When Companies Don’t Learn From “The Beer Game,” Inventory Stock-Outs Turn to Pile-Ups

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You're a retailing or manufacturing executive who hasn't heard of MIT's “Beer Game” management simulator?

Then you're probably swimming in a lot of excess inventory.

If you're an executive who also incorrectly thinks that “just in time” supply chains somehow mean shipping products on a literal slow boat from China (then going through slow and overwhelmed ports of entry on the west coast), you're going to be in an even worse situation.

Side note — the media almost ALWAYS gets it wrong when they try describing (or blaming) “JIT.” Here's just one example from 2021 and there are many more – it's something I write about a lot.

One of the best lessons that I ever got in supply chain management was the opportunity to play the interactive tabletop version of the “Beer Game” simulation. Call it the “root beer game” if you want to keep alcohol out of it. The game uses chips and tokens, not actual beer (only MIT could remove actual beer from a learning experience called “the Beer Game”). You can play the game online, if you like.

In the Beer Game, each person plays one of four roles in a supply chain for beer (and it really could be about any other product, like winter coats or outdoor furniture):

  • Retailer
  • Wholesaler
  • Distributor
  • Factory

There are some key lessons from the game, as I recall (and they've stuck with me):

  • When you're upstream in the supply chain, you want (you NEED) real-time visibility to actual customer demand at the retailer. Otherwise, you end up making really bad decisions based on guesses.
  • These bad decisions lead to a number of overreactions that swing you from shortages, to oversupply, to greater shortages, and so forth.
  • You're more likely to make bad supply chain decisions when there are long lags between placing an order and receiving the ordered product. Long lead times, in other words — they really hurt you.
  • The “bullwhip” effect means variation increases wildly as you get further up the supply chain.

Read about “Beer Game” lessons from early in the pandemic, related to toilet paper.

Remember how we had huge shortages of hand sanitizer… and then stores were FLOODED with it. I remember seeing sales on the order of “buy 1, get 3 free” — stores couldn't give it away at some point. That's the Beer Game effect at work. Everybody in the supply chain panics as the result of shortages… which leads to overadjustments and a resulting flood of inventory (again, this is exacerbated by long, slow global supply chains that aren't really “just in time” at all).

What made me think of all of this? An article in the WSJ this week:

Glut of Goods at Target, Walmart Is a Boon for Liquidators

That link should be free to read for non-subscribers, as my gift link to you.

This paragraph tells you all about the Beer Game without telling you that it's the Beer Game:

At the onset of the Covid-19 pandemic when many stores were temporarily closed, retailers canceled orders from overseas suppliers as shoppers huddled at home. Then, as the economy started to open up, supply-chain bottlenecks due to factory backlogs and shipping and port delays left retailers with a dearth of goods to sell. To compensate, they ordered extra and placed those orders further in advance to ensure that products arrived on time.

“Ordering extra” and doing so “further in advance” are classic mistakes that most Beer Game players make. If you think you need 10 of something, you'll order 20 — partly because you think you might get short-shipped if there are supply constraints and you hope your bigger order will get more priority.

Again, long lead times are a supply chain killer. That's why true “just in time” involves relatively local suppliers, short distances, and frequent deliveries.

What also happens during long lead times? Demand changes (and forecasts are ALWAYS less accurate for longer horizons):

“They wanted to make sure they'd have stuff to stock on the shelves,” said Marcus Shen, chief executive of B-Stock, a software company that helps retailers manage excess inventory by matching sellers with buyers. “In the time it took for that product to get here, demand shifted.”

As a consumer, it's a good time to buy certain items (if you can afford to do so with inflation in other parts of our spending):

Home Buys, a Columbus, Ohio, off-price retailer with eight stores, is selling name-brand washers and dryers at 40% off the regular price. “Before Covid, we wouldn't have had washers and dryers in our stores,” said Brady Churches, the chain's chief executive. “The market for those items is normally tight, and there isn't a lot of excess.”

The problem is the worst it's been in 20 years:

Mr. Churches said there is more excess merchandise now than at any time in the past two decades. 

Companies and leaders will blame the pandemic. They should really blame whoever didn't make them play the Beer Game.

Will there be a further overreaction?

Even though the secondary market is overloaded with excess outdoor furniture, Mr. Rankin said he isn't buying more because the season to sell those items is almost over. “We don't want to be overstocked ourselves,” he said.

Will we again go from feast to famine, just as we went from famine to feast?

How do we break the cycle before it gets worse?

When will our shortages of computer chips turn into a glut??? Maybe that's less likely, considering how expensive it is to build semiconductor factories and equipment? Coats and tables are one thing… chips are another.

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