Demand forecasting and sharing strategies to reduce fluctuations and the bullwhip effect in supply chains

Supply chain inventories are prone to fluctuations and instability. Known as the bullwhip effect, small variations in the end item demand create oscillations that amplify throughout the chain. By using system dynamics simulation, we investigate some of the structural sources of the bullwhip effect, and explore the effectiveness of information sharing to eliminate the undesirable fluctuations. Extensive simulation analysis is carried out on parameters of some standard ordering policies, as well as external demand and lead-time parameters. Simulation results show that (i) a major structural cause of the bullwhip effect is isolated demand forecasting performed at each echelon of the supply chain, and (ii) demand and forecast sharing strategies can significantly reduce the bullwhip effect, even though they cannot completely eliminate it. We specifically show how each policy is improved by demand and forecast sharing. Future research involves more advanced ordering and forecasting methods, modelling of other well-known sources of bullwhip, and more complex supply network structures. Journal of the Operational Research Society (2011) 62, 458-473. doi:10.1057/jors.2010.188