Evaluation of an information systems investment into reducing the bullwhip effect - a three-step process

A simplified three‐step methodology for profitability evaluation of an information systems investment into reducing the bullwhip effect in the supply chain is presented. The bullwhip effect is the effect of increasing variability of the demand upstream in the supply chain and it causes especially the upstream companies to suffer. Removing bullwhip is beneficial for the whole supply chain. There are remedies to the bullwhip effect, based on increasing the information flow throughout the supply chain ‐ these remedies often require an information systems investment, the cost of which is hard to estimate exactly. Investment in a bullwhip reducing information system will take place if it is perceived to be profitable. Being able to evaluate the profitability, when information about the reachable benefits and the costs of the project is imprecise requires specialised methods: for this reason, the pay‐off method is used for the analysis. The three‐step process is illustrated with a numerical example.