Pricing strategy and product substitution of bullwhip effect in dual parallel supply chain: aggravation or mitigation?

Abstract

The bullwhip effect affects not only the revenue of the retailer but also the revenue of the manufacture and weakens the performance of the whole supply chain. In this research, the bullwhip effect influenced by pricing strategy is studied for the first time in two parallel supply chains distributing price-sensitive and substitutable products. The analytical expression of bullwhip effect based on pricing strategy and product substitution is derived for the first time. The effects of pricing strategy and product substitution on the bullwhip effect are studied through simulation. The analytic results and the simulation results show that the bullwhip effect of the two parallel supply chains will be affected by lead time, product substitution rate, and pricing coefficient. The interesting finding is that the bullwhip effect can be efficiently alleviated by adopting a price strategy with many correlations and a small coefficient of autocorrelation.