Quantifying the bullwhip effect in supply chains

Consider multiple companies operating as a serial supply chain. Within this environment, end users form the demand for the last company in the supply chain, but the demand for upstream companies is formed by the companies in the immediate downstream supply chain link. It has been shown that demand seasonality and forecast error can increase as we proceed up the supply chain. These demand distortions, called the “bullwhip” effect, create inefficiencies for upstream firms. This work seeks to identify the magnitude of the problem by establishing an empirical lower bound on the profitability impact of the bullwhip effect. Results indicate that the importance of the bullwhip effect to a firm differs greatly depending on the specific business environment. Given appropriate conditions, however, eliminating the bullwhip effect can increase product profitability by 10–30%.