Bullwhips and Root Beer:
Why Supply Chain Management is so Difficult
By Michael Bean
The basic concept behind supply chain management is simple: customers order products from you; you keep track of what you're selling, and you order enough raw materials from your suppliers to meet your customers' demand. So why is it that, in a recent article, the Economist claimed that, "Managing a supply chain is becoming a bit like rocket science?"
The problem turns out to be one of coordination. Suppliers, manufacturers, sales people, and customers have their own, often incomplete, understanding of what real demand is. Each group has control over only a part of the supply chain, but each group can influence the entire chain by ordering too much or too little. Further, each group is influenced by decisions that others are making.
This lack of coordination coupled with the ability to influence while being influenced by others leads to what Stanford's Hau Lee refers to as the Bullwhip Effect. Decisions made by groups along the supply actually worsen shortages and overstocks.
The bullwhip effect is illustrated by a story Prof. Lee tells about how Volvo found itself with extra inventories of green cars. To get them off the dealers' lots, Volvo's sales department offered special deals, so demand for green cars increased. Production, unaware of the promotion, saw the increase in sales and ramped up production of green cars.
Cisco faced a similar problem last year that resulted in a $2.2 billion inventory write-down. Only a few months before the write-down, Cisco wasn't able to get its products to customers quickly enough. Quoting a supplier to Cisco interviewed in CIO Magazine, "People see a shortage and intuitively they forecast higher. Salespeople don't want to be caught without supply, so they make sure they have supply by forecasting more sales than they expect. Procurement needs 100 of a part, but they know if they ask for 100, they'll get 80. So they ask for 120 to get 100."
Delays Wreak Havoc
But coordination isn't just about communication. Even in supply chains where communication is perfect, manufacturing and procurement delays can wreak havoc. That's because while customers are asking for increased orders, backlogs are building, and it is oh-so-easy to confuse backlogged orders with increases in demand.
Thousands have felt the frustration of supply chain management in a simulation developed at MIT's Sloan School of Management called the beer game. The simulation is run as a board game in teams playing the roles of retailers, wholesalers, distributors, and brewers of beer. As the backlog for orders increase, players order too much inventory, forcing their teammates into severe backlogs further down the supply chain. The game can be emotionally intense. John Sterman, Director of MIT's System Dynamics Group writes, "During the game emotions run high. Many players report feelings of frustration and helplessness. Many blame their teammates for their problems; occasionally heated arguments break out."
Try The Root Beer Game Simulation first-hand.
Here are instructions for running The Root Beer Game simulation:
Go to http://forio.com/simulation/harvard-business-school-root-beer-game-demo/#page=summary.
Review the Simulation Summary, Your Role and How to play sections under the Prepare tab
Then go to the Analyze tab to run the simulation
Submit your weekly order in the Order field
When finished with each turn, review your performance under the Dashboard Overview, Inventory and Shipments, Orders and Backlog, and Cost Detail tabs
Plan and play your next turn. Spend a maximum of one hour working with it -- no more. See how far you can get with it.
All of this sounds easy right? Try it out and see how well you can get beer to the customers while keeping your inventory and costs low! See if you can control the bullwhip oscillations of stock-outs followed by over-supply.
When you're done with the active play, think about it in conjunction with this Module's readings for perhaps another 15-20 minutes. Then please address the following questions:
Describe what you did in the simulation. What activities did you engage in? What did you learn about what's going on?
Briefly describe what you believe you learned about operations management from your participation in this simulation thus far, if anything.
Briefly describe any ideas that occur to you as a result of thinking about the simulation in relation to the module topic and readings.
What do you now think of computer-based simulations in general as a learning mechanism? What about this one in particular?
SLP ASSIGNMENT EXPECTATIONS:
Your paper should reflect your personal experiences with this issue. The important part of all these project assignments is to carefully assess your own experiences with the topic, and then reflect critically on what you might have learned about yourself and about situations through this assessment process.
Your grade is not dependent on your "winning" the simulation, or even doing particularly well; if there are reasons why you can't get into it, just explain them and do as much as you can. Obviously, your learning will be greater the more you are able to accomplish; but the major factor in grading the Project will be the work that you invest in it and the energy that you apply to learning from the experience, whatever it might be.
If there are reasons why the entire exercise is impractical for you to undertake at all, please explain them to your instructor as early in the Module as possible, so that an alternative assignment can be arranged.
Your paper will be evaluated on the following criteria:
Precision: You carried out the exercise as assigned, or carefully explained the limitations that might have prevented your completing some parts (running out of time isn't generally considered an adequate limitation).
Clarity: Your answers are clear and show your good understanding of the topic.
Breadth and Depth: The scope covered in your paper is directly related to the questions of the assignment and the learning objectives of the module.
Critical thinking: The paper incorporates YOUR reactions, examples, and applications of the material to business that illustrate your reflective judgment and good understanding of the concepts.
Overall quality: Your paper is well written and the references, where needed, are properly cited and listed (refer to the university guidelines (http://www.trident.edu/Media/Default/pdf/Well-Written-Paper.pdf) if you are uncertain about formats or other issues.
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Root Beer Game Simulation
The Root Beer Game served as an excellent demonstration of how supply chain management operates in an organization. The game requires the user to serve as the "retailer" in the game. During the simulation, the retailer must manage new orders, inventory, back-orders, and shipments. The game provides direct hands-on training in the area of inventory and supply chain management for students.
As the game started out, I began with a sizeable backlog. This required me to carefully evaluate my orders and ensure that I was estimating the right amount of shipment size. The game began with a rough patch as a retailer. I made the initial mistake of ordering the amount of inventory based upon orders received, and I failed to take into account my orders on backlog. This put me at a self-inflicted disadvantage and ...
The root beer game simulations are given.