270. Beer Game

The Beer Distribution Game (MIT Sloan, 1960s) — a tabletop / simulation exercise demonstrating the bullwhip effect. The most-played management game ever.

270.1. Setup

Four-stage supply chain: Retailer → Wholesaler → Distributor → Factory. Each stage:

• Receives orders from downstream
• Ships goods to downstream
• Places orders upstream
• Carries inventory; pays holding cost and backorder cost

There’s a 2-week shipping delay between stages and 1-week order delay. Initially, demand is 4 cases/week (stable).

270.2. The shock

After 4 weeks, retail customer demand steps up to 8 cases/week and stays there.

270.3. The result (consistent across hundreds of plays)

Despite the step being small (4 → 8), upstream stages see:

• Factory orders peak at 20-40 cases/week
• All stages alternate between massive backorders and massive overstocks
• Total system cost is 10-30× higher than the optimum

Even MIT students consistently exhibit this behavior. The bullwhip is structural, not a personal failure.

270.4. Sterman’s decision-rule estimate

Sterman (1989) fit each player’s order rule to:

where is smoothed demand. He found:

• (modest correction speed)
• — but more critically:
• Players underweight the supply line (most attention on , less on )

This supply-line neglect drives oscillation: players keep ordering even though previous orders are en route.

270.5. What works

After playing several rounds, players learn:

1. Slow down: smaller corrections per period
2. Pay attention to the supply line: full
3. Smooth demand: don’t react to every blip
4. Information sharing: when upstream sees end-customer demand (not just downstream orders), bullwhip largely vanishes

270.6. Mathematical structure

Each echelon is a 2nd-order delayed feedback system (here). Four cascaded → high-order oscillator. With shock input + supply-line neglect → sustained large oscillation.

270.7. Variations

• Beer Game online: Powersim, Forio, MIT’s online version
• Reduced-delay variant: shorter lead times → less bullwhip
• Information-sharing variant: all stages see end-demand → bullwhip eliminated

270.8. Why it matters

The beer game is the empirical answer to “do real people exhibit bullwhip?” Answer: yes, robustly. It validates the SD theory and motivates:

• Lead-time reduction
• Information sharing (CPFR, VMI, EDI)
• Order-policy training
• Centralized planning

270.9. See also

• Bullwhip in SD — closed-form analysis
• Stock Management — the decision rule
• Bullwhip Effect
• Delays