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
July 16, 2014
Stanford University Graduate School of Business Research Paper No. 13-11
This work distinguishes between two concepts that have often been confounded --- the bullwhip effect and production smoothing. These phenomena appear antithetical, sharing opposing empirical tests: production variability exceeding sales variability for bullwhip, and vice versa for smoothing. But this is a false dichotomy. We differentiate between these two ideas with a new "Bullwhip-Corrected Production Smoothing Metric" (BCPSM), 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 65% smooth production by at least 10% the variance of demand, despite the fact that 99% exhibit the bullwhip effect. Indeed, we estimate both the bullwhip effect (we find production 220% as variable as sales) and production smoothing (we find production would be 11% more variable without deliberate production stabilization). We develop our smoothing measure from a structural econometric production scheduling model, based on the Generalized Order-Up-To Policy.
Number of Pages in PDF File: 30
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: July 18, 2014
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