The Beer Game

In our first encounter with the “Beer Game” there was a deliberate lack of information flow throughout the supply chain. This inability to access and analyze previous data and forecasts left all participants in the supply chain in the dark as to the right amount of stock to keep on hand and the ability to predict future fluctuations in the demand. Without this data to rely on many decisions were made from a panic mentality rather than a logical one. Communication within the supply chain is imperative and must be shared among all participants to allow each member to better evaluate their customer demands at high and low periods.

In the second session of the “Beer Game”, all participants were allowed access and share data needed to make rational decisions rather than emotional ones. By having this information, the prices and inventories were kept at closer intervals and all members were able to adjust accordingly without panic, saving undue production and costs. Having a demand forecast updating throughout the supply chain allows all participants the ability to fine-tune their inventories, reduce overheads and costs.

Cisco in turn had the opportunity to secure all information and data needed to make good decisions but, in gathering information, it is only as good as a person that gathers it. After reading the article “What Happened to Cisco”, the information that was gathered was skewed toward the idea of cost growth. Cisco had begun to believe their own hype and believed that their systems were so efficient that they were infallible. The one thing Cisco did not model for was what would happen if the growth suddenly stopped.

After four straight quarters of consistent growth, Cisco was never not growing. (3) The next issue facing the members of supply chain had to do with the time limitations and delivery schedules between orders. This effect, according to the article “The Bullwhip Effect in Supply Chains” was referred to as ‘order batching’. Order batching is when companies do not immediately place orders with their suppliers due to back-up stock on hand, or often accumulating the demand first and waiting until they can take advantage of full load discounts and promotions.

Our window in the first game was 4 weeks. A major variability in demand in the 5th week created a surge in demand that was forecasted but overlooked by many. Without the proper data, the entire supply chain was caught off guard and there were shortages that rippled all the way back to the factory. “Periodic ordering amplifies variability and contributes to the bullwhip effect. ” (1) Communication abilities in the second round allowed shorter delivery turn around, which led to less drastic variations in the ordering curve, no stock-outs, and no thirsty customers.

Cisco also began to experience shortages in their supply of routers and switches. So they decided to increase the component inventory in order to reduce wait time for its customers, also giving them a reserve always to draw its component makers ran out. This behavior also corresponds with the fourth effect of the bullwhip known as rationing and shortage gaming. The sales staff continued reporting higher demands and forecasts which meant it was time to build up inventory. And then in the year 2000 largest recession since the Great Depression hits leaving Cisco with equipment that could not be delivered.

(3) The third reason for The Bullwhip Effect according to the aforementioned article was price fluctuation. Although there was no price fluctuation in game one or in game two, we did see a major fluctuation in the ordering curve. The fluctuation in price and unforeseen order demands would have seriously affected the overall costs of products, stock-outs, and inventory. Also, having the ability to order without satisfying full order limits help to curtail logistics expenditures. Many of the problems seen in the bullwhip effect originate from large buy in quantities during promotions.

It is at this time that many retailers will buy at lower prices anticipating future price increases. This extra buy in will create a ripple that affects everyone in the supply chain without the proper information and communication that will need to be documented. In other words, if a grocery store buys 2000 cases of soda in anticipation of two promotions, knowing that before the second promotion there will be a price increase, the mass quantity buy will increase the retailers overall profits but shows up on the sales data as a major fluctuation.

Without knowing about the circumstance of the sale this could create a bullwhip effect. This occurrence happened quite often while I was involved in the beverage industry. The district manager would forecast a certain number of cases to be moved within a quarter; then the factory would ship according to the forecast, whether close or not. Problem was the forecast sometimes did not live up to the hype and at the end of the quarter many times the warehouse was overstocked with product that needed to be moved before the next shipment started for the beginning of the next sales quarter.

This overstock lead to many major price reductions and incentives throughout the district so that most of the grocery stores were able to purchase large sums of stock and run supplement ads other than previously corporate contracted. Extra discounts equal lower costs which led to higher profits because many of the franchises did not reflect their savings in their everyday prices. With Cisco, there was no mention of any major price fluctuations other than when the bottom falls out in 2000.

Instead of selling their switches and routers for full retail markup, they wind up settling for $. 15 on the dollar. (3) The final issue, rationing and shortage gaming, results when demand exceeds supply and manufacturers ration products on the basis of amounts ordered. Customers exaggerate their needs in an effort to get more products. When demands drop, customers will cancel their orders leaving the manufacturers stuck with the excess. This was not evident in the first game because of the lack of information available to the participating parties.

In the second game, with more information and data available for review operating costs, inventory, and planning for greatly enhanced and reduced. Again this issue was prevalent in 1980s while I was involved in the beverage industry. Pepsi Cola had just introduced the Slice products in many of the stores found themselves without inventory and ordered larger quantities to build their stock. Shortly after, the program rapidly faded as just another flavored soft drink; leaving most warehouses with an overabundance of fruit sodas.

Cisco was part of The Great Moderation because of its relation to changes in inventory management. Inventories were to act as a buffer between production and sales while excess of production over sales resulted in inventory accumulation. The Great Moderation was a belief that any major recession was a thing of the past. According to these explanations, the widespread adoption of information technology could have been brought about innovations in supply chain management. (4)