Several years ago Oil and Gas industry was booming. It seemed that oil price will go to $200 and the projects were planned accordingly. And then the oil price crashed. The whole industry and the supply chain looked like the Beer Game explanation for the Bullwhip Effect.
So what is the Beer Game?
The Beer Game, also known as the beer distribution game, is an educational game used to address typical problems in supply chain process. It is representing non-coordinated processes where problems arise due to lack of information sharing.
Due to the lack of information sharing, suppliers, manufacturers, sales people and customers often have vague understanding on real demand.
Each grou in the game has only control over it’s part of the supply chain. Each group influences the whole supply chain by either ordering too much or too little which in the end leads to the bullwhip effect.
Pub that is usually consuming 250 kegs of beer suddenly sees increase in alcohol consumption. So what do they do? They estimate that they became more popular pub and that their demand has gone up. They start ordering 500 kegs from the distribution company.
The distribution company gets exited, and says “OK now we need to ramp up our stock to meet the increase in demand from the pub. Let’s order 1000 kegs” with the brewing company.
Brewing company, happy to see that sales of their beer is going up – start making larger orders at the raw material suppliers (grains, hops and yeast) to match 2000 kegs a month, so they start producing more malt, hops and yeast for the next year to match demand.
The next month comes, and the pub realizes that the increase in sales was due to local football club winning a match.
They call the distributor to tell them they will reduce the order and that they don’t need extra 250 that month. Distributor holding 1000 kegs in storage calls quickly on the brewer that they don’t need 2000 kegs. Brewer calls on raw materials producers and tells them that they will not take extra materials.
Moving up the supply chain from end-consumer to raw materials supplier, each supply chain participant has greater observed variation in demand and thus greater need for safety stock.
Raw material companies go bankrupt, brewers need to source new raw products, possibly will lose clients due to inability to fulfill future demands, and the effect goes all the way to pub.
Consequences of bullwhip effect are severe and lead to both professional and personal problems. Business may go bankrupt, customers unserved and workers laid off.
Causes for Bullwhip effect can be divided in:
Behavioral causes for bullwhip effect
One of the main behavioral causes that contribute to the bullwhip effect is the under-estimation of the pipeline.
In addition, the complementary bias, over-estimation of the pipeline, also has a negative effect under such conditions.
Nevertheless, it has been shown that when the demand stream is stationary, the system is relatively robust to this bias.
In such situations, it has been found that biased policies (both under-estimating and over-estimating the pipeline) perform just as well as unbiased policies.
Other behavioural causes include:
- Misuse of base-stock policies
- Mis-perceptions of feedback and time delays
- Panic ordering reactions after unmet demand
- Perceived risk of other players’ bounded rationality
Operational causes for bullwhip effect
Major operational causes for bullwhip effect are
- Individual demand forecast updating along the supply chain
- Rounding up of the order quantities from downstream customer and round up or down to meet equipment setup or truckload quantities. These add up and create distortions
- Discounts or other price fluctuations tend to stimulate customers to buy more than what they actually need. This add variability and uncertainty into forecast
- Gaming the system is occurring when retailer is providing only a percentage of the order placed originally by the buyer. Buyer then starts placing the larger orders to get the quantity he wants. This generates wrong ordering information.
- Lead time variability (forecast errors due to replenishment lead times)
- Anticipation of shortages
How to countermeasure bullwhip effect?
Most companies and managers are aware of bullwhip effect and the damage it can produced. Yet, so many of them still fall into the trap and trigger bullwhip effect.
Here are some techniques that seem simple, but companies don’t follow:
- Sharing information
- Aligning your supply chain
- Implementing on promotional sales policies
- Establishing relations and long term contracts with suppliers
- Improving operational efficiency