UNDERSTANDING THE FINANCIAL CONSEQUENCES OF THE BULLWHIP EFFECT IN A MULTI‐ECHELON SUPPLY CHAIN

Abstract

This article is concerned with how supply chain strategies can mitigate the Bullwhip Effect and inflated inventories from the perspective of the central firm (typically a manufacturer) in the supply chain. We first outline a base case scenario with a validated system dynamics simulation model, using supply chain characteristics as reported by a real firm, in this case a Mexican electronics supplier to U.S. automobile assemblers. We find, surprisingly, that a lower Bullwhip Effect Index (BE) does not always lead to lower costs in the supply chain studied. Furthermore, sensitivity analysis suggests some interesting, counterintuitive results. The implications of these findings are further developed as we test how lead time reduction can also reduce the Bullwhip Effect in the simulated setting.

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