Abstract
Bullwhip effect reduces the efficiency, responsiveness, and value of the supply chain. There are some indirect causes like lead time, the number of echelons, and some direct causes of bullwhip effect such as rationing or price variation. Due to capacity constraints, retailers are forced to experience rationing of their demands. Fear of rationing usually gives rise to manipulable demand and hence increases the bullwhip effect. Moreover, if the retailer’s demand is price sensitive then it will cause price variation. The offerings of premium payment by retailers due to unfulfilled demand lure the supplier to extend his existing capacity and to allocate them more supply. In this paper, an attempt has been made to mitigate the impact of the bullwhip effect using a premium payment scheme. A technique has been coined that will help in reducing the bullwhip effect. The increased value of the supply chain on using a premium payment scheme is proof of the reduction of the bullwhip effect. Results are validated through numerical analysis.
Highlights
A supply chain system includes all the communications among suppliers, manufacturers, retailers and customers
Chain mechanisms that deal with price variation and shortage gaming needs special attention because both are considered as the main causes of the bullwhip effect
When demand is taken as an independent variable instead of selling price of a retailer, it becomes more sensitive to change in cost parameters with respect to supply chain profit; sensitivity with respect to extended capacity would be more if the selling price of retailer would be taken as an independent variable
Summary
A supply chain system includes all the communications among suppliers, manufacturers, retailers and customers. The amalgamation of information in the form of demand and supply at manufacturing sites in the context of the supply chain has become more practical and has attracted the attention of both industry practitioners and academic researchers This information needs to be propagated correctly to an upstream member from downstream members. In practice, retailers may experience price-sensitive demand which will amplify bullwhip effect. To the best of our knowledge, the impact on bullwhip effect under the pricesensitive demand in a monopolistic environment with capacity constraint and premium payment has not been explored so far. The optimal value of demand is substituted in demand function to get the value of selling price It has been discussed whether it is beneficial for the supplier to extend his existing capacity or not while getting premium payment from the retailers.
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