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Systematic Risk and the Bullwhip Effect in Supply Chains


Nikolay Osadchiy


Emory University Goizueta Business School

Vishal Gaur


Cornell University - Samuel Curtis Johnson Graduate School of Management

Sridhar Seshadri


University of Texas at Austin - Red McCombs School of Business

April 1, 2011

Johnson School Research Paper Series No. 41-2011
McCombs Research Paper Series No. IROM-04-11

Abstract:     
The variance of demand can be divided into two components, a systematic risk component that occurs due to economic factors, and an idiosyncratic noise component. Operational hedging addresses the total variance of demand, whereas financial hedging is useful against systematic risk. We investigate the systematic risk component of demand uncertainty using industry-level data for the manufacturing, wholesale trade, and retail trade sectors of the U.S. economy, and applying sales as a proxy for demand. We show that the degree of systematic risk increases substantially from retailers to wholesalers to manufacturers. Investigating two potential sources of this phenomenon, amplification of production series as predicted by the bullwhip effect and aggregation of orders placed by downstream industries, we find evidence supporting the latter. Our result have implications for the relative values of different operational and financial hedging strategies chosen by a firm. It is particularly relevant to events such as the 2008-09 economic recession and the post-recession recovery.

Number of Pages in PDF File: 40

Keywords: Systematic risk, order aggregation, empirical analysis, supply webs, hedging

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Date posted: September 22, 2011 ; Last revised: January 10, 2012

Suggested Citation

Osadchiy, Nikolay and Gaur, Vishal and Seshadri, Sridhar, Systematic Risk and the Bullwhip Effect in Supply Chains (April 1, 2011). Johnson School Research Paper Series No. 41-2011; McCombs Research Paper Series No. IROM-04-11. Available at SSRN: http://ssrn.com/abstract=1931737 or http://dx.doi.org/10.2139/ssrn.1931737

Contact Information

Nikolay Osadchiy (Contact Author)
Emory University Goizueta Business School ( email )
1300 Clifton Rd NE
Atlanta, GA 30326
United States
Vishal Gaur
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
Ithaca, NY 14853
United States
HOME PAGE: http://www.johnson.cornell.edu/faculty/profiles/Gaur/

Sridhar Seshadri
University of Texas at Austin - Red McCombs School of Business ( email )
Austin, TX 78712
United States
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