The Beer Game -or- Why Apple Can’t Build iPads in the US

When President Obama asked Steve Jobs what it would take to make iPhones in the United States, the late Apple co-founder supposedly quipped: “Those jobs aren’t coming back."

When I read this, it reminded me of something my dad presented to us as kids a long time ago- The Beer Game.

My dad was really into management theory and would often use my friends and I as experimental guinea pigs. I distinctly remember sitting down with three of my friends before a large sheet of butcher paper.

The Beer Game

On the sheet, my dad had drawn four large boxes labelled like so:

The rules were simple:

This is the Beer Game. Beer is ordered by the customer at the retailer (he passed a slip of paper with a number on it to my friend sitting in front of the retailer slot). The retailer orders from the wholesaler, by passing him a paper slip with an order number on it. The wholesaler orders from the distributor and the distributor orders from the producer.

The goal of the game is to maximize profit. You make money for orders fulfilled. You lose money for keeping inventory and for unfulfilled backorders. Once you get orders, there is a four week delay as the paperwork is processed, the beer is picked, it goes onto a pallet, then goes onto a truck and finally gets delivered.

Oh and one more rule: no communicating between parties - your only communication was through order slips.

We used pennies for inventory and wrote on the sheet when we needed to track inventory cost and backorders cost.

It all started out well, my dad fed an order slip to the retailer who passed his orders to the wholesaler (me), who passed his orders to the distributor and right on down to the producer.

Things Fall Apart

However, right around week 4 things started to go horribly wrong. Suddenly, I was running significant backorders because people were drinking more and more beer. The retailer sent an order that put me into a backlog as demand for beer skyrocketed. I decided the smart thing to do would be to get ahead of increasing demand and put a big order into my distributor.

Things steadily got worse. As week 6 rolled around, demand had exploded! Everyone was drinking tons of beer and I was losing money hand over fist because of backordered beer. My distributor was letting me down and despite the rule against talking, I looked over to my friend and said "Come on man!”. He looked back at me also exasperated and said “It’s not my fault!”

Finally around week 14, I get ahead of the curve and drew down that massive backlog. I had raised my downstream orders to account for future increase in demand and then my retailer friend handed me the next slip of orders.

0. Zero orders.

What? Week after week he sends me 0 orders. Suddenly, I’m building the mother of all inventories and have to put in 0 orders to my distributor. Now it’s his turn to look at me and say “What the hell?” I can only shrug in return.

At the end of the game, my dad asks the me (wholesaler), the distributor and the producer what we thought happened. We agree that it must have looked like this.

He then tells the retailer to reveal what really happened.

WTF.

In the end, we had lost hundreds of dollars in backorders and excess inventory and were cursing out our upstream or downstream vendors for being idiots. We thought demand had spiked wildly and then dropped off but it was pretty steady. Our individual decisions in the supply chain had lead to systemic failure.

Why Apple Is In China

The lessons of the Beer Game are pretty evident. Delay in the supply chain causes amplified downstream problems. The problem wasn’t that we were kids running beer supply, the problem was the structure of the chain itself. Small changes at the front end lead to massive mistakes down the line.

In the NY Times’ excellent series on Apple’s iEconomy, Charles Duhigg and Keith Bradsher write an article title “How the U.S. Lost out iPhone Work”.

“The entire supply chain is in China now,” said another former high-ranking Apple executive. “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.”

Imagine if Apple built a Foxconn-style final assembly plant in California. They could literally be screwed waiting for new screws to come via cargo ship across the ocean. Beer Game all over again.

The Bullwhip Effect

Because of the bullwhip effect illustrated by the game, Apple needs to have factories in China because the supply chain is there. We learned in the Beer Game that minute changes have massive ripple effects along the supply chain.

The U.S. has lost that industrial base and it’s extremely difficult to get it back. It’s not about unions, jobs Americans don’t want - it’s about delay.

That’s why, with apologies to my libertarian friends (and Mitt Romney), Obama was right in bailing out the auto industry when GM and Chrysler were going bankrupt. Because it wasn’t just GM and Chrysler that were going to fail, it was an entire ripple-effect of suppliers, tool manufacturers, raw material suppliers, trucking companies and dealers that were going to go away.

Dash of Hope

It’s not hopeless of course. But once lost, an industrial chain is incredibly hard to reclaim. @anildash, once tweeted “Apple could invest part of its $100B in building U.S. factories.”

It might cost a lot more than that, but it can be done.

comments, flames, thought? - @marksweep