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Northwestern University

Kellogg Operations Workshop 2006

"In Search of the Bullwhip Effect"

Gérard P. Cachon, Taylor Randall, Glen M. Schmidt

Abstract

The bullwhip effect is the phenomenon of increasing demand variability in the supply chain as one moves from downstream echelons (retail) to upstream echelons (manufacturing). Macroeconomists have studied the related observation that production is often more variable than sales, while the operations management literature has more recently elaborated on explanations for the bullwhip effect and offers further examples. The objective of this study is to document the strength of the bullwhip effect in industry level U.S. data. We find the bullwhip effect among wholesalers, but little evidence of the bullwhip effect among retailers and only some with manufacturers. Even though we find evidence that the known causes of the bullwhip effect as one moves up the supply chain: in contrast to the natural consequence of the bullwhip effect, manufacturers do not have substantially greater demand volatility than retailers (and may even have lower demand volatility). Although the bullwhip effect is generally present among wholesalers and is strong with some manufacturers, we conclude that the bullwhip effect is not widespread in the U.S. economy when the unit of analysis is at the industry level. We explain why our results are apparently at odds with the existing literature.

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