The bullwhip effect on product orders and inventory: a perspective of demand forecasting techniques

Abstract

Demand forecasting is one of the key causes of the bullwhip effect on product orders. Although this aspect of order oscillation is not ignored, the current study focuses on another critical aspect of oscillation: the bullwhip effect on inventory, i.e. the net inventory variance amplification. In particular, this paper studies a two-level supply chain in which the demand is price sensitive, while the price follows a first-order autoregressive pricing process. We derive the analytical expressions of the bullwhip effect on product orders and inventory using minimum mean-squared error, moving average and exponential smoothing forecasting techniques. We also propose the conditions under which the three forecasting techniques would be chosen by the retailer to minimise the sum of the bullwhip effect on product orders and inventory under different weightings. These observations are used to develop managerial insights regarding choosing an appropriate forecasting technique after considering certain distinct characteristics of the product.