Modeling inefficient institutions
By: Daron Acemoglu
Contributors: Massachusetts Institute of Technology. Dept. of Economics
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 06-01; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 06-01.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2005
Place of publication: Cambridge, MA
Language: eng
Number of pages: 54
Description: A major cause of supply chain deficiencies is the bullwhip effect which can be substantial even over a single echelon. This effect refers to the tendency of the variance of the replenishment orders to increase as it moves up a supply chain. Supply chain managers experience this variance amplification in both inventory levels and replenishment orders. As a result, companies face shortages or bloated inventories, run-away transportation and warehousing costs and major production adjustment costs. In this article we analyze a major cause of the bullwhip effect and suggest a remedy. We focus on a smoothing replenishment rule that is able to reduce the bullwhip effect across a single echelon. In general, dampening variability in orders may have a negative impact on customer service due to inventory variance increases. We therefore quantify the variance of the net stock and compute the required safety stock as a function of the smoothing required. Our analysis shows that bullwhip can be satisfactorily managed without unduly increasing stock levels to maintain target fill rates. Keywords: Bullwhip effect, Supply chain management, Inventory management, Variance reduction.
Notes: "December 27, 2005."

Includes bibliographical references (p. 50-54).

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