MIT Center for Transportation and Logistics
Special Seminar

In search of the bullwhip effect

By Prof. Gerard Cachon, Wharton, University of Pennsylvania

About The Seminar
The bullwhip effect is the phenomenon of increasing demand variability in the supply chain as one moves from the lowest echelon (the retailer) to the highest echelon (manufacturer). Macroeconomists have studied the related observation that production is often more variable than sales, while the operations management literature has more recently elaborated on explanations for the bullwhip effect and offers further examples. The objective of this study is to document the existence of the bullwhip effect in industry level U.S. data. We find the bullwhip effect among wholesalers, but little evidence of the bullwhip effect among retailers and only some with manufacturers. Even though we find some evidence that the known causes of the bullwhip effect do contribute to volatility, we find that demand volatility does not increase as one moves up the supply chain: in contrast to the natural consequence of the bullwhip effect, manufacturers do not have substantially greater demand volatility than retailers (and may even have lower demand volatility). Although the bullwhip effect is generally present among wholesalers and is strong with some manufacturers, we conclude that the bullwhip effect is not widespread in the U.S. economy. We explain why our results are apparently at odds with the existing literature.