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Information Transmission and the Bullwhip Effect: An Empirical Investigation

Management Science, Vol. 58, No. 5, May 2012.

16 Pages Posted: 6 Oct 2013 Last revised: 27 Feb 2015

Date Written: May 1, 2012

Abstract

The bullwhip effect is the amplification of demand variability along a supply chain: a company bullwhips if it purchases from suppliers more variably than it sells to customers. Such bullwhips (amplifications of demand variability) can lead to mismatches between demand and production, and hence to lower supply chain efficiency. We investigate the bullwhip effect in a sample of 4,689 public U.S. companies over 1974-2008. Overall, about two thirds of firms bullwhip. The sample's mean and median bullwhips, both significantly positive, respectively measure 15.8% and 6.7% of total demand variability. Put another way, the mean quarterly standard deviation of upstream orders exceeds that of demand by $20 million. We decompose the bullwhip by information transmission lead time. Estimating the bullwhip's information-lead-time components with a two-stage estimator, we find that demand signals firms observe with more than three quarters' notice drive 30% of the bullwhip, and those firms observe with less than one quarter's notice drive 51%. From 1974-94 to 1995-2008, our sample's mean bullwhip dropped by a third.

Keywords: bullwhip effect, MMFE, production smoothing, bullwhip decomposition, demand uncertainty

Suggested Citation

Bray, Robert Louis and Mendelson, Haim, Information Transmission and the Bullwhip Effect: An Empirical Investigation (May 1, 2012). Management Science, Vol. 58, No. 5, May 2012.. Available at SSRN: https://ssrn.com/abstract=2336301 or http://dx.doi.org/10.2139/ssrn.2336301

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 )

655 Knight 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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