Lean Supply Chains:

The Foundation
 System’s Perspective
 Understand supply chain dynamics and adopt a
holistic view.
 Consider the business ecosystem in which you are
operating.
 Supply Chain Dynamics
 Enterprises can experience huge variations at each
step in the chain, with variations typically more
pronounced the further upstream the enterprise is
from the ultimate user.
Demand Distortion
 Results in:
 Larger inventory carrying costs
 Lost sales from stock outs
 Lack of responsiveness to customer demand
Bullwhip Effect
 A slight motion of the handle of a bullwhip can make
the top thrash wildly at up to 900mph.
 Increasing demand variability as you move upstream.
 Most demand distortion is caused by the supply chain
itself, not by the customer.
 Results in:
 excessive inventory investment
 poor customer service
 lost revenues
 misguided capacity planning
 ineffective transportation
 Ineffective production schedules.
 The Beer Game
 Underscores the importance of understanding supply
chain dynamics and applying systems thinking to
coordinate activities within and between enterprises.

 Explains the crucial role lead times play in enhancing

or inhibiting competitiveness

 Elaborates on the role of information systems in the

lean supply chain.  
Assumptions
 Assumes a linear SC, 4 enterprises, one type of beer

Factory Distributor Wholesaler Retailer

 Goal is to manage demand as imposed by it’s customer

 Each enterprise has only one manager
 Runs for 50 wks.
Assumptions
 Each week, an enterprise receives an order from
downstream customers and places an order
upstream.
 Two week lead time between when an order is
placed and when it is received.
 Another two week lead time before the order is
delivered.
 Each enterprise starts with 12 cases of beer.
 At the beginning of each week we know what
demand will be.
Playing the game
 Everyone acts in their own self
interest on the basis of their own
forecasts
 The system is in a steady state with
demand at four cases each week.
 In week 5, demand is disrupted to 8
cases a week and remains constant.
 Each player’s ordering policy is
based on two rules
Demand Forecast Rule
The forecast rule: The weekly demand for
each of the next four weeks is the
average of the weekly demand over the
four most recent weeks. Four period
moving average: (4+4+4+4)/4=4
Order Quantity Rule
Given the forecasts, the amount ordered is
just enough to replenish the ending
inventory (Four weeks from now-when
the order arrives) to a target of 12 cases.
12+(Forecast demand for next 4 weeks)-
(current inventory)-(Orders already
placed for the next three weeks.
 week 4:Customer/Retailer/Wholeseller
Customer and Retailer: Week 4
Forecast Demand: (4+4+4+4)/4 4
Demand (this period) 4 4 Order just received
Demand(next 3 periods): 4+4+4 12 12 Orders on the way: 4+4+4
Target Safety Stock 12 12 Inventory on hand
Order 4

Retailer and Wholeseller: Week 4

Forecast Demand: (4+4+4+4)/4 4
Demand (this period) 4 4 Order just received
Demand(next 3 periods): 4+4+4 12 12 Orders on the way: 4+4+4
Target Safety Stock 12 12 Inventory on hand
Order 4
week 5: Customer/Retailer/Wholeseller
Customer and Retailer: Week 5
Forecast Demand(4+4+4+8)/4 5
Demand (this period) 8 4 Order just received
Demand(next 3 periods): 5+5+5 15 12 Orders on the way: 4+4+4
Target Safety Stock 12 8 Inventory on hand
Order 12

 Consumer demand increased by 100%

 4  8 cases
 The retailers order to the wholesaler increased by
200%
 4  12 cases
 The retailer doubled the variation in demand
week 5: Customer/Retailer/Wholeseller
Retailer and Wholeseller: Week 5
Forecast Demand (4+4+4+12)/4 6
Demand (this period) 12 4 Order just received
Demand(next 3 periods): 6+6+6 18 12 Orders on the way: 4+4+4
Target Safety Stock 12 4 Inventory on hand
Order 20

 The wholesaler’s order to the distributor increased by

400%.
 4  20
week 5: Wholeseller/Didtributor/Factory
Wholeseller and Distributor: Week 5
Forecast Demand (4+4+4+20)/4 8
Demand (this period) 20 4 Order just received
Demand(next 3 periods): 8+8+8 24 12 Orders on the way: 4+4+4
Target Safety Stock 12 -4 Inventory on hand
Order 36

Distributor and Factory: Week 5

Forecast Demand (4+4+4+36)/4 12
Demand (this period) 36 4 Order just received
Demand(next 3 periods): 12+12+12 36 12 Orders on the way: 4+4+4
Target Safety Stock 12 -20 Inventory on hand
Order 68
 Retailer Wholesaler Distributor Factory

200% 400% 800% 1,600%

 The variation doubles at each stage.

 However, of the 64-case increase in the factory's
orders, only four cases were directly attributable to a
change in consumer demand.
 The lead times present in this value stream created
94 percent of the variation observed in the factory’s
orders.
 The Implications of Lead Time
on the Bullwhip Effect

Retailers
Warehouses/
Distributors
Manufacturers

 Lead times significantly exacerbate the bullwhip effect

 Reducing lead time, in combination with improved
visibility along the supply chain, can significantly and
positively relieve the bullwhip effect
The impact of information
 Assume all of the same factors except
that each stage is aware of the
customer’s orders.
 Assume we know that demand for
week six and onward is five cases.
 Following exactly the same steps.
The impact of information
Forecast Demand: (4+4+4+8)/4 5
Demand (this period) 8 4 Order just received
Demand(next 3 periods):5+5+5 15 12 Orders on the way:4+4+4
Target Safety Stock 12 8 Inventory on hand
Order 12

Forecast Demand 5
Demand (this period) 12 4 Order just received
Demand(next 3 periods):5+5+5 15 12 Orders on the way:4+4+4
Target Safety Stock 12 4 Inventory on hand
Order 16

Forecast Demand 5
Demand (this period) 16 4 Order just received
Demand(next 3 periods):5+5+5 15 12 Orders on the way:4+4+4
Target Safety Stock 12 0 Inventory on hand
Order 20

Forecast Demand 5
Demand (this period) 20 4 Order just received
Demand(next 3 periods):5+5+5 15 12 Orders on the way:4+4+4
Target Safety Stock 12 -4 Inventory on hand
Order 24
 Retailer Retailer orders 12 cases- a 200%
increase

Wholesaler Wholesaler orders 16 cases- a 300%

increase

Distributor Distributor orders 20 cases- a 400%

increase

Manufacturer order Raw Materials to make

Manufacturer
24 cases- a 500% increase
The Impact of Information on the
Bullwhip Effect
 Perfect forecasting does not eliminate the
bullwhip effect
 Lesson: The bullwhip effect is present even if
there is perfect information about the future that
is shared among all channel partners.
The Impact of Lead Time on the
Bullwhip Effect
 Lead times can multiply the variation in demand and
so everyone in the supply chain should be working to
reduce lead times.
 The implications of Little's Law are that when
inventory in the supply chain is high, lead times
increase, and, conversely, longer lead times result in
more inventories in the pipeline.
 This problematic and cyclical relationship between
lead times and inventory is a powerful reason for
reducing lead times.
Structure Drives Behavior:
Causes of the Bullwhip Effect
 Lack of visibility
 Long lead time
 Many stages in the supply chain
 Lack of pull signals
 Order batching
 Price discount and promotions
 Forward buying
 Rationing
Other Behaviors that Cause the
Bullwhip Effect
 Over-reaction to backlogs
 Neglecting to order to reduce inventory
 Hoarding customers
 Shortage gaming for customers
 Demand forecast inaccuracies
 Attempts to meet end-of-month metrics
Ways to Mitigate the Bullwhip Effect

 Reduce lead times

 Use/sharing of POS data
 Smaller orders
 Work with suppliers on more frequent deliveries of smaller
order increments
 Use stable pricing, “everyday low prices”
 Levels out customer demand
 Allocation based on past sales