In The Fifth Discipline, his book about systems thinking, Peter Senge describes a business simulation called the ‘beer game’. Developed in the 1960s at MIT, it consists of a simple supply chain for producing and distributing beer played out between a retailer, a wholesaler and a brewery. As the game starts, the retailer is selling and re-ordering four cases of beer a week, keeping a stock of 12 cases in store at any one time. Similarly at the wholesaler, except that his weekly orders are in truckloads. End-to-end time from retail order to delivery to the shop is four weeks. The game covers 25 weeks.
The fun starts in week two, when the retailer unexpectedly sells eight cases of beer instead of four. So he doubles the week’s order to eight, wanting to replenish his stock. But the next week, he sells another eight, while he only receives four (the order he made a month ago). That leaves only four cases in store, so he ups his order to 12 cases. The same thing happens in week five, and now, with panic in the air, the order goes up to 16.
Meanwhile, the same thing is happening up the supply chain, but amplified by the ‘bullwhip effect’ – the farther in distance and time from the customer, the greater the flex, like the tip of a whip when you crack it. After a few weeks of soaring orders from the wholesaler, the brewery is rubbing its hands and wondering if it should increase capacity. But a few weeks later, as the retailer starts to receive ever larger deliveries, he stops ordering. His stockroom is full and he has several weeks in hand. The cycle goes into reverse.
Senge reports that over thousands of replications, the game always ended the same way. A spike in demand leads to a build-up of orders and depleted inventories through the system – until volume deliveries feed through and orders promptly dry up. By the end of the game all the participants are awash with unsellable beer, each blaming the others for not keeping up with wildly shifting demand… They can scarcely believe the truth: after doubling in week two, retail demand remains perfectly stable at eight cases a week for the rest of the game.
Of course, since the 1970s management of supply-chains has tightened out of all recognition, with lead times slashed and smaller deliveries made just-in-time. On the other hand they have become longer and much more complex. Modern retail logistics systems perform extraordinary feats of coordination embracing thousands of suppliers to keep shelves filled even at the best of times. But tight links and many nodes also make for greater vulnerability to disruption, amplified by interaction between different supply chains – shortages of microchips, for instance, causing knock-on bottlenecks in logistics chains across many other industries.
Even with today’s technology, product or service supply chains need specialised workers to operate them. Specialised workers are the product of their own human supply chains, all operating to different lead times. Assuming you can get them – a big if nowadays – carers, bartenders and fruit-picker will take days to train, waiters/waitresses and food processing workers weeks, brickies and HGV drivers months, butchers and carpenters a year to get to basic level, nurses and mâitre d’s three years, vets five, GPs 10 and consultants 12 and up.
The hidden intricate infrastructure of the economy, modern supply chains cope with temporary shortages or small changes in demand every day. But now imagine them as a single enormous interrelated global beer game. And then the consequences of tossing a giant Covid-shaped spanner into the works. Manufacturing disrupted everywhere, as plants shut down or cut shifts; shipping schedules in chaos with vessels and containers non-existent where they are needed and jamming hubs and ports where they aren’t; travel and mobility restrictions inserting frictionpreventing the usual short-term fixes; and on top of all that, structural shortages breaking everywhere as the Covid shock jolts aggregate demand and supply and demand out of sync for everything from vegetables, bricks and microchips to labour. Especially the latter: if anything, the Great Resignation in the US may be accelerating, and in the UK the Office for National Statistics reported that in the three months to September a record 1.1m vacancies were posted – a rise of one-third over pre-pandemic numbers.
Then there are the debilitating symptoms of ‘long Brexit’ emerging as Covid peels away the patches on our fragile supply lines. More than one-third of the UK’s 5m resident EU workers who were expected to remain and ensure needed labour-market flexibility have had enough and gone home. The effects on the UK trades and professions listed above, all of which are in desperately short supply, have been dire. In comparison to the structural need, the government’s offer of short-term visas for a few hundred butchers and a few thousand lorry drivers and poultry workers is like using sticking plasters to cover holes in an already tattered bandage.
For once it really is, to change the metaphor, a perfect storm. Yet while this storm seems to have particularly complex causes and chaotic effects, we can see already how it is turning out: exactly as in the beer game, amplified to a massive and ramifying scale. Here’s veteran FT columnist John Dizard: as supply chains begin to sort themselves out, ‘an inventory recession looms,’ he predicted in a recent piece.
‘Why will consumers order new stuff if it turns out they over ordered in 2020 and 2021?… When all the goods are delivered by all those truck drivers coming out of retirement, there will be a huge global pile of stuff that will not be reordered soon.’ Industry associations across the economy are saying that the consequences will be playing out until 2023 or beyond – the sheer number of bottlenecks feeding into each other makes what comes next hard to predict after that. Dizard reckons the effects will be echoing around for decades.
A couple of rounds of beer game 2.0, anyone?