Coping with the Bullwhip Effect Using Inventory or Cash: An Environment-Behavior-Performance Paradigm

Abstract

The bullwhip effect is widely found in business and exerts adverse effects on business activities. To investigate the influence of the bullwhip effect on firms’ performance and their responses, this study proposed an environment-behavior-performance analysis framework and offered a new perspective for studying the bullwhip effect. Using data collected from 1,734 listed manufacturers in China from 2002 to 2017, we adopted regression models to test the proposed model and conducted a series of robustness tests. We find that the bullwhip effect is positively related to operating risk, inventory, and cash holdings, and the moderate levels of inventory and cash are negatively associated with operating risk. Specifically, inventory and cash play different roles and work together to alleviate operating risk induced by the bullwhip effect. However, excess resource holdings are positively associated with operating risk. Therefore, firms with different levels of resources should hold suitable levels of inventory, cash, or both as contingent responses to the bullwhip effect.