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Of beer games and bullwhips in supply chain

Headshot for Richard Smoley.

The Beer Game, although fascinating, is not quite as much fun as it sounds, but it does provide an illustration for produce companies to maximize efficiency.

It’s not a game that bingeing undergraduates play on spring break. In fact, it doesn’t involve drinking beer at all. You can play it as a board game; there are software versions too.

The Beer Game was created by management expert Jay Forrester at MIT in 1960 as a way of illustrating fluctuations in the supply chain—particularly the bullwhip effect. As you can easily imagine, someone flicks a bullwhip with his wrist. On that end, the motion is small. But as it passes down the length of the whip, the loops get bigger and bigger so that the other end cuts a huge swath.

In business, the bullwhip effect refers to the process whereby small fluctuations in demand at one end can cause huge distortions in production.

One cause is that operators in the supply chain misread real demand. The classic case had to do with Volvo in the 1990s. Volvo dealers had too many green cars, so they offered promotional deals to sell them. The green cars, naturally, started to sell very well. This news got back to the manufacturer, who interpreted it as an increased demand for green cars. So, it started to make more green cars, increasing the inventory of an item that wasn’t very popular in the first place.

The Beer Game has teams of four players, each of whom assumes the role of retailer, wholesaler, distributor, and producer. Each has to both fill and receive orders for cases of a hypothetical product called Lover’s Beer. In each round, the retailer draws a slip of paper indicating demand for that round, and everyone has to calculate the number of cases they will need. The goal is not to beat the other players, but to have the smoothest relation in supply and demand, with highest benefits for all. (The Beer Game can be played competitively, but between teams rather than individuals.)

The game is apparently is hard to play. Primary-school children can do quite well at it while seasoned executives perform miserably.

You can see how this dynamic might play out in the produce industry. You, the retailer, sell 20 more boxes of avocados this week than last: does that mean you order 20 more boxes next week? If it’s the week before the Super Bowl and everybody is making guacamole for parties, you might realize that this is just a brief spike. But other situations are not so easy to read.

The dynamic is somewhat different with produce, because supply (unlike with, say, beer) is comparatively inelastic: there is no factory that can speed up the avocado assembly line to meet demand. But similar distortions can and do arise.

Causes? An article in Thomas Insights lists several:
• Discounts, cost changes, and other price variations, which may lead to irregular buying patterns. (For example, big price cuts on green Volvos.)
• Poor performance or bad decision making by stakeholders along the chain.
• Lack of communication among participants in the supply chain.
• Over- or underreacting to demand expectations.
• Inaccurate forecasting due to overreliance on historical data.

All of which can be filed under “human error.”

The bullwhip effect points to a fundamental tension in the supply chain. On the one hand, for the most efficient fit between supply and demand, it is in each operator’s interest to communicate promptly and clearly with the other operators. On the other hand, businesses don’t like sharing information. They guard it closely, fearing to give anything away to the competition—even if this tactic works to their own disadvantage.

The best means of preventing the bullwhip effect is clear communication all along the supply line—particularly in relation to customer demand.

What are the rewards for getting it right? Let’s put it in one word: Walmart BB #:143789. In Walmart’s system, point-of-sale data are sent directly to corporate headquarters several times a day, enabling the company to time shipments from the distribution center to the stores, and from the supplier to the distribution center. This streamlined supply chain is one of the great secrets to Walmart’s success.

For the produce industry, with its chains of retailers, shippers, and growers, communication at this level of efficiency probably isn’t feasible. But it is probably wise to know the principle of the bullwhip effect and to remember that clear communication with buyers and sellers is often to your own best interest.


Richard Smoley is Editor with Blue Book Services Inc.