Jul 23, 2006
Cyber Sam has a post about systems thinking and how it is applied to Supply Chain Management at his site Cyber Sam. if you’ve taken a course in Systems thinking or familiar with the kind of beer that doesn’t leave you all woozy at the end of the night – then you’re used to the Beer game (or the Beer distribution game as it ought to be aptly called – first, its a game with a point to make and second, its about people and their behavior when it comes to basic cooperation). There are several version of the game available – one as a computer simulation across networked PCs or on the web and the other as a basic board game with players huddled at a table – the latter being, in my opinion, the right environs for this game.
If you are playing the game for the very first time, then you’d experience what is commonly termed as the Bullwhip effect. If you’re playing the game for the second or third time, then you’d experience what is commonly termed as the Bullwhip effect too (even with the hindsight provided by the first game).
How does the Bullwhip effect come to be?
Supply chain experts have recognized that the Bullwhip Effect is a problem in forecast-driven supply chains.
The factors that contribute to the Bullwhip effect include:
Factors contributing to the Bullwhip Effect:
- Forecast Errors
- Lead Time Variability
- Batch Ordering
- Price Fluctuations
- Product Promotions
- Inflated Orders
And the solution is:
The alternative is to establish a demand-driven supply chain which reacts to actual customer orders. In manufacturing, this concept is called Kanban.
The Bullwhip effect is not mitigated by a group of intelligent people working together but streamlining the information chain to the point at which forecasting the demand chain is made sufficiently redundant. That’s a fancy way of saying that near total reliance on fancy predictive algorithms in order to drive your production and distribution organization is going to transfer customer and intermediary ordering behavior into your organization with a multiplier effect (the magnitude of the multiplier applied by the intermediaries in your distribution chain is dependent on past fulfillment history, profit margins that can be realized, gut instinct etc etc).
Don’t take my word for it but play the Beer Distribution Game for yourself and you’ll come away from it wiser and perhaps, just perhaps, willing to take a look at systems thinking.
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