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Centralized versus Decentralized Inventory Control in Supply Chains and the Bullwhip Effect

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  • Qu, Zhan
  • Raff, Horst

Abstract

This paper constructs a model of a supply chain to examine how demand volatility is passed upstream through the chain. In particular, we seek to determine how likely it is that the chain experiences a bullwhip effect, where the variance of the upstream firms’ production exceeds the variance of the upstream firm’s sales. We show that the bullwhip effect is more likely to occur and is greater in size in supply chains in which inventory control is centralized rather than decentralized, that is, exercised by the downstream firm.

Suggested Citation

  • Qu, Zhan & Raff, Horst, 2017. "Centralized versus Decentralized Inventory Control in Supply Chains and the Bullwhip Effect," KCG Working Papers 6, Kiel Centre for Globalization (KCG).
  • Handle: RePEc:zbw:kcgwps:6
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    References listed on IDEAS

    as
    1. Blanchard, Olivier J, 1983. "The Production and Inventory Behavior of the American Automobile Industry," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 365-400, June.
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    6. Steven J. Davis & James A. Kahn, 2008. "Interpreting the Great Moderation: Changes in the Volatility of Economic Activity at the Macro and Micro Levels," Journal of Economic Perspectives, American Economic Association, vol. 22(4), pages 155-180, Fall.
    7. Dennis Novy & Alan M. Taylor, 2020. "Trade and Uncertainty," The Review of Economics and Statistics, MIT Press, vol. 102(4), pages 749-765, October.
    8. Qu, Zhan & Raff, Horst & Schmitt, Nicolas, 2018. "Incentives through inventory control in supply chains," International Journal of Industrial Organization, Elsevier, vol. 59(C), pages 486-513.
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    More about this item

    Keywords

    bullwhip effect; production smoothing; inventory; supply chain; demand uncertainty; stockout avoidance;
    All these keywords.

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management

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