1. Distribution and the Supply Chain The Beer Game The Bullwhip Effect causes cures The Curse of the Bullwhip Effect

2. The Big Picture m In the new less vertically-integrated industries of today, you are only as good as your suppliers. m If you make life more difficult for them, you too will pay a price. m The “Bullwhip effect,” which is a generalization of the Beer Game, shows how locally sensible policies are silly from a systemic point-of- view.

3. Beer Game De-Brief I m What are your reactions? m Patterns m Causes

4. Beer Game Debrief II m Solutions m Take-aways: The essence of OM

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

6. Delivery 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? What is our final Inventory Shortfall? What if we had a 2-day delivery delay?

7. Inventory 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? What is our final shortfall now? What if we carried only 5 weeks of inventory?

8. Order Batching orders received Supplier time April 1June 1 May1 time Retailer April 1June 1May1 Consumer sales

9. 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”

10. Shortage 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?

11. Shortage 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

12. Avoiding 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)

13. The 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.