Network Design against the Bullwhip Effect in Complex Supply Chains

Abstract

This paper studies the bullwhip effect, the amplification of demand fluctuations into larger order fluctuations upstream, in supply chain networks where each firm orders from several suppliers over routes with different lead times. We show that on a directed acyclic network every response from demand to orders is a sum over paths of products of nodal responses, so that the stability and stability margins of the network are determined by those of its individual nodes, and that a node which splits its orders across routes of different lengths gains margin it can spend on a higher gain and a faster response. We then minimize the worst-case amplification of the network by choosing how each firm splits its orders among its suppliers, which route lead times to shorten, and each firm's ordering gain, with gradients from one adjoint pass per demand node and frequency. On a 14-city network the optimized design amplifies 20~dB less than cost-minimal routing and 17~dB less than a design that shortens the longest routes with the same budget, and is better connected than either. Amplification is therefore a property of routing and delay, not only of the ordering policy, and designing against it also makes the network more robust to a lost route.