Variations of the Bullwhip Effect Across Foreign Subsidiaries

Problem definition : We investigate variations of the bullwhip effect across foreign subsidiaries and explore how it is affected by various features of foreign subsidiaries. Academic/practical relevance : During the era of global supply chain restructuring, researchers and executives of multinational firms should understand variations of the foreign subsidiary’s bullwhip effect, given that its reduction is a key strategy for coordinating supply chains. Methodology : Our work is based on a balanced panel data set of Korean-owned subsidiaries that provides distinguishable information on subsidiary purchases. It enables us to estimate an alternative measure for the bullwhip effect by the ratio of purchase volatility to demand volatility and compare it with the traditional measure of the ratio of production volatility to demand volatility. Results : Our alternative measure differs significantly from the traditional measure and better reflects the prevalence of the bullwhip effect across foreign subsidiaries. Using this new measure, we find that the bullwhip effect is strongly affected by country-specific factors and foreign subsidiary-specific factors. These findings support not only previous analytical findings on the bullwhip effect but also provide new remedies to reduce the bullwhip effect. Managerial implications : Our study advises managers of multinational firms. First, although locating foreign subsidiaries in developing countries tends to reduce production costs, it could instead increase the bullwhip effect, especially for politically unstable countries or those with lower import penetration. Second, we provide empirical evidence that relocating a subsidiary to a country close to its main suppliers or to one that incurs lower transportation costs will reduce the bullwhip effect. Finally, deploying expatriate managers and wholly owning the subsidiary are recommended strategies to reduce the bullwhip effect of foreign subsidiaries.