5. www.esrishti.co.in
Lack of SC Coordination
and the Bullwhip Effect
Supply chain coordination – all stages in the supply chain take
actions together (usually results in greater total supply chain
profits)
SC coordination requires that each stage take into account the
effects of its actions on the other stages
Lack of coordination results when
-Objectives of different stages conflict or
-Information moving between stages is distorted
6. www.esrishti.co.in
Bullwhip Effect
Fluctuations in orders increase as they move up the supply chain
from retailers to wholesales to manufacturers to suppliers
Distorts demand information within the supply chain, where
different stages have very different estimates of what demand looks
like
Results in a loss of supply chain coordination
Examples: Proctor & Gamble (Pampers); HP (printers); Barilla
(pasta)
9. www.esrishti.co.in
ORIGIN
• The Beer Game is a logistics game that was originally
developed by MIT in the 60s and has since been played
all over the world by people at all levels, from students
to presidents of big multinational groups.
10. www.esrishti.co.in
PURPOSE
• The purpose of the game was to show how the patterns we create in our
relations with the world around us sometimes give unexpected and
undesired results. This is an expression for what is called system
dynamics. Jay W Forrester in the USA first developed the ideas and
theories behind this branch of science.
• The game shows how we (re)act in various situations, and how these
situations lure us into standard ways of "thinking" that we accept
without question, as exemplified by responses such as it has always
been that way.
11. www.esrishti.co.in
OBJECTIVES
• To experience systemic effects and to introduce the need for
supply chain and network management.
• To see how single parts in a system influence each other
• To observe how individual thinking differs from systemic
thinking (network thinking).
• Potentials for systems optimization and the use of information
systems.
13. www.esrishti.co.in
STRATEGY SET OF PLAYERS
The actions that can be performed by each player are:
• receive incoming orders
• receive incoming deliveries
• send out deliveries
• decide on the quantity to be ordered
14. www.esrishti.co.in
PLAYING PROCEDURE
The game runs in weeks starting from 1.
In each week, each player has to proceed with the following steps:
• Receive new deliveries
• Receive orders
• Calculate the total amount that will be shipped (“their delivery”)
• Decide on a new order amount
15. www.esrishti.co.in
BASIC RULES
Ordering sequence of beer
Customer Retailer Wholesaler Distributor Factory
Supply sequence of beer
Customer Retailer Wholesaler Distributor Factory
Each player is under an obligation to meet his demands.
16. www.esrishti.co.in
COSTS
• The main objective of each player is to minimize his cost.
• There are two types of costs to each player:
– Inventory cost : Cost for holding the inventory in stock
– Back-order cost : If an incoming order cannot be fulfilled,
items are outstanding and have to be put on “backorder” to be
satisfied in the following week(s)
17. www.esrishti.co.in
SOME MORE RULES
• No communication is allowed between supply chain groups; supply
chain groups must not talk to each other at any time
• Especially the customer demand is only known to the retailer
• If stock is available, an order has to be fulfilled
• Every order has to be fulfilled, either in the current week (if enough
stock is available) or in one of the next weeks (items go on backorder)
• Either the inventory or the backorder, one of them is always zero
19. www.esrishti.co.in
TABULATION
A good analysis requires the following values to be tabulated
• Incoming Delivery
• Incoming Order
• Back-order
• On-hand Inventory
• Cost
• Player’s Order
21. www.esrishti.co.in
POST GAME ANALYSIS
• Did you feel yourself controlled by forces in the system from time
to time? Or did you feel in control?
• Did you find yourself "blaming" the groups next to you for your
problems?
• Did you feel desperation at any time?
• Why are there order delays?
• Why are there production delays? Shipping delays?
• Why have both distributor and wholesalers; why not ship beer
directly from the factory to the retailer?
• Must the brewer be concerned with the management of the raw
materials suppliers?
24. www.esrishti.co.in
REVIEW
a. What went wrong? How can the performance be improved?
b. What are the important factors affecting supply chain performance?
c. How can you help in improving supply chain performance with
respect to these factors?
25. www.esrishti.co.in
BULL-WHIP EFFECT
• The bullwhip effect (or whiplash effect) is an observed phenomenon in
forecast-driven distribution channels. It refers to a trend of larger and
larger swings in inventory in response to changes in demand, as one
looks at firms further back in the supply chain for a product.
• Order variability is amplified upstream in the supply chain. Ex: HP
26. www.esrishti.co.in
BULL-WHIP EFFECT PROBLEMS
• Variation in demand along the supply chain requires the following to
cope with peaks.
– Shipment capacity
– Production capacity
– Inventory capacity
• Most of the time this capacity will be idle.
– There’s significant cost and investments attached!
• In the end: high overall cost in the supply chain
– But competition is between supply chains and networks, not just
between individual companies!
27. www.esrishti.co.in
FACTORS CONTRIBUTING TO
BULL-WHIP EFFECT
• Demand forecasting
– Usage of aggregate and thus inaccurate data does not allow for
good predictions
– High variability leads to continuous adaptations of order
policies and thus increases variability upstream
• Lead time
– High lead time creates uncertainty
– Requires high safety stock levels
– Reduces flexibility and adaptability to unforeseen changes in
demand
28. www.esrishti.co.in
• Batch ordering
– Batch ordering at one stage in SC leads to observing high variability at
next stage upstream:
• one week large order followed by weeks with no order
• Contributors: fixed ordering costs, transportation and price discounts
• Price fluctuation
– Stock up when prices are lower large orders
– Promotions and discounts
• Inflated orders
– In time of shortages, suppliers place big orders when expecting to be
allocated proportionally
FACTORS CONTRIBUTING
TO BULL-WHIP EFFECT
29. www.esrishti.co.in
STRUCTURE CREATES BEHAVIOUR
• Different people in the same
organizational structure produce
similar results.
• The structure of the game (i.e. the
supply chain) causes the resultant
behaviour.
• This is precisely what its inventor
(Forrester) intended to achieve and what
is referred to as the effects of systems
dynamics.
30. www.esrishti.co.in
MORAL
• In traditional supply chains information about consumer demand is only passed up the
supply chain through the orders that are placed
– Or using aggregated figure
• Information is therefore lost
• High Buffer stocks result
• Even if each party acts “optimally” individually the result is less than optimal for the
whole supply chain
• Result is higher prices, less sales.
• Competition is now supply chain against supply chain and network against network
31. www.esrishti.co.in
ONGOING RESEARCH: MORE BEER
• Value of information sharing.
• Coordination and cooperation.
• Bargaining and negotiation.
• Alternative learning mechanisms: Classifier systems.
32. www.esrishti.co.in
References
1. Introduction to operations and supply chain management,
Sunil chopra and peter meindl.
2. Introduction to Logistics Systems Planning and Control,
Ghiani, Laporte and Musmanno, Wiley.
