Before you get your hopes up, this isn’t a drinking game discussion. On that topic, I’m not qualified for anything but designated driver duty. Instead, the “Beer Game” refers to a supply chain simulation from the folks at MIT that has been played in various forms in B-school classrooms and executive seminars for some time now. And it never changes.

The headlines definitely grab your attention: “Intel slashes 4Q outlook in sign of tech downturn” from the AP. “Led by Intel, chip makers cut outlook” from the NYTimes. The fact: Intel cut their 4Q outlook with a mid-quarter guidance statement saying they’re looking for revenue in the quarter of $8.7 to $9.3B, down from the previous target of $10.1 to $10.9B. Last year’s 4Q just for reference was $10.7B. I’ll tell you this isn’t as bad as it might look. Let’s play the game.

Here’s how the Beer Game starts. Players are divided into 4 teams - the retailer, the wholesaler, the distributor, and the factory. (Again: no actual beer, it’s called the Beer Game to keep most adult learners interested.) Like a business, there’s orders going up the chain, there’s inventory with a holding cost, and there’s backlog with a penalty cost. Each step in the chain is given 12 cases of starting inventory. Now the fun starts. And oh yeah, one rule - you’re not allowed to have a substantive conversation with the person next to you in the chain, and no conversation with the people downchain a step or two. All you see is a slip of paper with a number on it, and maybe a wink, smirk, or grimace.

In simulated week 1, the retailer puts an order on the wholesaler. In week 2, another order, and the wholesaler passes their first order to the distributor. In week 3, the factory gets to see their first order. And so it continues, until about week 20, when the factory team is using phrases like “You gotta be kidding?” and “WTF!?”, and the retailer team is laughing hysterically.

I’ll share that I was uttering those phrases as the buttclown - er, distributor (actually, he was our division CIO and my boss, great guy) was passing the factory dork (me) orders that went something like “80, 200, 0, 0″ and I realized I was in a bit of trouble.

And why is the retailer laughing his brains out at that point? Because he’s been passing a constrained demand that has never gotten bigger than 8 in any week. In some games, it’s flat. Sometimes it starts at 2 or 4 and steps to 8. Sometimes it’s a random number between 1 and 8. But it’s never been bigger than 8. And he’s the only actual demand in the chain. No more than 160 cases total at week 20. He’s been given a rule that the rest of the chain didn’t know about.

So how the *$&^ did I get an order in one week for 200, and then nothing?

As the game’s developer, John Sterman, wrote in one of his articles about the game, it’s always pretty much the same result. The orders oscillate wildly, with the fluctuations getting bigger going upchain, and the lag is very evident as the game unfolds. And not being able to see the demand until it arrives at your doorstep is pretty frustrating to say the least. Tip: don’t play this game with people you don’t like a lot. Bad tempers will get worse. Fists will fly.

The academic fix is to reduce the lag and improve the communication up and down the chain. But had this been an actual supply chain, it gets a whole lot more complicated.

Which brings us back to the real world. A $1B plus oscillation in Intel’s perceived demand gets a huge headline, and the sky is falling. How could this happen?

(As luck would have it, the Intel spokesperson for this mid-quarter announcement was Tom Beermann. No kidding, follow the link. I can’t make this stuff up. Honestly, I had most of this written before I discovered that.)

I love this one quote: “It is really a complete shutdown of consumer and corporate business,” said John Dryden, an analyst with Charter Equity Research. Mr. Dryden has apparently never played the Beer Game. But he does get ink.

Intel knows better. John Sterman knows better. Consumer demand doesn’t go to zero. Oh sure, there’s some buttclown somewhere in the supply chain that’s been passing bogus demand slips, and is now passing a zero. Maybe someone big like Circuit City isn’t playing nice, because they have bigger problems than this right now. Cisco isn’t sending warm fuzzies either, but at least they’re not passing a zero, not even close. And it’s not a simple picture - we don’t know Intel’s anticipated mix, current or projected. We don’t know how much inventory is at places like Dell, HP, or Lenovo.

And there’s one more factor at work. Intel’s motivation in this game is partly stock price, and it’s a whole lot less damaging to meet or exceed your adjusted mid-quarter guidance than it is to miss your unadjusted target by even a penny. Never underestimate the power of a good estimate on your stock price - and Intel is one of the best at that game.

Prudent, steady hands will win the day here. We may shrink a bit, but this bottomless crater with no consumer demand ever again just isn’t reality. Don’t play the role of the clueless factory dork. Read beyond those headlines a bit, and ask your customer, and your customer’s customer, and their customers, what’s going on. Then go have a beer if you need to this afternoon, and come back tomorrow and do the right thing.