The bullwhip effect in supply chains—An overestimated problem?

Abstract

A phenomenon that is now well known as the bullwhip effect suggests that the variability of orders increases as they move up the supply chain from retailers to wholesalers to manufacturers to suppliers. In this paper, we will focus mainly on measuring the bullwhip effect. Existing approaches that aim at quantifying the bullwhip effect neglect the network structure of supply chains. By only assuming a simple two-stage supply chain consisting of a single retailer and a single manufacturer, some of the relevant risk pooling effects associated with the network structure of supply chains are disregarded. Risk pooling effects arise when the orders, which a retailer receives from its customers, are statistically correlated with a coefficient of correlation less than one. When analyzing the bullwhip effect in supply chains, however, the influence of risk pooling has to be considered. The fact that these influences have not yet been analyzed motivates the research presented in this paper. We will show that the bullwhip effect is overestimated if just a simple supply chain is assumed and risk pooling effects are present.