Upstream Volatility in the Supply Chain: The Machine Tool Industry as a Case Study

23 Pages Posted: 4 Oct 2011

See all articles by Edward G. Anderson

Edward G. Anderson

University of Texas at Austin - Department of Information, Risk and Operations Management

Charles H. Fine

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Geoffrey Parker

Dartmouth College

Date Written: September 1, 2000

Abstract

Cyclicality is a well-known and accepted fact of life in market-driven economies. Less well known or understood, however, is the phenomenon of amplification as one looks “upstream” in the industrial supply chain. We examine the amplification phenomenon and its implications through the lens of one upstream industry that is notorious for the intensity of the business cycles it faces: the machine tool industry. Amplification of demand volatility in capital equipment supply chains, e.g., machine tools, is particularly large relative to that seen in distribution and component parts supply chains.

We present a system dynamics simulation model to capture demand volatility amplification in capital supply chains. We explore the lead-time, inventory, production, productivity, and staffing implications of these dynamic forces. Several results stand out. First, volatility hurts productivity and lowers average worker experience. Second, even though machine tool builders can do little to reduce the volatility in their order streams through choice of forecast rule, a smoother forecasting policy will lead companies to retain more of their skilled work force. This retention of skilled employees is often cited as one of the advantages that European and Japanese companies have had relative to their U.S. competitors.

Our results suggest some insights for supply chain design and management: downstream customers can do a great deal to reduce the volatility for upstream suppliers through their choice of order forecast rule. In particular, companies that use smoother forecasting policies tend to impose less of their own volatility upon their supply base and may consequently enjoy system-wide cost reduction.

Keywords: SUPPLY CHAIN, BUSINESS CYCLE, MANPOWER PLANNING, MACHINE TOOL, SYSTEM DYNAMICS, BOOM-BUST

JEL Classification: D24, L64, M11, M53, O33

Suggested Citation

Anderson, Edward G. and Fine, Charles H. and Parker, Geoffrey, Upstream Volatility in the Supply Chain: The Machine Tool Industry as a Case Study (September 1, 2000). Available at SSRN: https://ssrn.com/abstract=1938442 or http://dx.doi.org/10.2139/ssrn.1938442

Edward G. Anderson

University of Texas at Austin - Department of Information, Risk and Operations Management ( email )

CBA 5.202
Austin, TX 78712
United States
512-471-6394 (Phone)
512-471-3937 (Fax)

HOME PAGE: http://ed@edanderson.org

Charles H. Fine

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E53-393
Cambridge, MA 02142
United States
617-253-3632 (Phone)
617-258-7579 (Fax)

Geoffrey Parker (Contact Author)

Dartmouth College ( email )

Hanover, NH 03755
United States
603-646-9075 (Phone)

HOME PAGE: http://engineering.dartmouth.edu/people/faculty/geoffrey-parker

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