Re-evaluating the bullwhip effect measurement: what are we capturing?

By | July 24, 2015

P. Saoud, N. Kourentzes, J. Boylan, 2015, 27th European Conference on operational Research, Glasgow.

A major problem that supply chains face is the Bullwhip effect, which manifests itself by an upstream increase in the variability of demand. This phenomenon bears costly implications on the firms in the supply chain, and thus has been at the topic of numerous studies. Even though a vast body of literature has been dedicated to alleviating it, a much smaller effort has been placed in quantifying it. We proposes a new measurement to gauge the bullwhip effect, after highlighting the possible flaws of the current ones. Indeed, establishing adequate measures proves to be crucial in evaluating any contribution to dampen the Bullwhip Effect. The most pervasive metric employed is the ratio of variance, which consists of computing the ratio of variance of order placed over the variance of the demand at each node. Despite its ubiquity, this measure fails to serve its purpose on several occasions, such as in the case of seasonal demand, which is frequently encountered in real life. It also penalizes promotions, which appear as outliers, another driver of the Bullwhip Effect. An additional issue associated with this measurement is the nature of the costs that the metric ought to reflect. The fluctuations of the demand variability does not translate directly into the possible costs that can be incurred, nor does it assess the performance of the supply chain as a whole. This paper will investigate potential caveats and costs of the ratio of variance metric before introducing a new measure.

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