Supply Chain Management: Issues and Models Introduction to Beer Game

1. Supply Chain Management:Issues and ModelsIntroduction to Beer Game Prof. Dr. Jinxing Xie Department of Mathematical Sciences Tsinghua University, Beijing 100084, China http://faculty.math.tsinghua.edu.cn/~jxie Email: jxie@ math.tsinghua.edu.cn Voice: (86-10)62787812 Fax: (86-10)62785847 Office: Rm. 1308, New Science Building

2. What is a Beer Game? • The Beer Game 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.

3. A Supply Chain Game:The Beer Game Customers Orders Retailer Wholesaler Distributor Factory / Brewery / Manufacturer Products

4. Factory Delay Delay Four Players on a Team Orders Delay Delay Delay Distributor Delay Delay Delay Delay Delay Delay Wholesaler Retailer Delay Delay Delay Delay Material

5. Material delay = (2,2,2,3); Information Delay = (2,2,2,0)

6. Events in each period Retailer Wholesaler Distributor Factory Each Stage: • Holds Inventory • Receives Beer (after Shipping Delay) • Receives Orders from Downstream (after Mail Delay) • Ships Beer Downstream to meet Orders • Orders Beer from Upstream (the only decision)

7. Rules • Pick a Team Name • Holding Cost: $0.50/case/week • Backorder Cost: $1.00/case/week • Total Cost = Sum of Costs at all four Stages • Goal: Minimize Total Supply Chain Cost • NO COMMUNICATION BETWEEN STAGES!!! • Retailers must not reveal actual customer orders!!!

8. To Remember • All demand is to be satisfied • Unsatisfied demand becomes Backlog and is added to next period’s demand • It takes two weeks for replenishment order to reach; shipment time is also two weeks • There are no capacity restrictions

11. Game starts now! • First 4 weeks: order 4 cases each week • From 4th week on, you can order any quantity • The game will last 50 weeks • Now start the game

12. End of Game: Stop after 36 weeks • Calculate Total Cost at your Stage • Plot your Weekly Orders • Plot your Inventory and Backlog • Plot your Guess on Consumer Demand Pattern • Sum Costs over all Four Stages

13. Retailer Wholesaler Distributor Factory Orders Inventory Guess the demand • Tape results on wall as follows:

14. Debriefing and Discussion • What, if anything, is unrealistic about this game? Is reality more complicated or less complicated? • Why are there order, production and shipping delays? • Did you find yourself “blaming” the person upstream for your problems?

15. Debriefing and Discussion • What commonalities do you see in the graphs for the different teams? • What pattern do you see? What is the cost of this? • What are the reasons that such patterns are seen in the supply chain?

18. Lessons of the Game • Such oscillations are common • Bullwhip effect (demand distortion) • Everyone blames others - but problem is with the structure • Cost of this: Capacity crunch • Expediting • High indirect cost • Low service levels

19. Reasons for Oscillations • Demand randomness • Ill-conceived promotional policies • Rationing and shortage gaming • Ordering policy and aggregation • Incentives

20. Motorola's Inventory Problem • Feb. 17, 1996. Announced it has excess inventory of cellular phones • Stock price tumbled 10%; Profit estimates down $39 million • Reason • In 1994, distributors faced shortages • In 1995, they over-ordered, early and often • Now new-orders are down - idle capacity

21. Proctor & Gamble’s New Pricing Policy • Stopped price discounts on many products • Lowered prices • Marketing budget reduced from 25% to 20% • Stopped distributioncoupons to customers in many regions

22. Law of Supply Chain Dynamics The magnitude of demand volatility a company faces increases the farther upstream it resides in the supply chain. This is also called the bullwhip effect.

23. $2885

25. Information lag reduced to 1 week: Inventory $1773

26. Two Level - Inventory $380

27. Variants of the game • If there is no information delay? • If the final demand is random but the distribution is common knowledge? • Minimize the cost for the system or for the individual himself? • Are there any information sharing? • Two-level system? • …

28. Web-based Beer Game • For example • http://beergame.mit.edu (h=0.5; p=1.0) • http://www.masystem.com/beergame (h=1; p=2) • …

33. How to analyze the beer game? • Assumptions • Models • Control policy • Decentralized control • Centralized control

34. Summary • What is a beer game? • How do you think about the game? • Can you model and analyze the game mathematically? • Try to play the game on the Web

35. Thank you very much for your attendance! THE END