The Bullwhip Effect (again)

One of my favorite exercises in business school was a simulation called the "Beer Game".    The simulation 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 logistics.  I first heard 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 combined into one 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 skyrockets.  The individual playing the part of the manager of the retail store tries to keep up with the demand by placing more orders for beer.  Unfortunately, the supply chain is unable to keep up.  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 now the demand for the beer 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?).

As I mentioned in a recent post ("The world is changed..."), the worldwide demand for wine has dramatically declined in the past several years.  According to a recent article ("California's Wine Industry Is in Crisis") in The Wall Street Journal, the California wine industry in particular is experiencing a perfect storm in which people are drinking less wine (particularly the younger generations), tariffs have caused the biggest foreign market for California wine (Canada) to dry up, and the weather has been unusually favorable (cool temperatures), causing the grapes to grow in abundance.  As a result, some winemakers are destroying their grapes, while others are simply getting out of the business.  One estimate suggests that 30% of the grapes grown this year will not be sold.

However, all that being said, I am starting to wonder if we will see another real world example of the "Beer Game" and the "bullwhip effect" in the wine industry.  The pop singer Role Model recently appeared as the musical guest on the television show Saturday Night Live and sang his hit song "Sally, When the Wine Runs Out".  Apparently, whenever Role Model sings the song live, he invites a fan to join him on stage and dance during the bridge (as he calls out, "Where's my Sally tonight?").  A number of celebrities have also joined him on stage, including his mother, Susan Pillsbury,  Dylan Minnette, Renée Rapp, Bowen Yang (during a performance on The Tonight Show Starring Jimmy Fallon), Conan Gray, Natalie Portman, Olivia Rodrigo (at Lollapalooza), Troye Sivan, Kate Hudson, Hilary Duff, and Charli XCX (during his recent appearance on Saturday Night Live).

Given the popularity of the song (I know it's hit the top of the charts), I do wonder whether we will see a "bullwhip effect" on wine sales, given the title and prominence of the lyric, "when the wine runs out".  Who knows?  Stranger things have happened.  Apparently the U.S. sales of merlot decreased by 2% (and pinot noir increased by 16%) after the main character in the 2004 film Sideways trashed merlot.  The character played by Paul Giamatti loved pinot noir and apparently said during the film, "“No, if anyone orders Merlot, I'm leaving. I am NOT drinking any f#$&!@* Merlot!"  If you are in the wine industry, perhaps the anxiety about "the wine running out" will lead to the opposite effect!  Only time will tell...