00:00:07 Introduction to the beer game and its relevance to supply chains.
00:00:35 Jes Bengtsson background in the brewing industry and supply chain planning.
00:02:21 Explanation of the beer supply chain and the concept of double whip.
00:04:20 Challenges in beer supply chains due to low value density and the impact of distribution.
00:06:51 The role of promotions in the beer industry and their effect on supply chain fluctuations.
00:09:55 Shaping demand in the beer market and contrasting traditional advertising with modern supply chain reality.
00:10:36 Changes in the beer industry over time, including technological advances and new product categories.
00:12:38 The impact of increased product variety and packaging offerings on the beer industry.
00:14:54 Strategies for managing complexity in the assortment and pricing, including analytics and understanding consumer preferences.
00:17:45 Transitioning from the beer industry to consulting and the value of having deep industry experience.
00:19:31 Supply chain similarities and differences across industries.
00:21:02 McKinsey’s role in helping companies with supply chain management.
00:23:00 Importance of supply chain in various industries.
00:24:42 Relationship between company strategy and supply chain.
00:27:10 Conclusion and looking forward.

Summary

In an interview with Joannes Vermorel, founder of Lokad, supply chain leader Jes Bengtsson discusses the “beer game” and its relevance in today’s supply chain management. Bengtsson highlights the unique challenges of the beer supply chain, such as low value density, promotions, and increased product variety. The conversation also touches on the importance of clear success metrics, pricing structures, and the role of consulting firms like McKinsey in helping businesses improve their supply chain operations. Bengtsson emphasizes the need for companies to adapt to disruptions and uncertainties by developing new strategies and enhancing their supply chain skill sets.

Extended Summary

In this interview, Joannes Vermorel, the founder of Lokad, a software company specializing in supply chain optimization, speaks with Jes Bengtsson, a seasoned supply chain leader with an INSEAD MBA. Bengtsson has over a decade of experience working in the beer industry at scale in Europe with leading companies such as SABMiller, AB InBev, and Asahi Breweries. Currently, he is an expert with McKinsey and Company.

They discuss the “beer game,” a simulation exercise introduced fifty years ago to familiarize students with the challenges and complexities inherent in supply chains. The game highlights how multiple parties in a supply chain, lacking perfect information, can experience distortions in their perception of customer demand.

Vermorel starts the discussion by asking Bengtsson about his experience with the beer game and its relevance in today’s supply chain management. Bengtsson shares that the game is still a useful learning tool, as it demonstrates the consequences of poor communication and decision-making within a supply chain. He believes the game’s principles remain applicable, especially in the era of globalization and increased complexity in supply chains. However, Bengtsson also acknowledges that while the game provides valuable insights, it may not cover all aspects of modern supply chain management.

Bengtsson provides some background on his career, highlighting his experience working in various functions across supply chains, with a focus on planning. He also discusses the origin of the beer game and why it’s called the “beer game” instead of, for example, the “tomato game.” He explains that this naming choice is due to American legislation, which prohibits brewers from trading directly with stores and requires a distributor in the middle. This setup creates a supply chain with several layers, which is well-suited for the beer game.

The conversation shifts to the challenges faced in the beer industry’s supply chain. The primary signal that each level of the supply chain receives is the orders from its customers. In the beer industry, the process begins with the person drinking the beer purchasing it at a store. The store then reaches out to a distributor, who in turn contacts the brewery. This chain of events occurs with delays and different ordering rules, which can lead to inventory effects and an inability to respond quickly to changes in demand. By the time the brewery receives the signal that a beer

He discussed the complexities and challenges of the beer supply chain with Jes Bengtsson, a seasoned supply chain leader with an INSEAD MBA.

Bengtsson explains that the beer supply chain is unique due to its low value density and the necessity of being close to demand to maintain margins. The low value density means that adding inventory can result in the need for more warehouse space. Distribution must be carefully considered to avoid wasting margins on transportation costs. Beer supply chains must integrate production and distribution planning to optimize the overall cost.

Promotions heavily impact the beer supply chain, as they can cause fluctuations in sales. This can create challenges in maintaining proper inventory levels and warehouse capacities. Promotions are used to drive foot traffic in stores, but their mechanics and resulting demand response are not always obvious. Companies must analyze past promotions to predict the effects of future campaigns and adjust their supply chains accordingly.

Bengtsson notes that while the core principles of beer brewing have remained largely unchanged over the last century, there have been significant changes in product offerings and packaging. The variety of flavors and packaging available now allows companies to target specific niches and consumption occasions. This increased complexity, however, also results in more SKU management and potential cannibalization of sales within a company’s own product lineup.

The interviewees discuss the need for powerful analytics and strategies to cope with this increased complexity. Bengtsson suggests that companies must continuously adjust their assortment offerings and monitor the effects of pricing and cannibalization. The increasing complexity of the beer supply chain requires companies to utilize sophisticated planning and distribution techniques to maintain efficiency and profitability.

They discuss various aspects of supply chain management, the role of McKinsey in helping companies, and the changing landscape of supply chain challenges.

Bengtsson begins by explaining the importance of having clear success metrics in supply chain management. He talks about the need for understanding the substitutability of products and how that can help maintain the availability of goods in stores. The discussion then moves on to pricing structures, with Bengtsson mentioning that pricing tends to be driven by annual price lists and short-term promotions.

When asked about his experience transitioning from the brewing industry to McKinsey, Bengtsson highlights the vast array of experts at the consulting firm. He explains that his specific expertise in supply chain and distribution for breweries can be applied to other industries as well, since supply chains share many similarities across industries.

Bengtsson then discusses the value McKinsey provides to clients, emphasizing the combination of senior management trust, strategic approaches, and a pool of fresh, energetic graduates. He also notes that supply chain management has become more of a concern for CEOs, leading to increased demand for McKinsey’s help in improving operations.

The interview moves on to the topic of supply chain-driven companies, such as breweries and e-commerce businesses, which must consider their distribution channels from the start. Vermorel points out that many companies have historically treated supply chain management as an afterthought, especially those with high price-density products that can be shipped easily. However, this approach has proven problematic when overseas suppliers face difficulties or have different priorities.

Bengtsson agrees that some industries, like fashion, are now recognizing the need for a more holistic approach to supply chain management. He also observes that many companies thought they had a good grasp of their supply chain operations, but recent disruptions have shown that their systems were only optimized for stable environments. This realization has led to a growing interest in improving supply chain skill sets and adapting to new challenges.

In conclusion, the interview provides valuable insights into supply chain management, the role of consulting firms like McKinsey, and the evolving landscape of supply chain challenges. As businesses face more disruptions and uncertainties, supply chain professionals must adapt and develop new strategies to keep operations running smoothly.

Full Transcript

Joannes Vermorel: The beer game was introduced half a century ago to familiarize students with the sort of oddities that are found in supply chain, and more specifically, with the beer game. People can actually experience what it is to run a supply chain when there are multiple parties involved who do not have access to perfect information and the sort of distortion that you get, especially in the perception of the actual customer demand. So today, I am pleased to be joined by Jes Bengtsson, who has actually been playing the real beer game in the real world for over a decade at scale in Europe with some leading beer companies. Jes, thank you very much for being here. Can you tell us a little more about your background and what you’re doing presently?

Jes Bengtsson: Thanks, Joannes. Yes, I definitely can. The beer aspect of it, I worked for Brewers SABMiller, which was the second largest brewer in the world at the time, migrating through AB InBev through a takeover and then ultimately being sold off in the European Division and joined as part of that Asahi breweries, which bought the European function. In that, I’ve had nearly all functions across the supply chain but most of the time spent within planning. Currently, I am an expert with McKinsey and Company.

Joannes Vermorel: For the audience, I believe that the problem illustrated by the beer game, the fictitious thing, not the real-world company, is double whip. I believe that this sort of effect is actually fairly real, and in particular, there exists some kind of asymmetry of information between what is happening with people consuming beers and people who have actually to fulfill the requirements of producing the beers, who are one or several steps removed from the actual end consumers. Can you maybe shed some light on this specific industry?

Jes Bengtsson: A curious fact about the origin of the beer game and why it’s called the beer game and not the tomato game is that, under American legislation, brewers are not allowed to trade directly with stores; there must be a distributor in the middle. Hence, it was exactly the setup that you’re looking for that says you’re passing through several layers of the supply chain in order to get from your customer to the end. So it’s actually not because it’s inherently anything specific about beer; it’s a very generic thing that you see in all supply chains. It fits well in an American supply chain because then you get the tiers of it. But it’s absolutely true that the effect exists in the supply chain. You have consumers and then you have several layers where the main signal that is present at every level is what orders do I receive from my customer or from my customers. The person drinking the beer will go and buy it at the shop; the shop will then reach out to their distributor; the distributor will reach out to the brewery, and all of that happens with delays and with their own ordering rules. So you have both inventory effects and ordering rules and roles, and you’ve got the inability to respond quickly. All of that drives it, so by the time a message arrives at the brewery that a beer has just been consumed, it can end up being quite distorted along the way.

Joannes Vermorel: This type of supply chain is actually quite challenging because beer is relatively affordable, so it is not sold with very high margins. It is also fairly heavy, being a liquid. All the steps, transportation, and so on, weigh a lot in this sort of supply chain. Could you tell us a little bit more about the main specificities of the beer supply chain and what has the most economic impact on making a good beer supply chain versus a

Joannes Vermorel: Does that fit so that I get the lowest total cost while meeting all the demand out of typically a network of multiple breweries or multiple plants that are able to do the same thing? And as an end consumer, I noticed that these, like many other similar products in supermarkets, are being promoted, which creates a challenge of dealing with the supply chain where I will observe fluctuations caused by those promotions. While, as you were describing, it is already a challenge to maintain the margins and have warehouses and capacities that are properly sized. How does it play out with promotions and the sort of artificial fluctuations that are introduced by the distributors themselves, or at least at the level of the distributors themselves?

Jes Bengtsson: Promotions can have a heavy impact on the rate of sale because you have a relatively constant demand, and what you mainly see is a shift between the products that are being sold. Depending on the country, there are a few categories in a supermarket that can drive footfall. In the Nordics and other dairy-loving countries, fresh milk is one of those categories. Diapers tend to always be in that category, and then beer, especially in beer-traditional countries. That’s a clear way for supermarkets to say, “I want the footfall in my store,” and they will happily be cost-leading on whatever category drives that. That clearly shifts both demand from store to store and from brand to brand. Of course, if you are not on top of what is about to happen, then you’ll be sold out very quickly if a major supermarket chain does something. They tend to be in understanding with the breweries when that has happened, and it tends to be planned depending on the market dynamics. Some are more mature than others; there are some cowboy Wildcat-type campaigns happening or discounting, and that can be problematic because then you’re essentially not getting the full value of it. When you start a campaign and halfway into the campaign, there’s no more beer because no one knew that it was coming.

But back to the planning challenge, one of the challenges is understanding what mechanics of a campaign will drive what type of demand response, and that’s not obvious. There are many parameters that determine whether you do a “three for two” that’ll drive very beer-consuming versus doing a reduction just on every bottle that will drive a different response. Sometimes there’s a threshold that says if you meet it, you’ll be driving a ton of sales. If you just lower a little bit, it’ll just be a marginal increase, so it’s not a linear curve. One of the challenges is building up your corporate history in terms of what are all the campaigns that have been run in the past. Now that I’m doing another one, what do I therefore expect to be the outcome of that one? Because that’s the nature of the game: you don’t control the demand; you’re trying to incentivize demand. You’re making a change and then you’re hoping for an effect of a certain magnitude that makes it worth your while to have not got the profit.

Joannes Vermorel: Shaping demand is a relatively sophisticated way to approach the market. From an end consumer, you see the conflicting image of beer as the traditional product where many brands advertise “since the Middle Ages” or “we are doing it that way,” and the reality, which is beer is now produced with a very modern supply chain that’s the way beer can actually be affordable. So, you’ve spent more than a decade in this industry. What sort of changes have you seen from your start to your present there, and maybe if you extend further, what sort of ongoing changes do you see happening in this industry?

Joannes Vermorel: I think one of the core observations is just how little has changed, not since the Middle Ages, but certainly for the last 100 years. If you buy a lager pilsner style beer today, the brewers of a decade or a century ago would absolutely understand every step that’s going on because they would be doing some of the very same steps. There are certain things that happened at the time simply just because of technological limitations that have been overcome. Like in the past, you couldn’t control temperature deep inside of hot liquid, and therefore you had to do some approximation that says, okay, if it’s boiling, I know it’s a hundred percent, so I’ll sort of take a third and then I’ll boil that and then I’ll put it back in, and then I can calculate the average of what’s the likely temperature. And you do that until you hit the desired temperature. So there are the technological advances that have happened there, but the core principles of the steps of brewing and how long it takes, etc., they actually haven’t changed much. The ingredients are the same. What has changed is there are newer categories that say you’ve got flavored beers, you’ve got alcohol pops, you’ve got all sorts of things that you can make out of the same technology base and sell to a wider variety of tastes. Beer is an acquired taste; it’s not everyone that likes the bitterness of the product. With that same base, you can essentially make a base alcohol and buy in flavors from a flavor house that targets exactly the flavor profile that you’re looking for and then target that particular niche.

Jes Bengtsson: I think one of the key things is that you can have a much wider array of liquids and, of course, the packaging offerings have changed substantially. Brewers are becoming much more adept at capturing specific situations in which a product is consumed and then matching a product both in terms of the brand and whether it’s a can or a bottle, for example. So, the combination of many more types of liquids, many more types of occasions to drink, and many more types of packaging is the main change. Then, on the supply chain itself, there’s more and more sophistication, and that’s what you typically get in a situation where you have sufficient stability that the underlying core hasn’t changed that much. Therefore, you’ve had clever people who’ve now had a couple of decades to think about what is the best use of all the available technology that’s available to us both in terms of making the product but in terms of planning the product and distributing it. It’s an interesting combination of rather old-fashioned methods and some rather new takes.

Joannes Vermorel: And what do you see as the complexity has increased, not on the backend but more on the frontend, especially the packaging and flavoring? The more SKUs you add, the more complexity you add. But as you were mentioning, you have the fact that the consumption of beer is overall relatively stable, and thus you end up with many more SKUs but ultimately a lot of substitution and cannibalization. The way I see it is that as you increase that, you can capture market shares, but also you complicate your own game by having to micro-tune all those cannibalizations and substitutions that are happening within your own assortment all the time. How would you analyze this area of the challenge of being able to dynamically adjust the assortment? Is it something that is done just in time or with more powerful analytics involved? What are the main strategies to cope with this extra complexity?

Joannes Vermorel: Can factors be considered in the demand? You are absolutely right that the dynamic exists, and to a large extent, you’re not just competing against the competition, but you’re also competing against yourself. The finer you slice your offering, the more interfaces you’ll have where it could be this one versus that one.

Jes Bengtsson: There are a couple of things in that. There’s almost a fighting in depth analogy from the military that says this is your first line of defense, and this is your second line of defense. To some extent, you also need to be clear on what’s the success metric that says, “Do I need to be in the store with everything now that I have a very finely tuned array?” So, if I have the right brand in a can, does it matter too much if I don’t have the right brand in the right can in the right size or in the right six-pack versus a 12-pack?

We would qualify that by asking how well you are performing at the very specific SKU, but equally so, what are the things that we believe are mostly substitutable in the minds of the consumer? Of course, the consumer has a preference, but within that preference, there’s not that much difference over to the next line of defense. Hence, if you’re in stock of the group that is relatively interchangeable, you would still be in stock to be able to meet the underlying demand.

On the pricing structure, the most dynamic things tend to happen on pricing. You have two tiers: you have annual price list issuance with a lot of analysis behind it, considering all the dynamics you’re talking about, such as cannibalization. Then, you have the shorter term, which tends to be almost exclusively promotion driven. And then, of course, there are learnings based on building up a catalog of how all of those promotions pan out. One of the key parameters there is how much more did I sell of the one I intended to sell and how did that impact the rest.

Joannes Vermorel: Now, looking at your journey, you’ve started in this industry, spent more than a decade, and then transitioned toward McKinsey or consulting firms. From my perspective, the McKinsey consultant is a brilliant student coming fresh out of college, which is a bit of a paradox because you end up having someone who may have tons of energy and is overall very smart but is completely inexperienced in helping companies. In your case, you come with a very strong industrial background and deep experience in one industry. How do you see your own contribution in a company like McKinsey? What do you see as the present-day supply chain challenge, where maybe even beyond the specific brewing industry, your experience can be relevant, and by extension, the sort of contribution McKinsey can be most relevant?

Joannes Vermorel: How vast an array of experts exist inside that company on the most obscure topics that are available?

Jes Bengtsson: I now have a place on that very large shelf of experts that you can pull down from the wall and say, “Okay, we need someone who knows something very specific about supply chain and distribution for breweries.” But of course, that sort of expands in circles around that spot that says if you can talk about beer, you can probably also talk about other liquids and other CPGs. One of the interesting things for supply chain practitioners is that supply chains are very specific in one sense, and in another sense, very similar. You’re talking about the same aspects: you have a customer who doesn’t want to wait for the time it takes you to make the product, so you need to forecast in advance; you have a manufacturing facility that’s a black box, so to speak, where you stick raw materials in one end and magically out the other end comes a product, whether that’s canned tomatoes, beer, or rubber tires. You can abstract that away and you have raw materials that need to be planned, and you have distribution, all of which you do through people, processes, data, and data systems. So in that aspect, it’s the same toolbox that you apply in different ways to different industries.

Of course, knowing the particular kinks in each industry is essential. I may not know them if I walk into another brewery I didn’t work at, but based on my experience, I can say it would be interesting to know how you do X, Y, and Z because that will tune me into that specific deep concentration in one area of expertise and relevance across many others.

Joannes Vermorel: How does McKinsey help in this regard?

Jes Bengtsson: One of the key things that companies come to McKinsey for is that the C-suite, the top echelons of management, tend to go to McKinsey when they think they need help with something. Traditionally, this has been strategy, finance, or M&A. One of the things that’s very top of mind at the moment for CEOs is their supply chain not performing the way they would like, which results in a lot of requests coming McKinsey’s way in terms of how they can help improve operations.

Having a combination of senior management trust, the ability to take a strategic approach to the problem, and backing it up with actual expertise, while also having an engine room of fresh young graduates with a lot of brains and energy guided along the way by senior management and experts, often produces very good results.

Joannes Vermorel: It’s interesting that certain classes of companies are, by necessity, very much supply chain-driven, like breweries. You can’t have your distribution as an afterthought. You really need to think holistically, or maybe end-to-end, to see the full picture because otherwise, even your production apparatus is going to be a misfit, and you won’t be able to recover your distribution channels if you don’t consider the whole picture from day one. What are your thoughts on that for many companies?

Joannes Vermorel: Could you discuss how some companies treat supply chain as an afterthought, especially when they have high price density and can move products around the world, such as in the electronics industry? It seems that relying on overseas suppliers can be a challenge for the continuation of operations when they have different priorities. Do you see supply chain reaching out more to the higher levels of companies, and what is the relationship between company strategy and supply chain?

Jes Bengtsson: I think we’re seeing a couple of things. Some companies believed they were well on top of their game in terms of supply chain management, with good service levels and decent inventory levels. However, they now realize that their supply chain was well-tuned to a very specific operating system, which relied on the assumption that tomorrow would not be too different from yesterday. Now, they’re realizing that they’re not equipped to deal with good supply chain decisions when everything is not normal.

This challenge is coming to the forefront for many companies that thought supply chain was important and had gradually built something which was good enough for a stable supply chain because they were in a stable environment. Now that they’re not, they are realizing that many assumptions they’ve almost hard-coded into the way they do things are not working anymore, because those assumptions are now broken. It’s not just a flip of a switch; it’s a complete mindset shift and an entire toolkit that simply doesn’t exist.

Then there are other companies that never thought supply chain was a priority. They focused on designing products and left supply chain as an afterthought because their margins were large enough. However, they’re now realizing the amount of damage a non-functioning supply chain can do to a company. Even if their margins are fat, if they don’t have anything to sell, it impacts the bottom line significantly.

This is a fascinating time to be a supply chain professional, as many companies are realizing the importance of beefing up their skill sets in this area.

Joannes Vermorel: Thank you very much for those insights. See you next time.