Bullwhip Reduction and Win-win Strategies

We consider a two echelon supply chain with a single retailer and a single manufacturer. Inventory replenishment policies at the retailer level transmit customer demand variability to the manufacturer, sometimes even in an amplified form (known as the bullwhip effect). When production is inflexible at the manufacturing level, significant costs may be incurred by ramping up and down production levels frequently. In this paper we focus on an inventory replenishment rule that reduces the variation of upstream orders and generates a smooth ordering pattern. This is beneficial for the manufacturer. However, dampening the variability in orders inflates the retailer’s safety stock requirements due to the increased variance of the retailer’s inventory levels. We can turn this conflicting issue into a win-win situation for both supply chain echelons when we treat the lead time as an endogenous variable. A less variable order pattern generates shorter and less variable lead times, creating a compensating effect on the retailer's safety stock.