Information transmission and the bullwhip effect: An empirical investigation

Robert L. Bray*, Haim Mendelson

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

119 Scopus citations

Abstract

The bullwhip effect is the amplification of demand variability along a supply chain: a company bullwhips if it purchases from suppliers more variably than it sells to customers. Such bullwhips (amplifications of demand variability) can lead to mismatches between demand and production and hence to lower supply chain efficiency. We investigate the bullwhip effect in a sample of 4,689 public U.S. companies over 1974-2008. Overall, about two-thirds of firms bullwhip. The sample's mean and median bullwhips, both significantly positive, respectively measure 15.8% and 6.7% of total demand variability. Put another way, the mean quarterly standard deviation of upstream orders exceeds that of demand by $20 million.We decompose the bullwhip by information transmission lead time. Estimating the bullwhip's information-lead-time components with a two-stage estimator, we find that demand signals firms observe with more than three-quarters' notice drive 30% of the bullwhip, and those firms observe with less than one-quarter's notice drive 51%. From 1974-1994 to 1995-2008, our sample's mean bullwhip dropped by a third.

Original languageEnglish (US)
Pages (from-to)860-875
Number of pages16
JournalManagement Science
Volume58
Issue number5
DOIs
StatePublished - May 2012

Keywords

  • Bullwhip decomposition
  • Bullwhip effect
  • Demand uncertainty
  • Martingale model of forecast evolution
  • Production smoothing

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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