Beer Distribution Game (Bullwhip Effect)

THE BREWERY

Imagine that you were hired four months ago to manage distribution and marketing at the brewery, where Lover’s Beer is only one of several primary products. Yours is a small brewery, known for its quality, not its marketing savvy. That’s why you were hired.

Now, clearly, you have been doing something right. Because in only your second month (Week 6 of this game), new orders began to rise dramatically. By the end of your third month on the job, you felt the satisfaction of getting orders for forty gross of beer per week, up dramatically from the four when you started. And you shipped out… well, you shipped out thirty.

Because breweries get backlogs too. It takes (in your brewery, at least) two weeks from the time you decide to brew a bottle of beer until the moment when that beer is ready for shipment. Admittedly, you kept a few weeks’ worth of beer in your warehouse, but those stocks were exhausted by Week 7, only two weeks after the rising orders came in. The next week, while you had back orders for nine gross and another twenty-four gross in new orders, you could send out only twenty-two gross. By that time you were a hero within your company. The plant manager had given everyone incentives to work double-time, and was feverishly interviewing for new factory help.

You had lucked out with that Iconoclasts video mentioning the beer. You had learned about the video in Week 3—from letters written by teenagers to the brewery. But it had taken until Week 6 to see that video translate into higher orders.

Even by Week 14, the factory had still not caught up with its backlogged orders. You had regularly requested brew batches of seventy gross or more. You had wondered how large your bonus would be that year. Maybe you could ask for a percentage of the profits, at least once you caught up with back orders. You had even idly pictured yourself on the cover of Marketing Week.

Finally, you had caught up with the backlog in Week 16. But the next week, your distributors had asked for only nineteen gross. And last week, Week 18, they had not asked for any more beer at all. Some of the order slips actually had orders crossed out on them.

Approaching Week 21

Now, it’s Week 19. You have a hundred gross of beer in inventory. And the orders, once again, ask for virtually no new deliveries. Zero beer. Meanwhile the beer you’ve been brewing keeps rolling in. You place the phone call you’ve dreaded making to your boss. “Better hold off on production for a week or two,” you say. “We’ve got”— and you use a word you’ve picked up in business school—“a discontinuity.” There is silence on the other end of the phone. “But I’m sure it’s only temporary,” you say.

The same pattern continues for four more weeks: Weeks 20, 21, 22, and 23. Gradually your hopes of a resurgence slide, and your excuses come to sound flimsier and flimsier. Those distributors screwed us, you say. The retailers didn’t buy enough beer. The press and that rock video hyped up the beer and got everybody sick of it. At root, it’s the fickle kids—they have no loyalty whatsoever. How could they buy hundreds of cases one month, and nothing at all the next?

Week 24

Nobody misses you when you borrow the company car at the beginning of Week 24. Your first stop is the wholesaler’s office. Not only is it the first time you have ever met face to face, it’s only the second time you have ever spoken. There has never been anything to say until this crisis. You greet each other glumly, and then the wholesaler takes you out to the back warehouse. “We haven’t gotten an order for your brand in two months,” says the wholesaler. “I feel completely jerked around. Look! We still have 220 truckloads here.”

What must have happened, you decide together, is that demand rose rapidly, and then fell dramatically. Another example of the fickleness of the public. If the retailers had stayed on top of it and warned you, this would never have happened.

You are working over the phrasing of a marketing strategy report in your mind on the way home when, on a whim, you decide to stop at the store of a retailer you pass along the way. Fortuitously, the owner of the store is in. You introduce yourself and the retailer’s face breaks into a sardonic grin. Leaving an assistant in charge of the shop, the two of you walk next door to a luncheonette for a cup of coffee.

The retailer has brought along the shop’s inventory tally notebooks, and spreads them open across the table. “You don’t know how much I wanted to strangle you a few months ago.”

“Why?” you ask.

“Look—we’re stuck with ninety-three cases in our back room. At this rate, it’s going to be another six weeks before we order any more.”

Six weeks, you think to yourself. And then you pull out a pocket calculator. If every retailer in this area waits six weeks before ordering any more beer, and then only orders a few cases a week, it’s going to be a year or more before they put a dent in those 220 truck-loads sitting at the wholesaler’s. “This is a tragedy,” you say. “Who let it happen—I mean, how can we keep it from happening again?”

“Well, it’s not our fault,” says the retailer, after sipping some coffee. “We were selling four cases of beer when that music video came out. Then, in Week 2, we sold eight cases.”

“And then it mushroomed,” you say. “But then why did it die down?”

“No, you don’t understand,” says the retailer. “The demand never mushroomed. And it never died out. We still sell eight cases of beer—week after week after week. But you didn’t send us the beer we wanted. So we had to keep ordering, just to make sure we had enough to keep up with our customers.”

“But we got the beer out as soon as it was necessary.”

“Then maybe the wholesaler screwed up somehow,” says the retailer. “I’ve been wondering if I should switch suppliers. Anyway, I wish you’d do a coupon promotion or something, so I could make back some of my costs. I’d like to unload some of those ninety-three cases.”

You pick up the tab for coffee. On your trip back, you plan the wording of your resignation notice. Obviously, you’ll be blamed for any layoffs or plant closings that come out of this crisis—just as the wholesaler blamed the retailer, and the retailer blamed the wholesaler, and both of them wanted to blame you. At least it’s early enough that you can quit with some dignity. If only you could come up with some explanation to show that it wasn’t your fault—to show that you were the victim, instead of the culprit …