Quantifying the bullwhip effect in supply chains

TLDR

In serial supply chains, demand originates from end users and propagates upstream, with seasonality and forecast errors amplifying as one moves higher, producing the bullwhip effect that creates upstream inefficiencies. This study aims to quantify the bullwhip effect by establishing an empirical lower bound on its profitability impact. The effect’s importance varies by business context, but when conditions are favorable, eliminating it can raise product profitability by 10–30%.

Abstract

Abstract Consider multiple companies operating as a serial supply chain. Within this environment, end users form the demand for the last company in the supply chain, but the demand for upstream companies is formed by the companies in the immediate downstream supply chain link. It has been shown that demand seasonality and forecast error can increase as we proceed up the supply chain. These demand distortions, called the “bullwhip” effect, create inefficiencies for upstream firms. This work seeks to identify the magnitude of the problem by establishing an empirical lower bound on the profitability impact of the bullwhip effect. Results indicate that the importance of the bullwhip effect to a firm differs greatly depending on the specific business environment. Given appropriate conditions, however, eliminating the bullwhip effect can increase product profitability by 10–30%.