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

supply chains
Author(s): Y Barlas and B Gunduz
Source: The Journal of the Operational Research Society, Vol. 62, No. 3, Special Issue: Supply
Chain Forecasting and Planning (March 2011), pp. 458-473
Published by: Palgrave Macmillan Journals on behalf of the Operational Research Society
Stable URL: http://www.jstor.org/stable/41058923
Accessed: 08-01-2016 15:25 UTC

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Journalof the Operational Research Society (201 1) 62, 458-473 © 201 I OperationalResearchSocietyLtd.All rightsreserved.0160-5682/1
I *^>-

wvwv.palgrave-journals.com/jors/

Demandforecasting to
and sharingstrategies
and thebullwhipeffect
reducefluctuations in
supplychains
Y Barlas1*and B Gunduz2
Istanbul,Turkey;and Ford Otosan,Golcuk,Kocaeli,Turkey
Bogazici University,
Supplychaininventories are proneto fluctuationsand instability.
Known as thebullwhipeffect, small
variationsin theenditemdemandcreateoscillationsthatamplify throughoutthechain.Byusingsystem
dynamicssimulation, we investigate
someofthestructural sourcesofthebullwhipeffect,and explorethe
effectiveness of information sharingto eliminatethe undesirablefluctuations. Extensivesimulation
analysisis carriedout on parametersof somestandardorderingpolicies,as wellas externaldemandand
lead-timeparameters. Simulationresultsshowthat(i) a majorstructural cause of thebullwhipeffectis
isolateddemandforecasting performed at each echelonofthesupplychain,and (ii) demandand forecast
sharingstrategiescan significantly reduce the bullwhipeffect,even thoughtheycannot completely
eliminateit. We specifically
showhow each policyis improvedby demandand forecastsharing.Future
researchinvolvesmore advanced orderingand forecasting methods,modellingof otherwell-known
sourcesof bullwhip,and morecomplexsupplynetworkstructures.
JournaloftheOperational ResearchSociety(2011)62, 458-473.doi:10.1057/jors.2010.188

Keywords: supplychain; bullwhipeffect;demandforecasting;

information
sharing;systemdynamics;
simulation

Introduction demand informationcould significantly reduce the

bullwhip effect.Xu et al (2001) and Lee and Whang
Supplychain inventories are prone to fluctuations and
that sharingof the demand forecastand
Small changesin the end item demand can (1998) report
instability.
createinventory and orderoscillations thatamplify as one inventoryinformationis effectivein reducingorder
fluctuationsand safetystocks. Gavirneniet al (1999)
movesup in thesupplychain(Forrester, 1961,Chapter12;
compares the no-information-sharing case against two
Sterman,1989; Sterman,2000, Chapter 17, p 18). This different of
types information-sharing policiesused by the
phenomenonof amplification of oscillationsthroughthe
retailer(partialand completesharing)in a simpleone-
supplychainis also knownas thebullwhip effect(Lee et al, chain. Gallego and Özer (2001)
retailer-one-supplier
1997;Chen et al 1998;Xu et al, 2001). searchesoptimalpoliciesfor withand withoutdemand
Lee et al (1997) identifiesfour main causes of the
information-sharing cases in a two-stagesupplychain,
bullwhip effectas: demand signal processing,order where the retailerbatches orders and faces Poisson
batching,rationinggame, and price variations.Chen demands.Cheng and Wu (2005) show how information
et al (1998) argues that the bullwhipeffectis due, in
sharingcan reduceinventory costsin a two-level chainwith
part,to theneed to forecastthedemand.Sterman(2000, retailers. et al show that
multiple Dejonckheere (2004)
Chapter 17 and 18) and Forrester(1961, Chapter 12) information is if not
sharing very beneficial, indispensable
show that delays inherentwithin the supply chain
in order-up-to-Spolicies since the magnitudeof the
togetherwith demand forecastingand distortioncan reducedat higherlevels
createamplifiedoscillations. bullwhipcan thusbe significantly
in thechain.However,theynotethatinformation sharing
Supplychainliterature and management practicefocus cannot eliminate the and
on coordinationpolicies based on information completely bullwhip. Jeong
sharing discusses the of a multi-echelon
Maday (1996) stability
among supply chain membersin order to reduce the chainfroma feedbackcontroltheoretic
Chen et al (1998) arguesthatcentralizing supply perspective.
bullwhipeffect. Silveret al (1998) suggestsdemandsharingand echelon
* inventory policyimplementations. Authorspropose that
Correspondence:Y Barlas, Bogazici University,Departmentof
Industrial 34342,Bebek,Istanbul,Turkey.
Engineering,
each stage apply echelon (s, S) policy in whichan agent
E-mail:ybarlas@boun.edu.tr monitorsitstotalecheloninventory level.Chenet al (2000)

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 - Demand
Y BariasandB Gunduz andsharing
forecasting to reducefluctuations
strategies andthebullwhip insupply
effect chains 459

demonstratethe fact that smootherdemand forecasts used in systemdynamicsmodels,is normally

ruletypically
reducethebullwhipeffect, and longerlead timesincreaseit. time-continuous.As will be explained below, in the
They also show that for both moving average and assumedparametersettings, it was possibleto represent
exponentialsmoothingforecasts,the veryinclusionand the anchor-and-adjustorderingrulewithDT = 1 as well,
need for estimationof a linear trendparameterinto withoutcausinganyerroneousdynamics.
the forecastingmodel results in increased bullwhip. The basicgenericequationsofthemodelaredescribed in
Dejonckheereet al (2002) analyzetheeffects of constant, thissection(exceptthe policy-specificorderingequations
linear,and quadraticexponentialsmoothingalgorithms thatare presentedlaterin separatesections).
on thebullwhip.Theyshowthatthebullwhipemanating Local inventory(LI) increases with arrivals and
fromthetrenddetectionalgorithms (linearand quadratic decreaseswithshipments:
or exponentialsmoothing)are reduced by loweringthe U- , = U-,r-i + (Ai,t- Siit) [Goods] (1)
exponentialsmoothing in
constantused thesealgorithms.
Morerecently, Datta et al (2007)analyzestherelationships whereAitis thearrivalsto stage/and Sittis theshipments
betweendemandand orderforecasting and the bullwhip fromstage/in periodt.
effect,and proposes an advanced forecastingmodel In transitinventory, the goods shippedby the upper
stagethathave not yetarrived:
(GARCH) forsupplychainmanagement.
The purposeof our researchis twofold:(1) to under- -
ITiit= ITUt-x+ (Si+U Aitt) [Goods] (2)
standsome of the underlying structures and factorsthat
fluctuations and the bullwhipeffect Goods in transitarriveafteran exponential(gradual)
generateinventory
delaystructure:
throughthesupplychain;and (2) to exploretheeffective-
ness of some management strategiesin ameliorating this Ai,t = ITi,t/LTi [Goods/Period] (3)
undesirablebehaviour.We particularly focuson uncoor-
whereLT¡ is thetransitlead timeneededforshipments by
dinated demand forecastingas a major cause of the to reach i.
stage(i+l) stage
bullwhipeffect,and sharingof demand and forecast (SR) fora stage/is the sum of
Shipmentrequirement
information as a counter-bullwhip managementpolicy. demandfaced(Dit) at timet and backloggedorders(BLit):
SystemDynamics modellingis used as the research
platform. SRi,t = BLUt+ A, t [Goods/Period] (4)
If thereis enoughLI, the requiredamountis shipped
immediately portionof
in one period.Ifnot,theunfulfilled
The model structure ordersis added to BL:

We considera three-stage supplychain systemconsisting Siit= mm(SRiìtì

of identicalagentswhereeach agentordersonlyfromits
upper agent (/+1). An agent ships goods immediately
upon receivingthe order,if thereis sufficient on-hand
inventory.Orders be
may partially and
fulfilled, unfulfilled
orders are backlogged.Shipped goods arrive after a
constanttransitlead time(LT). The model represents a
set-
general un-capacitatedproducer-wholesaler-retailer
ting.The uppermoststage(producer)places ordersto an
unlimitedsource, so there is no backloggingof the
producer orders by the raw material/parts supplier.
Alternatively,we can thinkof a factorythatalwayskeeps
enoughstockof raw materialand parts.This assumption
is made in a senseto draw a practicalmodel boundary,
elsethesameinventory structurewouldhave
management
to be cascaded too many times,withoutadding any
conceptualor novel dimensionto the research.(See the
stock-flowdiagramsand equationsbelow.)
For consistencywith models and policies in the
inventory timeis modelleddiscrete(DT = 1 time
literature,
period). This makes the model time-discrete that is
necessaryto representstandard orderingpolicies like
Order-up-to-S and (s, S), as will be describedbelow.
Anotherpolicyanalyzed,the anchor-and-adjust ordering
Llht) [Goods/Period] (5)
-
BLi,t+x= BL¿it+ A, t Si,t [Goods] (6)
Net inventory (NI) is theLI afterthebackloggedorders
are subtracted:
t = LU,t - BLi,t [Goods]
JV7/, (7)
Agents are assumed to be unaware of theexactdemand
patterntheyare facing,so theymustforecastthe future
demand. Simple exponentialsmoothingis used as the
forecastingmechanism.Thus, the expecteddemand is
calculatedby:
Eiit=£,,,_!+ (l/EATi)(A,r-i- Eiit-')
[Goods/Period] (8)
whereE ATi is the expectationadjustmenttimeused by
stage /. Dht_xis the demandfaced by stage /. The end
demandDx is an externalinputto be describedin thenext
sectionand demandsD2 and D3 facedby stagetwo and
threeare actuallytheordersplaced by theirlowerstages.
(Di = 0¿_x, whereOt are to be describedin the following
sections.)
For any agent,the total expecteddemandduringLT
(DiL) is simplycalculatedby theexpecteddemandforone

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460 Journal Research
oftheOperational Vol.62,No.3
Society

by LT:
periodmultiplied {ITi t+ BLi+l> ,). Thus, the above formulationdoes not
implyan unrealistic assumptionin a realapplication.
A,l= {LTi){Eiit) [Goods] (9) The stock-flow diagramsfor retailer,wholesaler,and
producerare shownin Figure1 and 2.
Each agentcontinuously monitorsher inventory posi-
tion(IP), definedas the sum of her local inventory
(LI),
The demandpattern
goods(IT) fromtheupperstage,backlog(BL) at
in transit
theupperstage,minusBL at herown stage: Three typesof demandinputare used: (1) deterministic
'step up and down' demand for testing/verification
IP i = Lit + IT i + BLM - BLi [Goods] (10)
purposes;(2) iid randomdemand(Normal(20,2)) in some
In reallife,itis difficult foran agentto knowhowmuch selectedcomparisonruns; and (3) stationaryautocorre-
ofwhite
of its ordersare in transitand how muchare backlogged lateddemand(obtainedbyexponential smoothing
noise, withan autocorrelationperiodof five)used in most
by theupperstage.So, theexplicitinclusionof the term
runs in this paper, unless otherwise noted. (Figure 3
'ordersbackloggedby theupperstage(BLi+1 ,)' in theIP
illustrates
these threedemand patterns.)
formulation mayseemtoo idealistic. However,all ordering
policies tested in this researchutilizethesumof in-transit
goods and upper stage backlogs{ITt+ BLi+x), whichis
the difference betweenthe total ordersgivenand Orderingpolicies
simply
the ones that have arrived.An agentdoes not need to Threebasicinventory management policiesaretestedwithin
obtain specificBL information fromits upper stage in the supplychainmodel:Order-up-to-S policy,a standard
orderto determine totalordersthathave not yetarrived system dynamics ordering policy (anchor-and-adjust

rp £J Stage1: Retailer XX {}

/hipment2 In Transit N. ^'

^^^^^^^y^ne''men'or^

supplierdispatch ^T arrival T shipment '. '

transitlead time / T ^v X

/ ' / '
requirementX^erBackb/
Order 2
Backlog / ' _
y/ 4^

| ®- -^i)^-. - /backlog
i ;
?<s --~~~"*l J^K^^
^^^^--^__^^/ ""
_^--^-^^^^^^ ' / change
position '
inventory /~~~" >v I

~~
( Expected Demand
p ~~~~~^~^""^^^ ^^^-^n^/
jf^S. 'JVw^ ^^^í M ^^c^^kC^i demand
orderdocisiorrv N K.J ^Cw
'^ orderup to level c ' V
^'^^^ ^^^ change
expectations

inventoty
expectation
adjustmenttime
adjustmenttime

Figure1 Generalstock-flow
diagram model:stageone,retailer.
ofthesupply-chain

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All use subject to JSTOR Terms and Conditions
 Y ßarlas - Demand
andß Gunduz andsharing
forecasting toreduce
strategies fluctuations
andthebullwhip insupply
effect chains 461

Ç0 Tlj 5fs§€2 Wnojesa-*" ft

f shipment
3 L«al Inventory 2 X.
'n Transit ' 2^>^i5st trtvertory

dispatch2
supplier ^T ? ^^^-^wimnt2 ^v I
arrival1!

OrderBacklog3 / transit
teastime2 / . jl^^X X
* smpmtnt
r / I / X^Qréer Backlog^ Nt

- ^"^ '
mvenwry
pos-tt^ té^' ^oacklog
'^/ Jchange2
y ^^^'

Q*^~^ -----w^^^^ ^/ ExpectedDermrjH J^^^^J

X. orderypto leve 2 /
^ expectation
'v ^s^ ' cliarì^2

^^ ¡
inventory '

C© T3JJ Stage2 ^oda^* ||

InTransjfi
„ ^ '^
/-°*^'
3
3 ...--'netinventory
LocalInventory n.

'- ^- 1
J f -5hjpment3'
5Uppl^<ispat*3 arriva^
/ ' / / ^'S >v J

/ I transit
ieai time3 / ir'. X
I I A / shipment'i OriSer
Backtoft^'
ji ' 3 c !
j ^/ res|uirerkent ^^ V-.

I 1
inv^oiry
posibrT?^^^ J^--^i /^^
X /* ^*S"*^~*~"*^^^ '. I chan^3

(D*^~^~^^^ _ Demand
Expected 3 J^^V^
O^" "~^^^i ^>mZ
orcteroï^
' orderup to level3
eC^É^SÇ"
^ /"*V/~ ^UJ
t
X,^ ^-'"^ » / expectation
A "^^^-^__ - -- ~^*^ '^an§e3 ^
inventory oréerVision 2
time3 ex^tatbn
expectation
ad|iÄtment
adjustmenttime3

Figure2 Stock-flow
diagramof stagetwo and three:wholesalerand producer.

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462 oftheOperational
Journal Research Vol.62,No.3
Society

Figure3 Threedifferent
demandpatterns
usedin simulation
experiments.

policy),and (s,S) policy.All stagesare assumedidentical, variation.Thus,theformulais:

so foreach testedpolicyall stagesuse thesamepolicywith
thesameparameters. In reference runs,each stagelocally £. , = (LT/+ Ki)EUt [Goods] (12)
decides on the order quantitywithoutconsideringthe where
LT¿ is thetransitLT forstage/,K, is thelead time
overallsupplychain. inflationconstant',and Eht is the expecteddemand(or
expectedordersfromstage i-') estimatedby stage /.
Order-up-to-S policy (Recall that DLL= (LTl)(Eht) anyway,so that the term
(Kt)Eitis theextraadditionto DL to accountforrandom
Order-up-to-S policyis thewell-known base-stockpolicy
variation.)
wherean agentordersthequantityneededto bringits IP In thispolicy,the order-up-to-level S is updatedeach
up to a base-stocklevelS, whenever it fallsbelowS. The
period,as theexpecteddemandis updated.The resulting
associatedordering equationis: inventory dynamics (with autocorrelated demand),
= -
Oit max((S,-, IPi,t)/IAThO) . LT¡ = 3, Kj = 2 is seen in Figure4. Note the oscillations
({ }
[Goods/Period] and the bullwhipeffect(amplification) along the supply
chain, as one moves from the retail end toward the
WhereOh, is theorderdecision,Sht is theorder-up-to- as
producer.The increasein the bands of fluctuations
level, IPj, t is the inventoryposition,and IAT¿ is the we move up in the supplychain is graphically indicated
inventory adjustment time.In thestandardorder-up-to-S more
clearlyin Figure5.
policy,thediscrepancy is immediately ordered,so we set
inventory adjustment time(IAT) to one.
The order-up-to-level (Sh t) can be setin differentways. Systemdynamicsanchor-and-adjustpolicy
One approachis to computeit byS = DL + koL,whereDL
is expecteddemandduringLT, koLis safetystockwhereoL Thisis theanchor-and-adjust policywidelyusedin System
is thestandarddeviationof forecasterrorsof LT demand, Dynamicsliterature (Sterman,2000; Barlas, 2002). This
LI at a desiredlevel.The associated
and k is a constantselectedaccordingto desiredservice policytriesto stabilize
level.In anycase,theidea is to setS at a levelgreaterthan orderequation is the following:
DL to accountfordemandvariation(See Gündüz,2003). Oit =max((/*,- Iiit)/IATi + (SL*, - SLiit)/SLAT¡
Anotherpracticalformulasuggested forS is to 'inflate'the
shipmentLT by a factorK, to account for demand +£,-,„0) [Goods/Period] (13)

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 Y BariasandB Gunduz-
Demand andsharing
forecasting to reducefluctuations
strategies andthebullwhip
effect
insupply
chains 463

Figure4 Netinventories
whenorder-up- 4: producer).
to-Spolicyis applied(2: retail;3:wholesaler;

5 Thebullwhip
Figure thebandsofinventory
effect: fluctuations
areamplified
as onemovesfromtheretailendto thewholesaler,
andthento theproducer
end(markedbyA, B, andC respectively).

whereT*htis the desiredinventorylevel and SL*,t is t and SLh t represent

//, leveland supplyline
inventory
the desired supply line, IAT and SLAT are inven- thatare definedas follows:
toryadjustmenttime and supplyline adjustmenttime,
respectively. llt = LIit-BLlt [Goods] (14)

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464 Journal Research
oftheOperational Vol.62,No.3
Society

SLi,, = ITi,t+ BLi+i,t [Goods] ( 15) graphsdue to space limitation(the readeris referred to
Gündüz,2003).
The desiredlevels of inventoryand supply line are Finallynote that,as explainedbefore,forcomparison
determined
typically by: and consistency betweenall policies,theanchor-and-adjust
SL* t = LTiX Et,t [Goods] policy runs reportedin thisarticleare done withDT='
( 16)
(ie with a discretemodel).Since systemdynamicsmodels
are typicallycontinuous,we have also testedthe model
I*t = M [Goods] (17)
withseveralsmaller¿lvalues to makesurethattheobtai-
whereM is somechosenconstant. nedbehaviours arenotsensitive to DT. Indeed,verysimilar
Note thatin thispolicy,the desiredsupplyline SL*,t is inventory and
oscillations bullwhipeffects wereobtained
adjustedaccordingto theexpecteddemand,so as to yield withsmallerDT values,provingthatthe resultsare not
an arrivalrate equal to the expecteddemand at equili- sensitiveto DT='. (We are unableto providethegraphs
brium.The desiredinventory level on the otherhand is pleasesee Gündüz,2003.)
due to space restrictions;
takenas constantin thesimplestversionof thepolicy.
Inventorybehaviourin thiscase (withautocorrelated
demand,M= 100,L7=3, and lAT^SLAT^ 1) is seen (s,S) Policy
in Figure6. Justlike withthe order-up-to-levelS policy,
(s,S) Policy is a reviewpolicywhereordersare placed
we observeoscillationsand thebullwhipeffect(amplifica- IP dropsto the
S, whenever
to raiseIP to order-up-to-level
tion) throughthe supplychain,fromthe retailerto the reorderpoints or below.The orderequationis as follows:
wholesaler and thento theproducer.(ComparingFigures4
and 6, also notethatthebehaviourpatternsof ordersand Oit = (S-IPitt)/IAT ifIPi,t<:S
inventorieswith order-up-to-S policy and anchor-and- Oi,t = 0 otherwise [Goods/Period] (18)
adjust systemdynamicspolicyare quite similar.)As an
alternative,thedesiredinventory in theadjustment equa- In thestandard(s,S) policy,thediscrepancyis immedi-
tionabove can be definedas proportional to theexpected atelyordered,so we setIAT to one. The parameterss and
demand,namelymEht.With thisformulation, both the S musttypicallybe determined as functionsof LT and
oscillationamplitudesand thebullwhipeffect increaseas a theexpecteddemandE. In general,thelargerLT and E,
resultof stronger(double) effectof theexpecteddemand the highermustbe the reorderpoints, due to a riskier
on orders.We are unable to providethe corresponding the largerE, the highermustbe the
situation.Similarly,

when anchorand adjust policyis applied.

Figure6 Net inventories

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 Y BariasandB Gunduz-
Demand andsharing
forecasting to reducefluctuations
strategies andthebullwhip
effect
insupply
chains 465

S in orderto preventfrequent
order-up-to-level shortages. of thebullwhipeffect.In (s,S) policy,ordersare in effect
Thus, even if we assumeconstantLT, s and S mustbe batched.
updatedin practice,sincethe demand(henceEt ) would A relatedissuewouldbe thefrequency ofupdatings and S.
be varyingin time.In lightof this,thereorderpointsht> The above formulasassume that s and S are updated
and theorder-up-to-levelSht forstage/at timet, can be in everyperiodt.It is likelythatin somesituations,
s and S
computedby thefollowingequations: are updatedless frequently, if
especially thedemandtends
to changeslowly.Anotherextreme wouldbe notto update
siit= (LTi)(Eiit) + SSi [Goods] (19) s and S at all through theentiresimulationhorizon.In this
articlewe also presentthisextremecase of keepings and
Si,t = siit+ q £/,t [Goods] (20)
S constantthroughthe entirehorizon,in the Policy
whereSSi is some safetystockthatmustbe keptby the Analysissectionbelow.
company,and q is a constantordermultiplier to provide
a bufferfor the variationin demand.(S could also be
determined bys + EOQ, whereEOQ theoptimal'econom- Analysisof thesourcesof thebullwhipeffect
ic orderquantity'to be calculatedfor giveninventory
Numeroussimulationexperiments are carriedout using
holdingand BL costs.Optimalcomputations ofs and S are
each of thethreeordering describedabove. (Some
and irrelevant
difficult to the purposeof this policies
extremely variantsof these policies and other policies like (s,Q)
- see forinstanceNahmias,S. (2009, Chapter5)).
article
have been testedas well,but we skip themdue to space
Since it is knownin generalthat EOQ is an increasing
limitations(see Gündüz, 2003)). These experiments can
function of estimateddemandEi>u usingq Eh, in lieu of
be groupedin two: policy-independent parameters the
of
EOQ is reasonable.The inventory dynamicswithLT = 3, chain and
SS = 240 and q = 3 is shownin Figure7. Once again,we supply policy-specific
parameters.
observeoscillationsand the bullwhipeffectalong the
supplychain.Note further thatthelevelof amplification
in thiscase is strongerthanthe previoustwo cases- the parameteranalysis
Policy-independent
amplitudeof oscillationsmore than doubles with each Simulationexperimentsare performedwith different
stage.As willbe analyzedlater,thisfindingis consistent settingsof demandpattern(autocorrelation
degree),LT,
with the Lee et al (1997) resultsthat 'order batching' natureof delays,and demandestimationadjustmenttime
together withdemandforecasting is one ofthemaincauses (EAT). Some importantresultscan be summarizedas

when(s,S)policyis applied(SS = 240,q = 3).

Figure7 Netinventories

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466 oftheOperational
Journal Research Vol.62, No.3
Society

follows.Onlyone examplebehaviourgraphis showndue information delayseffectively increaseLT in receiving

to space limitation
(See Gündüz,2003). theordersplaced.
• Base retail oscillationsand bullwhipboth decrease
• If the end item demand is autocorrelated,the base significantly with an increasein the demand EAT,
(retail) oscillations and the bullwhip effect both for all three policies.(Compare Figure8 below,with
increase,especially when order-up-to-S policy or an- 4
Figure above, as an illustration.) The explanation
chor-and-adjustpolicy is used. With (s,S) policy, is that, the largerEAT, the less responsivethe model
autocorrelation does not have substantialeffecton becomesto changesin demand(or incomingorders).
inventory because significant
oscillations, 'batching'of Since uncoordinateddemand forecastingis a main
ordersin (s,S) makes it insensitive to demand auto- cause of the bullwhipeffect(Lee et al 1997), larger
correlation. But thisbatchinghas a bullwhipeffectas EAT, meaninglessresponsive (or almost'no') forecasts,
willbe seenlater. naturally lead to decreasedbullwhipeffect. Thisresultis
• The bullwhipeffectincreaseswithan increasein LT. important in the sensethatit revealsone of themajor
Thisis essentiallycausedbythefactthattheup-to-order causes of the bullwhip phenomena:uncoordinated
level S and the desiredsupply line SL, t are both demandforecasting, as willbe discussedbelow.
proportional to LT (delay).The ordersand theresulting
inventory oscillationsare, hence,amplified.The same Table 1 summarizes foreach ordering policy,theeffects
of
is not truewith(s,S) policy,wherethe orderquantity four policy-independent parameterson oscillationsand
and thefrequency are not affectedby LT. bullwhip,as discussedin thissection.
• In thebasic model,theonlydelayis thematerialdelay
on the supplyline (lead time').In reality,therecan
be otherdelayslikeinformation Policy-specificparameteranalysis
delayin placingorders.
The effectsof includingsuch additionaldelaysin the In the second set of runs,we experiment with policy-
ordering mechanisms havebeeninvestigated. In all three dependentparameterssuch as LT inflationconstantK
policies, the bullwhip effectsignificantly increases in theorder-up-to-S policy,orderquantitymultiplier q in
withinclusionof orderinformation delays(see Gündüz, (s,S) policy,and thedesiredinventory coverageconstantm
2003).Thisis consistent withourabove resultaboutthe in the anchor and adjust policy. (See the associated
bullwhipeffectsof increased LT, since additional equationsof each policy,above.)

Figure8 Netinventories policyand EAT increased

withorder-up-to-S to 10.

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 Y BariasandB GunduzDemand andsharing
forecasting to reducefluctuations
strategies andthebullwhip insupply
effect chains 467

Table 1 Summaryof policy-independent

parameteranalysis
Parameterchange: Demandpattern(fromiid Increasein lead Inclusionof order Increasein estimation
adjustment
Policy normal,to autocorr
-elated) time(from3 to 6) informationdelay time(from5 to 10)

Order-up-to-S Oscillationsandbullwhip Bullwhipeffect

increases Bullwhipeffect Oscillations
andbullwhip
effect
Policy effect
increase significantly decrease
significantly
increases
System Dynamics Oscillations
andbullwhip Bullwhipeffect
increases Bullwhipeffect Oscillations
andbullwhip
effect
Anchor-and- effect
increase significantly decrease
significantly
AdjustPolicy increases
(s,S)Policy No substantial
changein No substantial
change Bullwhip effect Oscillations
andbullwhip
effect
behaviour in behaviour significantly decrease
significantly
increases

when(s,S)policyis applied(SS = 240,q - 5).

Figure9 Netinventories

• Experiments showthatwhenLT inflation constantK (in • Whenthedesiredinventory coverageconstantm (in the

the order-up-to-S policy) is increased,the bullwhip
effectalso increases.(We are unableto showthegraphs
due to spacelimitations; see Gündüz,2003.)Note thatK
is a multiplier
of theexpecteddemandin theorder-up-
to-levelcomputation in thispolicy;so it representsthe
weightof theexpecteddemandin theorderdecisions.
• Whentheorderquantitymultiplier q (in (s,S) policy)is
increased, thebullwhipeffect and magnitudeof oscilla-
tionsboth increase(compareFigures9 and 7). Note
againthatq is a multiplier oftheexpecteddemandin the
order-up-to-levelS formulain thispolicy;it represents
the strengthof the demand forecastin the order
decisions.
anchor and adjust policy) is increased,the bullwhip
effectand magnitudeof oscillationsboth increase
(See Gündüz, 2003 for outputgraphs).Observethat
in this policy,the desiredinventoryis obtained by
multiplying the demand forecastswith the coverage
constantm,so thatthelatterrepresentsagaintheweight
of demandexpectations in orderdecisions.
Table 2 summarizestheeffects oftheparameters ofeach
orderingpolicy,on oscillationsand bullwhip,as discussed
in thissection.
All the threepolicy-specific resultspoint to a single
generalresult.The strongerthe role of isolateddemand

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468 Journal Research
oftheOperational Vol.62,No.3
Society

ofpolicy-specific
Table2 Summary parameter
analysis
Parameter
change: inleadtimeinflation
Increase Orderquantity
multiplier
q Desiredinventory
coverage
Policy K (from1 to3)
constant (from3 to5) constantm (from3 to5)

Order-up-to-S
policy effect
Bullwhip increases
System
dynamics Bullwhip and
effect
anchor-and-adjust
policy magnitudeofoscillations
increase
(s,S)policy Bullwhipeffect
and
magnitudeofoscillations
increase

under(s,S)policy,without
Figure10 Netinventories usinganyforecasting.

forecasts in theorderdecisions,thestronger is thebullwhip Figure7 withthosein Figures4 and 6. Buttheothermajor

effect (and in somecases thebase retailoscillations).This
resultis consistentwithForrester(1961), Sterman(2000),
Ya§arcanand Barlas(2005),Barlasand Özevin(2004),Lee
et al (1997),and Chen et al (1998). This finding,together
withtheearlierresultabout therole of orderbatchingin
amplifying the bullwhipeffect,leads to two important
policy-oriented rootsof thebullwhip.
The role of orderbatching
Amongthepoliciestested,ordersare batchedin the(s,S)
policy,sincetheyare notplacedin each period.We noted
earlierthattheeffectof thisbatchingis an increasein the
bullwhipeffect,comparingthe largeramplifications in
cause of thebullwhip,ie demand/order is also
forecasting,
presentin these(s,S) policyruns.In orderto isolateand
focuson the effectof orderbatchingonly,we test(s,S)
policywithfixedlevelsof s and S thatare not updated
by any demand/order forecasts.Results in this case
(Figure 10, compared to Figure 7) reveal that when
demandforecastsare not used, undertheeffectof order
batchingonly,thebullwhipdoes notpropagatethrough the
entirechain,it occursfromthe retailerto thewholesaler
only.The amplification fromtheretailerto thewholesaler
is a resultof batched orders,so the wholesalerfaces
batchedorderswhilethe retailerfacesun-batchedretail
demand. There is no amplificationat all from the
wholesalerto theproducer,because both of theseagents

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 - Demand
Y BarlasandB Gunduz andsharing
forecasting to reducefluctuations
strategies andthebullwhip insupply
effect chains 469

face the same type of batched orders,with the same Improvedpolicy:demandand forecastinformation
ordering rules.The samewouldbe truefromanystagen to sharing
stagew+1, n>'). Thus, we concludethat the batching
of ordersby itselfis notsufficient forthe bullwhipeffect
Thereare severalstrategies suggestedin the literature to
tacklethebullwhipeffect, as summarized in theintroduc-
to propagatein thesupplychain;orderpolicyparameters
tion. One such strategy, also impliedby our results,is
mustbe updatedby demandforecasts forthebullwhipto
that sharingof demandand/orforecastinformation between
propagate. But we also conclude batchingcan further
if the agentsin thesupplychain.Thereis a richliterature arguing
the
amplify bullwhipeffect, latteralreadyexistsas a fordemand/forecast information
resultof demand/order forecasts.Finally,note that if sharing,some of which
was mentioned above in theIntroduction section.In order
agentsused higherand higherdegreesof batching(ie less to explorethe effectsof this strategyon the behaviour
frequentorders)as we upstream,then order batching of the inventories, we modifythe supplychainmodel to
couldbyitselfresultin bullwhipeffects thatwouldpropa-
even without incorporateend-itemdemand sharing.Each stage uses
gate through the entire chain, any demand end-itemdemand informationto forecastthe future
forecasting.Such detailed analysis of the specificsof
is the demand,ratherthanusingordersofitslowerstage.Hence,
different orderingpolicies beyond scope of this all stages use demand forecastsobtaineddirectlyfrom
article.For instance,Potterand Disney(2006)showthatin
end-itemdemandin theirorderingdecisions.In the base
(S, nQ) policy,thebullwhipeffectis reducedif thebatch case reportedhere,sinceall agentsin the model use the
sizeQ is a multipleofaveragedemand,and in-between the
same forecastingmechanismwith same parameters,
minima,thebullwhipeffect risesand fallsin a waveform,
end-item demandsharingis equivalentto demandforecasts
reachinga peak at thehalfwaypoint. Given that the end itemdemandis shared,all
sharing.
stages effectively produce and use the same end item
The role of demandi orderforecasting demand forecasts.(If agents used different forecasting
methods, thendemandsharingand forecastsharingwould
Analysisof the simulationresultsof no-demand-sharing be two different
cases revealsthata primarycause of the bullwhipeffect strategies.)
The resultinginventorybehavioursfor order-up-to-S
is the isolatedsequentialdemandforecasting performed SD and (s,S) policywhendemandis shared
at each stageof thesupplychain,makinguse of previous policy, policy,
are shown in Figures 11-13 respectively. Demand and
stage'sorders.This resultis also supportedby Lee et al forecast sharing eliminates uncoordinatedsequential
(1997),Chen et al (1998),Sterman(2000,Chapter17 and mechanisms of thesupplychainso thata stage
forecasting
18), and Forrester(1961, Chapter12). As we have seen no bases its orders on its forecastsof the lower
longer
above, the weight of demand forecastsin ordering
decisionsdetermines thedegreeofthebullwhipexperienced stage's
orders. Instead, each stage directlyuses end-item
forecasts.Thus, the bullwhip effectalongthesupplychain
by the chain. All orderingpolicies that use demand is
forecasts in ordering demandforecasts
reduced.
significantly (CompareFigure11 to Figure4;
equationsmultiply
Figure 12 to Figure6; and Figure 13 to Figure7.) Our
by a constantin order to obtain some 'target'order resultsare consistentwith
level.This constantis K fororder-up- to-S policy,m for experimentaland empirical
evidenceon the role of demandinformation sharingon
anchor-and-adjust policy, and q for (s,S) policy (see
stabilizingsupply chain inventories (for instance,Chen
equationsabove). Simulationrunsshowthatthehigheris et al, 1998;Chengand Wu, 2005; Croson and Donohue,
themultiplier constant,thegreateris themagnitude of the
effect 9 for for the 2005).
bullwhip (see Figure example, (s,S)
policycase).
Experiments withdifferent EAT valuesalso revealthat
the bullwhipeffectdecreaseswith an increasein EAT Order-up-to-S policy
(Figure8). Increasein EAT meansthatdemandforecasts Anchorand
arelessresponsive to changesin demand.A veryhighEAT adjustpolicy
effectively means no forecastupdating,yielding'almost
constant'demand forecasts.At the extreme,constant (s,S) policy
('no') demandforecasting resultsin zero bullwhipeffect Anotherstrategy suggestedagainstbullwhipis theechelon
(Figure10 forexample).Note thatthislastextremeresult inventory policy,whereeach agentplacesordersbased on
is of theoretical
value,butwouldnot be implementable in echelon IP ratherthat its local position.The echelon
real world.Inventory management withoutany demand inventory of a stage is definedas IP of the subsystem
forecasting wouldobviouslycausemajorproblemsin terms consisting of thestageitselfand all itsdownstream stages
ofshortages and overstocking, so eliminatingthebullwhip (see Silveretal, 1998).Whenthemodelis runwithEchelon
effectwould not be of muchpracticalvalue withsuch a policies,we obtaina further decreasein thebullwhipeffect
strategy. becausethesepoliciesremovetheorderpropagationdelay

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470 Journal
oftheOperational
Research Vol.62, No.3
Society

Figure11 Netinventories
whenorderup-to-Spolicyis appliedanddemandis shared.

whenanchorandadjustpolicyis appliedanddemandis shared.

Figure12 Netinventories

fromthesupplychain.(We are unableto provideoutput Table 3 summarizesthe consequencesof the demand

graphsand further discussionof echelonpoliciesdue to forecasting/sharingand the Echelon inventorypolicies
space limitations
(see Gündüz,2003)). vis-a-visthebullwhipeffect.

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 Y BariasandB Gunduz-
Demand andsharing
forecasting to reducefluctuations
strategies andthebullwhip insupply
effect chains 47 1

when(s,S) policyis appliedand demandis shared.

Figure13 Net inventories

Table 3 Summaryresultsof information-sharing

policies
Scenario: No demandforecastis Demandandforecastsharingis policyis used
Echeloninventory
employed employed

Order-up-to-S
policy No bullwhip
effect effect
Bullwhip significantly Further in bullwhip
decrease
decreases effect
System dynamics No bullwhip
effect effect
Bullwhip significantly Further in bullwhip
decrease
anchor-and-adjust decreases effect
policy
(s,S)policy No bullwhip
effect effect
Bullwhip significantly Further in bullwhip
decrease
decreases effect

There are several well-knownbusiness practicesto structure.Disney et al (2004) analyze the impact of
implement demandinformation-sharing and/orEchelon- information and communicationtechnologies(ICT) on
inventorypolicies: Collaborative Planning, Vendor thebullwhipand supplychainperformance. Theyconclude
Managed Inventories (VMI), Continuous Replenishment that althoughthere are benefitsof ICT on bullwhip
Programs(CRP), information systems likeElectronicData and supplychain performance, such policies should be
Interchange (EDI), Pointof Sale (POS) applications,and implemented carefully because of the added complexities
more recentdevelopments like Web-basedTransactions, to thedecisionmakingprocess.Holwegetal (2005)classify
and Radio FrequencyIdentification (RFID) tags in lieu supplychain collaborationinitiatives based on inventory
of bar codes (see Nahmias,2009 and Lee et al, 1997 and and
replenishment forecasting collaboration dimensions.
1998). Disney SM and Towill DR (2003) analyze the They claim that collaborationin inventoryreplenishment
effectsof VMI structures on two particularsourcesof alone (eg VMI) or forecastsharingalone is not sufficient
the bullwhipeffect(demandsignalprocessingand order to achievesignificant improvement in thebullwhipeffect.
lead times).Theydemonstrate by simulationexperiments Sharedinformation shouldbe usedin supplier'sforecasting
that the bullwhipeffectis reducedsignificantly if VMI and inventory controlprocessesin orderto gainsubstantial
structures are comparedto the traditionalserial chain improvements in thebullwhip.

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472 Journal Research
oftheOperational Vol.62,No.3
Society

Conclusionsand futurework like EDI, POS applications,Web-based Transaction

Systems,and RFID tags in lieu of bar codes. To avoid
Threetypicalorderingpoliciesare consideredand mod- excessivebatching,a contributor CRP can be
to bullwhip,
elled in the context of a supply chain. Numerous used.To shortentheLT, anotherbullwhipamplifier,Quick
simulationexperiments are carriedout usingeach of the Response(QR) systems can be implemented.
three policies. These experimentsanalyze two groups Thereare two othermajorcauses of thebullwhipeffect
of factors:policy-independent parametersof the supply knownin the literature:shortage(rationing)gamingand
chainand policy-specific parameters foreach policy. price variations.
These two factors,necessitatingmore
The mostgeneralconclusionof theexperiments is that detailedand complexmodelling,are beyondthescope of
the bullwhipeffect(amplification of orders along the thisstudyand constitutefurther researchareas. Finally,
supplychain) resultsin all cases and policies,as long as informationsharing on supply networkstructuresis
each stageutilizeslocal uncoordinated forecastsbased on anotherpotentialresearchtopic. Advanced forecasting
incoming orders (or demand). So, uncoordinated local modelsinvolving methodsand moresophis-
extrapolative
demandforecasting is confirmed to be as a maincause of ticatedorderingpoliciesand can be testedin such more
thebullwhipeffect. An extensionof thisresultis thatthe realisticand complexsettings.
level of 'responsiveness'of forecaststo the demand
influences the magnitudeof the bullwhipeffectexperi- Acknowledgements - Supportedby Bogazici University Research
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