How the ‘Beer Game’ Helps Retailers Solve Toilet Paper Crisis

(Bloomberg) -- With nervous shoppers hoarding everything from toilet paper to tequila, retailers are coping by playing a game -- a game about beer.

Jay Forrester, a professor at MIT, invented the “beer game” in the late 1950s to illustrate system dynamics, a method of analyzing and managing complex organizations. The activity simulates supply-chain volatility, helping players navigate boom-or-bust conditions for products spanning diapers to refrigerators.

Retailers and suppliers have great need for that right now, with millions of shoppers stocking up for weeks of staying at home to slow the spread of the coronavirus. There have been runs on hand sanitizer, meat and canned soup -- just to name a few products, and the financial rewards could no doubt be big for companies that figure this out.

“It’s highly relevant to what’s going on in the economy today,” said John Sterman, an MIT Sloan School of Management professor who leads students and executives through the game about a dozen times a year. “The headlines about hoarding and shortages of toilet paper, cleaning supplies, and food have made this work highly topical.”

The game, which can be played online or on paper, divides players into the roles of retailer, wholesaler, distributor and brewer. Demand for beer is set at, say, 100 cases a week, and the others place orders up the chain. The goal is to meet consumer demand -- which can fluctuate as the game evolves -- while avoiding stock-outs and minimizing costly inventory.

The twist: None of the players can talk to each other, beyond relaying orders. Inevitably, there’s too much beer in one part of the chain, or too little to quench drinkers’ thirsts. Financial penalties accrue in both instances, and the team with the fewest costs at the end wins.

Forrester, who died in 2016, designed the game to show how small variations in demand at one end of a supply chain can get amplified exponentially upstream. Initially dubbed “The Bullwhip Effect,” the principle was later named after Forrester himself.

The phenomenon played out during the 1990s tech boom, when Cisco Systems Inc. and other makers of networking gear saw huge spikes in demand. Customers only got a fraction of what they wanted, so they ordered much more, which clogged the system even further. When factories eventually caught up, customers canceled the so-called “phantom” orders, leaving Cisco and others in the lurch.

Charmin Shortage

A similar pattern is playing out now with toilet paper. Demand for Charmin, a Procter & Gamble Co. brand, has increased so much, so quickly, that retailers have been put on allocation, which means they receive a fraction of their usual order. So they ask for more, prompting paper factories to work around the clock. But when those orders arrive on shelves, demand for toilet paper will be scarce because so many consumers already have stockpiles in their basements.

“You ramp up production, and it gets to the store just when we don’t want any more,” said Paul Chapman, an operations expert at the Said Business School at the University of Oxford who has advised executives at Walmart Inc. and other retailers.

What this all comes down to is that humans are hard-wired to hoard.

“There can be rational reasons to stock up, like if you see everyone else scoop up supplies,” MIT’s Sterman said. “But the beer game shows that people engage in hoarding, even when there’s no rational reason to do so. The impulse is deeply embedded in our brains.”

To examine that, Sterman once had participants play the beer game, but made it clear to everyone involved that demand for suds would remain constant. Even then, 22% of participants placed orders more than 25 times greater than what was needed.

It’s not just humans who hoard. The finely tuned software that oversees inventory and order management for big retailers is also susceptible to over-reacting to anomalous events like the coronavirus, Sterman said. Armed with those sophisticated IT systems, retail-industry executives are playing the beer game now -- and still losing.

“I’ve played the beer game many, many times,” said Philip Palin, a supply chain expert who’s busy helping supermarket executives grapple with virus-related shopper stockpiling. “Over the last three weeks, half my time has been spent helping grocers not play this game.”

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