Abstract

http://ssrn.com/abstract=2355531
 


 



Production Smoothing and 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 3, 2014

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

Abstract:     
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 Metric

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Date posted: November 17, 2013 ; Last revised: November 4, 2014

Suggested Citation

Bray, Robert Louis and Mendelson, Haim, Production Smoothing and the Bullwhip Effect (November 3, 2014). 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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