A win-win solution for the bullwhip problem

An important supply chain research problem is the bullwhip effect where demand variability increases as one moves up the supply chain. This distorted information may lead to inefficiencies. In this article we suggest a remedy to reduce the bullwhip effect. We focus on an inventory replenishment rule that reduces the variability of upstream orders and generates a smooth order pattern. However, dampening the order variability has a negative impact on customer service due to an increased inventory variance. We resolve this conflicting issue by taking the impact of the replenishment rule on lead times into account. A smooth order pattern generates shorter and less variable (production/ replenishment) lead times, introducing a compensating effect on the inventory levels. We show that by including endogenous lead times in our analysis, the order pattern can be smoothed to a considerable extent without increasing stock levels, resulting in a win-win solution for both supply chain echelons. Finally we discuss several order smoothing approaches from an industrial perspective and comment on how our results may influence these cases.