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
May 1, 2015
Forthcoming: Manufacturing & Service Operations Management
The bullwhip effect and production smoothing appear antithetical because their empirical tests oppose one another: production variability exceeding sales variability for bullwhip, and vice versa for smoothing. But this is a false dichotomy. We distinguish between the phenomena with a new production smoothing measure, which estimates how much more variable production would be absent production volatility costs. We apply our metric to an automotive manufacturing sample comprising 162 car models and find 75% smooth production by at least 5%, despite the fact that 99% exhibit the bullwhip effect. Indeed, we estimate both a strong bullwhip (on average, production is 220% as variable as sales) and robust 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: 14
Keywords: production smoothing; bullwhip effect; demand signal processing; generalized order-up-to policy; martingale model of forecast evolution
Date posted: November 17, 2013 ; Last revised: February 27, 2015
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