The impact of stochastic lead times on the bullwhip effect under correlated demand and moving average forecasts

Abstract

We quantify the bullwhip effect (which measures how the variance of replenishment orders is amplified as the orders move up the supply chain) when both random demands and random lead times are estimated using the industrially popular moving average forecasting method. We assume that the lead times constitute a sequence of independent identically distributed random variables and the correlated demands are described by a first-order autoregressive process. We obtain an expression that reveals the impact of demand and lead time forecasting on the bullwhip effect. We draw a number of conclusions on the bullwhip behaviour with respect to the demand auto-correlation and the number of past lead times and demands used in the forecasts. We find the maxima and minima in the bullwhip measure as a function of the demand auto-correlation.

Publication
Accepted for publication in the Omega: The International Journal of Management Science