Paul Beynon-Davies 2013

Additional Case study Beer distribution game

The key role of information in the value network can be demonstrated through use of a management simulation or game originally developed by Jay Forrester and his Systems Dynamics group at MIT during the 1960s. The game sometimes known as the beer distribution game - has been continually used since that time to demonstrate the important systemic nature of business activity as well as the importance of information to effective management. It is particularly used in Peter Senges book The Fifth Discipline to demonstrate the systemic nature of business activity (Senge, 2006). The game is a simplification of the typical business supply chain. At its simplest this economic system consists of three agencies/actors wholesaler, retailer and customer involved in the distribution of bottles of beer (value). These three agencies are related by two exchange relationships. The retailer procures a supply of beer from a wholesaler and in turn the retailer sells this beer to customers. This situation is illustrated in Figure 1. Here, broad arrows are used to represent physical flow of goods.

Wholesaler

Beer

Retailer

Beer

Customer

Figure 1: Actors in the beer supply chain

Accompanying physical flows in activity systems there are information flows (narrow arrows). Such information is needed to support repeat commerce between the customer and retailer and the retailer and the wholesaler. In this scenario, retailers order supplies of beer in units of cases from their wholesaler. Accompanying the shipments of beer to the retailer will be shipment information frequently represented as a shipping note; there may also be an invoice for payment issued to the retailer by the wholesaler on a regular basis. At some regular interval (perhaps once a quarter) the retailer makes a payment to the retailer. There is hence a regular business cycle of orders, deliveries, invoicing and payment; these data flows are used both by the wholesaler and the retailer to control their operations. This is illustrated in Figure 2.

 Paul Beynon-Davies 2013

Invoices Payments Shipments

Wholesaler

Beer Payments

Retailer

Beer

Customer

Orders
Figure 2: Data flows in the beer supply chain

Suppose the manager of the retail store likes to keep 12 cases of a specialist beer Cwrw - in stock; 8 cases in his store room and 4 cases on his shelves. This is because he finds that he typically sells four cases of Cwrw beer per week to his customers, which means he places a regular order for four cases per week of Cwrw Beer with his wholesaler to replenish his stock. In turn, this means that the wholesaler regularly delivers four cases of beer per week of Cwrw beer to the retailer. The situation in Week 1 (W1) is illustrated in Figure 3.

Invoices Payments Shipments

4 cases Wholesaler

Beer Payments

Retailer

Beer
4 cases

Customer

Orders
4 cases W1

12 cases

Retailers Inventory
Figure 3: The situation in Week 1
In Week 2 the retailer experiences a sudden hike in sales he sells 8 cases rather than the usual 4. This means that he has to raid his store-room to re-stock his shelves and that his inventory drops by end of 2

 Paul Beynon-Davies 2013 week to 8. But the previous diagrams do not describe all the features of this business system. An important property of many business systems are lags in the flow of goods and services (as well as possible lags in data flows). In this system there is a lag in the delivery of beer from the wholesaler to the retailer of 4 weeks. In other words there is a delay on average of 4 weeks between ordering a supply of beer and it being delivered. The retailer therefore decides to increase his weekly order to 8 cases rather than 4 to cover increased demand (Figure 4).

Payments Shipments
4 cases Wholesaler

Beer Payments

Retailer

Beer
8 cases

Customer

Orders
8 cases W1 W2 8 cases

Retailers Inventory
Delay of 4 weeks between ordering a supply of beer and it being delivered

Figure 4: System lags in the supply chain

In Week 3 sales of 8 cases continue. 4 cases are delivered that week by the wholesaler meaning that the retailers inventory falls to 4 cases. To play safe and to recover lost inventory the store manager decides to increase his order to 12 cases. In Week 4 the store receives 5 cases from the wholesaler but sells 8; this means that the inventory is now down to 1 case. On quizzing a customer the retail manager discovers that Cwrw beer is referred to in an extremely popular pop song of the moment. He decides to up his order to 16 cases. In Week 5 the store receives only 6 cases from the wholesaler. They are sold almost immediately along with the 1 case in stock meaning the retail store has to turn away custom. Some customers effectively place back-orders for the beer when it arrives this effectively builds a backlog of 2 cases of beer. In Week 7 the store receives only 5 cases from its wholesaler but receives a further 3 back-orders leading to a backorder list of 5 cases this leads the manager to increase his order in frustration to 24 cases (Figure 5).

 Paul Beynon-Davies 2013

Invoices Payments Shipments

6 cases Wholesaler

Beer Payments

Retailer

Beer
7 cases

Customer

Orders
16 cases W1 W2 W3 W4 W5 -2 cases

Retailers Inventory
Delay on average of 4 weeks between ordering a supply of beer and it being delivered

Figure 5: The situation in Week 5

The key question is why is the wholesaler failing to meet the retailers increased orders? The answer is because the retailer and wholesaler are part of a wider supply chain (system) including two other actors the beer distributor and the brewery (producer). Beer flows down this supply chain in different units of volume for every week. The customer typically purchases 1 six-bottle pack of beer. The retailer regularly purchases 4 cases each containing 8 packs. The wholesaler typically purchases 4 truckloads of beer from the distributor each truckload carries 200 cases of beer; the distributor typically orders 200 truckloads of beer. Shipments data also travels down the supply chain. Orders data travels up the supply chain, as does payments data. There is also an inherent delivery lag between each of the actors in the supply chain. The overall average 4 week lag between an order from a retailer and a response to order from the retailer is actually a composite of a supply lag between distributor and brewery, a supply lag between wholesaler and distributor and wholesaler and retailer. Each of the actors will be experiencing fluctuation in their stock levels in response to fluctuations in demand along the supply chain. Delays in processing order information flowing down the supply chain feed back up through the chain in terms of delays in increasing levels of production and distribution. In Week 7 changes in production at the brewery start feeding through the distribution and warehousing orders placed by the retailer start being fulfilled. However, sales of Cwrw beer fall back to the normal levels of four cases per week in week 8. As orders are fulfilled the inventory of the retailer grows rapidly the retailer reduces his orders of Cwrw beer in response but the delays in the supply chain mean that the inventory takes some while to clear (Figure 6).

 Paul Beynon-Davies 2013

Orders Shipments
Brewery

Orders Shipments
Distributor

Orders Payments Shipments

Wholesaler

Beer
2 weeks

Beer
1 week

Beer
1 week

Retailer

Beer

Customer

Payments

Payments

Payments

Figure 6: Information in the Beer Supply Chain

Commentary In the business game based upon the scenario just described, players in the game each take a different role in this linear supply chain (Brewery, Distributor, Wholesaler and Retailer). Time is divided up in terms of a number of distinct periods typically emulating 50 weeks of actual time. Each role is directly linked in the supply chain and beer cannot skip an element in the chain. For each period of play, each participant engages in the following cycle. Elements of the supply chain are updated: new orders and shipments are received, shipments en-route are advanced and inventory levels and backorder positions are calculated. The player reviews his current position. A shipping decision is made according to new orders and backlog, subject to inventory availability. An ordering decision is made for new beer. Performance is measured in terms of a simple view of costs. Two costs are used: an inventory holding cost of 1.00 per case per period and a back order cost of 2.00 per case per period. Each team has the goal of minimising the sum of these costs by balancing the cost of holding inventory with the cost of being out of inventory when a customer orders beer. As demonstrated in the scenario, there is an inherent delay in the movement of the product (beer) through the supply chain. Typically it takes three periods to move an order of beer between each player in the supply chain. For example, if during period 3 the wholesaler decides to ship 10 cases of beer to the retailer the beer takes periods 4 and 5 to move along the supply chain and would be available to the retailer in period 6. The game is initialised in equilibrium with each inventory containing 12 cases of beer and initial throughput set at four cases per week. This demand is kept constant for the first few weeks of the simulation while the players learn the mechanics of the game. Demand is then suddenly raised to eight cases per week and kept at this level for the duration of the game.

 Paul Beynon-Davies 2013 This game has been run many thousands of time at management schools around the world. The experience is the same one of oscillation and amplification characteristic of many business activity systems. Following an increase in demand the inventory level of the retailer declines. This leads to an increase in orders by the retailer causing, in turn, a decline in the inventory levels of wholesaler, distributor and factory. Players soon stock out. Backlogs of unfilled orders grow. Faced with rising orders and large backlogs, players dramatically increase the orders they place with suppliers. Eventually, the factory brews and ships this huge quantity of beer and inventory levels rise dramatically. Players claim to experience feelings of frustration and helplessness in controlling the business. This is primarily due to detailed local information but a lack of information concerning the behavior of the entire supply chain as well as the behaviour of their customers. Players tend to react to this local information rather than considering the systemic inter-relationship between the actions they take and the supply chain as a whole.

Issues The scenario enacted in the beer distribution game is effectively an example of the problems of control in business activity systems. The effective use of information systems can mitigate the managerial effects experienced in this scenario in a number of ways: In terms of a particular organisation such systems can speed up the process of processing information leading to more effective decision-making. How? More effective information integration between activity systems such as orders and production can also help reduce the lags experienced in the supply chain. How? Information systems can allow visibility of activities across the supply chain; for example, being able to match order fulfilment with product tracking. Explain how this might occur. Information systems also can be used to store historical data allowing trends in both consumer and supply behaviour to be determined and acted upon. Explain how this would be useful in controlling the supply-chain.

In other words, assuming that supplier relationship management systems and/or electronic procurement systems exist within the Beer supply chain, explain in terms of the scenario how such systems would have an impact in terms of the suggestions above?

References Senge, P. M. (2006). The Fifth Discipline: the art and practice of the learning organisation. Revised edition. Doubleday, New York.