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Unformatted text preview: In fo r m a tio n Distortion in a Supply Chain: The Bullwhip Effect Hau L. Lee * V. Padmanabhan * Seungjin Whang Department of Industrial Engineering and Engineering Management, Stanford University, Stanford, California 94305 Graduate School of Business, Stanford University, Stanford, California 94305 Graduate School of Business, Stanford University, Stanford, California 94305 C onsider a series of companies in a supply chain, each of whom orders from its immediate upstream member. In this setting, inbound orders from a downstream member serve as a valuable informational input to upstream production and inventory decisions. This paper claims that the information transferred in the form of "orders" tends to be distorted and can misguide upstream members in their inventory and production decisions. In particular, the variance of orders may be larger than that of sales, and the distortion tends to increase as one moves upstream-a phenomenon termed "bullwhip effect." This paper analyzes four sources of the bullwhip effect: demand signal processing, rationing game, order batching, and price variations. Actions that can be taken to mitigate the detrimental impact of this distortion are also discussed. (Supply Chain Management; Information Distortion; Information Integration; Production and Inventory Management) 1. Introduction Recent interest in supply chain management centers around coordination among various members of a sup- ply chain comprising manufacturers, distributors, wholesalers and retailers. There are many examples of the benefits of coordination activities to the individual members in the supply chain (see, for example, Byrnes and Shapiro 1992, and Kurt Salmon Associates 1993). One important mechanism for coordination in a sup- ply chain is the information flows among members of the supply chain. These information flows have a direct impact on the production scheduling, inventory control and delivery plans of individual members in the supply chain. This paper studies the demand information flow in a supply chain and reports the systematic distortion in demand information as it is passed along the supply chain in the form of orders. The illustration in Figure 1 (based on real data but manipulated to maintain confi- dentiality) shows a retail store's sales of a product, alongside the retailer's orders issued to the manufac- turer. The figure clearly highlights the distortion in de- mand information. The retailer's orders do not coincide with the actual retail sales. In this paper the bullwhip effect or whiplash effect refers to the phenomenon where orders to the supplier tend to have larger variance than sales to the buyer (i.e., demand distortion), and the dis- tortion propagates upstream in an amplified form (i.e., variance amplification)....
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