Operations Management

Root-Beer Game

Prof. Svenja Sommer

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 Course Roadmap 1-4
DESIGN AND DEPLOYMENT OF AN OPERATIONS
STRATEGY
SOURCES OF OPERATIONS PROCESS DESIGN AND PROCESS BUSINESS
ADVANTAGE STRATEGY MANAGEMENT EXECUTION RESULTS

P-P- PROCESS QUEUING LEAN/JIT /

INSTRUMENTS ANALYSIS THEORY
Matrix QUALITY

SESSION OR 4:
CASE STUDY 1: Rittenhouse 2: Sc.berger 3: Benihana
Cleveland

FOCUS ON INTERNAL PROCESSES

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 Course Roadmap 5-8
DESIGN AND DEPLOYMENT OF A SUPPLY CHAIN
STRATEGY
SOURCES OF SUPPLY CHAIN PROCESS SUPPLY CHAIN
SUSTAINABILITY BUSINESS
ADVANTAGE COORDINATION INNOVATION DESIGN RESULTS

INFORMATION INVENTORY SC Life Cycle

INSTRUMENTS
SHARING MGT FLEXIBILITY Analysis

SESSION / 7: Global
CASE STUDY 5: Distribution 6: Zara 8: Walmart?
Game SC Sim

FOCUS ON MATCHING SUPPLY WITH DEMAND

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 The Supply Chain:
A Chain of Independent Players

Retailer

• Local information
• Decentralized decision making
 Supply Chain Game Set-Up

2 weeks shipping delay $0.5 holding cost

2 weeks order delay $1 backlog cost

Factory: 2 weeks total delay

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6
 Inventory and Backlogs
FROM PREVIOUS WEEK 5

5+5= TOTAL DEMAND: 20

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5 10
WEEK n TOTAL DELIVERY: 10
10 LOGICAL INVENTORY: 10 – 20 = - 10
PHYSICAL INVENTORY: 0
- 10

10 TOTAL DEMAND: 10 + 10 = 20
WEEK n+1 5
TOTAL DELIVERY: 5
5 LOGICAL INVENTORY: 5 – 20 = - 15
PHYSICAL INVENTORY: 0
- 15

5 TOTAL DEMAND: 5 + 15 = 20
WEEK n+2 25
TOTAL DELIVERY: 20
20
PHYSICAL INVENTORY: 25 – 20 = 5
5

INFORMATION FLOW MATERIAL FLOW UNIT IN INVENTORY

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Typical Results

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 Typical Results

Three main patterns emerge:

• Oscillation: inventory/ backlog goes down, then up
• Amplification: height of oscillations increases the
farther away one is from the end customer
– Distributor more significant oscillation because factory
buffered by unlimited capacity
• Lag: swings (generally) happen later in time as one
goes farther away from the end customer

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Perceived Customer Demand

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Actual Customer Demand

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 Typical Order Pattern
Demand variability increases as you move up the
supply chain from customers towards supply

Information flow

Equipment Tier 1 Supplier Factory Distributor Retailer Customer

Product flow

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 The Bullwhip Effect
1000
Manufacturer’s Production Large swings
800
at the tip
600

400

200

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1
3
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Delivery
1000

800 Wholesaler’s Orders to

Order
600
Manufacturer
400

200

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25
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Delivery
1000

800
Retailer’s Orders to Wholesaler Small
Order 600
perturbation
400

200
at the handle
0
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Delivery
1000

800
Consumer Demand at Retailer
600
Order 400

200

0
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29

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1
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 Bullwhip effect in autos to machine tools
Machine tools
80% Autos

60%

40%
% change in demand

20%

0%

-20%

-40%
GDP = solid line
-60%

-80% Source:Anderson, Fine and Parker (1996)

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WSJ, June 14, 2021
By Ted Stank, Tom Goldsby and Lance Saunders

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 Group work

In the teams that played together, prepare 3 slides

explaining:
• Why should companies care? (What is impacted?)
• What is the root cause of these difficulties?
• If you had to play again, what would you change
(process, technology?)

Upload on Blackboard Session 5 (with your names) for class

participation points!
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Why care?

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 Why should companies care
about the “Bullwhip” effect?
• Excess finished goods inventory (holding costs, required warehouse
capacity)
• Inefficient production (manufacturing costs, plant capacity
requirements)
• Shortages (poor customer service; lost sales; expediting costs)
• Transportation costs (excess capacity or contract on short notice for
peak demand; partial truckload shipping during low demand)
• Forecasting difficulty (production planning difficult, poor utilization of
warehouses)
• Relationships across supply chain (Blame game)
The bullwhip effect reduces supply chain profitability
by making it more expensive to provide a given level of
product availability
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Root Causes

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 Underlying driving forces

1. Variability of demand (seasonality, unpredictability, new

products, promotions,…)
2. Long response times (delay of material and information
flows in the chain)
3. Local optimization (+individual forecasting)
– Every person is trying to balance their stock of goods: No one wants
to order or produce too much, but no one wants to have too little,
either…
4. Irrational behavior of operators (panic, hence order even
more…; shortage gaming)
5. Order batching (transportation discounts , volume
discounts, MRP runs) [NOT IN BEERGAME]
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 Trade promotions and forward buying
• Forward buying: Retailer purchases enough to satisfy demand until the
next trade promotion.
• Example: Campbell’s Chicken Noodle Soup over a one year period:

Total shipments and consumption

Shipments
Cases

Consumption

Time (weeks)

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 Over-Ordering: Importance of
Considering Pipeline Inventory
Policy: When IP  ROP, order “Q” units. Lead time: L
Inventory
Position (IP) On-hand
inventory

Q
Q Q
Q
Re-order
point
(ROP)

L L L
Place Order Place Order Place Order 28
 “Inventory Position” is the Key

Inventory Position (IP) = Current On-hand Inventory

+ Pipeline Inventory
- Backorders
Demand waiting
to be satisfied (orders placed but
not yet received)

You place orders, when the IP (including orders in the pipeline)

reaches the re-order point.

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 Over-Ordering: Importance of
Considering Pipeline Inventory
Consider Lead Time of 4 weeks – and Q=average weekly demand

Inventory Position

ROP

IP= 4 orders in the pipeline + onhand)

On-hand inventory

Having the right information and looking at the Inventory Position

can avoid panic and over-ordering!!

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BUT NOT ONLY DUE TO
IRRATIONAL FEARS…

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 Effect of independent forecasts and
independent order replenishment
Factory Wholesaler Distributor Retailer

• All 4 use same periodic ordering system, with P=1 and L=3
• Assume: Safety stock = 3 weeks of demand Should be
based on
• Current demand forecast = 4 variability!!
• OUL = (3+1+3) * 4 = 28
• All use “exponential smoothing” to update demand forecast:
new forecast = 0.25*(observed demand) + 0.75*(old forecast)

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 Effect of independent forecasts
and independent order replenishment
Demand increase from 4 to 8
Retailer: Shown solely to demonstrate
the impact of independent order
New forecast = 0.25 * 8 + 0.75 * 4 = 5 replenishment…
New OUL = (3+1+3) * 5 = 35
Order quantity = 35 – IP = 35 – (28-8) = 15 … you are not responsible for
these kind of calculations…
Distributor (once observed order = 15): … but can find this model (with
New forecast = 0.25 * 15 + 0.75 * 4 = 6.75 safety stock correctly depending
on uncertainty) in the book
New OUL = (3+1+3) * 6.75 = 47.25 chapter I posted in Session 4, if
Order quantity = 47.25 – IP = 47.25 – (28-15) = 35 interested.

Wholesaler (once observed order = 35):

New forecast = 0.25 * 35 + 0.75 * 4 = 11.75
New OUL = (3+1+3) * 11.75 = 82.25
Order quantity = 82.25 – IP = 82.25 – (28-35) = 90
Factory (once observed order = 90): Order quantity = 240
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So what can managers do?

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 Operational causes and remedies

• What can managers do to limit inefficiencies?

• Two main areas of intervention

– Structural: modify the design of supply chain structure and

underlying business processes

– Behavioral: adopt appropriate policies to optimize the

functioning of the system & improve information flow

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Will new technologies
solve the problem??

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Vendor Managed Inventory: Success Story

https://www.datalliance.com/writable/resources/CGT_Datalliance_PG.pdf

Sales increases of 20 to 25%

Improvement of inventory turnover up to 30%
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 What is JIT-Distribution or VMI ?

Traditional business model:

• Buyer places order with supplier, deciding timing and size of
order.

Vendor Managed Inventory (VMI):

• Supplier receives POS (point of sales) data from buyer,
typically via EDI (electronic data interchange). Supplier also
has inventory information and is informed of any plans for
promotions at the buyer. Based on this, the supplier decides
the quantity and delivery schedule.

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 Why does it work?
• Information sharing lowers forecast error.
• Supplier can take manufacturing realities into account; customer
not.
– Better production planning
– Shorter production lead times.
• Smaller deliveries (and hence inventory levels) due to increased
delivery frequency and an associated smaller lead time.
– Supplier can pool deliveries across multiple customers to maintain
economies of scale.
• Supplier can allocate inventory based on actual needs (rather than
orders), lowering the risk of stock-outs.

→ Lower inventory levels for same service level.

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Does it always work?
What does it require?

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IMAGINE YOU ARE THE CUSTOMER
/ A SALES PERSON

WHY MIGHT YOU BE SKEPTICAL

/ NOT IN FAVOR OF VMI?

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 Hurdles for Implementation

Customer
• Take away “fundamental right” to decide shipments
• Lack of trust; might fear:
– Higher prices (cannot take advantage of promotions)
– Stock-outs when demand increases
– Supplier will channel stuff (more inventory than I need)
– Fear to release critical information to competitor

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 Hurdles for Implementation

Sales
• Shift of internal power: No longer single point of contact
for customer
• Shift in role – no longer about order placement
– Joint promotion planning, push new products, acquire new
clients, …
• Effect on compensation – less influence on sales!
– Need different incentive system
• Concern about reduced market share (customers will fill
reduction in inventory with competitor products
– Fill with other SKUs (stock keeping units) from your firm!
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 Requirements
for successful implementation
• Top management commitment: not a logistics program!!
• Training of middle management and suppliers: understand
benefits and how VMI should work
• Buy-in from Sales (change role & incentives)
• Establish IT systems (collection of accurate data; quick
communication of information)
• Demonstrate benefits via trial runs
– Simulation using old data
• Clear commitments and accountabilities: information sharing
on one side, SL and inventory commitments on the other side
• Cultivate trust and commitment between both parties
(hardest!!)
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 Lessons from the Beergame
• Phenomenon: Lack of information and wrong incentives give rise to the bullwhip
effect (demand variability increases as you move up the supply chain from customers
towards supply);
• Consequences: source of huge inefficiencies and costs in SC (excess inventory +
shortages)
• Causes:
– process design: variability + long lead times;
– process management : local optimization, irrational behaviour of agents
(overreaction to large orders), demand signal processing, rationing, order
batching and price variations;
• Remedies:
– simplify process (i.e. reduce number of echelons);
– reduce lead times and order batches;
– increase visibility (e.g. via VMI or collaborative forecasting and replenishment);
– VMI is one way to reduce the bullwhip effect.
– Like any new initiative VMI is likely to encounter resistance. Upper management
involvement and local experimentation to prove its benefits essential.

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 Strategies to Combat the Bullwhip Effect
• Information sharing:
– Point of Sales Data, Blockchains, Cloud Computing
– Vendor Managed Inventory (VMI)
– Collaborative Planning, Forecasting and Replenishment (CPFR)
– Distribution requirements planning systems (DRP)
• Smooth the flow of products
– Coordinate with retailers to spread deliveries evenly.
– Reduce minimum batch sizes.
– Lead time reductions (EDI, shipment mode, supplier location)
– Smaller and more frequent replenishments
– Less intermediaries
• Eliminate pathological incentives
– Every day low price
– Restrict returns and order cancellations
– Order allocation based on past sales in case of shortages
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 Next Class

• Ways to Manage Demand Uncertainty

• Please Read Case Study

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 Backup Material
What is CPFR?
(Just FYI – nothing I will test you on!)

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 Some retailers go further:
CPFR (Collaborative Planning, Forecasting and Replenishment )

http://www.vics.org/committees/cpfr/ 49
CPFR: Who’s Behind it?

JCPenney

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