The purpose of the Beer Game is to recognize the importance of reducing inventory costs and opportunity loss costs in the supply chain. Decisions on ordering and manufacturing instructions are made with purchasing and manufacturing lead times of four weeks each.
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Production Management Systems in Indonesia
The ultimate goal in manufacturing is to improve productivity and meet delivery deadlines. Understanding the differences between manufacturing cost, cost of…
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What this article covers
- The Beer Game is a tool to experience the difficulty of inventory management in the supply chain.
- Purchasing and manufacturing lead times are each four weeks, requiring decision-making on orders and manufacturing instructions.
- Reducing inventory costs and opportunity loss costs is crucial for optimizing the entire supply chain.
- Managing order backlogs and adjusting order strategies are important elements in considering overall optimization.
- The bullwhip effect is influenced by the personality of location managers, and responses at the end downstream processes are crucial.
Overview of the Beer Game
Factories engage in make-to-stock production, but in the event of a stockout, it takes four weeks from manufacturing instruction to product receipt. Wholesalers and retailers ship from inventory, but in case of stockouts, it takes four weeks from ordering to receipt from factories or wholesalers. Thus, if inventory is zero in the supply chain, a PO issued by retailers will be received as a product 16 weeks later.
In the Beer Game's supply chain, despite the simple assumption of one item per delivery destination, inventory fluctuations become severe if demand is not visible between locations. In reality, it is common to procure multiple items from multiple suppliers, highlighting the difficulty of manual management by humans. The goal of production schedulers is to optimize within production sites, while the goal of supply chain management systems (SCM) is to optimize the entire supply chain.
Case Study: In a Japanese factory in Indonesia, the complexity of the supply chain was experienced through the Beer Game, and the importance of inventory management was learned.
Key Point: The Beer Game is a tool for understanding the difficulty of inventory management in the supply chain and the importance of overall optimization.
Operations Occurring Within the Supply Chain
In the flow of information and goods in the supply chain, processes such as order receipt, ordering (manufacturing instructions), receipt, and shipment are carried out. Decision-making is only possible at the time of ordering (manufacturing instructions). When considering the optimization of one's own site, determining how many to order (or manufacture) is crucial, which is why purchasing planning (production planning) is important. In the operation of the Beer Game, the content of work is divided by role.
- Sales Operations
- Move: Move the order form issued by the customer to the start of week 2
- View Order Form: Receive order form from the customer
- Shipment: Ship to the customer
- Move: Move undelivered items shipped to the customer to the start of week 4
- Purchasing Operations
- Order: Issue order form to supplier (decision-making opportunity available)
- Receipt: Receive from supplier
- Manufacturing Operations
- Move: Move the manufacturing instruction issued by the factory to the start of week 2
- View Manufacturing Instruction: Receive manufacturing instruction from the factory
- Shipment: Ship to the factory
- Move: Move undelivered items shipped to the factory to the start of week 4
- Issue Manufacturing Instruction: Issue manufacturing instruction to the shop floor (decision-making opportunity available)
- Receipt: Receive from the shop floor
- Factory: Sales and Manufacturing Operations
- Primary Wholesaler: Purchasing and Sales Operations
- Secondary Wholesaler: Sales and Purchasing Operations
- Retailer: Purchasing Operations
Secondary Wholesaler Operations
The secondary wholesaler performs order and receipt operations in the following steps.
- Receipt from Primary Wholesaler
- Move undelivered items to the retailer to the start of week 4
- Receive order form from retailer
- Shipment to retailer
- Move order form from retailer to the start of week 2
- Issue order form to primary wholesaler
Retailer Operations
As the end downstream, retailers have no customers and few tasks.
- Receipt from Secondary Wholesaler
- Receive order card from consumer
- Sales to consumer
- Issue order form to secondary wholesaler
Factory Operations
As the end upstream, factories have no trading partners and many tasks.
- Receipt of products from the shop floor
- Move products from the shop floor to the start of week 4
- Move undelivered items to the primary wholesaler to the start of week 2
- Receive order form from primary wholesaler
- Shipment to primary wholesaler
- The shop floor receives manufacturing instructions from the factory
- The shop floor ships to the factory
- Move order form from primary wholesaler to the start of week 2
- Issue manufacturing instructions to the shop floor
Purchasing and Production Planning
In purchasing and production planning, decisions are required on the timing of issuing order forms or manufacturing instructions. Here, it is necessary to plan "how many to order (manufacture) this week".
- If the purchasing L/T (manufacturing L/T) is one week, the orders placed (manufacturing instructions issued) this week will be received next week.
- Order backlogs (issued manufacturing instructions) will also be received next week.
Under these conditions, if the forecast order quantity for the next week is accurate, it is theoretically possible to reduce inventory costs to zero by determining the order quantity for this week as follows. However, in reality, it may not work well for the following reasons.
- (Forecast order quantity for next week + order backlog) = (Order quantity for this week + inventory quantity + order backlog)
- Forecast order quantities may be inaccurate.
- Order backlogs are "in transit + stockout quantities", and stockout quantities are "ordered quantities - received quantities - in transit".
- The arrival time of stockout quantities can only be predicted up to four weeks ahead.
When considering the optimization of one's own site, the following methods may come to mind, but it may be difficult to execute them within a short time limit.
- Accurately forecast next week's order quantity from market conditions.
- If the receipt quantity for the next and following weeks is small, increase the order quantity to shorten the opportunity loss period.
- If the receipt quantity for the next and following weeks is large, reduce the order quantity to shorten the inventory period.
Reflections After the Beer Game
After the Beer Game ended, there was confusion about starting with receipt. The assumption of "In-Transit (in transit) week 2" is that a P/O (purchase order) was issued four weeks ago. When a P/O is issued, it is expected to be received in the shortest four weeks, but if there is a delay in receipt from the factory at the wholesaler, the issued P/O accumulates as an order backlog at the wholesaler.
It is human nature to want to issue more P/Os to recover the order backlog, but theoretically, only the cumulative order quantity is shipped, so issuing more orders will quickly reduce the order backlog but also increase inventory. If an order backlog occurs, issuing more orders in advance and reducing the order quantity in the following weeks may be an effective strategy.
In the case of factories, if the customer operates on Saturdays and the company is closed on weekends, leveling production by dividing the manufacturing quantity for one Saturday into five working days when breaking down internal instructions can prevent delivery delays (order backlog). The reason for leveling is that the factory's capacity is finite, but in this case, the capacity is infinite, so if an order backlog occurs at the factory,
- Order backlog + forecast order quantity for the following weeks
it may be better to issue manufacturing instructions and adjust production once the resolution of the order backlog is predicted. Observing the state of the upstream (factory) is significant because, textbook-wise, it is necessary to consider "overall optimization", but before that, it is difficult to even optimize one's own site.
Case Study: The bullwhip effect is largely influenced by the personality of the location manager, and if the retail manager, who is the end downstream, is hasty, a larger bullwhip effect might have been expected.
Key Point: Managing order backlogs and adjusting order strategies are important, and while considering overall optimization, it is first necessary to aim for the optimization of one's own site.
Frequently Asked Questions | Beer Game and Supply Chain
Based on the content of this article, frequently asked questions are briefly organized.
What is the purpose of the Beer Game?
The purpose of the Beer Game is to recognize the importance of reducing inventory costs and opportunity loss costs in the supply chain. This allows for learning about the optimization of the entire supply chain.
What is the lead time in the Beer Game?
In the Beer Game, the purchasing lead time and manufacturing lead time are each four weeks. This makes the timing of ordering and manufacturing instructions important.
In which process is decision-making done in the supply chain?
Decision-making in the supply chain is done at the time of ordering (manufacturing instructions). Here, planning how many to order (manufacture) is important.