One of my favorite exercises in business school was learning about the Beer game. Contrary to what you are thinking, this is a business scenario invented at MIT. Too much or too little inventory can be a major disaster for the game participants. We have seen the Beer game transpire in real life with toilet paper (TP) and the impact that it is having on supply chain dynamics. The key lesson is to avoid a 2nd cash flow disaster by avoiding an inventory hangover.
The Toilet Paper Game
How to avoid an inventory hangover
“Leaders win through logistics. Vision, sure. Strategy, yes. But when you go to war, you need to have toilet paper and bullets at the right place at the right time. In other words, you must win through superior logistics.”
Tom Peters
The Beer Game Revisited
One of my favorite exercises in business school was learning about the Beer game. Contrary to what you are thinking, this is a business scenario invented by Jay Wright Forrester at the MIT Sloan School of Business Management in 1960. The game participants act in a four stage supply chain of how beer production navigates temporary changes in demand to manage the bullwhip effect on inventory. Too much or too little inventory can be a major disaster for the game participants. We have seen the Beer game transpire in real life with toilet paper (TP) and the impact that it is having on the supply chain. The key lesson is to avoid a 2nd cash flow disaster by avoiding an inventory hangover.
The TP Crisis
In the early days of the 2020 pandemic, the first major supermarket item to leave the shelves was toilet paper. Apparently, nothing is more scary than a bathroom without toilet paper (TP). However, the hoarding did not stop there. Then it was cleaning supplies. Then rice. Then meat. The list will go on…
For TP specifically, there was an actual increase in demand with the stay-at-home policies. Georgia-Pacific estimates that 40% more toilet paper is being used for residential purposes in the 75% of homes that were working from home or closed from school. This natural concern for being locked in our homes for an uncertain amount of time created increased purchases. Expected increases then turned to panic buying. According to Fortune magazine, toilet paper sales increased by 734% during the week of March 12th compared to the previous year. As the TP shelves were emptied, the next step turned to hoarding. Grab another 12 rolls because you never know when the next TP will arrive.
Then, supermarkets started to create limits to purchase because manufacturers are working to keep up. The sense of scarcity creates additional panic purchases. Who knew that Charmin would ever become this popular? I recently heard an add from the Charmin CEO on Pandora about how they were working around the clock to get toilet paper supplies back to the new demand levels.
Excess Inventory is Bad for Cash Flow
Just like too much beer can create hangovers, too much inventory creates cash flow problems. As the supply chain works overtime to replenish the shelves, people are starting to head back to their work sites. TP demand will begin to drop for two reasons. #1) They are transferring TP demand to the workplace (non-Charmin) and #2) They will stop buying because you only need so many rolls of TP. In the not too distant future, the equilibrium will shift but the manufacturers will not be able to react fast enough. There will be massive amounts of extra TP in warehouses, supermarkets and homes. Charmin will be selling much less in the near future. The discount deals on TP will be great.
The problem is that excess inventory is non-productive cash. Proctor and Gamble can handle this cash problem. However, many small to medium size businesses that pivot their activity to for a temporary increase in demand will find themselves with the equivalent of too much TP, inventory. The headline picture of this toilet paper supply is from an unnamed rural Costco store one month ago. In certain areas of the country, the excess supply has already occurred.
Increase Variable Labor Hours not Permanent Fixed Costs
As the nation begins to open back up, state by state, county by county, city by city…there will be a pent-up demand for a number of products and services. The easy example, hairdressers. As my hair is as long as it has been since 1983, I do not think I can even go back to my barber. Others will have to fix bad home haircuts. Gray hair is back – but not for long. For the first 30 days or longer, hairdressers will be able to work around the clock to catch-up and return hair back to normal. This will be appreciated because they have been out of work. But the next cycle will feel like it came faster than before. They will be tired.
Do not get punch drunk and get fooled by the temporary increase in demand. The mistake for the hairdresser or the brewery that shifted to selling hand sanitizer or the manufacturer that shifted to face masks – runs the risk that the increase in demand is most likely temporary. Some will want to hire new people or purchase new capacity on a permanent basis. This will result in the same mistake. Too much cash in supply or permanent staff that is not needed for the long run. Expanding supply for temporary demand may cause another shortage of cash.
The best way to handle the temporary changes is increased labor hours to get through the pent up demand. This is what supermarkets are doing. They have more temporary labor, longer hours and they are paying them higher wages and bonuses to get through the crisis. As equilibrium returns, the higher wages will go away and the temporary labor will move back to their traditional jobs.
Please don’t squeeze the TP
As we learn from the Beer game and present TP crisis, recognize short-term demand fluctuations. Avoid adding excess Inventory and Fixed Costs to squeeze your cash and avoid a 2nd hangover for your business.
If you have any additional suggestions, questions, recommendations and/or best practices, please send me an email to consider them on a future blog.
Here is my Calendar Link for a 20 Minute Strategy Chat.
Links to Top Articles / Ideas / Websites
State by State Analysis to Reopen
HBR Guide to the Break-Even Analysis
100 Examples of the Pareto Principle
The Beer Game Video Explanation
Professional Referral
Jerry Vieira, Certified Management Consultant, runs the QMP Group. He helps clients discover and mine hidden opportunities for revenue breakthroughs, earnings growth and increased corporate value. He is also a great mentor for consultants and he has helped guide me with the start of 40 Strategy. Jerry’s website is https://theqmpgroup.com/.
Current Audio Book Recommendation
Crashes and Crises: Lessons from a History of Financial Disasters by Professor Connel Fullenkamp, Duke University.
Past Book Recommendations
The Hard Thing About Hard Things, Ben Horowitz
What Your Do Is Who You Are, Ben Horowitz
Born to Win, Find Your Success, Zig Ziglar and Tom Ziglar
See You at the Top, 25th Anniversary, Zig Ziglar
Extreme Ownership, Jocko Willink and Leif Babin
Predictably Irrational, Dan Ariely
Across the Board, Mark A. Pfister
Factfulness by Hans Rosling, with Ola Rosling and Anna Rosling
The 80/20 Principle by Richard Koch
Profit First by Mike Michalowicz
Upcoming Webinars & Workshops & Free Tools
Pivoting Your Organization’s Strategy During COVID-19, Thursday, May 21st, 9AM PT, with the American Osteopathic Foundation. Here is the link to register.
Free 40 Point Checklist to Conduct Your Zoom Webinar
Free Break-Even Analysis Worksheet
Email me for a copy.
Past Webinar and Workshop Links
May 6, 2020 – Workshop – How to Develop a 10-Week Plan to Return Your Team back to Work
April 22, 2020, we co-host Crisis Strategy: Successfully Pivoting Your Personal Strategy in Times of Change, with Mark A Pfister, Author of Across the Board. Here is the recording.
April 23, 2020, Vacilitation: Managing Your Team Strategically in a Virtual World, with Technology Association of Oregon
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Volume 2020:9
(quote source – everythingsupplychain.com)
