Production Smoothing and the Bullwhip Effect

Bray, Robert L., and Haim Mendelson. "Production smoothing and the bullwhip effect." Manufacturing & Service Operations Management 17.2 (2015): 208-220.

14 Pages Posted: 17 Nov 2013 Last revised: 8 Feb 2016

Date Written: May 1, 2015

Abstract

The bullwhip effect and production smoothing appear antithetical because their empirical tests oppose one another: production variability exceeding sales variability for bullwhip, and vice versa for smoothing. But this is a false dichotomy. We distinguish between the phenomena with a new production smoothing measure, which estimates how much more variable production would be absent production volatility costs. We apply our metric to an automotive manufacturing sample comprising 162 car models and find 75% smooth production by at least 5%, despite the fact that 99% exhibit the bullwhip effect. Indeed, we estimate both a strong bullwhip (on average, production is 220% as variable as sales) and robust smoothing (on average, production would be 22% more variable without deliberate stabilization). We find firms smooth both production variability and production uncertainty. We measure production smoothing with a structural econometric production scheduling model, based on the generalized order-up-to policy.

Keywords: production smoothing; bullwhip effect; demand signal processing; generalized order-up-to policy; martingale model of forecast evolution

Suggested Citation

Bray, Robert Louis and Mendelson, Haim, Production Smoothing and the Bullwhip Effect (May 1, 2015). Bray, Robert L., and Haim Mendelson. "Production smoothing and the bullwhip effect." Manufacturing & Service Operations Management 17.2 (2015): 208-220.. Available at SSRN: https://ssrn.com/abstract=2355531 or http://dx.doi.org/10.2139/ssrn.2355531

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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