Beer Game Essay

Problem description and analysis The game that the group had to play was a simulation of a supply chain within the beer industry, starting with the factory and ending with the retailer. Seen from the supply chain management point of view, the beer game reveals the importance of the communication and cooperation within the supply chain and highlights a certain behaviour that characterises the supply chains – the bullwhip effect.

Like all the supply chains, the goal of the game was to fulfil customer’s requirements and at the same time to accomplish the company’s objectives – e. g. lower stock, but still increased delivery reliability. One of the most important issues of the game was that all of the links in the supply chain did not have information about the customer’s demand, and thus, the game was basically played on making assumptions with regards to customer’s orders. In order to explain the problems that appeared during the game, a simple description of facts will be realised in the next part.

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Seen from the Factory’s point of view, the game started with an amount of four beers in inventory, which is a valuable piece of information that should be considered for the rest of the game. This inventory reflects that customer’s demand is situated at around this value, and also reflects that the factory is able to produce in average a quantity of four beers for an order. During the game, up to week 4, the inventory is increasing due to the reduced quantity of orders that the Factory receives from the Distributor.

From week 4 to week 6, the inventory decreases considering the higher level of orders that have been received from the Distributor. Again, for the next two weeks, the level of inventory increases, but between weeks 11 and 15, the Factory receives important quantities of orders, which will reflect on its inventory and backlog, since the stock does not cover the high orders. This unexpectedly high demand from the Distributor has a negative effect on Factory’s activity and it produces disequilibrium on the inventory and backlog, as it can be seen in the picture below: [pic]

If in the beginning of the game, the Factory was trying to run its activity as smoothly as possible, this cannot be said for the following period. Receiving this high amount of orders, will result in much even higher production orders, since the goal is to cover the demand and build a small inventory. [pic] The Factory is now experiencing the, so called “Bullwhip effect”, by making higher production orders than needed, and this will result in very high level of inventory for the next period of time, as in the picture below: [pic]

For the next 19 weeks, the Factory is dealing with a difficult situation considering that it has a large amount of capital in an inventory that is not required. During these weeks, the Factory is not producing any beer, which can be considered a solution for reducing, or at least stabilizing the level of inventory, but will not improve the general situation of the Factory. [pic] Even if it does not producing beers, the Factory has fixed costs that are independent of the quantity of products that are manufactured, not to say that during these weeks the quality of the products can modify and become waste.

Moreover, what it will happen with its employees during these 19 weeks? Consequently, in these weeks the Factory accumulated losses, which are listed below: ? Losses in high inventory ? Fixed costs during the non-producing weeks ? Employees salary during the non-producing weeks The total cost of the Factory can be calculated with the formula: Total Cost = Total Inventory / 2 + Total Backlog where:Total Inventory = 534 units Total Backlog = 86 units Total Cost = 353 units The game records for the Factory are to be found in the appendix folder.

The Factory experienced a fluctuating demand – either very high or very low – which can be considered similar to the real situation of factories that struggle to reduce and eliminate this problem. This fluctuating demand cannot be confirmed by the Retailer, from which point of view the demand was approximately stable, only with little variations. As from the graph below, it can be found out that by the end of week 24 the situation of the Retailer is reasonable well, only with few variations in the inventory.

However, between weeks 27 and 44, the backlog is increasing rapidly due to higher customer orders and lower purchase orders. During weeks 44 and 45 the inventory is again increasing, when in week 48 the retailer is overstocked. [pic] Why everything goes wrong from week 27? The answer might be given by comparing the customer orders with the purchase orders of the Retailer. The goal of the Retailer, as for the Factory is to maintain lower stock, but manage to deliver all customer orders.

For this reason, the Retailer bought an amount of beers higher that needed in the first 4 weeks, just for preparing the safety stock. Afterwards, the customer’s order increased from 2 beers to 4 beers per week, like in the picture below. For the purpose of keeping an appropriate inventory, the Retailer made purchase orders at around 4 beers as well. From week 17 to week 25 the purchase orders are decreasing concomitant with the increase of customer’s orders, and this will have negative consequence on the inventory.

The stock is decreasing rapidly, and thus, by the end of week 44 the Retailer cannot fulfil customer’s orders. Once again, like Factory’s operating experience, the Retailer experiences the bullwhip effect, which occurs when customer’s orders are increasing and the amount of inventory is decreasing. Accordingly, when having a small quantity of products in the inventory and a high demand, the Retailer comes into panic and starts to make higher and higher purchase orders to the Wholesaler, which will eventually fulfil customer’s orders and will build a small stock.

But the Retailer forgets that the small stock that was considered in each purchase order will produce a massive inventory within the next weeks. [pic] The total cost of the Retailer can be calculated with the formula: Total Cost = Total Inventory / 2 + Total Backlog Where:Total Inventory = 290 units Total Backlog = 275 units Total Cost = 420 units The game records for the Retailer are to be found in the appendix folder.

The analysis of the beer game was realised only from the Retailer’s and Factory’s point of views since they can give the most accurate information about the market, while the Wholesaler and the Distributor are only linkages in the supply chain. Therefore, the conclusion that can be laid out is that the more far you go from the customer, the more problems you might experience. The Retailer can confirm the relatively stable demand, but the Factory, since is the last element in the supply chain of the game, experienced more problems, and therefore, its demand from the Distributor came as extremely unstable.

As it can be observed in the picture below, the inventory/backlog for nearer links in the supply chain is similar: Retailer and Wholesaler have almost equal thought about the customer’s orders, while Factory and Distributor also have similar idea, but totally different from the real situation of the customer’s demand – and this is because the far they are from the customer, the more dissimilar is the information they receive. [pic]

Considering that the supply chain would have had only the Retailer and the Factory, the demand would have been much clearer and stable for the Factory. And this because, being closer to the point of sales would give accurate information about the customer’s demand. The most important reasons for the negative situation of the company are given by the lack of communication and cooperation between the producer and the consumer, and the inexistence of a forecast that gives a better view of the market’s behaviour.

The bullwhip effect that the team experienced can be described as “a series of events that leads to supplier demand variability up the supply chain…As the orders make their way upstream, the perceived demand is amplified and produces what is known as the bullwhip effect. ”[1] The bullwhip effect can be dived into several steps: Step 1: Every link in the supply chain takes some orders, and then takes it to the system; Step 2: System with simple analysis of demand gives the information about necessity of rising the safety reserve;

Step 3: Participants of chain increase the orders in the supplier so they can have the desired effect; Step 4: When supplier gets the increasing orders he increases his safety reserve as well as the participants, so he gives increasing orders to producers too; Step 5: Producer respond for increasing orders by raising his safety reserve. Those stages proceed sometimes so fast, that there is no time for thinking, for what is really necessary. When ours supplier informs us that the reserves are going to end soon we start to panic and order more than what we really need.

Causes of the bullwhip effect: ? Lack of communication, information and coordination within the supply chain ? Overreaction to backlogs ? Lack or inaccurate forecast demand ? Reduce the purchase orders in an attempt to decrease the inventory level ? Many participants in the supply chain will result in a long supply chain ? Instability management of reserves ? Panic, frustration reactions caused by high backlogs and the incapability to fulfil customers orders ? Oversimplifying the problem of reserve planning level to simply calculate demand = supply ?

Lack of analysis of the market changes What are the effects? ? Excessive inventory ? Poor customer service ? Lost revenues ? Missed production schedule For sure the safety reserves are increasing and for this reason their orders are bigger too. Producers have problems with orders which give us more orders and we have ready spiral. Increasing reserves can give inadequately reactions in supply chain for demand: – when there is difficult acces to information or – we can`t properly interpret information – which we are not interested in final demand but only partial of final demand.

In some chains the reserves can be much bigger than what we really need. Every participant wants to fulfil in 100% expectations of consumers, so they collect numbers of products equal to orders and they get increases by number of safety reserves. In effect reserve that is keeping by chain which is farthest move away from final consumer will be many times bigger than market really needs. ———————– [1] http://scm. ncsu. edu/public/lessons/less030403. html ———————– Factory Distributor Wholesaler Retailer

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