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HOI research | Hidden causes behind fluctuating demand in supply chains

Why does demand suddenly spike and drop in supply chains? Researchers have identified a range of factors contributing to this, known as the bullwhip effect. Their study, published in Management Research Review, systematically categorizes these causes to help businesses better understand and mitigate the problem.

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Understanding the bullwhip effect

The bullwhip effect refers to the amplification of demand variability as orders move up the supply chain. This phenomenon means that small changes in consumer demand can cause significant fluctuations in orders placed by retailers, distributors, and manufacturers. First identified in the 1950s, it continues to be a significant issue, especially highlighted during crises like COVID-19. The bullwhip effect results in inefficiencies like excess inventory, underutilized capacity, and poor customer service.

The purpose of categorizing causes

Given that the predominantly used categorization of the causes into operational and behavioral factors can lead to further difficulties in understanding, this research aimed to consolidate all identified causes into a novel systematic framework. By doing so, it provides a comprehensive understanding that can help businesses and researchers design better strategies to counteract these fluctuations.

"One of the biggest challenges in this research was navigating through the extensive literature to ensure a comprehensive and unbiased categorization of the causes”, said Dr. Matin Mohaghegh of the House of Innovation. "We aimed to provide a comprehensive framework that could be universally applied across various industries and sectors."

Key research findings

  • Four main categories of causes: The bullwhip effect's causes can be classified into system structure, uncertainty, misaligned incentives, and inadequate cognition of the situation.
    • System structure: These causes lie primarily in the basic structure of a supply chain and cannot be completely eliminated, even under perfect conditions. Examples are (variability of) lead time and complexity of the supply chain, evidenced by feedback loops and nonlinear relationships between actors.
    • Uncertainty: Uncertainty is inextricably linked to the fact that not all necessary information about future developments is always known, available, and accessible to everyone in a supply chain. Poor information availability and lack of collaborations/coordinations are examples. 
    • Misaligned incentives: Causes listed within this overarching category are related to either the creation of a local incentive to optimize costs which is not aligned with the overall supply chain objective to avoid order  variance amplification or the action as a response to such an incentive.
    • Inadequate cognition of the situation: Those causes that result from cognitive processes that are inadequate for a given supply chain context such as irrational behavior or the lack of comprehensive overview of the complex supply chains.
  • Diverse interdependencies: The study highlights how these identified causes are interrelated and not easily isolated.
  • Managerial implications: The findings offer valuable insights for developing strategies to mitigate the bullwhip effect in supply chains across various industries and sectors. Given that the bullwhip effect is a complex phenomenon and cannot be traced back to only one single cause, managers are encouraged to remain vigilant in monitoring diverse causes to prevent policies designed to address one aspect of the bullwhip effect from inadvertently exacerbating another cause.

A future free from disruptive demand spikes

This research significantly contributes to understanding the bullwhip effect, providing a valuable framework for both academics and practitioners. Future research could build on these findings by exploring specific interventions within each category and their practical applications in different industries.

Meet the researchers

  • Manuel Brauch: Department of Operations Management, Faculty 10 Management Economics and Social Sciences, University of Stuttgart
  • Matin Mohaghegh: Department of Entrepreneurship, Innovation and Technology, House of Innovation, Stockholm School of Economics
  • Andreas Größler: Department of Operations Management, Faculty 10 Management Economics and Social Sciences, University of Stuttgart
House of Innovation International economics  Macroeconomics Management Social economics Strategy Article Journal Publication Research