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Counteracting the Bullwhip Effect with Decentralized Negotiations and Advance Demand Information

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  • Ouyang, Yanfeng
  • Daganzo, Carlos

Abstract

This paper shows how to reduce the bullwhip effect by introducing advance demand information (ADI) into the ordering schemes of supply chains. It quantifies the potential costs and benefits of ADI, and demonstrates that they are not evenly distributed across the chain. Therefore, market-based strategies to re-distribute wealth without penalizing any supplier are presented. The paper shows that if a centralized operation can eliminate the bullwhip effect and reduce total cost, then some of this reduction can also be achieved with decentralized negotiation schemes. Their performance is evaluated under different modes of probabilistic supplier behavior. For some forms of behavior the optimum is reached. But if suppliers are greedy and impatient the expected gain in wealth is relatively small. This is a case of economic "market failure."

Suggested Citation

  • Ouyang, Yanfeng & Daganzo, Carlos, 2005. "Counteracting the Bullwhip Effect with Decentralized Negotiations and Advance Demand Information," Institute of Transportation Studies, Research Reports, Working Papers, Proceedings qt0489z4qg, Institute of Transportation Studies, UC Berkeley.
    • Handle: RePEc:cdl:itsrrp:qt0489z4qg
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    References listed on IDEAS

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    1. Ramey, Valerie A, 1991. "Nonconvex Costs and the Behavior of Inventories," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 306-334, April.
    2. Alan S. Blinder, 1986. "Can the Production Smoothing Model of Inventory Behavior be Saved?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(3), pages 431-453.
    3. Ouyang, Yanfeng & Daganzo, Carlos F., 2005. "Some Properties of Decentralized Supply Chains," Institute of Transportation Studies, Research Reports, Working Papers, Proceedings qt5qt7g4tv, Institute of Transportation Studies, UC Berkeley.
    4. Naish, Howard F, 1994. "Production Smoothing in the Linear Quadratic Inventory Model," Economic Journal, Royal Economic Society, vol. 104(425), pages 864-875, July.
    5. Carlos F. Daganzo, 2004. "On the Stability of Supply Chains," Operations Research, INFORMS, vol. 52(6), pages 909-921, December.
    6. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-679, September.
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