Disentangling Production Smoothing from the Bullwhip Effect
Robert Louis Bray
Northwestern University - Department of Managerial Economics and Decision Sciences (MEDS)
Stanford University - Stanford Graduate School of Business
November 15, 2013
Stanford University Graduate School of Business Research Paper No. 13-11
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.working papers series
Date posted: November 17, 2013
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