Measuring and avoiding the bullwhip effect: A control theoretic aproach

Measuring and avoiding the bullwhip effect: A control theoretic aproach

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Article ID: iaor20042630
Country: Netherlands
Volume: 147
Issue: 3
Start Page Number: 567
End Page Number: 590
Publication Date: Jun 2003
Journal: European Journal of Operational Research
Authors: , , ,
Keywords: bullwhip effect, supply chain, system dynamics
Abstract:

An important contributory factor to the bullwhip effect (i.e. the variance amplification of order quantities observed in supply chains) is the replenishment rule used by supply chain members. First the bullwhip effect induced by the use of different forecasting methods in order-up-to replenishment policies is analysed. Variance amplification is quantified and we prove that the bullwhip effect is guaranteed in the order-up-to model irrespective of the forecasting method used. Thus, when production is inflexible and significant costs are incurred by frequently switching production quantities up and down, order-up-to policies may no longer be desirable or even achievable. In the second part of the paper a general decision rule is introduced that avoids variance amplification and succeeds in generating smooth ordering patterns, even when demand has to be forecast. The methodology is based on control systems engineering and allows important insights to be gained about the dynamic behaviour of replenishment rules.

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