Bull whip effect 3

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Unformatted text preview: nning decisions. While access to the industry-wide inventory status may be beneficial to the individual manufacturers, there is a concern whether manufacturers will sincerely share their true inventory information (see [11] to [14]). This is because each party has an incentive to overstate its inventory level to discourage others from producing more chips or building additional capacity. If every manufacturer acts selfishly and anticipates the same behavior of others, information sharing will not be sustained as an equilibrium. It will be interesting to see whether the proposed horizontal information sharing will actually take place in spite of the incentive problem. 2.2. Sales Data In the traditional supplier-buyer relationship, companies communicate demand information exclusively in the form of orders. Indeed, orders from downstream serve as a critical source of information about future businesses. But if the supplier depends solely 4 on orders for future production planning, a problem arises. Since orders are ‘ rocessed’ p result of various information and conjectures by the buyer, orders data often distort the true dynamics of the marketplace - a phenomenon called “the bullwhip effect” ([9] and [l0]). Thus, the information transferred in the form of orders tends to be distorted and can misguide upstream partners in their inventory and production decisions. In particular, the variance of is often larger than that of and the distortion tends to increase as one moves upstream (see Figure 1). The distortion injects additional uncertainties into order fulfillment processes and makes demand forecasting even more difficult. It ultimately hurts the efficiency of the supply chain in the form of excess raw material inventory, unplanned purchases of supplies, additional manufacturing expenses created by excess capacity, inefficient utilization and overtimes, excess warehousing expenses, premium shipping costs, and poor customer service level. Figure Lee et al (in and The Bullwhip Effect identify four sources of the bullwhip effect: (i) demand signal processing, (ii) rationing game, (iii) order batching and (iv) pric...
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This note was uploaded on 11/06/2013 for the course ISYE 6202 taught by Professor Staff during the Fall '08 term at Georgia Institute of Technology.

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