Abstract

http://ssrn.com/abstract=2355531
 


 



Disentangling Production Smoothing from the Bullwhip Effect


Robert Louis Bray


Northwestern University - Department of Managerial Economics and Decision Sciences (MEDS)

Haim Mendelson


Stanford University - Stanford Graduate School of Business

November 15, 2013

Stanford University Graduate School of Business Research Paper No. 13-11

Abstract:     
Until now, production smoothing and the bullwhip effect have shared a common measure: the difference between production variability and demand variability. This metric confounds the two effects, however, suggesting that firms that exhibit the bullwhip effect cannot smooth production. We develop new production smoothing measures that are robust to the bullwhip effect. We derive these measures from a structural econometric production scheduling model, based on demand signal processing. Applying these measures to monthly auto industry data, we find that auto manufacturers significantly smooth production, despite exhibiting a strong bullwhip effect. Further, we find that auto manufacturers actively smooth both production variability, which reflects all production fluctuations, and production uncertainty, which reflects only surprising production fluctuations.

Number of Pages in PDF File: 27

Keywords: Structural estimation, production smoothing, automotive industry, demand signal processing, Generalized Order-Up-To Policy, Martingale Model of Forecast Evolution.

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Date posted: November 17, 2013  

Suggested Citation

Bray, Robert Louis and Mendelson, Haim, Disentangling Production Smoothing from the Bullwhip Effect (November 15, 2013). Stanford University Graduate School of Business Research Paper No. 13-11. Available at SSRN: http://ssrn.com/abstract=2355531 or http://dx.doi.org/10.2139/ssrn.2355531

Contact Information

Robert Louis Bray (Contact Author)
Northwestern University - Department of Managerial Economics and Decision Sciences (MEDS) ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
Haim Mendelson
Stanford University - Stanford Graduate School of Business ( email )
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-8927 (Phone)
650-725-7979 (Fax)
HOME PAGE: http://faculty-gsb.stanford.edu/mendelson/

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