Beer Game

During business school, I participated in a simulation called "The Beer Game."  The "Beer Game" was developed by Jay Wright Forrester at the MIT Sloan School of Management in 1960 and is probably the best illustration of the importance of logistically.  I first learned about the "Beer Game" in the book "The Fifth Discipline" by Peter Senge.  

There are a number of simulations available for free online.  Game play is fairly straightforward.  Individuals play the role of a brewer, a distributor, a wholesaler, or the manager of a local retail store (in some games that I've seen, the distributor and the wholesaler are the same role).  The game's objective is simple in concept, but difficult in execution - keep up with the changing customer demand for beer.  The trick is to look at these individual players as being part of a system.  During the first few rounds of the game, the system establishes a certain equilibrium where beer moves through the supply chain without any significant problems.  

Once an equilibrium is established, the game adds in a new twist.  A popular singer or famous professional athlete appears in a video drinking a certain brand of beer, and when the video goes viral, demand for that particular brand of beer significantly increases.  The manager orders more beer of that brand, but the supply chain is unable to keep up.  However, the manager continues to order more in order to meet the demand.  As with all popular fads, the demand for the brand of beer quickly returns to its baseline.  Unfortunately, the orders for the brand of beer have already been placed.  Soon, the local retail store has a huge supply of the once popular brand of beer, but unfortunately the demand is just no longer there.

The "Beer Game" is a great illustration of a concept known as the "bullwhip effect".  The "bullwhip effect" (or "whipsaw effect" as it is sometimes called) is a well-described problem in supply chain logistics that describes the role played by periodical orders as one moves upstream in the supply chain toward the production end.  Even when demand is stable (as in the initial equilibrium phase of the "Beer Game" above), small variations in demand at the retail-end can dramatically amplify themselves upstream through the supply chain. The result is that order amounts become very erratic - they may be very high one week and then zero the next week.  The most recent example of the "bullwhip effect" occurred during the COVID-19 pandemic and involved the toilet paper supply chain (remember when you couldn't buy toilet paper because all the stores were out of stock?).  Just take a look at the great illustration from the website "sketchplanations" below: 

The "Beer Game" is a really fun game!  The game also illustrates one of the common pitfalls that leaders fall into when dealing with complex systems.  I've been posting a lot about complex systems in the last few weeks, particularly since reading the book The Logic of Failure by Dietrich Dörner.  My first post, "It's complicated..." defined complexity as a concept and highlighted some of the important differences between complex systems versus complicated ones.  The next post, "Sim City" talked about a series of simulations that Dörner and his team conducted in order to develop his theory of why humans typically fail when trying to solve complex problems.  The third post, "Wicked" brought in the concept that complex problems are often "wicked problems" (as opposed to "tame problems") and presented Dörner's framework for trying to solve complex or wicked problems.  

One of the reasons that makes complex or wicked problems so difficult to solve is that we, as decision-makers and problem-solvers, fail to properly deal with time lags.  One of the fundamental characteristics in our complex world is that there is frequently a time lag between the decisions we make and the subsequent impact of those decisions.  For example, consider the U.S. government's decision to pass an economic stimulus package.  When will the impact of that package be observed?  Certainly not immediately.  Unfortunately, in complex systems with time lags, we are extremely prone to "oversteer" or "overcorrect" (as in the "Beer Game" above).  As Aaron Renn writes in his review of The Logic of Failure, "We make decisions based on the present situation, without regard to the fact that our previous actions will have the intended effect in a future period."

We live in a complex and complicated world.  As leaders, we will be asked to make decisions which involve complex and complicated issues.  It's important to utilize some kind of framework to help solve these complex and wicked problems, and I plan to compare and contrast Dörner's framework with some other suggested frameworks in my final post on The Logic of Failure.