Playing for Real: Supply Chain Games for Training

Supply chain games are a great way to develop new staff’s instincts about coordination, competition, and the cause-effects of rule mechanisms on behavior. The infamous Beer Game and Procurement Game were some of my first introductions to multi-party coordination through rules. In 2010, I was looking for more supply chain games and ended up creating or modifying some game-theory classics for training supply chain skills. This article will go through a set of three of these. Since its original publication these games have been used by many readers in their companies, including universities and large and serious supply chain operators like Proctor and Gamble. One game is a modified Beer Game to illustrate how impactful service level commitment is, even in the presence of perfect information. The second game is cooperative, but shows the risk behind missing common information. The third game is competitive, and it shows how parties (imperfectly) use power during negotiations. Enjoy!

Game #1: Modified Beer Game

I made this game with the intention of having a super-fast version of the “beer game”. Back at during my master’s degree, my first time playing the beer game took two hours. With a room full of junior consultants, two hours is expensive training. What I wanted was a modified beer game that got the point across in five minutes or less. For those who are complete novices, checkout the beer game by googling it at MIT’s excellent supply chain program. While modifying the beer game, I changed the goal to trying to highlight how even perfect information doesn’t stop short-term bullwhip effects. Usually (and correctly) the bullwhip effect is attributed to lack of visibility to actual demand. But, my game below shows that just the combination of arbitrary case quantities and arbitrary service level commitments, the supply chain can massively over-react to actual demand.

Modified Beer Game Rules:

  1. Everyone takes a piece of paper out
  2. Going around the table, write down either 12 or 22 cans of beer. This is your “case pack quantity”.
  3. One person will be given an “order quantity” from the final customer.
  4. They take the order and then write down a re-order amount for your supplier (to their left)
  5. The re-order amount must be greater than order placed, and must be a multiple of your own “case pack quantity”. See the example below for a confirmation of this.
  6. Assuming that only this order is processed; all the remaining beer cans are wasted. Write down the number of beer cans wasted per player and then add up for the whole supply chain…

EXAMPLE:

–   My case pack quantity is 12

–   My customer requests 15 cans of beer

–   I must order 24 cans of beer, because it is more than 15 and a multiple of 12.

–   I have wasted 9 cans of beer (24 cans minus 15)

–   The next player repeats steps 1-6

Modified Beer Game Discussion:

The modified beer game should be ultra-fast, basically done within a few minutes. With ten players it is likely that the supply chain adds over 100 extra cans of beer to satisfy the final customer’s order. The discussion now begins: why does the supply chain appear to be over compensating against the order? Here are the major talking points:

  1. There is no uncertainty… everyone in the room hears what the final customer orders. In the unmodified beer game, which you may have played before, uncertainty is a part of what makes alignment difficult. But in this version we are confronted by a perfectly transparent supply chain. Why is this not enough to avoid wastage?
  2. Clearly the case-pack setting is a determinant of wastage. Lower case packs will tend to produce less wastage. But any case-pack greater than “1” has wastage probability.
  3. Clearly the commitment to 100% service level is a determinant of wastage. If each player could fulfill only 90% of their demand, the supply chain would have lower total wastage.
  4. Clearly the number of echelons (players) is a determinant. Each player tends to add 8-12 additional cans of wasted beer (given the setup provided). This is a very real outcome in multi-echelon supply chains.

Game #2: Seasonal S&OP

I made this game up to emphasize how cooperative situations feel when we are told to cooperate, but do not share the same belief set or criteria for success. If that sounds too technical, just think about what it feels like when two departments have to coordinate, but have different ideas of “success” and are measured by their bosses differently. In the game, two departments have to make related decisions in alternating time periods. The decisions are solely made by one department or the other, but the effects of the decision affect both sides. During the game setup, the two departments get some common information and some private information.

Seasonal S&OP Game Rules:

  1. Divide your players into two groups: Marketing and Warehousing.
  2. Each group gets instructions and gets fifteen minutes to plan its 8 week season
  3. You’ll then come together and play 8 rounds of weekly operations, shipping product to a store to be sold for Valentine ’s Day
  4. Each round is conducted as:
  5. Marketing requests a quantity to be shipped each week.
  6. The warehousing team uses its planned labor to ship. The warehouse is the final decision maker on volume shipped. They can over-ship or under-ship, meaning they can ship less or more quantity than requested by Marketing.
  7. The units shipped, plus inventory at store, are used to meet demand
  8. The goal is for both teams to earn their season bonus

Here are the two team-specific guides that are given out privately. There is no rules against exchanging information, but as a moderator, don’t suggest it.

 

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And here is the scorecard for the moderator of the game…

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Seasonal S&OP Game Discussion

The list below shows the main points I think are learned or encountered during the game…

  1. Both teams had the same forecast, but used it differently

–   Marketing used it as a “minimum”

–   Warehousing used it as “average”

  1. The departments had different goals… but both can win!

–   Marketing wanted to maximize revenue

–   Warehousing wanted to maximize labor efficiency

–   Nothing stops them from asking the other department what are their goals… but it’s infrequent that someone thinks to do this. Why is that so?

  1. In most outcomes, neither team is happy

–   It’s emotionally frustrating to not be aligned. The “them-us” mentality doesn’t feel good.

–   Your bonus is outside your control, both in the game and usually in real life.

  1. Departmental Alignment Takes Work

–   A third player, such as a Supply Chain Officer who gets a bonus based on both departments’ performance. The player has to have power as well.

–   Carefully negotiated agreements between the two parties that make pursuing a joint goal more valuable than being selfish

Game #3: iPad Negotiations

This is competitive game, unlike the S&OP game above. Here there are two teams, each one wants to win and for the other to lose. In order to “win” the team must emerge with the most profit after a series of time periods.

iPad Negotiations Game Rules:

  1. Divide the players into two groups, representing two companies: Apple and Foxcon.
  2. The iPad has just launched…together, FoxCon and Apple own the market for about 12 months
  3. Each company has a goal to maximize its own profits… only one will win.
  4. If the iPad’s retail price is low, many units will sell… high prices will sell slower
  5. We will play for 12 rounds… each round will use these steps:
  6. Apple and Foxcon negotiate next month’s unit cost in 2 minutes… if 2 minutes pass without agreement; there is no production that month. To be clear, this “cost” is how much Apple will pay FoxCon for each unit. It does not relate to the retail price Apple will charge.
  7. Next, Foxcon will set the units to produce. They can produce any number of units at the agreed unit cost from step 1.
  8. Apple must accept & pay for all units produced. It then sets a retail price. Apple’s decision on retail price is made independent of FoxCon, but announced publicly.
  9. Depending on the sales price, Apple will sell a certain number of units. The rest are held in their inventory. The administrator of the game uses predefined rules (see chart below) to decide how many units sell at given retail prices.

The moderator should use this chart to decide how many units are sold by Apple, depending on the price point each month. This chart can be seen by both teams in advance.

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Here is a scorecard for the moderator to track the two teams…

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iPad Negotiations Game Discussion:

Here are the points that players will likely touch on:

  1. Coordination in the supply chain is done by the powerful, against the weaker

–   The company with the most power (revenue or revenue potential) should have controlled the negotiations at each stage…

–   FoxCon begins with this power… did they give it up later?

–   Can you understand why FoxCon have the power on round 1?

  1. Subtle, cultural, or personal rules define how power is used…

–   Given a modest initial cost agreement, Foxcon can build 1 million units the first month and retire

–   Apple can negotiate a low cost early, saying it will go for high-volumes. Once it has the inventory, it stops ordering at all and sells its stock at high price points

–   Why don’t they burn each other? Maybe one of these reasons:

    –   Didn’t understand quickly enough?

    –   Sense of fairness?

    –   Feeling that more money can be made by cooperating?

  1. Even a weak partner can stop the supply chain from working

–   What would it take for you to refuse to continue negotiations?

–   Notice that there could be 12 rounds of refused agreement, and therefore a draw.

  1. We make business decisions the same way we make personal decisions
  2. Would behavior change if there were an unknown number of rounds? Does knowing there are only 12 rounds do something to the value of cooperating?

Monday Morning Wrap-Up:

As with all the articles on this site, we’re ending with a summary of how this information can help you the next time you go into work. Today’s article gave three example supply chain games which can be used to introduce supply chain concepts and also to help hone our professional skills. These games are quick to play. You can complete all three in about 90 minutes if you move fast. And each one gives you good opportunities to get outside of a PowerPoint deck and make people feel and react emotionally to the challenges of supply chain management. If you want to increase the emotional impact, use real money from each player, I suggest asking them to pay about the cost of a lunch at a restaurant. Then distribute this cash to the winners. Our natural loss-aversion kicks in and makes playing for money so much more emotionally intense. Key points include:

  1. Some supply chain management is about finding cooperative solutions, and some challenges are truly competitive
  2. For cooperative solutions, there are more and less expensive ways to coordinate the independent decision makers.
  3. Supply chain strategy breakthroughs usually are about making coordination cheaper or more dependable.
  4. In new situations the most important skill is to correctly identify that the interaction (i.e the game) is competitive vs. cooperative. Acting cooperatively to a competitive interaction (i.e. game) is a painful experience
  5. In truly competitive situations, the powerful use their power. Again, they understand that cooperation is not the imperative.
  6. In some situations, even the weakest party in the supply chain has a trump-card to negotiate with: the threat of refused cooperation. Small players may be able to win power over others in this way.

 

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