INFORMATION DISTORTION IN A SUPPLY CHAIN - THE BULLWHIP EFFECT

Consider a series of companies in a supply chain, each of whom orders from its immediate upstream member. In this setting, inbound orders fr om a downstream member serve as a valuable informational input to upst ream production and inventory decisions. This paper claims that the in formation transferred in the form of ''orders'' tends to be distorted and can misguide upstream members in their inventory and production de cisions. In particular, the variance of orders may be larger than that of sales, and the distortion tends to increase as one moves upstream- a phenomenon termed ''bullwhip effect.'' This paper analyzes four sour ces of the bullwhip effect: demand signal processing, rationing game, order batching, and price variations. Actions that can be taken to mit igate the detrimental impact of this distortion are also discussed.