In the 1960s, the MIT Sloan School of Business developed a beer game, a strategic fun game similar to Monopoly. They let the students experience the bullwhip effect in the supply chain of the production and marketing system through the game, that is, the demand rose slightly, but led to an excessive increase in inventory, which led to the commercial phenomenon of slow sales of products.
In the game, students can choose to play the three roles of beer manufacturer, wholesaler and retailer, and can only communicate with each other through orders and delivery procedures, and each role has independent autonomy to decide how many orders to place upstream and how many goods to sell downstream, so as to maximize the interests of the role they control.
Customers are automatically played by the game (automatically generate demand orders), only the retailer can face the customer directly, the wholesaler supplies to the retailer, the manufacturer supplies to the wholesaler, thus simulating the impact of changes in market demand on retailers, wholesalers and manufacturers.
The product you run is a very stable brand of "Lover's Beer", and the customers are mostly young people in their 20s. Since Lover's beer sales are very stable, the beer delivery time is 4 weeks, retailers will sell about 4 cases of beer per week, they will also order 4 cases of beer, keep the beer inventory at 12 cases, so as to avoid stock-outs.
In the first week, the retailer sold 4 cases of beer, the wholesaler sent 4 cases of beer, and at the same time took away the order for 4 cases of beer, and the inventory balance was 12 cases, which is the normal operation of the retailer.
Starting in Week 2, a rock band held an open-air concert nearby, doubling beer sales in Week 2 to 8 cases, leaving only 8 cases in stock. The retailer thought someone was hosting a banquet and bought some more beer, and in response to the change in sales, it ordered 8 cases of beer this week.
The 3rd week of the concert is still going on, beer sales are still 8 cases, wholesalers sent 4 cases of beer, but the inventory is only 4 cases, according to this sales, next week's beer inventory will be zero!
The retailer believes that the brewer must have done the brand promotion, which led to a large increase in beer sales, and wondered why he did not inform himself in advance. To avoid running out of stock, they ordered 12 cases of beer this week. In fact, in the title song of the new album of the rock band, there is a lyric at the end of the sentence "I drank the last bite of Lover's beer and threw myself into the sun", which made Lover's beer suddenly catch fire.
In week 4, 8 cases of beer were still sold, the retailer also heard about the concert, the wholesaler sent 4 cases of beer, but the inventory was sold out! So the retailer ordered 16 cases of beer in one go, so as not to run out of stock and affect the reputation.
In week 5, 8 cases were still sold, and the wholesaler sent 4 cases of beer, but the inventory was exhausted and there was a shortage of stocks. The retailer had to apologize to two regular customers who made the reservation: "I'm very sorry, I'll send it to you right next Monday." The retailer immediately ordered another 20 cases of beer.
The inventory situation remained grim in Week 6, with 8 cases sold and 8 cases of beer from wholesalers, but stocks were still out of stock. Considering that some more items had been ordered before, the retailer continued to order 16 more boxes.
In the 7th week, the sales were still 8 cases, and 12 cases of beer arrived, which finally made up for the shortage, but the inventory was still zero, and the retailer reduced the order volume to 12 cases.
In week 8, 16 cases of beer arrived, and considering the previous order volume, the retailer returned to the normal 4 cases per week order, and the inventory also returned to 8 cases, a relatively safe level.
The arrival of 20 cases of beer in week 9, considering that there is still a lot of inventory in transit, the retailer did not continue to order, fortunately sales remained at 8 cases / week, it seems that this will be the norm in the future. Inventory has quietly increased to 20 cases and can no longer be ordered next week.
There was no order in week 10, but another 16 cases of beer were received, and sales fell back to 4 cases per week as the concert ended and inventory increased to 32 cases, and retailers felt great pressure on inventory.
In week 11, 12 cases of beer were received, sales remained at 4 cases per week, and the inventory increased to 40 cases, more than twice the normal inventory.
Although retailers have stopped ordering, their inventory still needs a long time to digest, fortunately beer is a fast-selling commodity, if it is not commonly used goods, the consequences of slow sales will be more severe.
This is just a change in the market brought about by a concert, there are various holiday events every year, affecting changes in market demand, how to deal with these changes, neither losing customers, but also without generating too much inventory backlog, is indeed a difficult subject.
Table 1: Orders from retailers and wholesalers in beer games in response to market demand
Figure 1: Music causes changes in retailer beer sales
Figure 2: Music causes changes in retailer beer inventory
Figure 3: Changes in wholesaler beer stocks caused by concerts
As can be seen from the figure: just an 8-week open-air concert, the retailer's beer demand changed from 4 cases per week to 8 cases, which caused a large fluctuation in retailer orders, beer inventory increased from 12 cases in the normal period to a maximum of 40 cases, and there was also a 2-week beer shortage.
This change in the market was transmitted to the wholesalers, causing a greater impact, not only allowing the wholesalers' inventory to increase from 12 trucks in the normal period to 94 cars at the highest point, but also experiencing 5 consecutive weeks of short supply, not only losing a lot of business opportunities, but also having a negative impact on the brand.
Similarly, manufacturers are more severely affected.
Lover's Beer is just a product from a beer manufacturer, and it takes 2 weeks from manufacturing to shipment. The beer was of good quality, but it didn't sell much. In order to expand its market share, the company has just hired a marketing director, hoping to strengthen marketing and expand sales.
Just a few weeks after the ambitious sales director took office, orders for Lover's Beer were growing rapidly and were already outstripping demand. The boss praised the new director, but due to the lack of capacity in the brewery, the new director applied to increase the production line immediately, and the boss was of course very supportive.
Eight weeks later, a new beer production line was built and capacity was doubled. However, at this time, the market returned to normal, and the orders of many wholesalers became zero, resulting in the complete inability of this newly added production line to start! Manufacturers are overcapacity, inventories are increasing, and obviously, the new production line is a bad decision.
Faced with huge beer stocks and stagnant production lines, the once-confident sales director had to hand in his resignation...
The chart above is just one result of the beer game. For decades, tens of thousands of people from different backgrounds have been involved in the beer game, and the same crisis has occurred again and again, and the results have been almost identical: downstream retailers, midstream wholesalers and upstream manufacturers, all initially severely out of stock, and then heavily backlogged, must be more than personal.
This is the inventory accelerator theory in economics, also known as the bullwhip effect, which poses a huge challenge to inventory planning.
So, is it possible to avoid stock out of stock or inventory overstock? How can I minimize the bullwhip effect? In the next article, we'll discuss the implications from the beer game, as well as thinking about inventory planning.