Analysis of Ordering Patterns in Serial Supply Chains

Recall Observation 4: to forecast is to err. In our discussion of that observation, we illustrated how forecasts can vary from period to period even in environments where the underlying demand process is stationary and exhibits a low coefficient of variation. We noted that since forecasts do vary, a company’s order process on its suppliers will, as we will demonstrate and prove, vary even more than the variation in the demand process. This variation commonly is called the “bullwhip effect.” The degree of variation in the order quantities also depends on supplier lead times as well as the information integration among supply chain partners. In the second chapter, we focus on what is known as the bullwhip effect. We examine a serial supply chain in which each echelon employs an order up to policy. Our analysis of this system shows that it is impossible to eliminate the presence of the bullwhip effect completely whenever demand is uncertain and lead times are positive. Thus we establish the necessity of ensuring lead times a short, predictable and repeatable in effectively designed supply chain systems.