stationary beer game, The

Production and Operations Management, Spring 2000 by Chen, Fangruo, Samroengraja, Rungson

THE STATIONARY BEER GAME*

This paper presents a variant of the popular beer game. We call the new game the stationary beer game, which models the material and information flows in a production-distribution channel serving a stationary market where the customer demands in different periods are independent and identically distributed. Different players, who all know the demand distribution, manage the different stages of the channel. Summarizing the initial experience with the stationary beer game, the paper provides compelling reasons why this game is an effective teaching tool.

(OPERATIONS MANAGEMENT, SUPPLY CHAIN MANAGEMENT, TEACHING, BEER GAME)

1. Introduction

The beer game is an exercise that simulates the material and information flows in a production-distribution system. It has four players: a retailer, a wholesaler, a distributor, and a factory. Customer demand (in kegs of beer) arises at the retailer, which replenishes its inventory from the wholesaler, the wholesaler from the distributor, and the distributor from the factory. In each period, the channel members must decide how much, if any, to order from their respective suppliers and the factory must decide how much, if any, to produce. There are transportation leadtimes in shipping the material from one location to another, and there is a production leadtime at the factory. While material flows from upstream to downstream, information flows in the opposite direction through order placements. There is an order processing delay, or information leadtime, between when an order is placed and when the order is received by the supplier. The players share a common objective to optimize the system-wide performance. For more details on the beer game, see, e.g., Sterman (1984, 1989).

In the beer game, the customer demand is 4 kegs per period for the first several periods and then changes to 8 kegs per period for the rest of the game. Moreover, the players have no prior knowledge about the demand process. (The numbers 4 and 8 are not important, but the demand pattern and the players' lack of information about it are.) Here in the stationary beer game, the customer demands in different periods are independent and identically distributed, and all the players a priori know the demand distribution.

There are compelling reasons why the stationary beer game is an attractive teaching tool.

First, it is quite common that companies have some knowledge about the market demand and are able to use that information for planning proposes. This feature is captured in our game since the players know the customer demand distribution. [If one uses the stationary beer game in conjunction with the Barilla SpA (A) case (1984), students can easily see the appropriateness of this assumption.] Second, there exists a theoretical benchmark for the supply chain, i.e., what rational players do and what the optimal supply chain performance is. It is useful to have this piece of information since students often ask what we, the instructors, would have done. (For the original beer game, however, there does not exist such a benchmark.) Third, students often find it an interesting exercise to formulate a replenishment strategy by using the demand distribution, and they are often eager to discuss the rationale behind their strategies. Fourth, the stationary beer game can be used as an example of a periodic-review inventory model that is often taught in Operations Management or Supply Chain Management courses (see, e.g., van Ryzin 1998). The experience with the game helps students visualize important inventory concepts. Finally, with our computer program, it is easy to run the game and to collect and display the results. It is our experience that a single instructor is sufficient for a class of 60 students.

2. The Stationary Beer Game

Consider a supply chain consisting of four stations: a factory, a distribution center, a warehouse, and a retail store. Material flows from upstream to downstream (i.e., from the factory to the distribution center, then to the warehouse, and finally to the retail store), whereas information in the form of replenishment orders flows in the opposite direction. Both the material and information flows are subject to delays. Different players manage the stations. They only have access to local inventory status and make local replenishment decisions. Customer demand arises at the retail store only. The demands in different periods are independent and identically distributed random variables. The demand distribution is known to all the players. Holding costs are incurred at each station for their on-hand inventories, and backorder costs are incurred only at the retail store for customer backorders. The goal is to minimize the total holding and backorder costs incurred in the entire supply chain.

Figure 1 depicts the material and information flows in the supply chain. The figure also specifies the two kinds of delays at each station. For example, suppose the retail store orders 10 kegs from the warehouse on Monday. The warehouse receives this order on Wednesday. This information delay is due to the administrative steps in processing an order. On Wednesday, however, the warehouse only has 5 kegs of beer, so it ships 5 kegs to the retail store and backlogs the remaining 5. This shipment of 5 kegs arrives at the retail store on Friday. This delay is due to transportation.