APICS Hampton Roads: 10-17-06

1. The Beer Distribution Game APICS Hampton Roads: 10-17-06 G. L (Jerry) Kilty, CFPIM, CIRM, CSCP • 2519 McMullen Booth Road • Suite 510 Q • Clearwater, FL 33761 • 727 725-7674 • QMSJerry@ij.net Quality Management Solutions, Inc.

2. The Beer Distribution Game Purpose of the Game Introduce the principle that structure produces behavior Experience the pressure of playing a role in a complex system and understand the impact of collective decisions on system performance Show the impact and importance of information flow on the supply chain Quality Management Solutions, Inc.

3. The Beer Distribution Game Objectives for Your Teams Minimize total supply chain costs -- watch your inventory levels Achieve high order fill rates -- keep your customers happy and keep their business The team with the lowest total cost wins Cost of inventory: $1.00/case/wk Out-of-stock cost: $2.00/case/wk Quality Management Solutions, Inc.

4. The Beer Distribution Game Rules of the Game 1 Pick a team name 2 Each company fills out Record Sheets – Inventory/ Backlog and Orders 3 No communication between positions 4 Retailers -- do not reveal what customers actually order 5 Play for 50 weeks Quality Management Solutions, Inc.

5. The Beer Distribution Game Overview of the Game - The Supply Chain Customer Retailer Wholesaler Distributor Factory Maximize customer loyalty and sales Back orders mean high customer dis- satisfaction, loss of sales, and loss of market share Track record of high service levels One of a few select suppliers Poor service = loss of business Pretty good customer service On notice: in danger of losing business if fail to achieve required fill rates Strategy = quality and on time Distributor cross docks so needs high service level Charge-back penalties if late Quality Management Solutions, Inc.

6. The Beer Distribution Game Let the Game Begin We will walk through the first few weeks slowly until you get the hang of it For the first two weeks, order four cases/wk As the facilitator calls the weeks, follow the Instruction sheet Good Luck!! Quality Management Solutions, Inc.

7. Back orders appear Back orders are cumulative The Beer Distribution Game About Week 8 or 9... ….and explain Orders to fill this week New orders this week Back orders from last week = + Quality Management Solutions, Inc.

8. The Beer Distribution Game Debriefing: Purpose of the Game • Experience the pressures of a complex system • Understand the impact that the collective results of many individual decisions can have on system performance • Recognize that internal structure -- not external events -- causes system behavior • Highlight the importance of coordination in an organization in meeting customer and company objectives Quality Management Solutions, Inc.

9. The Beer Distribution Game Debriefing: Lesson #1 Even though different people working in the same structure act exercise their own free will, the qualitative patterns of behavior are the same: • Oscillation -- Orders and inventories are dominated by large amplitude fluctuations, with an average period of about 20 weeks • Amplification -- The amplitude and variance of orders increases steadily from customer to retailer to factory. The peak order rate at the factory is on average more than double the peak order rate at retail. • Phase Lag -- The order rate tends to peak later as one moves from the retailer to the factory. Retailer Orders Factory Orders Time Lag Quality Management Solutions, Inc.

10. The Beer Distribution Game …And the winner is…. Quality Management Solutions, Inc.

11. 1. Consumer Sales 2. Retailer Orders to Wholesalers 20 20 Order Order Quantity Quantity 0 0 Time Time 3. Wholesaler Orders to Manufacturers 4. Manufacturer Orders to Supplier 20 20 Order Order Quantity Quantity 0 0 Time Time Source: Prof. Tom Davis, “The Role of Variability in the Supply Chain” Seminar, Stanford University, Sept., 1996. The Beer Distribution Game Debriefing: Lesson #1 continued The “Bullwhip Effect” in Action Quality Management Solutions, Inc.

12. Manufacturer Distribution Retailer Supplier Consumer Demand Demand Demand Demand Demand Time Time Time Time Time Increased Variability Small Change in Demand IMPACT • Poor communication • Lack of visibility • Human error • Process constraints (e.g., capacity, batch sizes) • Time lags Demand Demand Time Time The Forrester Effect Quality Management Solutions, Inc.

13. The Beer Distribution Game Debriefing: Lesson #1 continued Actual Customer Orders Quantity Weeks Quality Management Solutions, Inc.

14. The Beer Distribution Game Debriefing: Lesson #2 Internal Structure -- Not External Events -- Causes System Behavior • Although each player was free to make his or her own decisions, the same patterns of behavior emerge in every game, demonstrating the powerful role of the system in shaping our behavior. • Understanding how well-intentioned, intelligent people can create an outcome no one expected and no one wants is one of the profound lessons of the game. Quality Management Solutions, Inc.

15. The Beer Distribution Game Group Exercise What would you do to improve the supply chain? Take 20 minutes Presentations Quality Management Solutions, Inc.

16. The Beer Distribution Game Wrap Up Supply chain improvements….. • Integrated planning and scheduling processes • Demand-pull manufacturing systems • Integrated supply chain (VMI, CRP, etc.) • Enterprise-wide information systems • Process-based organizational structure • Co-location of functional departments • Other? Quality Management Solutions, Inc.

17. The Beer Distribution Game THE END Quality Management Solutions, Inc.

18. The Beer Distribution Game THANK YOU! G. L (Jerry) Kilty, CFPIM, CIRM, CSCP • 2519 McMullen Booth Road • Suite 510 Q • Clearwater, FL 33761 • 727 725-7674 • QMSJerry@ij.net Quality Management Solutions, Inc.