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Opinion | How to Soften the Bullwhip Effect

What’s hilarious about the beer game is that participants routinely fail — and badly. What’s less hilarious is that generations of students at business schools around the world who failed at the beer game are now making purchasing decisions at big, important companies and presumably failing once more.

The question, again, is why it’s so hard to fix this problem. Human nature is partly to blame. John Sterman, who holds the Jay W. Forrester chair at M.I.T.’s Sloan School of Management and runs the beer game there now, said it’s natural to hoard when there’s a risk of shortages. In a 2020 article he cited a cartoon from World War II in which a shopper who’s caught loading up on cans of food says: “I’m not hoarding. I’m just stocking up before the hoarders get here!”

The voice in the purchasing manager’s head that says “Order more” comes straight from the amygdala and limbic system, ancient parts of the brain that overwhelm the rational prefrontal cortex. “People are not very good at keeping track of the supply line,” Sterman told me. “The most salient information that they’ve got is, do they have inventory? The on-hand inventory plays an outsize role in conditioning their decisions.”

Sterman said that when he played the beer game with executives in an executive education program last week, one team racked up costs on paper of $190,000. Correct play should keep costs under $1,000. “Many of them said, ‘Absolutely, we’re living this right now,’” he told me. “One guy said, ‘This game was my whole career flashing before my eyes.’”

Information technology can help by offering greater transparency. If people can see that the goods they’ve ordered are en route, they’ll be less likely to double- or triple-order.

But tech isn’t a cure-all. Replacing emotional people with unemotional algorithms won’t solve the bullwhip effect because the effect isn’t just about emotions. It can be rational to overorder if you’re worried about shortages. And it can be rational for a producer to ramp up production to satisfy those orders if it wants to make some money and stay in the good graces of its customers.

What would work better is fixing incentives. Ted Stank, the faculty director of the Global Supply Chain Institute at the University of Tennessee, Knoxville, said that companies need to change how executives are paid, “so that everyone feels the pain of excess inventory.” That seems straightforward, but it’s not, he said. “There’s empire building within organizations. People will say, ‘I have autonomy. I don’t want metrics on my list of key performance indicators that I don’t have direct control over.’”

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