Can you manage a supply chain?

DR PAUL WALLEY
Many years ago a professor from MIT in the United States developed a classroom game that simulated coordination across the supply chain. He called it the Beer Game, because it simulated at a very basic level the supply of beer from brewery to students. In class he would get students to place orders for beer according to a particular schedule. This game has become famous worldwide as an example of the difficulties of managing supply chains.

What you’re able to do yourself is an online version of this game. We put you in the position of managing one of the tiers of the supply chain. In this case we’re not using beer, we’re using tins of baked beans, because they’re a very stable product, and they’re also relatively unperishable, which makes the game a little bit easier compared with many versions. Your role is to coordinate supplies across the supply chain by deciding how many tins of beans to order at your tier in the supply chain.

What you’ll discover is that it’s much more difficult to do than you thought without either running out of stock or spending a lot of money keeping stock that you don’t need. So that’s the challenge. When you’ve tried it once, and it might have seemed that you could do it better, you can change certain things about the game, such as where you position yourself in the supply chain to try to keep it stable. And you can keep on practising. So good luck, have a few goes and see if you can manage a supply chain effectively.

Question: Why are supply chains so difficult to control?

DR PAUL WALLEY
Most supply chains are naturally unstable because of a phenomenon known as the bullwhip effect. This is where small changes in demand at the customer end of a supply chain are passed upstream but at every step this change in demand gets bigger. As a rule of thumb, the demand variation can double every time you pass an order further upstream. This becomes a real problem to maintain supply, especially if you are at the top end of the supply chain where you see the worst of its effects. 

Question: So what is the cause of the bullwhip effect?

DR PAUL WALLEY 
The bullwhip effect is created when three factors simultaneously come into play.

First, the main ingredient is demand uncertainty, where a supplier is not sure how much their customer is going to order. This obviously occurs very commonly.

Second, a contributing factor is order lead time - the time difference between when you place an order and get the items. This time delay means that any corrective action to stabilise a system takes time to filter through the supply chain as a whole.

The third factor, importantly, is human behaviour. If my customer drops their order quantity, I suddenly find I have too much stock - I’ve over-produced. I’ve a further problem in that my suppliers have already received orders from me that I placed days or weeks ago, based around a higher sales forecast - and so for a period of time they are going to continue to supply me with stock that I no longer need. I now severely reign back on my next few orders. My cut back in ordering is greater than the cut back from my customer.

This behaviour then cascades back up the supply chain. My supplier sees me cutting back, so they do the same - but to an even greater extent again and so on. And there you have the bullwhip effect.

Question: Does this effect only apply when demand is falling?

DR PAUL WALLEY
No, it works in both ways. Demand increases generate precisely the same human behaviour, but now we have shortage of stock and huge upswings in ordering instead of over-supply. In fact, one of the biggest avoidable causes of the bullwhip effect is where sellers - retailers - mainly, decide to embark on promotions that deliberately increase demand in the short term. For many products consumers don’t change their useage - they buy when the price is low and stockpile, leading to unnatural peaks and troughs in demand that mess up manufacturers’s schedules. The notion of “Black Friday” as a pre-Christmas sales event is another example of a nightmare set of conditions for many manufacturers in this respect.

Question: Can anything be done to eliminate the bullwhip effect?

DR PAUL WALLEY 
The bullwhip effect will appear any time you create the conditions for it. However, if you collaborate across the supply chain, working to schedules, sharing information, agreeing on stock policies, and so on, there are ways to keep the supply chain in control as much as possible. This takes a lot of work to pull this off.