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 Lecture 11: Beer Game

Instructor: Nooshin Salari

Office: RJC 225
Email:
[email protected]

1
Review: Supply Chain Management

• Supply Chain Management means managing all the steps needed to get a
product or service from the beginning to the final customer (starting with
raw materials and ending with a satisfied customer).
• A supply chain includes suppliers; manufacturers and/or service providers; and
distributors, wholesalers, and/or retailers who deliver the product and/or service
to the final customer
• Aim: To work together efficiently so the customer gets what they want, at the
right
time and place.

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Review: Explanation of each role

1. Suppliers
Provide the raw materials, parts, or components needed to make a product.
Example: A farmer supplying wheat to a bakery, or a company providing
steel
to a car manufacturer.
2. Manufacturers and/or Service Providers
Manufacturers: Use raw materials to produce finished goods.
Example: A factory making smartphones from parts.
Service Providers: Deliver services instead of physical products.

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Review: Explanation of each role

3. Distributors: Buy in bulk from manufacturers and sell to wholesalers or retailers.

Example: BlueLinx – Distributes building and construction materials to
wholesalers and large retailers like Home Depot.

4.Wholesalers: Sell products in large quantities to retailers (not directly

to consumers).
Example: Alibaba.com – A global platform where wholesalers offer
goods in
large quantities to businesses.

5. Retailers: Sell products directly to the final customer.

Example: Supermarkets, online stores, or clothing shops.
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 Review: Game Mechanics – Period by Period

Each week (period), the retailer

experiences random customer demand.
• After seeing demand, each player places
an order:
• Retailer → orders from Wholesaler
• Wholesaler → orders from Distributor
• Distributor → orders from
Manufacturer
• Manufacturer → orders from an external
supplier (not a player)

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Your Objective and Sequence of Events Each Week

Objectiv Minimize total cumulative inventory and backlog cost for your
e: supply chain
Observe: (1)Receive shipments from upstream location
(3)Ship cases
(2)Receive of beer
orders fromfrom on-hand location
downstream inventory to satisfy incoming
orders
Decide otherwise backlog
: (4)Place an Order (from your upstream location) to replenish
Costs: inventory
Incur weekly cost for carrying inventory or having backlog (each
have cost) Each case of beer you have in stock costs $1 per week.
Each order that you cannot fill results in a ‘backlog’, and each case
Be of beerof
aware ondelays:
backlog costs $2 per
Processing an order takes 2 weeks
week (information delay)
A shipment arrives in 2 weeks (shipment leadtime)
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Play the game!

• https://skilldynamics.com/supply-chain-beer-game/
• https://skilldynamics.com/supply-chain-beer-game/play-the-
game/?submissionGuid=a578c9ae-196f-4b92-a5da-1ee8ebce6350

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Bullwhip Effect

• When the consumer demand information travels up the supply chain, it often
gets
exaggerated and inflated.
• Each level in the supply chain adds a layer of uncertainty and often
compensates by ordering more than necessary to prevent stockouts.
• This distortion results in variability in order quantity, causing overproduction
or underproduction, impacting costs, lead times, and customer satisfaction.

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Amplification of Demand Distortion:

• The bullwhip effect refers to the

phenomenon where small
changes in consumer demand
cause increasingly larger
fluctuations in orders and
inventory levels as they move up
the supply chain.
• In simple terms, the Bullwhip
Effect refers to the phenomenon
where order variations increase
as you move up the supply chain
• The Bullwhip Effect is seen in
virtually all industries where a
supply chain is involved.
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19
Consequences of the Bullwhip Effect:

• Stockouts: Companies may fail to meet actual customer demand, resulting in lost
sales and dissatisfied customers.
• Excess Inventory: Over-ordering creates surplus stock that may lead to
increased storage costs, waste, or markdowns.
• Financial Losses: Millions of dollars are lost annually due to these
misalignments in supply and demand.
• Longer Lead Times: Manufacturers may experience backlogs due to
over- ordering, increasing delivery delays.

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What Causes the Bullwhip Effect?

Fall 2023
 1) Demand Forecast Errors

 Every company in the supply

chain makes demand predictions
using past order data from its
immediate customer
 However, each forecast adds a
layer of uncertainty since
companies typically add safety
stock to buffer against demand
volatility.
 As forecasts get updated with
every new order, the original
demand signal gets distorted,
causing upstream suppliers to
experience exaggerated demand 22
changes.
1) Demand Forecast Errors

Example:
 A retailer observes a slight increase in customer demand and orders 10%
more
than usual.
 The wholesaler interprets this as a sign of increasing future demand and
orders 20% more from the manufacturer.
 The manufacturer, fearing shortages, increases production by 30%.
 The supplier produces even more raw materials.
So what to do?

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Remedy for Demand Forecast Errors

The most effective way to reduce demand forecast errors is to increase visibility
by
sharing actual consumer demand data across the supply chain.
• Point-of-Sale (POS) Data: Retailers can share real-time sales data with suppliers,
reducing reliance on inaccurate forecasts.
• Companies can work together using systems like CPFR (Collaborative Planning,
Forecasting, and Replenishment) to generate more accurate forecasts.
Example:
• A retailer sells 1,000 units weekly. Instead of sending only their order quantity
to the wholesaler, they also share POS data. The wholesaler then sees actual
consumer demand and avoids over-ordering based on exaggerated predictions.

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2) Order Batching

•Companies don’t always place orders as soon as they sell a product.

Instead, they wait and accumulate orders to benefit from cost savings
like lower transportation fees (e.g., full truckloads).
•When orders finally get placed, they are large and irregular, creating
spikes in demand.

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2) Order Batching

Example: A small office uses around 200 pens per month. Rather than ordering
pens every month, the office manager decides to place one large order of 600 pens
every three months to reduce paperwork and take advantage of bulk discounts.
 The retailer receives a large order for 600 pens, even though there were no
orders in the previous two months. This sudden spike makes them think demand
has tripled.
 To avoid stockouts, the retailer increases their order to 800 pens from
the wholesaler.
 The wholesaler, fears increased market demand and places an even
bigger order
with the manufacturer.
 Manufacturer, who ramps up production—misled by what appears to be
rising
demand. 26
Remedy for Order Batching
• Each member of the supply chain tries to optimize own
operations.

6 the store
• So at 6 level6one sees6 demand like:
6 6 6
• But6at the wholesaler level one sees:
0 0 0 24 0 0
• And0so on … 24

• Coinciding order schedules exacerbate the problem.

So what to do?

Fall 2023
Remedy for Order Batching

• Channel coordination: Companies should act as though the entire supply chain
is one integrated system. This means determining lot
sizes that optimize the supply chain as a whole, rather than just
minimizing individual company costs.
• Frequent, Smaller Orders: Switching to more regular replenishments reduces
demand variability. Reduces artificial demand spikes seen by upstream
suppliers.
Example:
• A manufacturer might encourage its retailers to place weekly orders instead of
monthly orders by offering incentives for smaller, consistent orders. This
reduces the bullwhip effect upstream.

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3) Price Fluctuations

• Promotions, discounts, or temporary price reductions lead to forward buying —

where companies purchase in bulk when prices are low, not necessarily
because they need the products.
• Once the promotion ends, demand drops, causing a sharp decline in orders.
Example:
 When prices drop during a sale, both customers and retailers tend to stock up,
purchasing significantly more than they immediately need.
 This creates an artificial spike in demand, which manufacturers often
misinterpret
as a genuine increase, prompting them to overproduce.
 Once the promotion ends, demand returns to normal levels, leading to
inefficiencies, overstocking, and excess inventory throughout the supply chain.

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Remedy for Price Fluctuations

• To prevent artificial demand spikes caused by promotions, companies can

implement an Everyday Low Pricing (EDLP) strategy.
• EDLP offers consistent, predictable pricing without large discounts or sales
promotions.
• It encourages customers to buy based on actual demand
• Additionally, companies can reduce reliance on promotions by using targeted
loyalty programs or offering minimal, stable discounts instead of drastic price
cuts

• Example:
• A grocery chain might switch to an EDLP model, offering a constant, fair price
on household staples rather than fluctuating discounts. Customers then
purchase based on actual needs instead of stocking up during sales.
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4) Shortage Gaming

• During times of product shortages (e.g., due to

supply chain disruptions, economic
uncertainty, or natural disasters), customers
may inflate their orders to secure more
inventory.
• This is known as shortage gaming — customers
anticipate that they will receive only a portion
of their orders, so they deliberately order
more than they need.
• Once the shortage ends, customers cancel excess
orders, leaving manufacturers with excess
inventory and high storage costs.

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Example

• During the early stages of a pandemic, hospitals fear a

shortage of N95 masks.
• Each hospital normally uses 1,000 masks per month, but
to ensure they get enough supply, they order 5,000—
far more than needed. Manufacturers, seeing this
spike from every hospital, ramp up production, but
still can’t meet inflated demand.

• When the masks finally arrive in bulk, some hospitals

realize they don’t need them all and cancel part of
their orders or end up overstocked, while others still
face shortages

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Remedy for Shortage Gaming

• Proportional Allocation: Instead of allocating inventory purely based on the size of

current orders (which could be exaggerated), manufacturers allocate supply
proportionally based on each customer’s past purchasing behavior.
 If customers know that ordering more won’t guarantee them more product, they
are less likely to inflate orders.
• Transparency: Sharing clear and timely information about inventory levels,
production schedules, and expected delivery times with supply chain partners.
 When customers understand when and how much product will be available,
they are less likely to panic-buy or game the system.
• Penalties for Cancellations: Introducing fees or restrictions for cancelling or drastically
changing orders after they’re placed.
 This discourages customers from placing large speculative orders with the
intention of cancelling later if they receive more than needed.

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A Bullwhip Effect Measure

• A straightforward way to analyze the extent of the bullwhip effect at any link
in
the supply chain is to calculate the bullwhip measure:

• Variance amplification (i.e., the bullwhip effect) is present if the bullwhip measure
is greater than 1.

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A Bullwhip Effect Measure

Bullwhip Effect > 1 → The bullwhip effect is present, meaning order variability
is
higher than demand variability.

Bullwhip Effect = 1 → No amplification; order variability matches demand

variability.

Bullwhip Effect < 1 → Demand variability is higher than order variability,

which is rare and may suggest an efficient supply
chain.

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Note!

• We typically calculate the Bullwhip Effect between two consecutive stages,

like:
Retailer to Wholesaler
Wholesaler to Distributor
Distributor to Manufacturer

• At each stage, we compute:

𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒 𝑜𝑓
• Bullwhip Effect = 𝑂𝑟𝑑𝑒𝑟𝑠 𝐴𝑐𝑡𝑢𝑎𝑙
𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒𝑜𝑓 𝑆𝑒𝑛𝑡 𝐷𝑒𝑚𝑎𝑛𝑑
𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑

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Example

If the variance of customer demand is 100 units and the variance of orders placed
by
the retailer is 400 units:

Bullwhip Effect = 400/100= 4

• This indicates a significant bullwhip effect.

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Example
Week Actual Retailer
customer orders to
demand wholesaler
1 100 120
2 105 130
3 95 150
4 100 140

• Variance of Demand = 16.67

• Variance of Orders = 166.67
• Bullwhip effect=166.67
16.67=10
• The retailer’s ordering behavior is 10 times more variable than customer demand — a
strong bullwhip effect.

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Example

• Chieh Lee Metals, Inc., orders sheet metal and transforms it into 50 formed
tabletops that are sold to furniture manufacturers. The table below shows the
weekly variance of demand and orders for each major company in this supply
chain for tables. Each firm has one supplier and one customer, so the order
variance for one firm will equal the demand variance for its supplier. Analyze
the relative contributions to the bullwhip effect in this supply chain.
• Which stages of the supply chain are most affected by the bullwhip effect.

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Solution

40
Example

• Suppose that Chieh Lee can reduce her bullwhip measure from 2.50 to 1.20. If
the measure for all other firms remained the same, what would be the new
reduced variance of orders from Metal Suppliers?

• 2.50 -> 2.50 →

• 1.20
𝑚𝑒𝑎𝑛𝑖𝑛 � = 1.20→ 𝑥 = 360 𝑉𝑎𝑟𝑖𝑛𝑐𝑒 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟
�

𝑔: 𝑓𝑜𝑟 𝐶ℎ𝑖𝑒ℎ 𝐿𝑒𝑒

30
• All other measures remain the same → 2.67 � →
0 �

=
36
•𝑦 = 961 𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟 𝑓𝑜𝑟 𝑀𝑒𝑡𝑎𝑙 0

𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑟𝑠 𝐿𝑡𝑑.
41