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In: Economics

The Beer Game is widely used as an in-class assignment to identify the impact of hidden...

The Beer Game is widely used as an in-class assignment to identify the impact of hidden information and the importance of coordination across the supply chain. It was inspired by the GE factory distribution system challenges. MIT professor Jay Forreste developed it.

Identify the challenges to the supply chain in the Beer Game and discuss the similarities with our current supply chain challenges.

Solutions

Expert Solution

The Beer Game was originally developed at MIT in the 1950s to illustrate gow difficult it is to manage dynamic systems - in this case the dynamic system is a supply chain that delivers beer from brewery to the end consumer.

What makes the game so intriguing is that the structure of the supply chain and the rules of the game are simple, yet the resulting behaviour isquite complex. The Beer Game is well documented. The game has four players - the beer retailor, the wholesaler, the distributor, and the manufacturer. The game lasts up to an hour and stimulates a maximum of 52 consecutive weeks in the life of the beer distributor supply chain.

The game is available in s single-player and multiplayer formats. in the single-player format, you play the role of the distributor, with the other three roles played by AI bots. In the mutli-player format, between one and four players can play. If there are less than four human players, the remaining slots are taken up by AI bots.

The Challenge: Managing the Supply Chain

To understand the challenge of managing a supply chain, lets take a more detailed look at its structure- the supply chain leads from the brewery, via a distributor and wholesaler to the reseller, who sells beer to his customers,the end consumers.

The objective of the game is to ensure that the consumers demand for beer can be met directly or at least with as small a dealy as possible, while keeping each players inventory as small as possible.

The figure below illustrates the supply chain and the flow of information along it.

Initially customer demand for beer is stable at 100 units per week and the entire supply chain is in a steady state. Each memver of the supply chain has an inventory of 400 units.

The rules of the game are simple-in every round each player performs the following four steps:

  • Check deliveries - Check how many units of beer are being delivered to him from his supplier in the supply chain.
  • Check incoming orders- Check how many units of beer his client in the supply chain has ordered.
  • Deliver Beer- Deliver as much beer as he can to satisfy the customers demand.
  • Placing outgoing order - The difficult step is to decide how many units of beer the player needs from his supplier to keep his inventory stocked up and to ensure he has enough beer to meet future demands.

There are three pitfalls in the beer game that players beed to aware of:

  • Delays - Because of the nature of supply chains, the players demands for beer may not be fulfilled immediately- their supplier may also not have to pass its own order up the supply chain. There is a delay of at least one week in each direction i.e. a change order will not be delivered for at least two weeks, even if there is enough stock in the suppliers inventory.

  • Inventory Costs - if you order too many units of beer, your inventory costs will rise, because you will need more people to handle the beer and more storage space.

  • Backorder Costs - if you order to few units of beer, you may not be able to meet your customer demand for beer. Backorders are also penalised, each unit of beer on backorder cost of $ 1per week. Hence the target is to keep the backorder at 0,

Performance Appraisal

At the end of the game each player gets a personal performance appraisal. Given the rules of the game and the pitfalls mentioned above, there are two relevant performance measures:

  • Incentory Supply Chain Cost - This is the accumulated cost of the players part of the supply chain. i.e the sum of his inventory and backorder cost over time. The individual supply chain cost target is to keep the accumlated cost below $8,300 throughout the game.

  • Total Supply Chain Cost - This is the total supply chain cost. It is important to keep an eye on this because the individual player could improve his own cost at the expense of the other players in the supply chain.  


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