In search of the bullwhip effect

The bullwhip effect is the phenomenon of increasing demand variability in the supply chain from downstream echelons (retail) to upstream echelons (manufacturing). The objective of this study is to document the strength of the bullwhip effect in industry–level U.S. data. In particular, we say an industry exhibits the bullwhip effect if the variance of the inflow of material to the industry (what macroeconomists often refer to as the variance of an industry's ‘production’) is greater than the variance of the industry's sales. We find that wholesale industries exhibit a bullwhip effect, but retail industries generally do not exhibit the effect, nor do most manufacturing industries. Furthermore, we observe that manufacturing industries do not have substantially greater demand volatility than retail industries. Based on theoretical explanations for observing or not observing demand amplification, we are able to explain a substantial portion of the heterogeneity in the degree to which industries exhibit the bullwhip effect. In particular, the less seasonal an industry's demand, the more likely the industry amplifies volatility—highly seasonal industries tend to smooth demand volatility whereas nonseasonal industries tend to amplify.