lead times, the bullwhip effect and the effects of the zero strategy. This made backorders to be on the rise for all the supply chain operators. Increase in demand also played a great role in causing the high number of backorders which in turn made the total cost to rise at a higher pace than it should.
Figure 2: Order chart
Above is a chart showing the order levels of the Retailer, wholesaler, distributor, factory and customer. At the course of the game, due to the zero strategy, all supply chain operators had to make zero orders from week one to week 4, because demand was less than the inventory. The customer demand remained the same at 4 units until week 5. In week 5, demand from the retailer’s order rate had increased from zero to 16 while demand rose to 8 units compared to previous weeks.
The orders of the wholesaler, distributor and factory remained zero in this week because they had high inventories. The decrease in inventories of the retailer resulted in the increase in order rates which was caused by a decrease in shipment which is a bullwhip effect. By week 11, all the supply chain operators had increased their order rate because their inventory levels were down. And back orders followed alongside changes in order changes which are all caused by the bullwhip effect. In week 21, the bullwhip effect were decreased which resulted to increased inventories and the zero rule coming in.
* Issues that you encountered using the zero strategy:
* Increase in Backorders:
The biggest challenge we faced during the beer game was the challenge of constantly increasing backorders which can be seen in figure1. The retailer had a peak backorder rate of 49, the wholesaler 90, the distributor 85 and the factory 72 backorders. Backorder means a distribution term that refers to the status of items on a purchase order in the event that some or the entire inventory required to fulfill the order is insufficient to satisfy demand leading to a waiting period for the organisation to meet this demand (Donovan, 2010). After using the zero strategy for a few weeks, we found the backorder like a chain reaction star from retailer up to the factory.
* Zero inventory and Safety stock:
We know that in the real business, zero inventories and stock means that the company’s ability of resisting the risk of backorders and shortage of supply is reduced. But this is the case in the beer game where we went on with zero inventory and safety stock for weeks. This showed that the company was incompetent in meeting its own standards.
* High rise of cost:
Cost control is very important for a company, high cost operation is unacceptable. During the beer game, due to the high cost of back orders, we were running on an outrageous cost per week. This was either due to enormous inventory or massive backorders. The cost of the backorders $1.00 and inventory cost $0.60. After we finish this game, we found that the cost of each supply chain operator was high and a total cost of $2, 862. At the initial stage, the increase in cost was little and similar when back orders rose, the cost became tremendous.
* Delay in shipment (Long lead time):
During the game, it took two weeks for the retailer to get supplies from the wholesaler and twice as long if the wholesaler has not enough resources for the retailer. That means that it took two weeks to receive from the wholesaler, when the wholesaler is out of stock, it takes four weeks, and when the distributor is out of stock it takes six weeks for the distributor to get stock from the factory and finally, when the factory is out of stock, it takes seven weeks for the retailer to receive supplies. This shipment delay makes it difficult to meet customer demands and causes high cost due to backorders.
* Lack of communication:
During the beer game there was no communication of any sort between the supply chain operators and this led to so many misjudgements. The lack of communication led to the bullwhip effect which cost us a lot by resulting in back orders, and high costs.
* Challenges encountered in beer game:
* Bullwhip Effect:
The “bullwhip” effect was coined in by Proctor and Gamble (P&G) when the company experienced extensive demand amplification for their diaper products (Lee et .al, 1997). The bullwhip effect is a phenomenon in the supply chain whereby unpredictable elements introduced by human behaviour in the lower part of the chain becomes more pronounced the higher up the chain they move (Baugher, 2012). By synchronizing the supply chain the bullwhip effect can be eliminated. The bullwhip effect describes how inaccurate information, and a disconnection between production and real-time supply chain information result in loss of revenue bad customer service, high inventory levels and unrealised profits (Agarwal, 2009). With reference to figure 1 above, we can observe that the bullwhip effect did occur during the beer game simulation. An example of such a situation is in week 5 when the consumer demand increased from 4 units to 8 units.
The retailer then made an order of 16 units upstream in week 5, when the wholesaler got the figures the wholesaler then made an order of 20 units in week 7. This continued with the distributor, who ordered 25 units upstream in week 9, the reaction of the factory was similar with an order of 26 units in week 11. This shows a spike in demand upstream as illustrated in figure 3. The major cause of the bullwhip effect was the increase in consumer demand in week 5 and 6. Which later came to a normal state in week 7 at 8 units as illustrated in figure 2? The individual demand forecasts from the supply chain operators also caused the bullwhip effect.
Lack of communication is also very common when the supply chain operators may not provide sufficient or accurate information up the supply chain on the subject of current market conditions causing improper levels of inventory (Coyle et.al, 2003). This was the case during the beer game which can be seen that with time, the demand was interpreted differently as it went upstream. This the entire supply chain faced backorders due to the bullwhip effect from week 6 onwards even though the demand remained the same from week 8 onwards. The implications of the bullwhip effect includes excess inventories which was the case at the closing weeks of the game, problems with quality, increased raw materials costs, overtime expenses, increased inventory costs, increased backorder costs and increased shipping costs (Bowersox, D.J, 2007).
* Long lead time:
Lead time delay occurs when the time it takes to obtain, make and deliver the finished goods to a customer takes longer than the time the customer is prepared to wait for it to reach them (Fawcett et.al, 1992). During the beer game, it takes 2weeks for the wholesaler to get information from the retailer and vice versa. It takes the distributor two weeks to get information from the wholesaler and it takes two weeks for the wholesaler to get information from the distributor.
It also takes two weeks for the factory to get information from the distributor and two weeks for the distributor to get supplies from the factory. It takes the brewery one week to get information from the factory and one week for the factory to get information from the brewery. So like it was experienced in the beer game, when all the supply chain operators are dried out, doing the math, it takes seven weeks for supplies to go from the brewery down to the consumer, and six weeks for information to go from the retailer to the factory. The longer the lead time, it creates negative impact on the firm as it reduces the customer’s responsiveness and reactions (Stock, J.R and Lambert, D.S, 2001).
* Zero strategy:
The zero strategy which is a rule for playing the game clearly states that we as the operators place zero orders uplink if demand is less than inventory. This went along way to cause a lot of delays in shipments because of long lead times. This is because when the inventory of the retailer as seen in figure 1 becomes less than demand, it took 5 weeks for the factory to have such an effect. This made the lead time even longer and caused the bullwhip effect as well as enormous back orders.
* Neglect orders to reduce inventory:
During the course of the game, we had to neglect backorders in order to reduce inventory and save costs. This can be seen in figure 3 below where the retailer did not dramatically increase demand to meet back orders but did this on a gradual basis in order to reduce inventory and holding cost. However when the supplies finally came, the effects were just as bad with inventory rates skyrocketing overnight. Figure 3: Inventory and Demand of retailer
* Ways to improve the zero strategy:
* Improve communication:
By improving communication levels among the supply chain operators will help to solve the problem of assumptions, inappropriate decisions and reduce the bullwhip effect. In both actual supply chains and supply chain simulation, we can cut supply chain fluctuations by 80% by cutting order-to-delivery time by half (Simchi et.al, 2003). Improvement in communication will help to improve the efficiency of the system by eliminating assumptions and stimulating a synchronized supply chain which will help in getting all the partners to operate in a way that is mutually supportive, corporative and transparent (Gérard P. Cacho et al.)
* Point of Sale (POS) system:
Point of Sale system is a means or can be referred to as a system which is meant to deal with the sales of goods. Point of sale system is software that works with hardware in order to inspect and monitor sales in order to give accurate demand and sales information (http://www.gofrugal.com/pos/ point-of-sale.html?gclid=CPyHobrW-q4CFQ8b6wodkDXwwg,2004). By implementing this system, the company can be able to get accurate demand which will help the company in eliminating sudden demand spikes like seen in the beer game. An example of a company which uses such a system is Wal-Mart and the system works well for the company helping to monitor all sales and demand, reduce the risk of inventory shrinkage, manage special demands, maintain control, improve efficiency and help the company make timely and accurate reports (http://www.carolinabarcode. com/run-my-store-a-36.html, 2012).
* Just in time inventory system:
Just in time (JIT) also known as just in time inventory system manages the inventory and lessens the costs of inventory control and the cost of maintaining the inventory of a business. This helps the company to reduce a substantial amount of its inventories, reduce ordering and save warehousing costs (Bowersox, D.J, 2007). A real life example of a company using the Just in time inventory system is Dell computer corporation which uses the just –in –time system so that an order for a customized personal computer that comes in over the internet at 9am can be delivered by truck to the customer by 9pm.
This system allows dell to save costs and with this, the company under prices its products compared to its rivals by about 10% to 15% (McWilliams, 1997)(Source: Gray McWilliams, “Whirlwind on the web, “Business Week, April 7, 1997.). This system would lead to more efficiency of the bear game eliminating backorders and keeping just enough stock for the company to produce when needed. This strategy will by many supply chain operators such as the distributor and the wholesaler leaving just the factory and the retailer making products available quickly and almost eliminating the bullwhip effect.
* Push and Pull Boundary:
The push boundary process is a forecast and execution driven in anticipation for demand, while the pull process is demand driven and is initiated in response to real demand (Chopra and Meindl, 2001). The present trend around the world is a swing from a push system to a pull system this is because the pull system helps in reducing inventory levels. Push and pull boundary occurs when the demand intersects expectation of future demand. Pull systems are based on real demands and production and manufacturing of goods done in relationship with the demands of the consumers (Bowersox, D.J, 2007).
Figure 3: Push/pull boundary in Dell’s supply chain
The above diagram shows the push and pull boundary of Dell’s supply chain. The company combines both push and pulls boundary systems in running its operations. The company by-passes a lot of areas in the supply chain by manufacturing and selling directly to its customers. The process starts with consumer ordering and then the manufacturing cycle which are known as pull boundary systems.
The inventory of the company will be stocked up following the demand of customers in order for the product to be made. All the processes included in the procurement of a product is implemented by Dell and this is regarded as a push approach primarily because it reacts to future demands effectively making products available in time and keeping low inventories. This system will be of great help to the beer game helping in making raw materials readily available for production and keeping inventories and costs low.
* Eliminate gaming in shortage situations:
During the beer game, the gaming shortage situation was experienced when there was a shortage in raw materials and inventories for the manufacturing of these products. When shortages occur, instead of allocating products based on orders, it is allocated in a proportion to past sales record. This will make customers have no need to exaggerate their demands because it will cause them negative results. General motors’ has used this method for a long time in the allocation of its supply. This will help to make the beer game have more reliable demand data.
* Continuous system (fixed –order-quantity):
In the beer game, order time is the same which is once a week. This makes it easier for the retailers to make quick orders for products required. However, the quantity of the product differs and it would be easier if the demand rate was fixed with adjustments made to make the order rate cater for inventory, buffer stock and demand. This will go a long way in making things easier and decreasing the bullwhip effect which can be seen to be predominant in the game.
* Adopt the Vendor Managed Inventory Strategy:
The vendor managed inventory strategy is a strategy which manages the quantity of goods produced by a manufacturer allowing the manufacturer to decide the quantity to keep and how much to ship to the retailer. This is a strategic move for manufacturers in order for them to be able to increase profitability by eliminating stock while improving on sales and overall performance.
* Avoid multiple demand forecast updates:
As can be noted in the beer game, the bullwhip effect causes the demand forecast to be multiplied as it goes uplink. Instead, making same orders from downstream been the retailer to the supplier to be the same will make things much easier eliminating high inventories and the bullwhip effect.
* Reasons for Changes made to the Zero Strategy:
The zero strategy is considered as a bad strategy due to its failure during the simulation test. While we obeyed the zero rule of the zero strategy while playing the game, we noticed that the game started to fail with a dramatic fall in inventory rate, lack of buffer stock, increase in backorders and a rise in the total operations cost. This led to the total failure of the game because the zero strategy did not allow us to meet the needs of consumers because of too many uplinks in the supply chain and long lead time. The bullwhip effect also posed a great disadvantage to the strategy because it contributed greatly to the failure of the game. * Impact on the outcome of the game:
* Decrease in cost as a result of little inventories and no backorders.
* Elimination of some supply chain operators which will reduce lead time and results in quick flow of information and supplies.
* Decrease or eliminate the bullwhip effect.
* Decrease lead times and make delivery quicker.
* Have safety stock for risky situations.
Having conducted the above analysis on the zero strategy, it is important that I stress that the bullwhip effect can take a high toll on a company with reference to the game. The game however was a tremendous failure with poor results which includes increase in backorder rates, lack of inventories, rise in cost and long lead time. These issues can however be overcome by using the POS system, just in time inventory system (JIT), improve communication among supply chain operators and the push and pull boundary system. With example of success from companies that have tried these systems and its success in the beer game, I think these changes will go a long way in making the beer game simulation a success.
University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 18 October 2016
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