Bullwhip Effect in Supply Chains

Dr Stephen Disney

Cardiff Business School, Cardiff University

Last updated on 27 April 2009

Abstract

We review a range of methodological approaches to solving the bullwhip problem.

The bullwhip problem is a dynamic consequence of supply chain structures and
replenishment policies. The roles of the structure of the demand process, the
treatment of time (continuous v discrete), forecasting techniques and lead-times
will be reviewed. In practice, and in the theory, a variety of techniques have been
used to smooth the dynamics of supply chains. These include, the use of
sophisticated forecasting, pooling of demand and inventories, proportional feedback
controllers and full-state feedback systems. Multi-echelon supply chains also
present a number of interesting innovations. From the traditional, arms-length
trading relationships, information sharing, vendor managed inventory and echelon
stock policies can be developed. More sophisticated collaboration and co-ordination
mechanisms may also lead to altruistic behaviour and result in superior
performance. The impact of these procedures will be examined. Finally thoughts on
new directions in bullwhip research is presented.

Keywords: Bullwhip, supply chains, inventory, multi-echelon, order-up-to policy

Introduction: The bullwhip effect in supply chains

The bullwhip effect is a dynamical phenomenon in supply chains. It refers to the

tendency of the variability of orders rates to increase as they pass through the
echelons of a supply chain towards producers and raw material suppliers. A classic
example of the effect is baby nappies or diapers. Babies are fairly regular in their
use of nappies - they have a new nappy (almost) every time they feed. Sure, there
is seasonal variation in the birth rates as more babies are conceived in spring (when
male sperm count is significantly higher than in any other season; however this is
not globally consistent and the there is some debate over the role of both
temperature and the day length [1]). Neither-the-less, this seasonal variation is
small compared to the widely fluctuating and erratic production rates experienced
by the diaper manufacturer after the orders have passed through the supermarkets
and distribution centres.

There are various measures of the bullwhip effect proposed in the literature [2]. The
most common measure is the ratio of the variance of the order rate to the variance
of the demand rate, see equation (1). It is the measure that we will focus on herein,
and works best for stationary, stochastic, discrete time demand processes. However
there are other measures. Standard deviations could be used instead. Indeed, as we
will reveal later, this is more natural when the economics of the bullwhip (and
inventory) are considered. Another (practical) measure is ratios of the co-efficient of
variation ( COV=variance/mean) of order and demand rates. This is a useful
measure when there are multiple products going through multiple routes to market
and some comparison is needed across different products, businesses or routes to
market.

(1)

Bullwhip creates unstable production schedules. These unstable production

schedules are the cause of a range of unnecessary costs in supply chains.
Companies have to invest in extra capacity to meet the high variable demand. This
capacity is then under-utilised when demand drops. Unit labour costs rise in periods
of low demand, over-time, agency and sub-contract costs rise in periods of high
demand. The highly variable demand increases the requirements for safety stock in
the supply chain. Additionally, companies may decide to produce to stock in periods
of low demand to increase productivity. If this is not managed properly this will lead
to excessive obsolescence. Highly variable demand also increases lead-times. These
inflated lead-times lead to increased stocks and bullwhip effects. Thus the bullwhip
effect can be quite exasperating for companies; they invest in extra capacity, extra
inventory, work over-time one week and stand idle the next, whilst at the retail
store the shelves of popular products are empty, and the shelves with products that
aren’t selling are full.
There are various causes to the bullwhip effect. Lee, Padmanabhan and Whang
(1997) [3] made ground-breaking contributions and re-ignited interest in the subject
[4]. Their main contribution was to analyse four different causes of the bullwhip
effect; batching, shortage gaming, lead-times and demand signal processing.
However, there are other sources of the bullwhip effect [5]. Together demand signal
processing (the way that replenishment decisions are made) and the impact of lead-
times have previously been called the Forrester Effect [6]. We will mainly focus
herein on the bullwhip problems generated by the so-called Forrester Effects.

Methodological approaches to solving the bullwhip problem

The biggest decision to make is whether to study the bullwhip problem in discrete
or continuous time. In discrete time, system states (demand rates, inventory and
WIP levels) and replenishment orders are made at the equally spaced moments of
time. In between these moments of time, nothing is known about the system. In
continuous time the systems states are monitored at all moments of time and the
order rate is continuously adjusted.

Neither representation of time is incorrect; it is just that one representation of time

may be more suitable for a given situation than the other. For example, in a grocery
supply chain, supermarkets total up demand that has occurred during the day, a
replenishment order is generated and a delivery is despatched from the distribution
centre overnight. This scenario is very suitable for a discrete time analysis. A
petrochemical plant, on the other hand, may be able to continuously adjust its
production of different grades of product to reflect the current demand rates for
each grade. This type of scenario is more amenable to a continuous analysis.

Continuous time methods

The Laplace transform was originally developed by Laplace and Euler in the 17 th
century for studying the orbits of planets. However, electronic engineers have
developed a whole range of tools, loosely termed control theory, for studying
continuous time systems based on Laplace transformed transfer functions. These
transfer function techniques work very well if the system is linear, time invariant
(LTI - a common assumption) and the system has no initial conditions (IC). Simon
(1952) [7] seems to have been the first to apply the Laplace transform to a
production and inventory control problem. Transform approaches work well in
Single Input and Single Output (SISO) scenarios as then only a single transfer
function is required. Transforms also contain complete information about frequency
response of the system. Interestingly, the transforms that describe cash flows are
directly related to the Net Present Value of that cash flow [8].

If the two assumptions of LTI and zero IC do not hold, then the analytical
approaches have to resort back to the (non-linear) differential equation forms.
Unfortunately there is no “standard approach” for analysis of such systems. Indeed
many systems have no known solution, and even when we can obtain a solution
there is often an infinite number of them, one for each set of IC and non-linearity.
Linear differential equations are also readily handled by state-space techniques.
These are essentially matrix representations of systems of equations. State-space
methods are especially good at handling Multiple Input, Multiple Output (MIMO)
systems and can be easily extended to include non-zero IC’s.

Another important type of system is known as the differential-delay equation. These

are systems that contain a pure time delay in them (as supposed to a lag, which
can be readily handled by differential equations and Laplace transforms). Pure time
delays occur in supply chain settings when there is a transport delay, whereas lags
have been shown to be a good representation of factory output when there are
multiple stages of production. The principle problem with differential-delay
equations is that they generate an infinite number of complex solutions to the
characteristic equation and thus have a transcendental nature [9]. However, the
Lambert W function has been successfully applied to obtain solutions to delay
differential equations [10]. The Lambert W function is the inverse function of f( w)=
we w. The general strategy is to re-arrange to differential equation to make it look
like Y=Xe X and then use the W function to provide the solution, X=W( Y).

Discrete time methods

The discrete time analogue of the Laplace transform is the z-transform. It was
developed independently by scholars from the UK [11] and Russia [12] during the
Second World War for controlling such things radar and gun targeting systems and
other applications that involved the newly available digital computers. The first
book that brought together all of the developments of the z-transform was by Jury
(1964) [13], but the first person to apply the z-transform to a production and
inventory control problem appears to have been Vassian (1955) [14]. The
advantages of using the z-transform over the time domain difference equations are
the same as for the continuous case; convolution in the time domain is
multiplication in the frequency domain. However, the disadvantages are that it has
to be LTI and possess zero IC. However, problems with the pure-time delay are
completely avoided in discrete time as it forms the kernel of the z-transform. State
space methods (with the same advantages) are also available in discrete time.

In discrete time a lot can be done with stochastic techniques using the expectation
operator. However, the calculation of the co-variances can become very tedious
when complex systems are studied. Interestingly this difficultly is completely
avoided with transform approaches. Martingales have also been used to study
inventory problems, for example, see Graves (1999) [15]. Martingales are useful
tools as they can yield insights into magnitude of infinite variances that occur in
non-stationary time series.

A particularly useful difference equation approach was developed by Box and

Jenkins (1970) [16]. Known as ARIMA modelling, Box and Jenkins developed a
generalised time series model that consisted of an arbitrary number of three types
of terms. That is, Auto-regressive, Integrated and Moving Average terms. Their
generalised time series model has been found to represent a wide range of
stochastic time series. The general ARIMA( p,d,q) model is given by equation 2. The
Box and Jenkins approach copes with non-stationary processes by differencing the
time series.

(2)

Other approaches

Any time series, continuous or discrete, can be analysed using variations of the
Fourier transform. This is a frequency response method, where a time series is
broken up into a series of harmonics. Harmonics are sine waves of different
frequencies, amplitudes and phase lags. Understanding how replenishment rules
respond to the complete spectrum of individual harmonic frequencies allow us to
understand how they react any demand signal, thus the tool is particularly powerful
[17].

The beer game, a table top management game, is also very good demonstrator of
the bullwhip effect. It may also be used to generate knowledge and insights into
how actual people manage supply chains, Sterman (1989) [18]. The beer game has
been used extensively in business schools world-wide and many forms of it exist.
Some variants of the beer game are simply electronic or internet based [19]
versions of the original game, others have been adapted to represent particular
industries [20] or to investigate particular supply chain strategies such as
information sharing or VMI [21].

Systems dynamics is an intuitively based computer simulation technique that

essentially relies on animating causal loop diagrams. It was originally advocated by
Forrester (1961) [22] as a means of investigating large non-linear systems without
resorting to complex mathematical models. Another form of simulation is discrete
event simulation. It actually has the power to investigate, at least numerically, very
realistic models of supply chains. It is possible to explicitly model such things as
capacity constraints, non-negative inventory and WIP levels, actual real-life demand
patterns, process uncertainties (machine breakdowns), quality losses, process time
variation, rework and even quality control procedures [23]. The real value from
system dynamics (and simulation approaches in general) is from the act of building
the model itself as the process formalises a lot of tacit knowledge. However,
simulation based approaches suffer from the drawback of being cumbersome, time
consuming and only providing limited insight.

Supply chain strategies for taming the bullwhip effect

The bullwhip effect is greatly influenced by the structure of the material and
information flow in a supply chain and the how the replenishment decisions are
made. In this section we will briefly review the impact of the supply chain structure
and how it influences the bullwhip effect. We will do this with a “water tank model”
as it very easily illustrates the main principles [24]. In the water tank model, water
represents inventory, tanks represent companies, flow of water out of a tank
represents sales, flow in, deliveries. The replenishment or ordering decision is
conceptualised with a “ball cock” that regulates the flow.

Traditional supply chains

In a traditional supply chain each echelon makes its own replenishment decision,
based on it own local information. This local information often includes sales (flow
out of its tank), inventory (water in the tank) and orders placed, but not yet
received or WIP (water in the pipe flowing towards the tank), see Figure 1. Most
supply chains operate in this mode. The problem is bullwhip increases geometrically
in traditional supply chains. Every time the order passes through an echelon of the
supply chain, the variance of the order rates “multiples up”, and this causes
inefficiencies.

Figure 1. Schematic of a traditional supply chain

Information sharing

Some supply chains have the ability to share point of sale data to the end consumer
with other members of the supply chain. Consider, for example, the supermarket
supply chains in the UK. As the barcodes are scanned at checkouts an electronic file
is populated from which sales patterns for particular products can be determined.
These sales patterns are then transferred (sold even) to suppliers. Often suppliers
use this in capacity planning activities, but the real benefit comes from using it in
their replenishment / ordering decisions (see Figure 2). Using the POS data solely in
the capacity decisions has no effect on the dynamics of the supply chain; the
bullwhip effect still exists, and it still increases geometrically. Thus suppliers are left
dismayed, wondering why the retailer’s orders fluctuate widely despite fairly steady
sales.

However, if suppliers are sophisticated enough to incorporate this information into

the forecasts that they use inside their replenishment decisions, then the bullwhip
effect can be greatly reduced. This is especially true for echelons further away from
the end consumer as now the bullwhip effect will only increase linearly as it
proceeds up the supply chain.

VMI- type supply arrangements

The gold standard in supply chains structures however comes from completely
eliminating replenishment decisions. This can be done via Vendor Managed
Inventory (VMI) arrangements. In VMI supply chains suppliers have complete
visibility of the downstream supply chain; they can see end consumer demand, their
customer’s inventory levels and the contents of the pipeline (WIP). They can then
base their replenishment rules on the state of the complete downstream supply
chain. It is then possible to get a multi-echelon supply chain to act dynamically as a
single echelon. This effectively removes the bullwhip problem from the supply
chain.

Figure 2. Schematic of a supply chain with information sharing

To achieve this, the retailer and the supplier need to come to some arrangement
about how the retailers inventory levels are managed. Often a minimum and
maximum allowable inventory level is agreed upon and freedom is given to the
supplier to replenish the retailers inventory whenever he desires, as long as the
inventory levels stay within the pre-defined limits. This is akin to deciding how big
the retailers tank is, see Figure 3.

Figure 3 . Schematic of a VMI supply chain

It is often assumed that the supplier is managing the retailer’s inventory. This is
simply unacceptable for many retailers, as they consider their inventory
management skill to be a core competency of their business. However, the supplier
does not need to be in direct control of the retailer’s inventory. Consider the second
water tank model of Figure 4. It does not matter who’s “hand” is controlling the
“cup” (the cup is an analogy for a truckload of product) to move the inventory from
one company to the other. It could be either the retailer or the supplier. What is
important is not who owns inventory or who makes the decisions. What is important
is how decisions are formed and what information is used within them.

Figure 4 . Alternative schematic of a VMI supply chain

Replenishment rules for solving the bullwhip problem

In order to illustrate a range of solutions to the bullwhip problem we will consider a

simple example. It will be based on some assumptions, although we will highlight
the impact of these assumptions when it is appropriate. Indeed some solutions to
the bullwhip effect come from breaking down these assumptions. The
replenishment rule operates in discrete time, uses exponential smoothing as a
forecasting method, demand is a stochastic, independent and identically distributed
random variable and the Order-Up-To (OUT) policy is used to formulate the
replenishment decision.

The OUT policy makes replenishment decisions based on three factors; a forecast of
future demand, an inventory level discrepancy term and a WIP level discrepancy
term, see equation (3).

(3)

Notice in (3) we have defined the Target Net Stock as a time invariant constant.
This need not always be the case, it maybe appropriate to assume that it is a
function of time, t. The forecast of demand can be done in a variety of ways, but
here it is convenient for demonstration purposes to use simple exponential
smoothing, see equation (4).

(4)

To complete the definition of the OUT policy we will also need the inventory and WIP
balance equations. These are

, (5)
. (6)

In equations (5) and (6) there is a new term, T p, which is the replenishment lead-
time. This lead-time is the time between placing an order and receiving the
products ordered into stock. This order can be placed either on a supplier or on a
production system.

It is also obvious from (5) that there is a link between the bullwhip effect and “net
stock variance amplification” or NSAmp. NSAmp is the analogy of bullwhip in the
inventory levels. Clearly, when designing a replenishment rule, we want to avoid
both bullwhip (capacity related) costs and NSAmp (inventory related) costs.

(7)

Better forecasting

An important skill for companies to master in order to tame the bullwhip effect is to
create good forecasts. By “good” we mean forecasts that minimise mean squared
error (MMSE) between the forecast of demand over the lead-time (and review
period in discrete time systems) and the actual, realised demand over the lead-time
(and review period). Assuming an i.i.d. demand and simple exponential smoothing
forecasting is used inside the OUT policy, then the bullwhip is given by,

. (8)

In equation (8) when T a=0 then Bullwhip=5+6T p+2T p 2 and as T a approaches

infinity the Bullwhip ratio approaches unity. The value of T a that minimizes all
future forecast errors for i.i.d. demand is T a=infinity. Thus, we can see that we
make more accurate forecasts the bullwhip problem is reduced (but is not
eliminated in this scenario) with more accurate forecasts.

It is also interesting to see what happens to the inventory bullwhip effect, NSAmp,
in our stylised example. It is given by equation (9),

(9)

Here we can see that the inventory variance is always greater than unity. Hence
inventory levels will always vary more than the demand signal and it is not possible
to achieve zero inventory policy without making the customer wait for the product
with this ordering decision. The last part of equation (9) tends to zero as Ta
approaches infinity. Thus, more accurate forecasting also leads to lower inventory
levels.

Reduce lead-times

Reducing lead-times will also reduce bullwhip. For example, see equation (8). Here
T p, the replenishment lead-time, occurs in the numerator of the bullwhip
expression and thus smaller T p’s will mean less bullwhip is produced. Furthermore,
for i.i.d. demand and MMSE forecasting, the lead-time drops out of the order
variance ratio expression. Unfortunately this is not a general conclusion. For other
types of demand processes (such as ARIMA demand) and other forecasting
mechanisms, lead-time does play a role. What is interesting though is the fact that
bullwhip will never increase when lead-time decreases.

Reducing lead-time will also have a positive impact on the inventory costs in a
supply chain. Inspection of equation (9) reveals that the inventory variance is made
up of three components. The first unit of inventory variance is due to the order of
events delay. That is, because demand for this planning period is not known until
the end of the planning period, inventory has got to vary at least as much as the
demand levels (in a continuous system this order-of-events delay does not occur
and thus this statement does not hold anymore). Inventory variance increases as
the production lead-time increases. In fact, we can see that inventory levels will also
vary by at least ((1+ Tp)*(Variance of demand)), no matter how well the forecasts
are generated. The third component of the inventory variance (equation (9)) is to
cover the forecasts errors introduced by the non-optimal forecasts.

Proportional feedback controllers and smoothing replenishment rules

A control engineer may look at equation (3) and not be at all surprised by the fact
that the OUT policy produces bullwhip effects. Scrutiny of equation (3) shows that it
has two feedback loops, one for the net stock and one for the WIP. Both of these
feedback loops have a gain of unity. That is, all of the discrepancy between actual
and target inventory (and WIP) is incorporated into the order rate.

It is almost second nature to a control engineer that it always possible to eliminate

the bullwhip effect if the feedback loops or gains are properly designed. There are
various options for designing these feedback loops. The simplest and most common
approach is to use a “proportional feedback controller”. It may take the form of a
fraction, 1/ T i for example (although a PID [25] controller could also have been
used, amongst others) and including into the OUT policy may result in a new form of
equation (3);

(10)

In equation (9) we have added two independent feedback controllers, T i and T w. T

i is for regulating the net stock error feedback and T w is for regulating the WIP
error feedback. Allowing the feedback loops to be independent allows the natural
frequency and damping ratio of the OUT policy to be decoupled from each other
[26]. However, when T w= T i the mathematics involved become considerably
simpler [27], although the independent case is possible to study [28]. When T w= T
i, and T a = infinity, the bullwhip expression, in our stylized example becomes

(11)

In (11) we notice that bullwhip is now independent of the lead-time. Under the same
conditions the NSAmp expression becomes

(12)

where can now see that both T i>1 (smoothing) and T i<1 (bullwhip) increases
inventory requirements. However, the influence of the lead-time on the inventory
has remained the same; longer lead-times mean that the variance of the inventory
levels increases.

An interesting trade-off situation now occurs. If we assume costs were equal to the
order and inventory variances we may wish to minimise the sum of the bullwhip and
NSAmp expressions. Adding together equations (11) and (12), differentiating them
with respect to T i and solving for zero gradient shows that the optimal value of T i
is the golden ratio, 1.618034. This is illustrated graphically in Figure 5.

The use of proportional controllers need not be limited to feedback loops either. By
exploiting optimal control theory and state-space approaches it is possible to derive
policies that take full account of all the states in the system. These types of systems
are known as a full-state feedback systems [29] and can account for the structure
of complex demand process in a superior manner when compared to the traditional
(and the proportional) order-up-to policy.
Figure 5. Variance ratios with the golden feedback controller

Multi-echelon supply chain policies

When we consider multi-echelon supply chains then there a whole new range of
options available to us. For example, we have already spoke of VMI supply chains.
Here downstream supply chain states are communicated to suppliers and this
information is used in their replenishment decisions. This type of arrangement is
closely related to what is known as the echelon-stock policy or the echelon order-
up-to policy, Hoberg, Bradley and Thonemann (2007) [30].

Collaboration and coordination mechanisms for multi-echelon supply chains also

have very good economic performance. For example, if a retailer is willing and able
to smooth his replenishment orders he places on his supplier, the supplier will be
able to manufacture product more efficiently. However, this is effectively an
altruistic contribution on behalf of the retailer if the supplier does not share the
gains with the retailer. Disney, Lambrecht, Towill and Van de Velde (2007) [31] have
been investigating the role that matched proportional feedback controllers can have
in this type of coordination scheme when both bullwhip and inventory costs exist.
Hosoda and Disney (2006) [32] considered the case when only inventory costs
exist.

Finally, there is a very innovative and novel method currently being developed by
Gaalman and Disney (2007) [33] for co-ordinating a multi-echelon supply chain. This
policy has been derived using optimal control theory and, in a sense, is like a VMI
supply chain in reverse. The core of the idea is that because the retailer’s lead-time
is shorter than the manufacturer’s lead-time, he can correct some of the
manufacturer’s forecast errors. In this way, the retailer is accounting for the state of
the “upstream” supply chain. The analysis of this policy is not yet complete but
initial findings are very interesting.
Economics of the bullwhip problem

In this section we will quickly explore an economic approach to looking at the

bullwhip problem. To capture the lost capacity and over-time costs that may
reasonably be assumed to be dependent on the order rate we will assume that
demand is normally distributed and a discrete time, linear system exists. Other
costs may be assumed to be constant or independent of the order rate and we
simply ignore them here. Such costs may be materials, energy and administration
overheads, for example.

Let S be an amount of (slack) capacity above the mean demand rate (

) and N be the cost per unit per period of not producing to the available production
capacity. Then there will be piece-wise linear, convex lost capacity costs in each
period of

. (13)

Let P be the cost per unit per period of producing in over-time, so there are piece-
wise linear, convex over-time costs in each period of

. (14)

We can invest in an optimal amount of capacity (above or below average demand)

to achieve an economic over-time probability. The desired amount of capacity is
driven by the critical fractile and turn out be
. (15)

When this optimal amount of capacity exists then the bullwhip related costs are

. (16)

Equation (16) shows us that the bullwhip costs are linearly related to the standard
deviation of the order rates.

The square root law for bullwhip

Let’s turn our focus now to a distribution network. Assume that we have multiple
retailers being served by a number of distribution centres. All transportation lead-
times are the unity, regardless of the number of distribution centres that exist. Each
retailer faces i.i.d. demand with the same mean and variance. Furthermore each
retailer and distribution centre employs a traditional OUT policy with MMSE
forecasting and unit feedback gains. For such a scenario Maister (1976) [34]
introduced the “Square Root Law for Inventory” when consolidation occurs in the
distribution network. Quoting directly from Maister,

“If the inventories of a single product (or stock keeping unit) are originally
maintained at a number ( n) of field locations (refereed to as the decentralised
system) but are then consolidated into one central inventory then the ratio
exists”, Maister (1976).

Amazingly, the square root law also exists for bullwhip costs. Consider the capacity
related costs at the DC echelon. Equation (16) shows us that bullwhip or capacity
costs are given by

. (17)

Y is a constant determined by the lost capacity and overtime costs. It is easy too
prove the square root law for bullwhip exists by considering that in the
decentralised supply chain the standard deviation of the orders at each of the n
distribution centres is

, and in the centralised supply chain (with only one distribution centre) the standard
deviation of the orders is

. Thus,

, (18)

which is the “Square Root Law for Bullwhip” [35]. This result surprised us, as
intuitively, we expected it to have the opposite impact. This result also suggests
that reasons to consolidate distribution networks are actually a lot stronger than
previously thought (as this is often based solely on inventory costs). The likely
impact of this is to force companies to consolidate even further than they have in
the past, increasing the amount of traffic on the road. Thus, internalising the
external costs transportation causes is now even more important.

Some ideas on future bullwhip research

We have reviewed the main methodological approaches to solving the bullwhip

effect and highlighted the role that the supply chain structure and the
replenishment rules have upon it. We have briefly considered the economics of the
bullwhip effect and what it might mean in a divergent distribution network. We have
also given a short summary of an industrial case study where we designed out
bullwhip from a supply chain. We will now conclude with some thoughts on future
bullwhip research.

Joint replenishment polices (JRP) which control more than one product in the same
inventory replenishment decision is a very promising but complex issue. It is closely
related to the inventory routing problem (IRP) and there are some initial results [36]
on both the JRP and IRP that have some interesting properties and show improved
economic performance. This is especially true when order set-up or transportation
costs are considered.

Recently we have discovered that there is a link between smoothing and lead-times.
We have been using queuing theory to model a manufacturer. The manufacturer
works on a make-to-order, first come, first served basis. When a retailer smoothes
his replenishment order that is placed on a manufacturer, the lead-time that the
manufacturer needs to produce and deliver the products is reduced. Thus, there is a
link between bullwhip and lead-time variability [37]. The smoother the retailer’s
order is, the quicker the manufacturer can replenish his order, on the average. Thus
there is actually a mechanism to break the bullwhip, inventory trade-off we spoke of
earlier. Other research that has recently considered similar problems was
conducted by Chatfield, Kim, Harrison and Hayya (2004) [38] who investigated the
impact of stochastic lead-times, information quality and information sharing in the
OUT policy via a simulation experiment. This approach is further clarified with
analytical insights in Kim et al (2006) [39].
Multi-echelon policies offer a very promising route for future bullwhip analysis.
However, they will require a significant industrial engineering effort to implement in
practice. Collaboration and co-ordination mechanisms are also needed. However,
the biggest problem with multi-echelon research is properly capturing the effect of
lost sales and capacity constraints. This is very difficult to achieve as these systems
are non-linear. However, Markov Chains do offer a means of analysis and will even
cope with quantised systems where only integer amount of products can be ordered
from a supplier or production system.

Finally, if you would like to explore more about the bullwhip effect, please go to
www.bullwhip.co.uk. There you will find a collection of simulations, java explorers,
table top games and reference lists associated with the bullwhip effect.

References