Distribution and the Supply ChainDistribution and the Supply Chain

The Beer Game

The Bullwhip Effect

• causes

• cures

The Curse of the Bullwhip Effect

The Big PictureThe Big Picture

In the new less vertically-integrated industries of today, you are only as good as your suppliers.

If you make life more difficult for them, you too will pay a price.

The “Bullwhip effect,” which is a generalization of the Beer Game, shows how locally sensible policies are silly from a systemic point-of-view.

Beer Game De-Brief IBeer Game De-Brief I

What are your reactions?

Patterns

Causes

Beer Game Debrief IIBeer Game Debrief II

Solutions

Take-aways: The essence of OM

The Bullwhip EffectThe Bullwhip Effect

There is a tendency for variability to escalate with each stage in the distribution process. . .

But, this is a rational response resulting from

• delivery delays & inventory target adjustments

• order batching• price fluctuations• shortage gaming

Orders

Co nsum er Retailer Wholesaler Facto ry Equipme nt

Material

. . .usually from a corresponding degradation in the quality of demand information.

Delivery DelaysDelivery Delays

Delivery Delays make it more difficult to react to changes in demand and control your inventory.

To see this, consider the following example. Assume we seek only to balance demand.

What was our delivery delay?

Week 1 2 3 4 5 6 7Cases Shipped 10 11 11 11 11 11 11Cases R'cvd. 10Target Inventory 100 100 100 100 100 100 100Actual Inventory 100Orders Placed 10 11 11 11 11 11 11

What is our final Inventory Shortfall?

What if we had a 2-day delivery delay?

Inventory Target AdjustmentsInventory Target Adjustments

Inventories exacerbate this effect. For example, what if we set our target inventory at 10 weeks of demand?

Looking at the previous example. What happens to target inventory in week 2?Week 1 2 3 4 5 6 7Cases Shipped 10 11 11 11 11 11 11Cases R'cvd. 10 10 10 10 10 11 11Target Inventory 100Actual Inventory 100 99 98 97 96 96 96Orders Placed 10 11 11 11 11 11 11

What is our final shortfall now?

What if we carried only 5 weeks of inventory?

Order BatchingOrder Batchingor

ders

rec

eive

d Supplier

timeApril 1 June 1May1

time

Retailer

April 1 June 1May1

Con

sum

er s

ales

Price Fluctuations (Promotions)Price Fluctuations (Promotions)

[Promotional sales discounts] are among the dumbest marketing ploys ever created.

Fortune Magazine

What happens to sales after a promotion?

• Retail (The Forest Green Volvo)

• Automotive Companies

sales

time

It is estimated that 80% of transactions from manufacturer to distributor are “forward-buy”

Shortage GamingShortage Gaming

If rationing is proportional to amount ordered, then orders have very little information content about actual demand for the product…

Consider the following example:

1. Normally you order 100 cases of beer per week, but on Memorial Day you order 200. The wholesaler only ships you 150.

2. You want to get 200 cases for July 4 weekend. How many do you order?

3. How do you respond when the excess finally arrives?

4. What happens to the market?

Shortage GamingShortage Gaming

This happens all the time in real industries, and is usually called “Double” or “Phantom” ordering:

• Capital Equipment

• DRAMs

• Fad Items (Tickle-Me Elmo, Sleep & Snore Ernie)

• Dell Computers

Avoiding the BullwhipAvoiding the Bullwhip

Everybody in the supply chain loses when the Bullwhip effect occurs. . .

lots of incentive to avoid it

Four basic techniques:

• information sharing (POS info helps here)

Everyone in chain knows consumer demand and each other’s inventories. (Delivery Delays, Target Inventory Adjustments, Shortage gaming.)

• channel alignment (reduce suppliers or tiers)(Delivery delays, shortage gaming)

• every-day low prices, long-term contracts (Price fluctuations)

• operational efficiency

Increase deliveries. Reduce delivery delays and inventories. (Delivery delays, Target Inventory Adjustments, batching)

The MessageThe Message

In the future, you will only be as competitive as your supply chain.

Communication and a tight working relationship with your suppliers and marketing can go a long ways to minimizing the “bullwhip effect” and reducing supply-chain costs.