Forward or backward: The Impact of Vertical Integration Direction on the bullwhip effect

Abstract

The bullwhip effect represents a major source of supply chain inefficiency. Traditional OM analytical approaches and theories view vertical integration as a countermeasure to the bullwhip effect. Despite its intuitive appeal, this relationship has yet to be rigorously examined. To be specific, a firm may choose backward integration to tighten its grip on the supply and production side, or forward integration to control over the demand and distribution side. The effect of different integration could be diverse depending on the firm’s supply chain position, but research on this link is limited. Driven by a large dataset containing 292,080 detailed business information of listed firms in China, we empirically examine the impact of forward and backward vertical integration on the bullwhip effect, as well as the moderating role of the firms’ supply chain positions. We find that: (1) forward vertical integration does reduce the bullwhip effect, and this mitigation effect is more pronounced for firms located further downstream; (2) the magnitude and direction of backward vertical integration effects are diverse. It has a strong mitigation effect on the bullwhip effect for upstream firms, and when firms are located further downstream, backward vertical integration will surprisingly increase the bullwhip effect.