Do you know the far-reaching implications of you ordering a non-regular beer in a bar? I mean, in addition to all the personal pleasures (and problems) that may follow? If you have ever played the Beer Game* you know what I’m talking about: The Bullwhip Effect. When you create small variations in customer demand you start a chain-reaction of amplifying variations upstream the supply chain**. Follow me to the bar.
These days I teach Supply Chain Management at the University of Groningen in the Netherlands. As the students play the Beer Game on computers, I play it for real at a bar. The original Beer Game covers the brewery, a distributor, a wholesaler and a retailer. I’ll play the consumer (which the Beer Game wisely ignores). After all, this end-stage link is the reason for the supply chain’s existence in the first place. Because rigorous research and heavy beer drinking is a poor match, I’ll try to keep this post short.
The Bullwhip Effect
The Beer Game shows us how small variance in consumer demand can disrupt complete supply chains. It teaches how inventory- and order levels tend to amplify upstream the supply chain, caused by small demand variations. This is what we call the Bullwhip effect (or Forrester effect after Jay Forrester). In practice it means that the inventory levels at the retailer are less fluctuating (more stable) than the wholesaler’s inventory, which is less fluctuating than the distributor’s inventory, which is less fluctuating than the brewery’s inventory levels (see illustration below). In a perfect world, all of these inventories should follow the same fluctuating pattern (with some time lag for lead times), because there’s no need of producing more than consumers drink anyway. There are several explanations why the Bullwhip occurs, which you can read all about in this MIT Sloan Management Review paper by Lee, Padmanabhan and Whang. Let’s go to the bar.
Cafè de Pintelier – A great bar for great beer
Conveniently located for a brief case study, my hotel room neighbor in Groningen happens to be Cafè de Pintelier. De Pintelier is a renowned Belgian-style beer pub, known for its excellent service and respectful range of beer types. It holds 23 beers on tap and about 75 on bottle. Because my room is behind the closest wall to the pub I witness that it is indeed very popular—every single day of the week (in fact, it’s only closed two days a year)… I guess I should see that as an opportunity. And because research cannot rely on a single case visit, I drop by a few times during my three-week-stay. I don’t mind it. On the day I write this, four gentlemen are working at the bar; Daniel, Floriaan, Maryn, and Peter-Paul prove extremely knowledgeable in everything about beer. (In another job, Daniel even offers training in hospitality and service for the Dutch HoReCa industry).
Talking about beer and bullwhips it makes sense to differentiate between seasonal and all-year beers. Seasonal beers are maybe not the best examples of the Bullwhip effect. These beers—be it October bock beer, Christmas beer, spring bocks or light Summer wheat beer—are produced by the Breweries and pushed through the supply chain anyway. They’re sold until there’s no more left. The most interesting beers regarding supply chain dynamics are the ones that are sold throughout the year. Many of these are provided by the world-leading giant AB InBev (for example Leffe [which I like and order], Jupiler, Hertog Jan, Hoegarden), but—as an independent beer bar—de Pintelier is also free to order beers from others. 5 taps are kept for AB InBev, 18 for others. One example of one of the others is the Pauwel Kwak beer.
Pauwel Kwak is an amber ale at 8.4 % alcohol, brewed by the Beligan family-owned brewery Brouwerij Bosteels. De Pintelier is said to be the bar that sells the most Pauwel Kwak beer in the world. Today it sells about 350 kegs à 30 liters of it every year. That’s about 90 glasses every single day. This beer is served in a special glass standing in a wooden frame, which makes it stand out even in a crowd of beers like the one in De Pintelier. It’s good; smooth and tasty with that nice amber colour. However, Pauwel Kwak is consistently among the top-5 sold beers in Cafè de Pintelier, so not sure if my order makes the big difference after all. I need another type of beer to distort this supply chain…
This time I specifically ask for a beer that might make Cafè de Pintelier need to place a new order with their supplier. Floriaan serves me a bottled Belgian ale named Wolf 7. Great. It’s also a very good and uncomplicated blond ale beer. I literally start feeling its 7.4 % volume now. Who said blogging needs to be boring? I have just started the bullwhip. Good luck Cafè de Pintelier, importers, transporters and the Wolf Brewery. I’m sure you’ll cope well. Cheers!
—THE HAPPY END—
* About the Beer Game
The Beer Game is an excellent management game for teaching supply chain dynamics. It was developed in the early 1960s at MIT Sloan School of Management. The game is usually played as a group of four—playing the brewery, the distributor, the wholesaler and the retailer respectively. A game coordinator or a computer simulates the consumers’ demand at the retailer. No communication is allowed in the supply chain during the game. The players only know their current stock, the inbound lead time (2 weeks), and the weekly customer order (including backorders). They also know the weekly cost of holding inventory and the cost of not being able to deliver customer orders (twice as expensive as holding inventory). Based on this information, they decide how much to order from their supplier each week.
At the University of Groningen (RUG) we use the online Beer Game made by Dr. Kai Reimer at the University of Sydney and University of Münster (check it out at www.beergame.org). The game is typically played for 40 virtual weeks. Including introduction, this only took 1 hour 30 minutes in our classes (Many thanks to Dr. Kirstin Scholten who manages the game in class at RUG). I highly recommend the Beer Game for educational purposes on supply chain dynamics.
** About the Bullwhip
Ok, admittedly a single purchase at the bar may probably not distort complete beer supply chains. But if a certain amount of customers act different from the demand forecast, the whip has been swung. Say, for example, that some person blogs about his experience of a seasonal Leffe, Pauwel Kwak or Wolf beer in a bar, and it goes viral and starts a worldwide trend. Then you have certainly started the bullwhip…
For more information about the Bullwhip effect, see these references:
- Jay W. Forrester (1961) Industrial Dynamics, The MIT Press, Cambridge, MA
- Hau L. Lee, V. Padmanabhan and Seungjin Whang (1997) The Bullwhip Effect in Supply Chains, MIT Sloan Management Review, Spring Issue
- Check out this great YouTube video on how Professor Hau Lee teaches the Bullwhip Effect at Stanford University