IEOR-DRO Seminar: Vishal Gaur (Cornell)

November 29, 2016 | 1:10pm - 2:10pm

IEOR-DRO Seminar: Vishal Gaur (Cornell)

Mudd 303

 Title: The Cost-Driven Bullwhip Effect in Supply Chains (paper is not available at this time)

Authors: Vishal Gaur, Maximiliano Udenio, Jan Fransoo

Abstract: Inventory fluctuations can be decomposed into cycle stock and safety stock changes. The literature on the bullwhip effect has focused on the former and investigated the contribution of cycle stock changes, through demand forecast updating, on the occurrence of the bullwhip effect. In this paper, we argue that the cost ratio (the relationship between holding and penalty costs) that firms use to set their safety stocks is also time variant, driven by financial and macroeconomic conditions. We develop a two-stage structural model of inventory decisions to investigate downstream inventory adjustments and their influence on upstream firms. Using supply network and financial data for 6,040 unique supplier-customer dyads for the years 1984--2013 for the U.S. economy, we show that suppliers overreact to downstream inventory adjustments over and above the demand changes, revealing a new explanation for transient shocks getting amplified upstream in a supply chain. Our structural estimation indicates that inventory cost ratios are dynamic, and that they follow economic and financial sentiment such as liquidity considerations and GDP growth rates. Our counterfactual analysis shows that approximately 30% of the estimated bullwhip can be traced to overreaction to inventory changes. For managers, this implies that bullwhip-mitigation strategies must explicitly account for safety stock changes.

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