An Analysis of Compound Bullwhip Effect Causes

Document Type

Article

Publication Date

5-1-2011

Publication Title

European Journal of Operational Research

DOI

10.1016/j.ejor.2010.09.030

ISSN

0377-2217

Abstract

This research investigates compound causes of the bullwhip effect (BWE) by considering an inventory system with multiple price-sensitive demand streams. Joint price and demand dynamics are captured by a vector time-series process that incorporates the stochastic co-movements in price and demand. We study two BWE measures, one for each demand stream individually and one for the aggregated demand. We show that demand parameters including demand autocorrelation, cross-correlation, and price sensitivity serve as root causes of the BWE. We prove that the impact of these parameters on the BWE can be additively decomposed. Conditions are established under which a pair of simultaneous compound causes may attenuate or dampen the BWE. When demand streams are aggregated, we derive a pooling factor that quantifies the impact of demand aggregation on order stability. When positive, the pooling factor corresponds to a synergy effect that captures the gain in the stability of the pooled orders. Conditions for the existence of the synergy effect are obtained for several special cases involving a zero leadtime. We also discuss how our analytical findings can be managerially applied to bullwhip mitigation strategies.

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