Upstream or downstream thinking? What’s the best way for suppliers to go mainstream and reach the most customers?
You might have heard of the beer distribution game.
The idea is that a group of participants enact a four-stage supply chain scenario. Some take on the role of those at the point of origin in the supply chain – the upstream agents: manufacturers and distributors. Others role-play the downstream agents at the other end of the chain – the distributors and end-customers: in this case, let’s say the bar owners and beer drinkers. The goal is simple. All you have to do is produce, deliver and sell the beer to your customers, while keeping your costs on back orders and inventory to a minimum.
This should be easy enough, in theory. The basic rules of economics suggest that customer demand dictates supply. In practice, however, things can get a little skewed. And this disconnect can happen fast.
For a start, players have limited information. They can only see what’s in front of them – bits of paper with order numbers. And as they start to share this information with each other, all kinds of coordination issues arise. Things start to go wrong. Customer demand for X or Y kegs of beer is imperfectly relayed to the bar owner retailer, who in turn passes it on the other players upstream, but makes mistakes in doing so. The result is a kind of Chinese Whispers where confusion reigns, poor decisions are made about stock, too much or too little beer is manufactured or supplied. You end up with increased costs in the supply chain, and, not to mention thirsty beer drinkers.
The beer game is just that – a game. But it represents a problem that is all too familiar to suppliers in most industries and sectors. It’s called the Bullwhip effect, and it’s a conundrum.
“The Bullwhip effect is a real challenge for suppliers in every industry,” said Nikolay Osadchiy, associate professor of Information Systems & Operations Management at Goizueta Business School. “Because demand information gets distorted along the chain, suppliers can see a lot of volatility at their end which can translate into more inventory and drives up costs. It’s a really pressing issue that needs to be addressed.”
Osadchiy and his colleagues Bill Schmidt from Cornell University and Jing Wu from the Chinese University of Hong Kong got to work researching the idea.
- First, they modeled a supply network based on 15 years of data from publicly traded companies across the globe.
- Second, they determined the ‘upstreamness’ that different firms had – or the positions they occupy – within that network.
- And third, they examined the demand distortion within each firm and measured demand variability across the different layers of the network to determine how they affect each other.
The results of their work were all captured in the article attached below – the information was quite compelling and will greatly assist businesses as they plan their way through and after a globe-shifting event like COVID-19.
It’s interesting material for sure – and if you are a journalist looking to know more about supply chains and how businesses will need to adapt in order to survive post-pandemic, then let our experts help with your questions and coverage.
Nikolay Osadchiy is an Associate Professor of Information Systems & Operations Management at Emory University's Goizueta Business School. He is an acclaimed expert in the areas of supply chain management and how supply networks affect risk and operational performance. Nikolay is available to speak with media regarding this topic – simply click on his icon to arrange an interview today.