Rachel Croson
Department of Operations and Information Management, The Wharton School, University of Pennsylvania Philadelphia, PA 19104-6340 crosonr@wharton.upenn.edu
Karen Donohue
Department of Operations and Management Science, The Carlson School, University of Minnesota Minneapolis, MN 55455-9940. kdonohue@csom.umn.edu
Elena Katok
Department of Supply Chain and Information Systems, Smeal College of Business, Penn State University University Park, PA 16802-1913. ekatok@psu.edu
John Sterman
Sloan School of Management Massachusetts Institute of Technology, Cambridge, MA 02142. jsterman@mit.edu
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 structural characteristics that lead rational agents to amplify changes in demand, while behavioral causes arise from suboptimal decision-making. Here we examine causes of the bullwhip through experiments with a serial supply chain, using the Beer Distribution Game. Unlike prior studies, we control for 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, arising when players deviate from equilibrium to build inventory to protect against 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 do 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: Bullwhip Effect, Behavioral Causes, Supply Chain Management, Beer Distribution Game, Business Cycles
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