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

July 16, 2014

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

Abstract:     
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 Metric

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Date posted: November 17, 2013 ; Last revised: July 18, 2014

Suggested Citation

Bray, Robert Louis and Mendelson, Haim, Production Smoothing and the Bullwhip Effect (July 16, 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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