Reducing Bullwhip Effect in Supply Chains Using Control Variates

Abstract

The bullwhip effect refers to the phenomenon where orders to the supplier tend to have a larger variance than sales to the buyer, and the distortion propagates as one moves upstream in an amplified form. The problem of variance propagation and amplification can be significant for even the existing optimal inventory policies. In this paper, we propose a control variate technique for reducing the bullwhip effect, or more generally the demand variability in supply chains. The method is effective and easy to implement in practical management and supply chain systems. The idea is to stabilize the inventory control policy to dampen the effect of propagation by imposing a correlated control variate to the original order. The proposed method is applied to stabilize the inventory policy and rectify the bullwhip effect discussed in Lee et al. [15] and Chen et al. [7, 8]. It shows that the method may lead to a system-wide optimal performance within a class of stabilizing policies.