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Centralized versus decentralized inventory control in supply chains and the bullwhip effect

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  • Qu, Zhan
  • Raff, Horst

Abstract

This paper constructs a model of a supply chain to examine how demand volatility is passed upstream through the chain. In particular, we seek to determine how likely it is that the chain experiences a bullwhip effect, where the variance of the upstream firm's production exceeds the variance of the downstream firm's sales. We show that the bullwhip effect is more likely to occur and is greater in size in supply chains in which inventory control is centralized rather than decentralized, that is, exercised by the downstream firm.

Suggested Citation

  • Qu, Zhan & Raff, Horst, 2017. "Centralized versus decentralized inventory control in supply chains and the bullwhip effect," CEPIE Working Papers 17/17, Technische Universität Dresden, Center of Public and International Economics (CEPIE).
    • Handle: RePEc:zbw:tudcep:1717
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    References listed on IDEAS

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    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.
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    More about this item

    Keywords

    bullwhip effect; production smoothing; inventory; supply chain; volatility; stockout avoidance;
    All these keywords.

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management

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