Order Stability in Supply Chains : Coordination Risk and the Role of Coordination

The bullwhip effect describes the tendency for the variance of orders in supply chains to increase as one moves upstream from consumer demand. Previous research attributes this phenomenon to both operational and behavioral causes. We report on a set of laboratory experiments with a serial supply chain, using the Beer Distribution Game. The experimental conditions eliminate all operational causes of the bullwhip effect. Nevertheless, we find that the bullwhip effect persists in this setting and offer one possible explanation based on coordination risk. Coordination risk exists when individuals’ decisions contribute to a collective outcome and the decision rules followed by each individual are not known with certainty, e.g., where managers cannot be sure how their supply chain partners will behave. We conjecture that the existence of coordination risk may contribute to bullwhip behavior. We test this conjecture by controlling for environmental factors that lead to coordination risk and find these controls lead to significant reduction in order oscillations and amplification. Next, we investigate a managerial intervention to reduce the bullwhip effect, inspired by our conjecture that coordination risk contributes to bullwhip behavior. While the intervention, holding additional on-hand inventory, does not change the existence of coordination risk, we find that it reduces order oscillation and amplification by providing a buffer against the endogenous risk of coordination failure. We conclude that the magnitude of the bullwhip can be mitigated, but that its behavioral causes appear robust.