Alex BurkJeremy CarterLisa GoldmanWill SteinertMorgan Williams

The “Beer Game” Improving Supply Chain Efficiency

Forecasting

Projection of a firm’s economic activity and prediction of future events and their impact on a company and/or supply chain

Judgment--Actual rarely matches predicted. Guides corporate strategy Affects and is affected by: all areas of planning Accuracy =preparation Most difficult to forecast: high-technology innovations (80%

wrong) Lack of unity throughout organization may be fatal

The simultaneous use of varying methodologies will host the bullwhip effect

Ordering will fluctuate and demand will become distorted

Demand Signal Processing

P&G variation in diaper orders

HP Printer Distributors > customers

Distortion of Data interpreted as amplified demandWhen retailer issues orders based on updated demand

forecast

Pass the Secret

Differing Forecasting Methodologies

Eliminating channel intermediaries (unified forecast)

Order Excess Inventory from Suppliers If a large order is not filled

Suppliers increase capacityContinuously large orders are placed

Revert Back to original order quantitySuppliers now have excess capacity

The Rationing Game

Reasons for gaming

Forgotten inventory in pipeline

Time lag to receive past orders

Rational behavior

The Rationing Game

Companies often batch or accumulate demands before issuing an order.Two forms of order batching:

Random ordering occurs when demands from retailers are independent.Correlated ordering occurs when all orders fall in the same period. High variability.

Order Batching

Reasons for large order batching:

Periodic review process

High cost of placing an order and

replenishing it.

Cost of transportation

Order Batching

Counter Measures to mitigate batching effect:

Provide access to sell-though/inventory data at retail levelLower transaction costs by implementing EDI- based order transmission systems.Discount on assorted truckloadsConsolidation by third party logisticsCoordination of delivery schedules

Order Batching

Inherent in Supply Chain Raw Material price fluctuations

Natural disaster Shortage/surplus Market demand changes Critical supplies Obsolete material in product

Equipment Requirements Handling/Storage cost Stimulates Value Chain Buyer Power/Supplier Power

Price Variation

Mitigating Bullwhip Effect Purchase Contract

Manufacturer meets production schedule requirements Buyer keeps strategic purchasing practice

Win-win negotiation (zero-sum) Mutual benefit Customer satisfaction Efficiency in SC flow

Reduce frequency/depth of promotions (EDLP model)

Price Variation

Allow managers time to do other value adding tasks

Studying trends Product sales Customer wants and needs Improving employee skills and training Frees up time for high level

duties/responsibilities

Technology

Technology breakthroughs enable increased feedback Between concurrent teams Through CRM and SAP systems Between different functional area’s of the

organization Centralizes function’s

DRP

Technology

Used to simulate situations

Test situation prior to implementation

Develop new possibilities

Plan for the future events

Technology

Increases automation Lowers labor costs Increases efficiency levels of processes Increases productivity and production

levels Decreases error rates

Technology

Problem is not the technology Lack of proper implementation of the

technology Organizations failure to practice the theories

available today Lack the ability to keep pace with technology

changes Technology changes over night

Technology

Agility Flexibility with market trends/change is key

Noticing consumer demand changes To avoid over stocks To avoid having to discount inventories

React speedily React in a cost-efficient manner to changes Collaborative relationship with suppliers and customers

Design and redesign processes Prepare a backup plan for crisis situations

Trained managers Design common parts or processes with little variation

Interchangeable pieces Simple/standard processes

The 3-AAgility, Adaptability, Alignment

Adaptability Two keys

Ability to spot trends/future patterns Capability to change supply networks

React to strategic and structural changes Evolve over time Recognize economic progress, political and social

changes, demographic trends, and technology advancements

The 3-AAgility, Adaptability, Alignment

Alignment Align interest to optimize performance of Supply Chain

Vendor Managed Inventory Clear, defined roles for partnerships relationship to

be successful Three area’s to align

Forecasting Sales data Planning

The 3-AAgility, Adaptability, Alignment

Anchoring in the Choice of the Desired Stock

With absence of a calculus to determine

optimal inventories, subjects strongly anchor

desired stocks on their initial level.

Misperceptions of Feedback

Misperception of Time LagsUnderestimation of lag between placing and receiving ordersTo ensure appropriate acquisition rate the supply line must be proportional to the lag in acquiring beerFailure to allow for sufficient beer in the pipeline to achieve their desired inventory level.Need to fully account for goods in supply line to prevent over ordering

Misperceptions of Feedback

“Open-Loop” Explanations of FeedbackAttribute dynamics to external variablesErroneous open-loop attribution of dynamics to exogenous events draw learning away from the high leverage point in the system and towards efforts to anticipate and react to external shock.Key to improved performance lies within the policy individuals use to manage the system and not in the external environment.

Misperceptions of Feedback

Time Lag

Order placement

Lead time

Order processing

Order filling

Shipping time

Time Lag

How does it effect the supply

chain?Forgetting beer in the pipeline

May cause stock out or overstock

Requires further forecasting

More inaccurate

Point in value chain for a product, where the product is linked to a specific customer order Two types of Customer Order Decoupling Points (CODP) also

known as Flows or “Leagility” approach

Upstream Forecast-driven Lean supply chain Associated with high levels of cost performance MTS – oriented Difficult to maintain right quantities and competitive pricing

all the time

Decoupling

Two types of Customer Order Decoupling Points (CODP) also known as Flows or “Leagility” approach Downstream

Customer order-driven Agile supply chain

Associated with flexibility in performance Market/production alignment

MTO - oriented

Decoupling

Decoupling

Aspect Upstream the CODP Downstream the CODP

ProductStandard components, high volumes, predictable demand

Fully customized, unpredictable demand

Process Assembly line type Job shop type

Supply chainPhysically efficient, high utilization, low-cost, supplier selection based on cost and lead time

Market-responsive, buffer capacity

Planning and control

Make-to-stock Make-to-order, customer orders

Company perspective of CODP can be positioned at:

Manufacturing operations Suppliers (upstream) Interface with suppliers (raw material inventory) At the border towards the customer (finished goods

inventory) Beyond the customer (further downstream)

Lean (Upstream) and Agile (Downstream) SC focus

DecouplingDual design Approach

Questions