Advanced Principles of Supply Chain Management
Beer Game
3th March 2008
By Markus Brinkmann
MSc Marine Engineering and Management
CONTENT:
1. Introduction
2. Playing the Beer Game
3. Recap of the Game
4. Computer Game Part 1
5. Recap of the Computer Game Part 1
6. Computer Game Part 2
7. Recap of the Computer Game Part 2
8. Supply Chain Management
9. Bullwhip Effect
10. Beer vs iPod
11. Conclustion
12. References
1. Introduction
The Beer Game is a logistics game created by a group of professors at Massachusetts
Institute of Technology (MIT) Sloan School of Management in early 1960's to demonstrate a
number of key principles of Supply Chain Management.
Throughout this report a range of Beer Game variations will be played to gain awareness of
patterns in the Supply Chain Management. However it is important to note that certain
management decisions creates patterns in the supply chain that do not necessarily
guarantee the results expected.
Several System Dynamics have been researched and explored through the various Beer
Games and compared to the actual Supply Chain Market.
2. Playing the Beer Game
To develop a basic assessment of the Supply Chain, four teams consisting of approximately
five students played the Beer Game with one another. Each team was assigned a business
in the Supply Chain representing one of the following:
• Retailer
• Wholesaler
• Distributor
• Manufacturer
The main aim of the team is to minimize the cost created by an inventory and backlog. Each
team is responsible for the reduction of costs incurred by its assigned company and not of
the whole Supply Chain.
The teams are only permitted to communicate to one another through the use of numbers
that indicates their desired order while all other communication are prohibited.
3. Recap of the Game
The short time frame combined with limited knowledge of the Supply Chain Management
creates difficulties for each team to develop a successful strategy. The manufacturing team
completed the game with a staggering inventory due to the inconsistent orders which at
times ranged from 0 to 40 units.
Following completion of the game the teams assessed the overall cost of the customers
orders. However, the manufacturing team later realised that the customers orders varied
marginally between 4 to 8 units in comparison to their own orders which differed from 0 to 40
units.
This experiment illustrates that a slight change down-stream (customer) of the Supply Chain
has a much stronger effect up-stream (manufacturer).
4. Computer Game Part 1
The research obtained in the previous experiment was later used in a computer version of
the Beer Game as found in this website
http://forio.com/simulation/nearbeer/index.htm?FD_action=start_trial to confirm the theories
that had been developed previously.
The computer Beer Game is more predictable than the human mind and as a result simplifies
the game and makes it easier to understand the basic Supply Chain. Following the
completion of the first game it was more feasible to develop a strategy that would overcome
the projected challenges, for example a larger inventory early in the game helps to withstand
a backlock later on in the game.
New Customer Orders
Graph 1 - Source: Near Beer Game
Total Customer Orders
Blue: Total Customer Orders Red: Cumulative Unfilled Orders
Graph 2 - Source: Near Beer Game
Total Inventories
Blue: Work In Process Red: Finished Goods Inventory
Graph 3 - Source: Near Beer Game
Shipments
Blue: Shipment Red: Total Customer Orders
Graph 4 - Source: Near Beer Game
5. Recap of the Computer Game Part 1
The graphs above where generated from the computer Beer Game and confirm the previous
recap regarding the impact on the Supply Chain. The following text provides an analysis of
the graphs of the game.
• The new customer orders increase only once at the beginning and has a long lasting
effect on the total customer order.
• The total customer order is a combination of the Cumulative Unfilled Orders and the
New Customer Order.
• The inventories graph presents the amount of items ordered by the supplier and how the
inventory affects the size of order.
• The Shipments Graph illustrates clearly the time difference between the orders and
shipments, which indicate the delay that occurs because of the Supply Chain.
As this game is limited to the customer and supplier a more complex game will be used in
Part 2 to illustrate the different game patterns compiled during this research.
6. Computer Game Part 2
This version of the Beer Game focuses on the four different participants in the Supply Chain
(Retailer. Wholesaler, Distributor and Manufacturer) in comparison to the previous version
that focuses on the orders, inventories and shipments of products (cited on
http://beergame.masystem.se:8000/).
Order
Graph 5 - Source: MA Systems Beer Game
Red - Retailer
Blue - Wholesaler
Yellow - Distributor
White - Manufacturer
Stock
Graph 6 - Source: MA Systems Beer Game
Red - Retailer
Blue - Wholesaler
Yellow - Distributor
White - Manufacturer
Costs
Graph 7 - Source: MA Systems Beer Game
Red - Retailer
Blue - Wholesaler
Yellow - Distributor
White - Manufacturer
7. Recap of the Computer Game Part 2
Participating in the game as the wholesaler enabled a different perspective on the game
because of the influences on the orders from the surrounding participants. As the information
was passed from the customer to the retailer and then to the wholesaler the order changed
significantly in comparison to Part 1.
Graph 5, 6 and 7 illustrate how the different levels of the Supply Chain react to each other.
• At the early stages of the game a high wholesaler order requires the distributor to
increase their order, which occurs with a delay. This high wholesaler order reduces the
inventory of the distributor and creates a backlog because of to the insufficient inventory.
Furthermore, the cost for the wholesaler are above average but declines over time in
comparison to other companies in the Supply Chain.
• As a result of the slow distributor reaction, the wholesaler increases the order
significantly to adjust the distributors order and increase the delivery to the wholesaler
this is to reduce its increasing backlog. Thereafter, the wholesaler reduces the order
volume to decrease its stock until the inventory is minimised. This has a significant
impact on the cost for the distributor and manufacturer as the orders create a backlog
and a higher inventory at a later stage.
This experiment shows that companies in the Supply Chain have the capability to inflict
damage on one another and subsequently suffer due to the Supply Chain dependency.
However, this could be solved by the use of modern communication systems.
8. Supply Chain Management
Supply Chain Management is the process of planning, implementing, and controlling the
operations of the supply chain as efficiently as possible (cited wikipedia.org).
The most valuable element in the Supply Chain System is information. Companies are
required to understand the real demand and inventory of their partners in the Supply Chain in
order to remain successful in the market. Lack of information and incorrect interpretation of
the order can create major issues, which is referred to as the Bullwhip Effect.
Information can enable companies to optimize the entire Supply Chain rather than sub-
optimize based on a local interest. This leads to better planned overall production and
distribution, which cut costs and give a more attractive final product leading to better sales
and better overall results for the companies involved.
9. Bullwhip Effect
The Bullwhip Effect also known as the Whiplash Effect is an common phenomenon in
forecast-driven distribution systems such as the Supply Chain.
Customer demand is rarely perfectly stable, which is why businesses have to forecast
demand in order arrange their inventory and other resources. These forecasts are based on
statistics and ecological as well as political influences because of the possible errors in the
forecast companies tend to have an inventory buffer (safety stock).
Graph 8 and 9 – Source: A. T. Kearny Inventory Distribution Simulator
The Bullwhip Effect increases from the customer to the manufacturer, which has an impact
on the safety stock of the participating company in the Supply Chain. Furthermore, when the
the demand rises, companies increase their orders. Additionally, falling demand will minimise
orders to reduce inventory. This demand is amplified up-stream in the Supply Chain (further
from the customer).
Graphs 8 and 9 illustrate how an order influences the inventory of the supplier upstream and
therefore creates the Bullwhip Effect, which can increase to huge proportions depending on
the orders and size of the Supply Chain.
10. Beer vs iPod
Companies that have mastered Supply Chain Management are able to used the various
effects for their advantage.
Companies that produce different variations of one product can control the behaviour of the
customer by the quantities of each variation that is being supplied. For example, by
producing a limited amount of the cheapest iPod, Apple-Customers are required to purchase
the more expensive version.
This example presents that companies have various possibilities to use the Supply Chain not
only for improving the product-flow but also for improving the products impact on the market.
11. Conclustion
The Beer Game is a powerful tool used to provide an understanding of how Supply Chain
Management can be implemented. It provides awareness of the possible impact that may
occur such as the Bullwhip Effect.
Through good communication with the companies in the Supply Chain as well as a thorough
knowledge of the companies help to improve the management of the company to develop
successful strategies for better customer service and reduce the inventory and dangerous
backlogs. Furthermore, through the use of good Supply Chain Management market shares
can be gained
.
12. References
1. Supply Chain Redesign: Transforming Supply Chains into Integrated Value Systems
by Robert B. Handfield and Jr. Ernst L. Nichols
2. Wikipedia.org (Feb. 2008)
3. http://forio.com/simulation/nearbeer/index.htm?FD_action=start_trial (Feb. 2008)
4. http://beergame.masystem.se:8000 (Feb. 2008)
5. Near Beer Game (2006)
6. MA Systems Beer Game (2008)
7. A. T. Kearny Inventory Distribution Simulator (2000)
