Information Sharing and Order Variability Control Under a Generalized Demand Model

This paper examines the value of information sharing and how it can address the bullwhip effect. We start with a general demand model, coupled with a smoothing policy for order variability control. In addition, we do not require that the supplier has full knowledge of the retailer’s demand model and order policy, but instead let the retailer share its projected future orders. We first obtain a unifying formula for the magnitude of the bullwhip effect. The formula indicates that it is the forecast correlation over the exposure period as a whole that determines the magnitude of the bullwhip effect. We then quantify the value of information sharing. Finally, we explore the optimal smoothing parameters that could benefit the total supply chain. The resulting optimal policy resembles the postponement strategy. We find that information sharing together with order postponement improves supply chain performance, even though order variability may amplify in some cases.