Supply Chain Management: The Beer Game

[Music] [Music] begin with a few acknowledgments first to Provo Simpson for the opportunity to do this it actually caused me to learn something I didn't realize and hopefully have a moment to talk about that later colleagues students especially I'm delighted to hear see students here and dr. Terry Lynch Karras I recall died I'd forgotten but I recalled that the beer game actually came from her suggestion so I have a great debt of gratitude to you it's been a fabulous exercise for me and my supply-chain courses and so I greatly appreciate that with me is Thomas dr. Thomas nicht edema dr. Nicodemo is going to be helping me with the data entry so that during the game I can interact more freely with with the participants I really had a hard time with the title of this speaker series because I'm either the in distinguished or non distinguished professor I want to emphasize that my perhaps I'm distinguished in different ways given my experience before I've come here at Purdue I've always wanted to teach at the collegiate level and so it's a great pleasure to be at Kettering I've only been here four years I'm very new as you heard I'm not a doctor in the business department we like to call ourselves prac adem --ax and that's a practice practice honor who's gone to the dark side to become an academic no research yet but even as we were looking at this maybe there's some opportunities in the area of innovation development which has been my primary focus of new coursework and has been my long-term joy in my career has been the process the business process of product development so supply chain management to me when I was in industry was a buzzword it had been going around and people have been talking about it but now I actually teach it imagine that supply chain what is a supply chain it's all the activities involved directly or indirectly in fulfilling a customer request and this typically includes the suppliers manufacturers transporters warehouses you know everybody in the supply chain out to the customer but it also includes within each function or in each company the functions involved in fulfilling a request and I'm delighted to see that Professor Chopra from Northwestern University has identified product development because it kind of begins with there with the new ideas and things that are the innovations that are coming into the organization and of course through marketing operations distribution finance and customer service supply chains are dynamic network systems that require effective coordination of information up and down the supply chain generally we look at supply chains this week this way and Thomas and I use a text that has this illustration in it talking about people who want ketchup and so the consumers here buy from the retail grocery store who gets it from the ketchup factory and I noticed there's quite a bit of distribution here that doesn't occur but they identify upstream tomato paste factories grading stations and tomato suppliers which would of course be the farmers and we often talk about tears in the supply chain that's very common in the automotive industry and in Southeast Michigan the interesting thing is not only are you managing the product as it's moving this way but you're managing information flows back and forth and cash flows of course coming back as people get paid here is a generalized model of a supply chain that comes from the text I use one of the texts I use is a supply chain logistics management by Bowersox Klaus Cooper they are professors from Michigan State University Michigan State actually has a really good competency in supply chain and logistics management and so I found their text to be the best for one of my courses and they have this illustration a supply chain is sourcing materials through a supply network which has a lot of nodes on this the one thing that you'll see about a supply chain is it's very much like an information network lots of nodes paths product moving information moving into your enterprise your enterprise purchases manufacturers produces distributes and sells to customers which they call customer accommodation and then you've got a distribution network of wholesalers and distributors that move this product physically through the distribution channels to the customers typical supply chain services are these generally a supply chain has value in that it buffers time between production and consumption the most obvious example of this is the farmer in our food products we really like to eat in the winter time but food is only produced in the summer time and so they're buffering time in the supply chain we also span distance the location of production and consumption is dramatically different typically and so a supply chain has an important function in spanning distance we call that logistics and if you're with UPS you heart logistics quantity producers specialize in large quantities and the limited assortment so as a manufacturer we have a certain product line we produce truckload railcar low quantities and we ship that out to the distribution channels but assortment is what customers want customers want small quantities and wide assortment so this is these are the values that supply chains provide to the marketplace when I was studying supply chain management to begin to teach it I realized I'd been in supply chains for the bulk of my career but I really didn't understand what this phenomenon called supply chain management was and so part of my learning was kind of boiling it down I'd like to make things simple and that way I can understand it and this is what I found there are three things that summarize the practice the characteristics of supply chain management are performance excellent customer satisfaction at the lowest total cost what you're going to hear are some common themes if you're familiar with total quality management lean systems all of these things have the same holistic approach and supply chain management simply adopts those there's truly a belief that we can do things much better and do it at lower cost which improves profitability improves sustainability for the organization and value for the shareholder of a public corporation the second is collaboration with supply chain partners coordinating operating activities modern supply chain practitioners do very much to coordinate the activities between enterprises we don't have a history of doing that especially in the United States we're very independent managers and so this kind of approach and philosophy is somewhat new information technology without information technology that we have now in high-power software and low-cost computing performance we cannot do the things that we do now in supply chain management so these are the three things that are driving supply chain management as a phenomenon now we're going to set up the beer gate and this will take some time and hopefully we'll have some fun with this but I want to explain the principles of the beer game as an exercise in understanding the dynamics of operating systems here is the beer game supply chain it's very simple that you'll never find a supply chain this simple in the business world you have only one participant in each stage commonly there's a network of enterprises that are involved in a supply chain here we have a factory that purchases materials and places orders for materials and they brew beer and they send that off to distributors and distributors place orders with when they need beer and they ship the factory ships them beer when they need it the wholesaler does the same thing they place orders with the distributor and beer gets shipped to the wholesaler then the retailer orders get placed beer gets shipped and eventually the consumer gets their beer this is a what's known as a traditional supply chain an echelon structure where we have one step after another this structure is important in supply chains and very important in understanding the principles of the beer game so the structure is one thing and then the operating processes the participants in the beer chain will only have to do these three things ship beer manage inventory and order beer actually in reality you only have to order beer because the worksheet that Thomas will be working will take care of shipping the beer automatically as soon as you have the orders and the inventory and it will also manage the inventory for you you know do the classic inventory calculation which we teach in accounting and Kathy I can't remember I apologize I'm panicking here but give me a moment here to to get oh yes okay so on to the beer game here's the beer game situation and if you've been in my courses I'd use the Bulldog beer bottle too many times we have a demand forecast it is mid-may in Michigan winter is gone and temperatures are rising beer is seasonal and demand rises in the summer and Peaks around the holidays recently demand has been steady at four pallets per week this has been a demand at the retailer sales are expected to rise with temperature the Memorial Day holiday weekend and a sales promotion that the beer brand is is going to be operating we have a performance goal pricing is market driven beer is very fungible I mean if I don't have beer here I'll go down the street and get beer from another retailer so to maximize profit we do that by amazing cost now we have two costs this is very simple we only have an inventory holding cost of $1 per pallet per week and we have a $2 backorder cost a per pallet per week so $1 to hold inventory and if you run out of inventory the cost is $2 per pallet per week ok so let's play Thomas we'll get you up here now to help help me a little bit I'm gonna gonna pick the retailers right here ok Katie you want to game the system you're welcome to okay so we'll have these three people right here and so you are going to be our retailers okay we got a little name tent for you everybody knows who the retailer is Katie you know the drill okay what's that oh I forgot to mention this exercise has nothing to do with drinking beer did I fail to mention that oh I am so sorry yeah this has nothing to do with drinking beer would you two gentlemen like to to be our wholesalers can we can you do that for us you want to that okay be our wholesale you'll learn quickly okay Schaeffer Kathy Schaeffer dr. Schaeffer sorry oh let's say you know this the yeah yeah no they don't okay here we're gonna we're gonna do them they're gonna be the gear beer game okay you're gonna be our distributors neil and who wants to you guys yeah okay who wants to do it yeah the more the merrier okay all four of you well good nope they'll never make a decision okay okay so we have our retailer our wholesaler or distributor and our factory teams okay your management you got to manage the beer game you can see here that everybody has inventory of 12 pallets of beer in every stage of the supply chain things are good here in week zero there are no back orders there's no inventory cost and in fact we have no orders placed on the supply chain so your job is to manage the supply chain you will I will ask you to place orders for for beer and you will manage your inventory level to minimize your inventory cost but try to avoid stocking out if you do then you'll have a backorder cost and of course the whole objective is to minimize the total cost of the supply chain so everybody will be able to see we have all the information here all the calculations are taken care of all you have to do is order beer so let's go let's see I'm so used to be working that spreadsheet thank you so much Thomas I greatly appreciate it ok retailers they want to order four four four pallets of beer ok wholesalers you got to order beer manage your inventory you want 5 you want 5 okay they want 5 gonna do ok we're doing well or doing well 5 they're gonna do fine ok what's that you want to order beer ok did I mention we have to do 50 weeks ok 50 weeks is my target we really got to move ok 5 5 ok this is a new strategy here okay now retailers you want for ok wholesalers to to AH see wisely managing their inventory minimizing that inventory costs distributor 5 and factory for ok very good retailers for for okay wholesalers PI okay fine for they want an agent for okay everyday is doing really well the retailers inventories getting a little low okay and factory three okay three managing that inventory reducing their yeah they got the highest inventory carrying cost that's you're not getting any orders are you know okay okay well you know it takes a little time to brew beer and get it out there into this yeah there's there's a little bit of a lag you know okay retailer eight okay hey one one very good very managing that inventory for for for the distributor and for the factory zero they're not doing brewing any beer no no need for beer this week everybody gets a vacation retailer eight wholesaler three for for the distributor and factory zero okay good okay very good oh gee what's happening you don't have any inventory what's going on here you got order some beer let's go eight okay they're ordering eight wholesaler five okay they're on or five distributor zero and factory five okay five retailer eight wholesaler ten ten okay ten distributor zero factory ten okay okay yeah factories realizing they're running out of beer retailer okay eight wholesaler five okay distributor yeah it takes time to get beer you know it's one week to order one week to deliver and you have to have a source of supply what's going your inventories not changing that's because the inputs are equaling the outputs and so everything's fine is this a problem I'm sorry oh okay okay and how much do you wish to order for okay very good factory three retail eight wholesale eight distributor in factory to - okay retail eight please okay wholesale ten distributor ten factory three okay retail eight you got some Beck orders there you might want to take care of that no people wait for their beer okay wholesaler twelve distributor twenty he's gonna make up for that problem okay factory but just to zero to twenty okay yeah yeah all right just a little coaching there little management education okay okay retailer 16 although we talked over fast wholesaler 16 okay distributor 20 factory 20 going wrong right you won with the program retail eight wholesale I'm sorry twelve okay distributor 20 and in the factory 30 30 okay yeah let's go retail ten wholesale fifteen distributor twenty factory twenty retail Hey okay wholesale twelve distributor twenty factory twenty okay retail eight wholesale ten six for the distributor factory eight man there's a lot of beer in the supply chain but retails only using eight okay we tip ten okay wholesale twelve distributor what six okay factory for managing that inventory retail eight wholesale nine distributor six factory or very good for okay retail only about 30 left to go so sixteen wholesale fifteen distributor then factory eight retail for oh wait you good too much inventory okay wholesale five distributor six factory six okay settling down here retail seven wholesale zero okay good managing that inventory zero me a packet zero well if people are lining up at the unemployment line right now retail none Oh zero zero okay wholesale zero zero in fact zero retail Oh Thomas you're advanced one week click it back one week just click it down one week there that's reflecting the proper week when after we enter in the week 23 then we update okay wholesale zero distributor is your own in factory to retail zero wholesale zero distributor summer shutdown factory zero okay retail poor oh yeah you're throwing a little book wholesale 5:04 the distributor and factory good at zero retail oh no inventory you got some back orders Oh wholesale - okay zero for the distributor factory zero okay retail 20 wholesale 16 de Streeter well factory a eight retail sorry wholesale 25 okay keeping up with those retail distributor boy factory 18 retail hate wholesale 10 distributor factory okay retail Hey wholesale tonight it's true here 20 factory 30 30 not gonna run out of beer retail zero whole sir fifteen distributor twelve factory fine okay retail wholesale Wow twelve let's trip and retail Hey wholesale ten distributor fourteen factories ten I think we're good what do you call that the professor carrots the horizon where you tell that's fifteen we really only do clarity ortho is I'm giving you the false impression that there is no end to the glam to the game but the the game is done in the bank and Thomas thank you so much I really appreciate it let's look at the charts fascinating tell me Katie he's actually does this were you Charlie trying to gain the system or you were trying you started out trying to manage your integer or and then what happened oh really okay in there I can't see so who have done it before it be both wait some tried to game the system trying to optimize the system the reality is in weeks one two and three four pallets per week actual demand and they're the only ones that seem actual demand and this is typical of the traditional way to boost supply chains in week four before it jumps up to eight palace per week then it stays there the rest of the game pallets per week this is called a step change and it provides the disruptions to the dynamics of the system which everybody tries to compensate for throughout the remainder of the game but the nature of system dynamics is that you're already losing it's just too difficult to manage the supply chain so let's discuss some of the principles of this no this is great yeah super job up down up down that's exactly we're going to see I always worried you know whether it's gonna work out or not I've done is about 10 or 12 times and it's always worked out quite well let's take a look at the data part of the data [Music] okay this is an exercise to illustrate system dynamics it was created by MIT his availables of working in a software simulation and our beer game is kind of an acceleration of the whole process normally if you look at this this is actually Brandeis University and they use this exercise as a freshman in charge season oppression in NBA weekend orientation introduction to explain the complexities of business and this is a video of the software simulation that's also available let's review the beer game participants typically crack the whip in fact this phenomenon in distribution systems is known as the golgotha factors and the idea is that a little change over here by the consumer translates into big changes up the supply chain the game starts with steady demand an increase in demand is generated just once and this induces variation in the system participants try to compensate but errors are amplified the whole exercise I absolutely love because it's an exercise in expectation failure ok we learned this word from Ken Bates book what the best polish teachers do Friday thank you also professor Lynch parents we're studying this book club and what is great about this is it really sucks up a whole course for the remainder of the term for me students realized that this whole thing isn't so easy and it's nice to have this exercise to demonstrate how what you think pretty straightforward causes the problems in the system clinics then we can use the principles of supply chain management to explain what is going on the most important is in supply chain dynamics is variation reduction reducing variation is a primary objective of supply chain management the sources of variation of supply chains are not obvious in this dynamic supply chain system and the bullwhip effect is the phenomenon that occurs when acting in isolation with limited information supply chain managers make decisions that are magnified upstream and in results in stock outs and overstocking throughout the supply chain so that is the principle that is that is utilized in supply chain management here are the factors that contribute to the bullwhip there is a lead time impact on the supply chain it takes in the game one way to order and one week to receive product so that 2-week lag causes of delay in the system which is difficult to monitor there's an impact of batch ordering you can order a lot or a little but we're only ordering on a weekly basis that batching induces more problems to the system they're also magnifying the effects of inflated orders when someone puts a large order into the system well the person next to the supply chain thinks oh my gosh I'm going to run out and they order even more that's because his supply chain managers inventory availability is our number one priority we have to have them there to sell to the customer or provide for production and so there's a psychological effect that causes people to not have just-in-time inventory but just in case inventory there's also demand forecasting and accuracy you didn't know what the real demand was and traditionally that was the case in the supply chain people simply reacted to what they were seeing in the next participant in the supply chain and finally information and decision isolation why weren't you guys talking to each other nobody talked to each other supply chains typically don't have the ability to talk to each other at least traditionally and here we are in the room I've given you perfect information you had everything you needed an adult the only thing that could've done which was taught you could have talked to each other that didn't happen interestingly in the board game that's done at MIT they actually have our rule you cannot talk to each other I have never ever said that in the beer game and nobody ever talks to each other we're Americans believe it or not this is 50 years old this phenomena was known in distributions in the 30s and the 40s but Professor J W Forester of MIT created a mathematical model to simulate the effects here is the 10% step change in retail sales that translates into a 16% step change in distributor orders which translates into a 28% increase in factory warehouse orders from the distributors which translates into a 40% increase in factory production output and you can see the swings you've got the sinusoidal relationship that occurs throughout the supply chain until it settles down notice that it does start to settle down at 10% above what's interesting is if you have seasonality where you increase and reduce retail so the whole thing goes haywire and I saw this in my industry and compound on that factory capacity well what happens is the factory goes up and it stays flat because you can't produce anymore and it makes the swing even worse because people panic because there's a rush on goods there's not enough in supply professor Forrester saw these three principles in system dynamics structure multi-step organizational chains like his original observation create structural problems in the supply chain and in fact way back in 1961 he said you know if we could get rid of some of these steps in the supply chain it would probably work a lot better he stimulated it and demonstrated it that led to some of the principles received in modern supply chain where you order direct from the manufacturer delays there's implementation and information delays we don't have perfect information we get updates late we takes it takes time to implement improvements or expansions of production capacity these kinds of things are delays in the system which compound the problem and that creates amplification we overcompensate our decisions to take into account things that we perceive are going on in the system this was his original chart and unless you were alive at this time which think Leia was only one club he was one year before my birth with more than 50 years ago you do this all manually there were graphic artists that created this his computer output on a really old IBM was not matrix kind of thing that showed symbols going up and down and somebody made a very beautiful illustration of system dynamic showing the relationships all of this he programmed with mathematical equations and he got this knowledge from is electrical engineering background in servomechanism control systems he created some of the first concepts were built on the first concepts in thermo control and he utilized the information feedback controls as part of system dynamics they are curvilinear equations we mean business we're straight line people in business we like nice linear relationships engineering you like these things these are your domain this is challenging for us business people but he also did a continuous variable simulation a very big in management science techniques I've done a lot of simulation work but mostly discrete event this is high power stuff here are strategies to mitigate the bull with reducing uncertainty by providing centralized information about the man reducing variability by delivery reliability of promotional volume spikes eliminating those white those spikes reducing lead time by improving responsiveness collaboration by information sharing across the supply chain the bullwhip effect illustrates the necessity of all three of the characteristics of modern supply chain management the supply chain revolution of the the 21st century was built on the 20th century where things were very slow to deliver we had poor delivery reliability there are large inventories in the system transportation was slow and regulated we have now days to move product Heinemann inventory it is sized in place to meet customer need transport is very efficient in economical supply chains have anticipatory elements and responsive elements generally where the customer order arrives determines whether you're more of a responsive business that pulls your product through the supply chain whether you're more of an anticipatory business that fees or pushes the product to the customer if you think about food we're way out here as a customer we go to this show and pick up the food off of the shelf everything is occurred for us up to that point of time if you're Dell computer the customer order arrives back here and the only thing they've done is prepare the design and the materials and then they rapidly produce it to deliver to the customer after the order arrives here is the traditional distribution supply chain customers go to the store the store gives them the products when they run low they have more delivered from the distribution center the manufacturers delivered to the distribution center and on a request for order much like the beer game the flexible network structure in Dell says the customer doesn't even have to come to us they sent us a communication signal through the internet and we assemble the product from all of the components that we have available in just a few hours and deliberate in a few days well if you also bundle with it a white screen TV adele can provide that and they send a single out to their supplier of that and actually send it to a UPS hub and a half of that order merged together as one order to deliver to you the customer network structures have importance in design much of what dr. Sanders dr. Liddle is Karis deal with in IME is the is designing the network structure the whole purpose of a network structure and warehouses within the network structure are simply to minimize transportation costs and we do that by consolidating truckload shipments of our goods so that is the only purpose of a warehouse here is the cross stock distribution center of Walmart notice the traditional Sam's Club distribution center right next to it this is storage this is flow every morning trucks come in they all line up by the afternoon all of these trailers were full of product going to the Walmart stores inventory doesn't sit it flows through the system Sales and Operations planning is one of the strategies in supply chain management that is an important business process that's dramatically the way we do supply chain management I'm running out of time so let me kind of briefly scan through these this is an outline of that business process we use optimization methods and supply chain management these are operations research models we have facility location models Sales and Operations planning models product availability models and transportation levels all these varied by the steps in the supply chain and the level of detail and timeframe of the planning horizon from many years out to the day-to-day operations of the supply chain here is an example of an aggregate planning model real math is pretty neat stuff and these are the things that are actually very enjoyable to do this is a quite simple one often these various models have thousands of variables my equations and constraints I'm going to close with this we're out of time careers and supply chain management they are challenging we have complex big problems to solve there are new expectations and innovations driving changes it's changing IT advancements are driving improves in the adoption rate remains low what's remarkable about large supply chain management is that so few companies are really implementing it effectively it's growing it's difficult to export logistics you need to do it if you want to sell things and globalization is actually driving opportunities for students then finally it's leading leading supply chain practitioners are high quality first Amazon Apple Dell the list goes on many of the firm's that we know Branson we identify with have behind it a very very competent supply chain management capability so I can't conclude with some of the things and I apologize to my colleagues because I wanted to show some of their work and conclude with some of the things I'm interested in pursuing but I'm going to stop right there [Music]

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Views: 266,226

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Keywords: business, supply chain management

Id: 7ilJRuAapvA

Length: 45min 3sec (2703 seconds)

Published: Tue Jun 05 2012