IDEAS home Printed from https://ideas.repec.org/a/inm/ormsom/v19y2017i2p36-51.html
   My bibliography  Save this article

Measuring the Bullwhip Effect: Discrepancy and Alignment Between Information and Material Flows

Author

Listed:
  • Li Chen

    (Samuel Curtis Johnson Graduate School of Management, Cornell University, Ithaca, New York 14853)

  • Wei Luo

    (IESE Business School, University of Navarra, 08034 Barcelona, Spain)

  • Kevin Shang

    (Fuqua School of Business, Duke University, Durham, North Carolina 27708)

Abstract

The bullwhip effect is a phenomenon commonly observed in supply chains. It describes how demand variance amplifies from a downstream site to an upstream site due to demand information distortion. Two different bullwhip effect measures have been used in the literature. Theorists analyze the bullwhip effect based on the information flow (i.e., order and demand information), whereas most empiricists measure it according to the material flow (i.e., shipment and sales data). It is unclear how much the discrepancy between these two measures is, and, if significant, how to reconcile the discrepancy. In this paper, we illustrate and quantify the discrepancy under three inventory systems. For the system with stationary demand and ample supply, we show that the bullwhip effect measure based on the material-flow data is always greater than that based on the information flow. For the system with correlated demand and for the system with supply shortages, we derive conditions under which the material flow measure is either greater or less than the information flow measure. We find that the discrepancy is driven by four factors: stocking level, lead time, demand correlation, and supply service level. We further propose a method to reduce the discrepancy by using the sample variances of aggregated sales data. Our method works for common demand processes with short-range dependence, and it does not require the knowledge of the underlying base-stock levels.

Suggested Citation

  • Li Chen & Wei Luo & Kevin Shang, 2017. "Measuring the Bullwhip Effect: Discrepancy and Alignment Between Information and Material Flows," Manufacturing & Service Operations Management, INFORMS, vol. 19(1), pages 36-51, February.
    • Handle: RePEc:inm:ormsom:v:19:y:2017:i:2:p:36-51
    DOI: 10.1287/msom.2016.0590
    as

    Download full text from publisher

    File URL: https://doi.org/10.1287/msom.2016.0590
    Download Restriction: no
    File URL: https://libkey.io/10.1287/msom.2016.0590?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Fair, Ray C., 1989. "The production-smoothing model is alive and well," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 353-370, November.
    2. Nikolay Osadchiy & Vishal Gaur & Sridhar Seshadri, 2016. "Systematic Risk in Supply Chain Networks," Management Science, INFORMS, vol. 62(6), pages 1755-1777, June.
    3. Miron, Jeffrey A & Zeldes, Stephen P, 1988. "Seasonality, Cost Shocks, and the Production Smoothing Models of Inventories," Econometrica, Econometric Society, vol. 56(4), pages 877-908, July.
    4. Karel H. van Donselaar & Vishal Gaur & Tom van Woensel & Rob A. C. M. Broekmeulen & Jan C. Fransoo, 2010. "Ordering Behavior in Retail Stores and Implications for Automated Replenishment," Management Science, INFORMS, vol. 56(5), pages 766-784, May.
    5. Hau L. Lee & Kut C. So & Christopher S. Tang, 2000. "The Value of Information Sharing in a Two-Level Supply Chain," Management Science, INFORMS, vol. 46(5), pages 626-643, May.
    6. Li Chen & Hau L. Lee, 2012. "Bullwhip Effect Measurement and Its Implications," Operations Research, INFORMS, vol. 60(4), pages 771-784, August.
    7. Vishal Gaur & Avi Giloni & Sridhar Seshadri, 2005. "Information Sharing in a Supply Chain Under ARMA Demand," Management Science, INFORMS, vol. 51(6), pages 961-969, June.
    8. Yossi Aviv, 2003. "A Time-Series Framework for Supply-Chain Inventory Management," Operations Research, INFORMS, vol. 51(2), pages 210-227, April.
    9. Kenneth Gilbert, 2005. "An ARIMA Supply Chain Model," Management Science, INFORMS, vol. 51(2), pages 305-310, February.
    10. Blanchard, Olivier J, 1983. "The Production and Inventory Behavior of the American Automobile Industry," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 365-400, June.
    11. Yossi Aviv, 2002. "Gaining Benefits from Joint Forecasting and Replenishment Processes: The Case of Auto-Correlated Demand," Manufacturing & Service Operations Management, INFORMS, vol. 4(1), pages 55-74, December.
    12. James A. Kahn, 1992. "Why is Production More Volatile than Sales? Theory and Evidence on the Stockout-Avoidance Motive for Inventory-Holding," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(2), pages 481-510.
    13. Robert L. Bray & Haim Mendelson, 2012. "Information Transmission and the Bullwhip Effect: An Empirical Investigation," Management Science, INFORMS, vol. 58(5), pages 860-875, May.
    14. Gérard P. Cachon, 1999. "Managing Supply Chain Demand Variability with Scheduled Ordering Policies," Management Science, INFORMS, vol. 45(6), pages 843-856, June.
    15. Patricia C. Mosser, 1991. "Trade Inventories and (S,s)," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1267-1286.
    16. Charles C. Holt & Franco Modigliani & John P. Shelton, 1968. "The Transmission of Demand Fluctuations Through a Distribution and Production System, the Tv-Set Industry," Canadian Journal of Economics, Canadian Economics Association, vol. 1(4), pages 718-739, November.
    17. Li Chen & Hau L. Lee, 2009. "Information Sharing and Order Variability Control Under a Generalized Demand Model," Management Science, INFORMS, vol. 55(5), pages 781-797, May.
    18. repec:sen:rebelj:v:57:i:3:y:2012:p:382-391 is not listed on IDEAS
    19. Sven Axsäter & Kaj Rosling, 1993. "Notes: Installation vs. Echelon Stock Policies for Multilevel Inventory Control," Management Science, INFORMS, vol. 39(10), pages 1274-1280, October.
    20. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-679, September.
    21. Stephen C. Graves, 1999. "A Single-Item Inventory Model for a Nonstationary Demand Process," Manufacturing & Service Operations Management, INFORMS, vol. 1(1), pages 50-61.
    22. Gérard P. Cachon & Taylor Randall & Glen M. Schmidt, 2007. "In Search of the Bullwhip Effect," Manufacturing & Service Operations Management, INFORMS, vol. 9(4), pages 457-479, April.
    23. Hau L. Lee & V. Padmanabhan & Seungjin Whang, 1997. "Information Distortion in a Supply Chain: The Bullwhip Effect," Management Science, INFORMS, vol. 43(4), pages 546-558, April.
    24. Udenio, Maximiliano & Fransoo, Jan C. & Peels, Robert, 2015. "Destocking, the bullwhip effect, and the credit crisis: Empirical modeling of supply chain dynamics," International Journal of Production Economics, Elsevier, vol. 160(C), pages 34-46.
    25. Ghali, Moheb A, 1987. "Seasonality, Aggregation and the Testing of the Production Smoothing Hypothesis," American Economic Review, American Economic Association, vol. 77(3), pages 464-469, June.
    26. Robert L. Bray & Haim Mendelson, 2015. "Production Smoothing and the Bullwhip Effect," Manufacturing & Service Operations Management, INFORMS, vol. 17(2), pages 208-220, May.
    27. Alan S. Blinder, 1981. "Retail Inventory Behavior and Business Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 443-520.
    28. Yossi Aviv, 2001. "The Effect of Collaborative Forecasting on Supply Chain Performance," Management Science, INFORMS, vol. 47(10), pages 1326-1343, October.
    29. Yossi Aviv, 2007. "On the Benefits of Collaborative Forecasting Partnerships Between Retailers and Manufacturers," Management Science, INFORMS, vol. 53(5), pages 777-794, May.
    30. A.G. De Kok, 2012. "The Return of the Bullwhip," Review of Business and Economic Literature, Intersentia, vol. 57(3), pages 381-393, September.
    31. Stephen C. Graves, 1999. "Addendum to "A Single-Item Inventory Model for a Nonstationary Demand Process"," Manufacturing & Service Operations Management, INFORMS, vol. 1(2), pages 174-174.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Guo, Peijun, 2019. "Focus theory of choice and its application to resolving the St. Petersburg, Allais, and Ellsberg paradoxes and other anomalies," European Journal of Operational Research, Elsevier, vol. 276(3), pages 1034-1043.
    2. Lu, Jizhou & Feng, Gengzhong & Shum, Stephen & Lai, Kin Keung, 2021. "On the value of information sharing in the presence of information errors," European Journal of Operational Research, Elsevier, vol. 294(3), pages 1139-1152.
    3. Nagaraja, Chaitra H. & McElroy, Tucker, 2018. "The multivariate bullwhip effect," European Journal of Operational Research, Elsevier, vol. 267(1), pages 96-106.
    4. Ying Rong & Lawrence V. Snyder & Zuo‐Jun Max Shen, 2017. "Bullwhip and reverse bullwhip effects under the rationing game," Naval Research Logistics (NRL), John Wiley & Sons, vol. 64(3), pages 203-216, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wang, Xun & Disney, Stephen M., 2016. "The bullwhip effect: Progress, trends and directions," European Journal of Operational Research, Elsevier, vol. 250(3), pages 691-701.
    2. Li Chen & Hau L. Lee, 2012. "Bullwhip Effect Measurement and Its Implications," Operations Research, INFORMS, vol. 60(4), pages 771-784, August.
    3. Gérard P. Cachon & Taylor Randall & Glen M. Schmidt, 2007. "In Search of the Bullwhip Effect," Manufacturing & Service Operations Management, INFORMS, vol. 9(4), pages 457-479, April.
    4. QU, Zhan & RAFF, Horst, 2023. "Two-part tariffs, inventory stockpiling, and the bullwhip effect," European Journal of Operational Research, Elsevier, vol. 308(1), pages 201-214.
    5. Isaksson, Olov H.D. & Seifert, Ralf W., 2016. "Quantifying the bullwhip effect using two-echelon data: A cross-industry empirical investigation," International Journal of Production Economics, Elsevier, vol. 171(P3), pages 311-320.
    6. Li Chen & Hau L. Lee, 2009. "Information Sharing and Order Variability Control Under a Generalized Demand Model," Management Science, INFORMS, vol. 55(5), pages 781-797, May.
    7. Ruomeng Cui & Gad Allon & Achal Bassamboo & Jan A. Van Mieghem, 2015. "Information Sharing in Supply Chains: An Empirical and Theoretical Valuation," Management Science, INFORMS, vol. 61(11), pages 2803-2824, November.
    8. Ma, Yungao & Wang, Nengmin & He, Zhengwen & Lu, Jizhou & Liang, Huigang, 2015. "Analysis of the bullwhip effect in two parallel supply chains with interacting price-sensitive demands," European Journal of Operational Research, Elsevier, vol. 243(3), pages 815-825.
    9. Jalali, Hamed & Menezes, Mozart B.C., 2024. "Product portfolio adjustments and the bullwhip effect: The impact of product introduction and retirement," European Journal of Operational Research, Elsevier, vol. 318(1), pages 87-99.
    10. Robert L. Bray & Haim Mendelson, 2012. "Information Transmission and the Bullwhip Effect: An Empirical Investigation," Management Science, INFORMS, vol. 58(5), pages 860-875, May.
    11. Zhang, Xiaolong & Burke, Gerard J., 2011. "Analysis of compound bullwhip effect causes," European Journal of Operational Research, Elsevier, vol. 210(3), pages 514-526, May.
    12. Zotteri, Giulio, 2013. "An empirical investigation on causes and effects of the Bullwhip-effect: Evidence from the personal care sector," International Journal of Production Economics, Elsevier, vol. 143(2), pages 489-498.
    13. Ouyang, Yanfeng & Li, Xiaopeng, 2010. "The bullwhip effect in supply chain networks," European Journal of Operational Research, Elsevier, vol. 201(3), pages 799-810, March.
    14. Ouyang, Yanfeng, 2007. "The effect of information sharing on supply chain stability and the bullwhip effect," European Journal of Operational Research, Elsevier, vol. 182(3), pages 1107-1121, November.
    15. Robert L. Bray & Haim Mendelson, 2015. "Production Smoothing and the Bullwhip Effect," Manufacturing & Service Operations Management, INFORMS, vol. 17(2), pages 208-220, May.
    16. Minner, Stefan & Transchel, Sandra, 2017. "Order variability in perishable product supply chains," European Journal of Operational Research, Elsevier, vol. 260(1), pages 93-107.
    17. Robert L. Bray & Yuliang Yao & Yongrui Duan & Jiazhen Huo, 2019. "Ration Gaming and the Bullwhip Effect," Operations Research, INFORMS, vol. 67(2), pages 453-467, March.
    18. Pastore, Erica & Alfieri, Arianna & Zotteri, Giulio, 2019. "An empirical investigation on the antecedents of the bullwhip effect: Evidence from the spare parts industry," International Journal of Production Economics, Elsevier, vol. 209(C), pages 121-133.
    19. Ouyang, Yanfeng & Daganzo, Carlos, 2008. "Robust tests for the bullwhip effect in supply chains with stochastic dynamics," European Journal of Operational Research, Elsevier, vol. 185(1), pages 340-353, February.
    20. Yanfeng Ouyang & Carlos Daganzo, 2006. "Characterization of the Bullwhip Effect in Linear, Time-Invariant Supply Chains: Some Formulae and Tests," Management Science, INFORMS, vol. 52(10), pages 1544-1556, October.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormsom:v:19:y:2017:i:2:p:36-51. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.