Production Smoothing and the Bullwhip Effect
Robert Louis Bray
Northwestern University - Department of Managerial Economics and Decision Sciences (MEDS)
Stanford University - Stanford Graduate School of Business
November 3, 2014
Stanford University Graduate School of Business Research Paper No. 13-11
This work distinguishes between two related concepts --- the bullwhip effect and production smoothing. These phenomena appear antithetical because they share opposing empirical tests: production variability exceeding sales variability for bullwhip, and vice versa for smoothing. But this is a false dichotomy. We differentiate between the two with a new production smoothing measure, which estimates how much more volatile production would be absent production volatility costs. We apply this metric to an automotive manufacturing sample comprising 162 car models. We find 75% of our sample smooths production by at least 5%, despite the fact that 99% exhibits the bullwhip effect; indeed, we estimate both a strong bullwhip (on average, production is 220% as variable as sales) and a strong degree of smoothing (on average, production would be 22% more variable without deliberate stabilization). We find firms smooth both production variability and production uncertainty. We measure production smoothing with a structural econometric production scheduling model, based on the Generalized Order-Up-To Policy.
Number of Pages in PDF File: 27
Keywords: production smoothing; bullwhip effect; demand signal processing; Generalized Order-Up-To Policy; Martingale Model of Forecast Evolution; Bullwhip-Corrected Production Smoothing Metricworking papers series
Date posted: November 17, 2013 ; Last revised: November 4, 2014
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