The Beer Game
To see how decisions at one part of a supply chain effect the overall performance of a system, we ran a simulation called the beer game. The supply chain consists of a retailer who orders from a distributor who orders from a wholesaler who orders from a factory. At the beginning of each period, each stage of the chain orders upstream and receives the order shipped out to them two periods ago (the order they placed 4 periods ago) unless the next stage upstream is backlogged. All orders are eventually filled when inventory becomes available. The holding cost specified for each location are (in $/keg.period): factory: 0.25, distribution center: 0.50, warehouse: 0.75, and factory: 1.00. Additionally, the penalty cost for a shortage is zero for all stages except the retail stores where the penalty cost is estimated to be $10.00 per keg/period.
After trying many different strategies, the best policy I was able to come up with had a total cost of $122.00. This was achieved using choice 4, the base-stock policy. This policy re-orders a specified amount, less inventory on hand and pipeline inventory. The player specifies the base stock quantity for the retailer, warehouse, distributor, and factory. When this policy was used at each point in the supply chain, the lowest cost strategy was achieved.
Location Base Stock Amount Cost
Retail 300 101.55
Warehouse 210 10.21
Distributor 210 7.70
Factory 150 3.41
Total 122.87
Because the retail store encounters such a high penalty for shortages, it is best to keep them well stocked. They also have the highest holding “overage”cost, but at $1.00 it is only 1/10 of the shortage “underage”cost. If the “overage” and “underage” costs were equal it would make sense to always order enough to anticipate having the mean (50) on hand. This policy is not optimal however, when it costs the retailer more for a shortage than for excess.
Burns Corporation is an auto corporation that consists of 24 dealerships selling foreign automobiles in the United States. Burns has experienced an increase in their inventory, which is becoming costly and cutting into profits. Inventory costs total approximately 300 million dollars with a 3% finance charge. Recently, however, inventory costs have peaked at 360 million dollars and finance charges have reached approximately 750 thousand dollars monthly. As inventory grows due to misalignment of sales and merchandise ordering, so does the need for more accurate forecasting models. The manufactures have issued a "turn and earn" approach that affects how dealerships will be receiving their inventory. This change states that shipments will be based on inventory. The only way new models will be received is when other models are sold. Burns needs an analysis model that will assist them in future inventory decisions. The development of this model and what is should entail seems to be the main priority.
Kahn, Jeffrey P. "How Beer Gave Us Civilization." Nytimes.com. The New York Times, 16 Mar. 2013. Web. 27 Sept. 2016.
In the last several decades, supply chain management has evolved to be a very interesting field of research. This field has recognized that the business processes are made of different entities and decentralized players where the strategic operational decision of one player leaves the impact on other player. If one player in the supply chain chooses his strategy then it changes the individual profits of other player as well as the total channel profit. So, here the concept of game theory comes into the picture when the economic variable selected by one player leaves impact on the economic variable of other player.
...n Empirical Comparison of Anticipatory and Response Based Supply chain Strategies.” The International Journal of Logistics Management. 9: 2; 21-33. Lair, Noor Ajian Mohd, Awaluddin Mohamed Shaharoun and Mohamed Shariff Nabi Baksh, “JIT Implementation across A Supply Chain and It effects on Inventory Distribution”, http://www.moste.gov.my/kstas/NSFWorkshop/NSF/nsf%5CAAI16.DOC Lenzini, Joshua M (2002) “The Army's answer to supply chain management Army Logistician”; Fort Lee; Sep/Oct 2002 Li, Yuan, Fan, Zhiping and Zhao, Xuan (1999). “An Integrated Framework of Supply chain Management System.” Software Engineering Conference 1999. Proceeding sixth Asia Pacific. 196 – 199 Pagh, Janus D and Martha C Cooper (1998) “Supply chain postponement and speculation strategies: How to choose the right strategy”, Journal of Business Logistics, Issue # 2, Volume 19, Pg. 13-33.
In the effort to lock supplies of limited products, the company was seen ordering enormous quantities in advance. Another symptom of the problem was the artificially inflated projections. Other companies had noted the flaws in their projections, but Cisco failed to notice. This was because there existed other Competitors in the market that compromised Cisco’s projections since customers would turn to suppliers who would deliver the products first. In addition, the triple and double ordering of inventory without contemplating on the accuracy of their projections was a great symptom that squeezed on the supply of goods and bloated the demand
The commercial, "The Bug," is an advertisement for Budweiser beer. It takes place in a barroom that is long and narrow, typical of such an establishment in any city neighborhood. The bar itself is on the right of the TV screen, with the required mirror on the wall behind it, and assorted bottles on the counter. The over-all color of the place is dark with a typical wood bar and the colors beige and green, in various shades. In the opening shot, the bartender is setting up drinks on the counter, with the first patron arriving, saying, "How ya doin'?" as he sits down at the bar.
The inventory issue also ties in with transportation problems where accurate lead and delivery times are non-existent. The inventory turnover is not at its full potential because if the DC has merchandise yet the stores are stocked out, the inventory is frozen and will become obsolete.
Understanding the changes in the market and the growth of e-commerce prompted the organization to invest heavily in its supply chain management forecasting and management system. The development of a network of distribution centers and Direct Fulfillment Centers to position the company to capitalize on the growing e-commerce market indicate a strong understanding of the need to adapt to changing market forces. The company spent over $300 million on new distribution center facilities in 2014 alone, and continues to expand to maintain efficiency in product movement (Cassidy,
This is a game to play while doing other things at a party. To play the
Coase study #2 Beer: The vice president of marketing for a major brewing company is aware that college students account for a large proportion of beer sales and that people in this age group form lifelong loyalties to brands of beer. The executive is personally uncomfortable with the tasteless gimmicks used by her competitors in the industry to encourage drinking on campuses, including beach parties and beer-drinking contests. She worries about the company’s contribution to underage drinking and alcohol abuse among college students. Should she go along with the competition? State your case/opinion, etc.
Just like anything in life, there are going to be certain peaks and valleys to worry about. There is one concept however that tries to make sense of this madness. According to finance.zack.com It is called risk pooling. Risk pooling is mainly used in the insurance industry to try and lower risk for things like earthquakes, fires and hurricanes. This technique will diversify risk between several companies through pooling agreements. In the world of supply chain, this theory suggests that when demand is lower in a certain area, there is probably a different area that is experiencing high demand. Because of this, you don’t have to keep as much safety stock. If high demand and low demand with cancel each other out, than less inventory will be
Sethi, S, Yan, H, & Zhang, H. (2005) Inventory And Supply Chain Management With Forecast Updates New York, NY : Springer.
With most aspects of life it is frequently the failures, as opposed to successes, from which we learn the most indelible lessons. With this approach in mind, The Beer Game to a large extent serves as the very antithesis of a properly functioning supply chain. In other words, the exercise demonstrates how NOT to manage a logistic operation. Hopefully, an examination of the pitfalls and shortcomings of a worst case scenario and avoiding the same types of mistakes will lend insight how to correctly manage a supply chain. What otherwise appears as a simple classroom exercise actually represents a powerful training tool with enduring lessons directly transferable to real world application.
Rapid Replenishment. Another approach is to set up rapid replenishment and supply the stores with what they need when they need it. This allows for centralization of cooking capacity and low levels of inventory, but increases the cost of replenishment and receiving.
Inventory management involves planning, coordinating, and controlling the acquisition, storage, handling, movement, distribution, and possible sale of raw materials, component parts and subassemblies, supplies and tools, replacement parts, and other assets that are needed to meet customer wants and needs (Collier & Evans, 2009). In order for business and supply chains to run smoothly, they must meet all the listed requirements for effective inventory management. Thus, inventory management must be managed wisely in order to be a successful an...