MIT Sloan Executive Education Blog

Mapping risk with the beer game

As MIT Sloan Professor John Sterman told MIT Technology Review, “there’s no actual beer in the Beer Game.” Instead, it’s an exercise for MIT Sloan students that simulates the supply chain of the beer industry. The roles include retailer, wholesaler, distributor, and brewer; the goal is to make operating costs as low as possible.

The Beer Game demonstrates the fluctuations of inventories and backlogs and how they impact the bottom line. In the real world of the “beer game”—that of the craft beer industry—the stakes are very high. And, one wonders if they’d benefit from mapping their own risk by playing MIT’s Beer Game.

According to NPR, the craft beer industry owns approximately 6% of the overall beer market. That 6% of the market is split among some 2,347 craft breweries, according to the Brewers Association. Hence, despite the popularity of craft beer, each craft brewer captures a minuscule percentage of the market

Regardless of size, each craft brewer needs to manage its supply chain—retailers, wholesalers, distributors, and actual brewing—just as the international and national brewers do. Craft brewers, like nearly every company producing goods or products, also need to manage their supply and demand while keeping costs low.

Supply Chain Risks in the Craft Beer Industry

Recently, there was some big news in the craft beer industry: cult-favorite, The Alchemist brewery in Waterbury, Vermont—brewer of Heady Topper, which is ranked number one out of 25 beers in the world by the BeerAdvocate—announced it was closing its retail shop and self-guided tour area.

The Alchemist brewery has experienced tremendous growth in the brewer’s two-year history: sales have grown from 30 barrels a week to 180 barrels a week. Despite that growth, fans of Heady Topper say beers from The Alchemist have limited distribution points. In fact, they are currently sold at less than 130 retail stores and restaurants and there are currently no plans to add new distributors.

This issue triggered the boom in “beer tourism” that The Alchemist experienced. As the Associated Press reported, the brewery got “too many complaints from neighbors” about the large numbers of people visiting the brewery. One can assume the brewery compared its risk of the loss of local good will and any potential lawsuits with the loss of retail sales on site. The issue becomes even more complex because the brewer has indicated it will be looking for a different space in which to brew and sell its popular beer. Expansion always adds the risk of higher operating costs.

MIT’s Beer Game is designed to help students “properly understand complex systems.” Perhaps those in the craft beer world must add a few other risk factors—beer tourism and managing growth—to their own version of understanding a very complex business.

John Sterman is Faculty Director of the Business Dynamics: MIT’s Approach to Diagnosing and Solving Complex Business Problems and Strategies for Sustainable Business programs at MIT Sloan Executive Education and also teaches in Leading Change in Complex Organizations.