Beer Distribution Game

Bullwhip effect

The beer distribution game (also known as the ‘beer game’) is a role-play simulation developed by MIT Sloan School of Management in the 1960s to reveal information sharing failures and typical coordination problems of a supply chain.

This game outlines the importance of information sharing, supply chain management, and collaboration throughout a supply chain process. Due to lack of information, suppliers, manufacturers, sales people and customers often have an incomplete understanding of what the real demand of an order is.

The most interesting part of the game is that each group has no control over another part of the supply chain. Each group can highly influence the entire supply chain by ordering too much or too little, which can lead to a bullwhip effect (increasing swings in inventory in response to shifts in customer demand as one moves further up the supply chain). Therefore, the order taking of a group also highly depends on decisions of the other groups.

The game was invented by MIT systems scientist Jay Wright Forrester as a result of his work on system dynamics.

The game is played in 24 rounds, and in each round of the game the following four steps have to be performed: 1. check deliveries (how many units of beer are being delivered to the player from the wholesaler), 2. check orders (how many units the customer has ordered); 3. deliver beer (this step is performed automatically), and 4. make order decision (decide how many units are needed to order to maintain stock).

The goal of the game is to meet customer demand for cases of beer through the distribution side of a multi-stage supply chain with minimal expenditure on back orders and inventory. There are four stages, manufacturer, distributor, supplier, and retailer, with a two-week communication gap of orders toward the upstream and a two-week supply chain delay of product towards the downstream. There is a one-point cost for holding excess inventory and a one-point cost for any backlog (old backlog + orders – current inventory).

In the board game version, players cannot see anything other than what is communicated to them through pieces of paper with numbers written on them, signifying orders or product. The retailer draws from a deck of cards for what the customer demands, and the manufacturer places an order which, in turn, becomes product in four weeks.

Players look to one another within their supply chain frantically trying to figure out where things are going wrong. The team or supply chain that achieves the lowest total costs wins. At the end 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. The game illustrates in a compelling way the effects of poor system understanding and poor communication for even a relatively simple and idealized supply chain.

Although players often raise the lack of perfect information about the customer orders as a primary reason for their poor team performance in the game, analysis of the minimum possible score under different conditions shows an expected value of perfect information of 0 for the standard game, and simulations that included giving players perfect information still showed poor team performance.

A supply chain is a network between a company and its suppliers to produce and distribute a specific product to the final buyer. This network includes different activities, people, entities, information, and resources. The supply chain also represents the steps it takes to get the product or service from its original state to the customer. Supply chains are developed by companies so they can reduce their costs and remain competitive in the business landscape. I

Supply Chain Management (SCM) is the management of the flow of goods and services and includes all processes that transform raw materials into final products. It involves the active streamlining of a business’s supply-side activities to maximize customer value and gain a competitive advantage in the marketplace.

Typically, SCM attempts to centrally control or link the production, shipment, and distribution of a product. By managing the supply chain, companies are able to cut excess costs and deliver products to the consumer faster. This is done by keeping tighter control of internal inventories, internal production, distribution, sales, and the inventories of company vendors. SCM is based on the idea that nearly every product that comes to market results from the efforts of various organizations that make up a supply chain.

The bullwhip effect is a well-known symptom of coordination problems in (traditional) supply chains. It refers to the role played by periodical order amounts as one moves upstream in the supply chain toward the production end. Even when demand is stable, small variations in that demand, at the retail-end, tend to dramatically amplify themselves upstream through the supply chain. The resulting effect is that order amounts become very erratic. Very high one week, and then zero the next. The term was first coined around 1990 when Procter & Gamble perceived erratic and amplified order patterns in its supply chain for baby diapers. The effect is also known by the names whiplash or whipsaw effect.

As a consequence of the bullwhip effect a range of inefficiencies occur throughout the supply chain, like overstocking and decreased inter-firm trust. The effect can result from ‘order batching,’ which is when each member in the chain orders more quantities than it needs, warping the original quantities demanded.

Other triggers for the bullwhip effect include ‘price fluctuations’ (special discounts and cost changes can cause buyers to take advantage, resulting in irregular production and distorted demand), ‘demand information misuse (past demand information for new estimates do not take into account fluctuations), ‘lack of communication’ (identifying the product demand differently within different links of the supply chain), and ‘free return policies’ (customers may overstate demands due to shortages, if customers cannot returns items, retailers will continue to exaggerate their needs, cancelling orders and causing in excess product or materials).

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