Quantifying the impact of demand substitution on the bullwhip effect in a supply chain
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ORIGINAL PAPER
Quantifying the impact of demand substitution on the bullwhip effect in a supply chain Xueping Li • Laigang Song • Zhaoxiao Zhao
Received: 15 October 2010 / Accepted: 8 September 2011 / Published online: 25 September 2011 Springer-Verlag 2011
Abstract In a supply chain, the distorted demand information when it goes upstream is commonly known as the bullwhip effect. In this paper, the impact of demand substitution on the bullwhip effect in a two-stage supply chain is investigated. In our model, a single retailer observes inventory levels for two products, among which product 1 can be used to substitute product 2. The retailer places orders to a single manufacturer following an order-up-to inventory policy and uses a simple moving average forecasting method to estimate the lead-time demand. The customers’ demands are modeled by an autoregressive process. By analyzing the bullwhip effect in such settings, quantitative relations between the bullwhip effect and the forecasting method, lead time, demand process, and the product substitution are obtained. Numerical results show that demand substitution can reduce the bullwhip effect in most cases. Keywords Bullwhip effect Demand substitution Supply chain management
1 Introduction A simple two-stage supply chain typically consists of manufacturers, retailers, and end customers. Only retailers
X. Li (&) L. Song Z. Zhao Department of Industrial and Information Engineering, University of Tennessee, Knoxville 408 East Stadium Hall, Knoxville, TN 37996-0700, USA e-mail: [email protected] L. Song e-mail: [email protected] Z. Zhao e-mail: [email protected]
have direct information of end customers’ demands. As to manufacturers, only orders from retailers can be seen. End customers’ demands are not visible to manufactures. Products are distributed downward along the supply chain, while information flows upward from end customers to manufacturers. It has been noticed that the information is distorted due to various reasons. This distortion of the demand in the upstream of a supply chain is widely known as the bullwhip effect [5, 12], which has been studied from both design and operation perspectives. Figure 1 illustrates the bullwhip effect in a three-stage supply chain that consists of manufacturers, distributors, retailers, and end customers. The order quantity, placed by the distributors to manufacturers, is distorted dramatically comparing with the real end customers’ demand. Because of observing only immediate order data, the entities in the supply chain are misled by the amplified demand patterns. This distorted information causes inefficiencies in many parts of the supply chain, such as excess raw materials due to unplanned purchases from suppliers, additional manufacturing expenses created by excess order demands, inefficient utilization and overtime, excessive warehouse cost, and so on. Fuller et al. [9] pointed out that the inefficiencies led by distorted information born some responsibility for $75 billion to $100 billion out of $300 billion
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