Long ago, in a land far, far away, you could walk into a grocery store and be tempted by shelves overflowing with a seemingly endless variety and limitless supply of produce to satisfy your every whim.
It describes the happy state of the US economy in early 2020, as the well-choreographed ‘dance’ involving the various links in the global supply chain ensured the arrival of the right amount of goods when needed. . When the supply chain is functioning properly, it is like breathing air; it works without a thought.
Fast-forward to today, and you’ll find some seemingly random grocery shelves stripped bare. COVID has exposed the fragility of the global supply chain; when it’s broken, it makes the headlines. When you can’t get what you want is all You think about.
Supply chain management was a low-key profession that gained visibility in the early 1970s when Toyota introduced “just in time”, a manufacturing philosophy that valued “maximum efficiency”, where suppliers delivered the goods. parts at the factory exactly when they are needed. This profession is poised to become more publicized as the pandemic has demonstrated the wisdom of having “just in case” safety stocks to protect against future supply chain disruptions.
Professor John Sterman of the Sloan School of Management at the Massachusetts Institute of Technology has used the “Beer Distribution Game” as a “management flight simulator” for four decades. The BDG simulates supply and demand across the industry, from brewery (B) to distributor (D) to wholesaler (W) to retailer (R).
Each team competes against all the others and is divided into BDWR groups, which are not allowed to communicate outside of their group. Customers buy from the retailer, who then orders from the wholesaler, who in turn orders from the distributor, who buys the beer from the brewery. The brewery makes the beer, which is then shipped up the chain to the retailer and ultimately purchased by the customer.
The game consists of 40 rounds. It costs 50 cents to keep a case of beer in inventory and $ 1 for each case the group is unable to deliver. Each team competes to minimize its total cost throughout its supply chain.
Sterman and Gokhan Dogan presented their observations on the BDG and their theories on how students with such intellectual power could be wrong in a scientific article: “I don’t hoard. I just refuel before the hoarders arrive. Behavioral causes of phantom orders in supply chains.
The authors define hoarding as “attempts to accumulate large private stocks of goods when people perceive threats to the supply.” Hoarding goes hand in hand with ‘shadow order’, where ‘people respond to uncertain supply by ordering more than they actually want, or ordering from multiple suppliers and then planning to cancel their excess orders one after another. once they got what they want ”.
In their experimentation, all the players learn at the outset that customer demand is constant to four cases per week. There are no random shocks: no machine breakdowns, material or labor shortages, or transportation problems. With constant demand and an assured supply, you don’t have to go to MIT to know there is no rational need for hoarding or shadow orders. Everyone should order four cases a week, every week.
Behavioral finance tells us that investors look more like irrational Homer Simpson than coldly logical Mr. Spock and must overcome all kinds of bad instincts and biases. The amygdala is the brain’s ‘fear center’ where our prehistoric ‘fight or flee’ survival instinct resides and screams at us to, “DO SOMETHING!”
Whether it’s the fear of loss that causes us to panic and sell when stocks plunge or the fear of missing out (“FOMO”) that prompts us to hunt memes stocks or cryptocurrencies, the damage is real.
It turns out it’s the same with those responsible for the supply chain, as the amygdala responds to scarcity, real or imagined. In the BDG, tiny changes in people’s orders have led to huge production runs, a phenomenon known as the “boost effect”. Indeed, the authors noted that 22% of groups placed orders for 100 cases per week, i.e. 25 times constant and known demand from customers for four checkouts per week.
The shortages, hoarding, and boom and bust cycles of the game were completely self-inflicted.
While we can’t predict a pandemic or a container ship stuck in the Suez Canal, we need to understand the causes of the panic and avoid it. Until we do, expect the fear of running out (“FORO”?) To prevail and lead to more hoarding and ghost orders, not less. •
Kim is the COO and Director of Compliance for Kirr Marbach & Co. He can be reached at 812-376-9444 or [email protected]