Chapter no 3 of Fifth Discipline book by Peter Senge.

1. 1

2. 2

3. 3

4. To acquaint you all with the concepts
of Famous Beer Game, Lessons learnt,
Analysis and how to Improve
Performance by using Beer Game.
4

5. PART 1 – (Raja Manzar)
 Beer Game.
5
PART 2 – (Rashid Aziz)
 Lessons Learnt from Beer Game.
PART 3 – (Muhammad Farooq Munir)
 Structure Influences Behavior.
PART 4 – (Rana Shahzad)
 Redefining your Scope of Influence: How to Improve
Performance in the Beer Game.
 The Learning Disabilities and Our Ways of Thinking

6. 6

7. 7
Distributor
Wholeseller
Retailer
Consumer
Brewery
The Consumer
buys beer from
the retailer.
The retailer either
has beer in stock
or orders extra
units of beer from
the wholeseller.
The wholeseller
either has beer in
stock or orders
extra units of beer
from the
distributor.
The distributor
either has beer in
stock or orders
extra units of beer
from the brewery.
Demand for beer
is fulfilled as soon
as there is enough
beer in stock.
Demand for beer
is fulfilled as soon
as there is enough
beer in stock.
Demand for beer
is fulfilled as soon
as there is enough
beer in stock.
Demand for beer
is fulfilled as soon
as there is enough
beer in stock
The brewery
either has beer
in stock or it
increases the
production.
Order
Placing
Cycle
Order
Delivery
Cycle

8. 8
• Beer game as described by Peter Senge in Chapter 3 of
his book - The Fifth Discipline: The Art & Practice of The
Learning Organization.
• Was developed at Massachusetts Institute of
Technology's Sloan School of Management in the 1960s
by James R. Martin, Ph.D.
• The game involves a simple production/distribution
system for a single brand of beer.
• Mainly 3 players in the game. Each player's goal is to
maximize profit.
–a retailer, a wholesaler, a marketing director at the
brewery.
Contd…

9. 9
• The players at each position are completely free to make
any decision that seems prudent. Their only goal is to
manage their position as best they can to maximize their
profits.
• Truck driver delivers beer once each week to retailer &
he places order for next week. Truck driver places order
with distributor. There is 4 weeks lag in between.
• The retailer and wholesaler do not communicate directly.
• The retailer sells hundreds of products.
• The wholesaler distributes many products to large no of
customers.

10. 10
• Imagine that you're a retail merchant.
• No matter what your store looks like, beer is a cornerstone of
your business.
• Stock beer in back room, where you keep your inventory.
• Once each week a trucker arrives, hands over delivery & takes
new orders for next week.
• A delivery of beer generally arrives in your store about four weeks
after you order it.
• You probably have never even met your beer wholesaler him; you
know only the truck driver.
• One of your steadiest beer brands is called Lover's Beer.
• To make sure you always have enough Lover's Beer, you try to
keep twelve cases in the store at any time.
Contd…

11. 11
• Week 2:
• Without warning, one week in Nov sales of the beer double.
They jump from four cases to eight. To bring your inventory
back to normal you order 8 cases this week.
Contd…
1st week 2nd week
Inventory 4 8
0
1
2
3
4
5
6
7
8
9

12. 12
• Week 3:
• You sell eight cases of Lover's Beer the next week.
• You think for a moment about any advertisement, spring break
etc. But gets out of thoughts due to a customer.
• At the moment the deliveryman comes, you're still not thinking
much about Lover's Beer, but you look down at your sheet and
see that he's brought only four cases this time. (It's from the
order you placed four weeks ago.)
• You only have four cases left in stock, which means unless
there's a drop-back in sales you're going to sell out all your
Lover's Beer this week.
• Just to be on the safe side, you order twelve so you can rebuild
your inventory.
Contd…

13. 13
• Week 4: You find time on Tuesday & It turns out that a new
music video appeared a month or so back using "I take one last
sip of Lover's Beer and run into the sun."
• You think of calling the wholesaler, but a delivery of potato
chips arrives and the subject of Lover's Beer slips your mind.
• In next delivery of beer comes in, only five cases of beer arrive.
• In stock you are left with one case only so you order 16 more.
Contd…
1st week 2nd week 3rd week
Inventory 4 8 16
0
5
10
15
20

14. 14
• Week 5:
• Your one case sells out Monday morning. Fortunately, you receive a
shipment for seven more cases of Lover's (apparently your
wholesaler is starting to respond to your higher orders).
• All are sold by the end of the week, leaving Inventory zero.
• You order another sixteen.
• Week 6:
• Customers are looking for Lover's beer.
• Some put their names on a list to be called when the beer comes
in.
• The trucker delivers only 6 cases and all are sold by the weekend.
The retailer orders another 16 cases.
Contd…

15. 15
• Week 7: The delivery truck brings only five cases this week.
• Lover's Beer is sold out within two days.
• This week, amazingly, five customers give you their names.
• You order another sixteen and silently pray for delivery.
• Week 8: Now you are eagerly waiting for truck expecting 16 cases.
• But he brings only five. Upon question by you he replies "I guess
they're backlogged.
• Seeing the situation you order 24 cases.
• Your state of Mind.
• What is that wholesaler doing to me, you wonder?
• Doesn't he know what a ravenous market we have down
here?
Contd…

16. 16
1st week
2nd
week
3rd
week
4th
week
5th
week
6th
week
7th
week
8th
week
delivery 4 4 4 5 7 5 5 5
order 4 8 16 16 16 16 16 24
0
5
10
15
20
25
30

17. 17
• Distributes many brands of beer but only distributor of
Lover's beer.
• Orders 4 truckloads per week & receives after 4 week lag.
• As policy keeps 12 truckloads in inventory at all times.
Contd…
Order per week Inventory per week
Beer truck loads 4 12
0
2
4
6
8
10
12
14

18. 18
• Week 6:
• By week 6 the wholesaler is out of Lover's beer and zero.
• He responds by ordering 30 truckloads from the brewery.
• A few of the larger chain stores called you asking for Lover’s beer.
• Week 8:
• By the 8th week most stores are ordering 3 or 4 times more
Lovers' beer than their regular amounts.
• When you had called the brewery to ask if there was any way to
speed up their deliveries they answered..
“we had only just stepped up production two weeks
before. We have just learnt about the increase in
demand”.
Contd…

19. 19
• Week 9:
• You're getting orders for 20 truckloads' worth of Lover's Beer per
week, and you still don't have it.
• Last week 29 truck loads orders are still backlogged.
• But you're confident that, this week, the 20 truck-loads you
ordered a month ago will finally arrive.
• But only 6 truckloads arrive.
• You call some of your larger chains and assure them that the beer
they ordered will be coming shortly.
• Week 10:
• You were expecting 20 truckloads this week.
• Only 8 truckloads are delivered.
• To meet up new and old backlogged demand you order 40
truckloads this week. Contd…

20. 20
• Week 11:
• Only 12 truckloads are received and there are 77 truckloads in
backlog, so the wholesaler orders 40 more truckloads.
Contd…
Order per week
Inventory this
week
Orders Backlogged
Beer truck loads 40 12 77
0
10
20
30
40
50
60
70
80
90

21. 21
• Week 12:
• The wholesaler orders 60 more truckloads of Lover's beer.
• It appears that the beer is becoming more popular every week.
• Week 13:
• There is still a huge backlog.
• Weeks 14-15:
• Finally larger shipments started pouring from the brewery.
• But orders from retailers begin to drop off.
• Week 16:
• Receives 55 truckloads.
• Zero orders from retailers.
• You order zero to brewery.
Contd…

22. 22
• Week 17: Now you receive backlogged orders of 60 truck loads,
no orders from retailer so you also order zero. The brewery keeps
sending beer.
Order this
week
Inventory this
week
Orders
Backlogged
Retaler orders
Beer truck loads 0.001 109 60 0.001
0
20
40
60
80
100
120

23. 23
• 4 months ago you were hired as manager marketing &
distribution.
• Yours is a small brewery, known for its quality but not marketing.
• In 2nd month new orders had begun to rise dramatically.
• By 3rd month orders increased from 4 to 40 truck loads.
• At breweries they take 2 weeks to decide brewing bottles.
• By week 10 you were a hero within your company.
• Plant manager had given everyone incentives to work double
time.
• Finally, you had caught up with the backlog in Week 16.
• After week 18 distributors ordered Zero.
Contd…

24. 24
• Week 19:
• The brewery has 100 gross of Lover's beer in stock.
• No new orders.
• But the plant keep on brewing what you had ordered.
• After explaining to boss the brewery stops producing Lover's beer.
• Weeks 20-23.
• No orders in these 4 weeks.
Contd…

25. 25Contd…-100
-50
0
50
100
150
200
250
Retailer inventory Wholesaler inventory Brewery inventory

26. 26
• At this point all the players blame each other for the excess
inventory.
• Conversations with wholesale and retailer reveal an inventory of 93
cases at the retailer and 220 truckloads at the wholesaler. The
marketing manager figures it will take the wholesaler a year to sell
the Lover's beer he has in stock. The retailers must be the problem.
• The retailer explains that demand increased from 4 cases per week
to 8 cases. The wholesaler and marketing manager think demand
mushroomed after that, and then fell off, but the retailer explains
that didn't happen.
• Demand stayed at 8 cases per week. Since he didn't get the beer he
ordered, he kept ordering more in an attempt to keep up with the
demand.
• The marketing manager plans his resignation.

27. 27

29. • What can your team and organization learn
from the exercise?
• Take some time to discuss with your team.
• Capture 3 to 4 lessons learned.

30. • There are no such culprits
• There is no one to blame
• Each of the three players in our story had the best
possible intentions: to serve his customers well, to
keep the product moving smoothly through the
system, and to avoid penalties
• Each participant made well-motivated, clearly
defensible judgments based on reasonable
guesses about what might happen
• There were no villains, but there was a crisis
nonetheless built into the structure of the system

31. How could such
a small perturbation in
one part of the system create
such havoc in the
rest of the system?

32.  ONE.
• The structure of any system governs
human behavior within the system.
• Changing people without changing the
system structure may not lead to desired
or permanent improvement.

33.  TWO.
• To effectively manage a system a “systems”
perspective should be adopted:
Realize that . . .
 Often, . . . a lag between what one
observes and what caused that
observation.
 Ripple effects within and across
organizational boundaries.
 Volatility directly proportional to
distance from market.

34.  THREE.
• The amplification in the supply chain is
called the “Bullwhip effect.”
• Suggested Solutions?
 Improved communication
 Reduced lead-time
• What does research and experience tell
us?

35.  FOUR.
Characteristics of top Supply Chain performers?
• Agile: able make quick adjustments in output
in response to the market.
• Adaptable: able to adapt supply chain
structure and facilities to changing needs.
• Alignment: Partners in the supply chain are
aligned in their objectives & incentive
structures.

36. • How do you feel now? How did you feel while
playing the game?
• Did you feel yourself controlled by forces in the
system from time to time?
• Did you find yourself “blaming” the person next
to you for your problems?
• What is the total cost of your team? Why the
large discrepancy between teams? What caused
large inventories and backlogs?
• Did you notice any patterns on your graphs?

37. • There is growing demand that can't be met.
• Orders build throughout the system.
• Inventories are depleted.
• Backlogs grow.
• Then the beer arrives en masse while incoming
orders suddenly decline.
Moreover "beer game"-type structures
create similar crises in real-life
production distribution systems.

38. In 1985, personal computer memory
chips were cheap and readily
available; sales went down by 18
percent and American producers
suffered 25 to 60 percent losses.
But in late 1986 a sudden shortage
developed and was then
exacerbated by panic and over
ordering. The result was a 100 to

39. A similar surge and collapse in demand
occurred in the semiconductor industry
in 1973 to 1975. After a huge order
buildup and increases in delivery delays
throughout the industry, demand
collapsed and you could have virtually
any product you wanted off any
supplier's shelf overnight. Within a few
years, Siemens, Signe tics, Northern
Telecom, Honeywell, and Schlumberger

40. • A real retailer can order from three or four wholesalers at
once, wait for the first group of deliveries to arrive, and
cancel the other orders. Real producers often run up
against production capacity limits not present in the
game, thereby exacerbating panic throughout the
distribution system. In turn, producers invest in
additional capacity because they believe that current
demand levels will continue into the future, then find
themselves strapped with excess capacity once demand
collapses.
• The dynamics of production-distribution systems such as
the beer game illustrate the first principle of systems
thinking:

41.  That makes total intellectual activity of Organization:
• Idea generation
• Learning & Skill development
• Exchange of information
• Development of strategic Direction
• Project Planning
• Communication
• Market Research
• Problem solving
• Process improvement
• Quantum leaps

42. 42

45. “A truly profound and different
insight is the way you begin to
see that the system causes its
own behavior”
(Donella
Meadows)

46. During the beer game
“after a one-time increase, consumer
demand, for the rest of the simulation, was
perfectly flat! “
Of course, none of the players other than the
retailer knew consumer demand, and even the
retailers saw demand only week by week, with no
clue about what would come next?

47. “What is/was the cause
of that activity, or from what
laws did it arise? asked the
human intellect”

48. Once they see that they can no longer blame one
another, or the customer, the players have one last
recourse—blame the system:
"It's an unmanageable system,"
and some say:
"The problem is that we couldn't
communicate with each other”

49. • But, the human intellect not only refuses to believe
in explanations, but flatly declares that the method
of explanation is not a correct one . . .
• Because the logic behind is:
“whenever there have been wars, there have been
great military leaders; whenever there have been
revolutions in states, there have been great men,"
says history. "Whenever there have been great
military leaders there have, indeed, been wars,"
replies the human reason; "but that does not prove
that the generals were the cause of the wars”

50. • In the beer game, the structure that caused wild swings
in orders and inventories involved:
• The multiple-stage supply chain
• The delays intervening between different stages
• Limited information available at each stage in the
system
• The goals, costs, perceptions
• Fears that influenced individuals' orders for beer.
Contd…

51. • But it is very important to understand that when we use the
term "systemic structure" we do not just mean structure
outside the individual. The nature of structure in human
systems is subtle because we are part of the structure. “This
means that we often have the power to alter structures within
which we are operating”.
• However, more often than not, we do not perceive that power.
In fact, we usually don't see the structures at play much at all.
• Rather, “we just find ourselves feeling compelled to act in
certain ways”.
Contd…
Contd…

52. • Structure: " as used, does not mean the "logical structure" of
a carefully developed argument or the reporting "structure"
as shown by an organization chart. Rather,
• “Systemic Structure" is concerned with the key
interrelationships that influence behavior over time. These
are not interrelationships between people, but among key
variables, such as population, natural resources, and food
production in a developing country; or engineers' product
ideas and technical and managerial knowhow in a company..
Contd…
Contd…

53. • The beer game provides a laboratory for exploring how
structure influences behavior. Each player—retailer,
wholesaler, and brewery —made only one decision per
week: how much beer to order.
• The result is a characteristic pattern of buildup and
decline in orders at each position, amplified in intensity
as you move "up-stream," from retailers to breweries.
• The other characteristic pattern of behavior in the game
can be seen in the inventories and backlogs.
• These characteristic patterns of overshoot and collapse
in ordering and inventory backlog cycles occur despite
stable consumer demand..
Contd…

54. 54

57. • Incoming orders come from "outside"—most
wholesalers and brewers, for instance, shocked
by the implacable mystery of those latter-half
orders, “which should be high numbers”
• Members responded to new orders by shipping
out beer, but had little sense of how those
shipments will influence the next round of
orders
• Only had a fuzzy concept of what happens to the
orders you place

58. • Consider outcomes, if each player did nothing to correct
his inventory or backlog- Backlogs developed
• Which precluded placing the orders in excess of orders
received needed to correct backlogs
• Is the "no strategy" strategy successful?
• In real life, such a situation would, undoubtedly, invite
competitors to enter a market and provide better
delivery service
• Only producers/distributors with monopolies on markets
would be likely to stick to such a strategy
• ‘Strategy’ - eliminates the buildup and collapse in
ordering, and the associated wild swings in inventories

59. 59
My
Customers
Orders BREWERY
STOCK
YARD
My Orders
Placed
Vicious
Cycle
My Inventory

60. • If players, respond (as many do) by placing still more
orders, they create a "vicious cycle" that increases
problems throughout the system
• It can be set off by any player who panics, anywhere
within the system—be he retailer, or wholesaler
• Even factories can create the same effect, simply by
failing to produce enough beer
• Eventually, as one vicious circle influences other
vicious circles, the resulting panic spreads up and
down the entire production distribution system
• Once the panic builds momentum, players generate
orders that are twenty to fifty times what is actually
needed to correct real inventory imbalances

61. 61
My
Customers
Orders BREWERY
STOCK
YARD
My Orders
Placed
Vicious
Cycle
My Inventory

62. • Redefine the Scopes of Influence (your success is
not just influenced by your orders; it is influenced
by the actions of everyone else in the system
• Under standing of “Vicious cycle”
• Manage Your Position
• Understanding Structural explanations: are so
important; is that only they address the underlying
causes of behavior at a level that patterns of
behavior can be changed

63. • Shift of view: means getting to the heart of
fundamental mismatches - "mental model" of it
and knowing the actual reality of how the game
works
• Pay close attention to your own inventory, costs,
backlog, orders, and shipments
• “Managing their position“ - how their position
interacts with the larger system

64. • "Take two aspirin and wait" rule
• Don't panic
How well can players do if follow these guidelines?
• Totally eliminate all overshoots in orders and all
inventory/backlog cycles – Not possible
• Hold instabilities to a very modest level - Possible
• Substantial improvements – Possible
It takes discipline to contain the overwhelming
urge to order more when backlogs are building and
your customers are screaming

66. • It is no accident that most organizations learn
poorly. The way systems are designed and
managed, the way people's jobs are defined, and
most importantly, the way we have all been taught
to think and interact (not only in organizations but
more broadly) create fundamental learning
disabilities
• These disabilities operate despite the best efforts
of bright, committed people. Often the harder they
try to solve problems, the worse are the results

67. • "I am my position“
• "The enemy is out there“
• The illusion of taking charge
• The fixation on events
• The parable of the boiled frog
• The delusion of learning from experience
• The myth of the management team

68. • Because they "become their position," people do
not see how their actions affect the other positions
• Consequently, when problems arise, they quickly
blame each other—"the enemy“ becomes the
players at the other positions, or even the
customers
• When they get "proactive" and place more orders,
they make matters worse
• Because their over ordering builds up gradually,
they don't realize the direness of their situation
until it's too late

69. • By and large, they don't learn from their
experience because the most important
consequences of their actions occur elsewhere in
the system, eventually coming back to create the
very problems they blame on others
• The "teams" running the different positions
(usually there are two or three individuals at each
position) become consumed with blaming the
other players for their problems, precluding any
opportunity to learn from each others' experience

70. • Been with us for a long time
• In story after story, leaders could not see the
consequences of their own policies, even when
they were warned in advance that their own
survival was at stake
• We live in no less perilous times today, and the
same learning disabilities persist, along with their
consequences
• The five disciplines of the learning organization,
act as antidotes to these learning disabilities:

71. • Personal Mastery
• Mental Models
• Building Shared Vision
• Team Learning
• The fifth discipline: “Systems thinking” is the fifth
discipline. It is the discipline that integrates the
disciplines, fusing them into a coherent body of
theory and practice. It keeps them from being
separate gimmicks or the latest organization change
fads. Without a systemic orientation, there is no
motivation to look at how the disciplines interrelate.
By enhancing each of the other disciplines, it
continually reminds us that the whole can exceed the
sum of its parts

72. Comes from seeing:
• How learning disabilities are related to “alternative ways of
thinking” in complex situations
• When people realize that their problems, and their hopes for
improvement, are inextricably tied to “how they think”
• They also discover a bit of timeless wisdom delivered years ago
by Walt Kelly: "We have met the enemy and he is us.“
• Requires a conceptual framework of "structural" or systemic
thinking, the ability to discover structural causes of behavior
• Enthusiasm for "creating future" is not enough
“Generative learning” cannot be sustained in an org where
event thinking predominates. It requires a conceptual
framework of "structural" or “Systemic Thinking”

73. Systemic Structure (generative)
Patterns of Behavior (responsive)
Events (reactive)

74. • Event explanations: "who did what to whom“-
“reactive stance” - most common in contemporary
culture, and that is exactly why reactive
management prevails
• Pattern of behavior: to break the grip of short-
term reactiveness; “suggest how, over a longer
term, we can respond to shifting trends”
• “Structural" explanation: least common and most
powerful; focuses on answering the question,
"What causes the patterns of behavior?"

75. • How orders placed
• Shipment movements
• Inventory interact to generate the observed
patterns of instability and amplification
• Taking into account the effects of built-in delays in
filling new orders, and the vicious cycle that arises
when rising delivery delays lead to more orders
placed

76. • Addresses the underlying causes of behavior at a
level that patterns of behavior can be changed
• Structure produces behavior, and changing
underlying structures can produce different
patterns of behavior
• Structural explanations are inherently generative
• Structure in human systems includes the
"operating policies" of the decision makers in the
system, redesigning our own decision making
redesigns the system structure

77. 77

78. 78