Bullwhip Effect and The beer game

1. Bullwhip Effect and The beer game Igor POLYANTCHIKOV Eduard SHEVTSHENKO

2. Preparation activities! • Please visit web site beergame.org and read the game instructions • Register on the web site http://www.ariscommunity.com/university to be able to use the ARIS Express software • Install the ARIS Express software and review the BusinessProcess DistributorBPM files • Practice drawing of some well known Business Process in ARIS Express by Yourself

3. Our plan for today! • to understand how the supply chain is working (playing beer game in two groups) • to definethe structure of the enterprise processes • to write down in diagram form relations between different partners • to suggest what should be changed in the system to improve the profitability

4. Next time you need gasoline … • Pause for a moment and consider • All you’ve had to do is coast into a gas station and you’d find … gasoline. It’s simply there, ready for you to buy – every time, all the time. For you, and for countless other motorists. • Yet Somebody must have put the gasoline into the gas station’s underground tank for you to pump from. • To begin at the beginning, somebody must have prospected for oil, found it, and then dug the well to extract it. • Next, somebody must have shipped the oil to a refinery, converted it into gasoline, and then transported the gasoline to your favorite gas station. • In short, an awful lot of work must have occurred, across a long and vast network of firms – the supply chain, to deliver a reliable supply of gasoline. The BullWhip Effect

5. The Bullwhip Effect • The supply chain for gasoline is indeed quite reliable, so much so that most consumers take it for granted. • In 2001, Cisco was forced to write down $2.2 billion worth of obsolete inventory, victim of a pernicious pathology in its supply chain. • That particular disease even has a terrifying name: the Bullwhip Effect. The BullWhip Effect

6. The Beer Game • Role-playing simulation developed in the 1960’s at MIT’s Sloan School of Management • Production and distribution of beer. • Players divide themselves into groups: Retailer, Wholesaler, Distributor, and Brewer. • Weekly consumer demand simulated by a deck of cards • Retailer sells from his inventory and reorders from the Wholesaler, who sells from his inventory and reorders from the Distributor, who in turn sells from his inventory and reorders from the Brewer, who finally sells from his inventory and restocks from his production. • Order processing delays; Shipping delays • Inventory carrying costs; Stockout costs • Players base their decisions strictly on the orders they receive from their respective buyers. The BullWhip Effect

7. Stakeholders along supply chain • Have different and frequently conflicting objectives. • Often operated independently. • The network can oscillate in very large swings as each organization in the supply chain seeks to solve the problem from its own perspective. The BullWhip Effect

8. Variability increases as one moves up the supply chain Source: Johnson & Pike, 1999 The BullWhip Effect

9. Lower revenues. Stockouts and backlogs mean lost sales, as customers take their business elsewhere. Higher costs. High carrying cost Stockout cost Distributors need to expedite orders (at higher shipping expenses) Manufactures need to adjust jobs (at higher setups and changeover expenses, higher labor expenses for overtime, perhaps even higher materials expenses for scarce components.) All entities in the supply chain must also invest heavily in outsized facilities (plants, warehouses) to handle peaks in demand, resulting in alternating under or over-utilization. Consequences of the Bullwhip Effect The BullWhip Effect

10. Causes of Bullwhip Effect

11. Demand variability, quality problems, strikes, plant fires, etc. • Variability coupled with time delays in the transmission of information up the supply chain and time delays in manufacturing and shipping goods down the supply chain create the bullwhip effect. The BullWhip Effect

12. Overreaction to backlogs • Neglecting to order in an attempt to reduce inventory • No communication up and down the supply chain • No coordination up and down the supply chain • Delay times for information and material flow The BullWhip Effect

13. Order batching - larger orders result in more variance. Order batching occurs in an effort to reduce ordering costs, to take advantage of transportation economics such as full truck load economies, and to benefit from sales incentives. Promotions often result in forward buying to benefit more from the lower prices. • Shortage gaming: customers order more than they need during a period of short supply, hoping that the partial shipments they receive will be sufficient. The BullWhip Effect

14. Demand forecast inaccuracies: everybody in the chain adds a certain percentage to the demand estimates. The result is no visibility of true customer demand. • Free return policies The BullWhip Effect

15. Countermeasures to the Bullwhip Effect

16. Countermeasures to order batching • Countermeasures to shortage gaming • Countermeasures to fluctuating prices • Countermeasures to demand forecast inaccuracies • Free return policies The BullWhip Effect

17. Order Batching • High order cost is countered with Electronic Data Interchange (EDI) and computer aided ordering (CAO). • Full truck load economics are countered with third-party logistics and assorted truckloads. Random or correlated ordering is countered with regular delivery appointments. • More frequent ordering results in smaller orders and smaller variance. • However, when an entity orders more often, it will not see a reduction in its own demand variance - the reduction is seen by the upstream entities. • Also, when an entity orders more frequently, its required safety stock may increase or decrease; see the standard loss function in the Inventory Management section. The BullWhip Effect

18. Shortage Gaming • Proportional rationing schemes are countered by allocating units based on past sales. • Ignorance of supply chain conditions can be addressed by sharing capacity and supply information. • Unrestricted ordering capability can be addressed by reducing the order size flexibility and implementing capacity reservations. • For example, one can reserve a fixed quantity for a given year and specify the quantity of each order shortly before it is needed, as long as the sum of the order quantities equals to the reserved quantity. The BullWhip Effect

19. Fluctuating Prices • High-low pricing can be replaced with every day low prices (EDLP). Special purchase contracts can be implemented in order to specify ordering at regular intervals to better synchronize delivery and purchase. The BullWhip Effect

20. Demand Forecast Inaccuracies • Lack of demand visibility can be addressed by providing access to point of sale (POS) data. • Changes in pricing and trade promotions and channel initiatives, such as vendor managed inventory (VMI), coordinated forecasting and replenishment (CFAR), and continuous replenishment can significantly reduce demand variance. The BullWhip Effect

21. Free Return Policies • Free return policies are not addressed easily. • Often, such policies simply must be prohibited or limited. The BullWhip Effect

22. Vendor managed inventory (VMI)

23. Popularized in the late 1980s by Wal-Mart and Procter & Gamble, VMI became one of the key programs in the grocery industry’s pursuit of “efficient consumer response” and the garment industry’s “quick response.” • Successful VMI initiatives have been trumpeted by other companies in the United States, including Campbell Soup and Johnson & Johnson, and by European firms like Barilla (the pasta manufacturer). The BullWhip Effect

24. The manufacturer is responsible for both its own inventory and the inventory stored at is customers’ distribution centers. The BullWhip Effect

25. The beer game Introduction

26. Delay Factory Distributor Wholesaler Retailer Delay Delay Delay

27. Distributor Outgoing order Incoming order Wholesaler Delay Delay Incoming delivery Outgoing delivery Factory

28. Delay Factory Distributor Wholesaler Retailer Delay Delay Delay

29. Step 1: Delivery IN Delay Factory Distributor Wholesaler Retailer Delay Delay Delay • Fill in incoming delivery to your playsheet. • Add incoming to inventory to get availableamount.

30. Step 2: Order IN Delay Factory Distributor Wholesaler Retailer Delay Delay Delay • Open new order and fill into your playsheet. • Calculate amount to ship by addingnew order to old backorder.

31. Step 3: Prepare Delivery Delay Factory Distributor Wholesaler Retailer Delay Delay Delay DELIVERY 9

32. Step 3: Prepare Delivery Delay Factory Distributor Wholesaler Retailer Delay Delay Delay • Figure out whether the amount to ship can be fulfilled fromavailable stock. • If yes, then your delivery equals the amount to ship. • If not, you ship whatever is available, the rest adds to backorder. • Update your backorder!

33. Step 4: Place your order Delay Factory Distributor Wholesaler Retailer Delay Delay Delay ORDER 12 That is entirely your decision. Keep your cost low!

34. Between weeks: logistics! Delay Factory Distributor Wholesaler Retailer Delay Delay Delay

35. Delay Factory Distributor Wholesaler Retailer Delay Delay Delay

36. mrpx scalax The computer simulation http://beergame.masystem.se/ http://www.beergame.org/materials/excel-playsheets/view Materials used: Henry C. Co Technology and Operations Management, California Polytechnic and State University