Order Stability in Supply Chains: Coordination Risk and the Role of Coordination Stock

32 Pages Posted: 19 Oct 2004

See all articles by Rachel T. A. Croson

Rachel T. A. Croson

Michigan State University

Karen Lisa Donohue

University of Minnesota - Twin Cities - Carlson School of Management

Elena Katok

University of Texas at Dallas

John Sterman

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

Date Written: October 2004

Abstract

The bullwhip effect describes the tendency for the variance of orders in supply chains to increase as one moves upstream from consumer demand. Previous research attributes this phenomenon to both operational and behavioral causes. Operational causes are features of the institutional setting that lead rational agents to amplify changes in demand, while behavioral causes arise from suboptimal decisionmaking. This paper examines causes of the bullwhip through experiments with a serial supply chain, using the Beer Distribution Game. Unlike prior studies, we control all four commonly cited operational causes of the bullwhip, including uncertainty about customer demand. We eliminate demand uncertainty completely by making customer demand constant and known to all participants. Despite these controls, order amplification, instability, and supply line underweighting remain pervasive. We propose a new behavioral cause of the bullwhip, coordination risk, that arises when players place excessive orders to address the perceived risk that others will not behave optimally. We test two strategies to mitigate coordination risk: (1) holding additional on-hand inventory, and (2) creating common knowledge by informing participants of the optimal policy. Both strategies reduce, but not eliminate, the bullwhip effect. Holding excess inventory reduces order amplification by providing a buffer against the endogenous risk of coordination failure. Such coordination stock differs from traditional safety stock, which buffers against exogenous demand uncertainty. Surprisingly, neither strategy reduces supply-line underweighting. We conclude that the bullwhip can be mitigated but its behavioral causes appear robust.

Keywords: supply chains, coordination risk, coordination stock, bullwhip effect

Suggested Citation

Croson, Rachel T. A. and Donohue, Karen Lisa and Katok, Elena and Sterman, John, Order Stability in Supply Chains: Coordination Risk and the Role of Coordination Stock (October 2004). Available at SSRN: https://ssrn.com/abstract=607321 or http://dx.doi.org/10.2139/ssrn.607321

Rachel T. A. Croson

Michigan State University ( email )

East Lansing, MI 48824
United States

Karen Lisa Donohue

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Elena Katok

University of Texas at Dallas ( email )

Jindal School of Management
800 W. Campbell Dr.
Richardson, TX 75080
United States

HOME PAGE: http://www.utdallas.edu/~ekatok/

John Sterman (Contact Author)

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

E62-436
Cambridge, MA 02139
United States
617-253-1951 (Phone)

HOME PAGE: http://jsterman.scripts.mit.edu/

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