2020 24th International Conference on System Theory, Control and Computing (ICSTCC)
Bullwhip Effect – Supply Chain Stability
Examination in the Presence of Demand
Uncertainty and Delay
Przemysław Ignaciuk Senior Member, IEEE
Institute of Information Technology
Lodz University of Technology
Lodz, Poland
https://orcid.org/0000-0003-4420-9941
Abstract–The paper analyzes the formation of the bullwhip
effect in logistic systems, as a major threat to preserving stability
in the face of non-negligible goods transport delay and
uncertainty of demand and stock records. The popular Order-
Up-To policy is selected as the method governing the goods flow.
A dynamic model of entity interaction is constructed and
examined, first, analytically, then in numerical tests for various
scenarios of practical significance, e.g., a supply chain with
external and local demand signals. It has been found that the
Order-Up-To policy does not trigger the bullwhip effect despite
the delays in the goods delivery in the nominal operating
conditions. However, when the stock records are imprecise or
erroneous, the bullwhip effect does occur. It leads to economic
costs increase and, in certain cases, to the loss of system stability.
The intensity of the bullwhip effect depends on the type of
demand distribution function with the normal distribution
leading to the largest order-to-demand variance increase.
Keywords–Supply chain control, stability analysis, time-delay
systems
I. INTRODUCTION
Inventory management and goods flow control are
decision centered problems that affect all actors in logistic
networks: suppliers, distribution centers, and retailers. The
reserves used to meet the unpredictable market demand are
replenished with a variety of delivery options. However, the
process of goods distribution is influenced by numerous
factors not to be neglected in shaping the resource
management strategy. For instance, the useful quantity of
merchandises obtained from a supplier for the sales purposes,
may differ from the ordered one. Such situation may also
occur due to distortions in the process of data collection and
information processing, product defects, manufacturing
imperfections, or improper transport. Moreover, the stock
records registered in the system may be imprecise or
erroneous, as caused by human mistakes, spoilage, or theft.
A significant systemic distortion in the logistic structures
is the bullwhip effect (BE), which manifests itself as an
intensified variability of demand translated to the goods
ordering signal. This distortion propagates in the supply chain
augmenting the costs of subsequent suppliers. The BE, in
addition to reduced economic benefits, leads to unnecessary
shipments and excessive transport and resource accumulation
at the intermediate nodes. Pioneering research concerning the
BE was conducted by Forrester [1], and a detailed study of its
formation in production-distribution systems was given in [2]
and [3]. The main factors impacting the goods flow in
distributed architectures were analyzed by Lee et al. in [4] and
[5], whereas the BE triggers in the current business context
978-1-7281-9809-5/20/$31.00 ©2020 IEEE
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Adam Dziomdziora
Institute of Information Technology
Lodz University of Technology
Lodz, Poland
https://orcid.org/0000-0002-9667-8689
were discussed in [6]–[8]. Five main causes of the BE: run
through demand forecasting, production inadequacy, transit
time, batch arrangement, and charge deviations; have been
recognized. Besides examining its origins, various researches
sought methods of reducing the BE negative influence on the
logistic system performance [9]–[12]. However, they focused
on the operations research methods and long-term statistical
analysis. A viable alternative is sought in the application of
dynamic system approach and robust control methods [13]–
[17].
In this paper, the performance of supply chain, organized
in a serial structure with multiple demand points, is analyzed
from the dynamic system perspective and described in the
state-space model. The goods flow proceeds according to the
ordering decisions established via the popular Order-Up-To
(OUT) inventory policy, applied autonomously at each node
in the chain. The good reflow is subject to non-negligible time
delay. The system cohesion with respect to the formation of
the BE is examined by tracking the evolution of the stock
level, satisfied demands and order quantity requested by the
nodes. As a quantitative measure of logistic stability order-to-
demand variance ratio is selected. The analytical study is
supported by numerous simulation tests. In the experiments, a
few probability distributions, typically considered in
inventory management systems, have been examined to judge
about the system proclivity to the BE formation. Also, the
system sensitivity with respect to the measurement error
(inaccurate stock level records) has been explored.
This paper is organized in the following way. The ordering
policies, put in the proposed framework are given in Section
II. The system model and the detailed analytical treatment are
introduced in Section III. Section IV is devoted to numerical
study. Finally, conclusions and managerial insights are
presented in Section V. The main parameters used in the
simulation scenarios are grouped in Table I. The variety of
system quantities recorded within the nominal case are
represented in Table II. The variance of system variables
during the stock reduced state are arranged in Table III and,
accordingly, the stock increased state system parameters are
assorted in Table IV.
II. ORDER-UP-TO INVENTORY POLICY
In order to refill the stock drained to meet the external
(market) demand and inner goods requests enforced at a node
in the chain, the OUT policy can be used. The OUT policy
indicates to collect the stock at the node warehouse up to a
reference level, if the sum of already gathered goods and
goods in-transit decreases below that level. When the
prognosis of future demand evolution is not applied, the order
624
quantity is calculated by the OUT policy according to (see considering BE formation with respect to the external
[18] for a comprehensive description of the underlying demand only, one can formulate the following expression
ordering tactics):
ui (k )  xi ref  xi (k )  ORi (k ), (1)  var[u1 ]  b1   var[d1 ] 
 var[u ]  b2   var[d ]
where: xiref – the reference level, i ∈ Z = {1, …, n} – node  2 
  2 
. (3)
index, n – number of nodes, k – instant of stock review and     
    
taking the ordering decision, xi(k) – on-hand stock level,and  var[un ]  bn   var[d n ]
ORi(k) – the open-order volume, i.e., the goods in transit that B
have not yet reached the node due to lead-time delay.
The tuning strategies with respect to the policy parameter with the BI in a matrix form:
selection in the basic constructs are discussed in [19], whereas
more advanced topologies are treated in [20]. B  bT I n , (4)
III. BULLWHIP EFFECT IN SUPPLY CHAIN where In is an n×n identity matrix and b = [b1 b2 … bn]T is a
A. BE at one echelon vector grouping the individual BI determined separately at
In the subject literature [21], one can find various each node.
measures used to quantify the BE, both in the time and the In the nominal operating conditions, the OUT policy
frequency domain. One of the most popular BE indicators is guarantees that (locally) BI is not triggered. We have thus
the order-to-demand variance ratio, as introduced for the two- [22, 15]:
node interaction by Chen et al. in [22]. This bullwhip indicator b1  b2  ...  bn  1. (5)
(BI) is calculated as:
Assuming that d1, d2, …, dn are not correlated (given the
var[u1 ] information about the demand imposed at a node, one should
b1  , (2)
var[d1 ] generally not infer about the magnitude of demand at other
nodes), one can ensure that:
i.e., as the ratio of the variance of generated stock
replenishment signal – u1 – to the variance of demand – d1 – var[u1  d 2 ]  var[u1 ]  var[ d 2 ] (6)
imposed on that node. Fig. 1 illustrates the variables at one
echelon. Thus, using (5) and (6), var[un] can be calculated as:

var[u1 ]  b1 var[d1 ]  var[d1 ]

d1

var[u2 ]  var[u1  d 2 ]
 var[u1 ]  var[d 2 ]
u1  var[d1 ]  var[d 2 ] (7)
b1
Fig. 1. BE measurement at one echelon: d1 – demand, u1 – generated n
ordering signal, b1 – BE indicator. var[un ]   var[di ].
i 1
B. Serial connection – BE with respect to external demand
only C. Serial connection – BE with respect to external and
internal demand
In this section, a serial connection of n nodes, with an
external supplier (having unlimited resources), will be
analyzed. The considered situation is depicted in Fig.2, with In order to conclude about the BE formation, in the
S1 – the goods supplier. circumstances better reflecting a real-world scenario, both
internal and external demand signals should be taken into
account. The corresponding supply chain structure is
depicted in Fig. 3.
d1

d2

dn

(..) S1
d1

d2

dn

u1 u2 un

bn (..) S1
b1 b2 un
u1 u2

b1 b2 bn
Fig. 2. Serial connection of n nodes: u1, u2, …, un – ordering signals and d1,
d2, …, dn – imposed demands. Resources are provided by external source S1.
The arrows indicate the flow of information. Fig. 3. BE calculation in a serial connection of n nodes with internally (u1,
u2, …, un) and externally (d1, d2, …, dn) imposed demand.
Equation (2) quantifies the BE formation at a single
entity. If b1 > 1, the BE is observed. For a chain structure,

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In that case, the BI at the nodes is calculated consecutively improper imprecise information recorded in the system
as: database, may be the source of instability.

var[u1 ] IV. NUMERICAL STUDIES

b1  In order to investigate the system performance, the
var[d1 ]
(8) dynamic model of entity interaction was implemented in a
var[u2 ] var[u2 ] Matlab program, with the state-space characterization. In the
b2  
var[d 2  u1 ] var[d 2 ]  var[u1 ] experiments, two cases were analyzed for a supply chain
organized in a serial structure, illustrated in Fig. 4. In the first
and the variance as
series of simulations, the demand signal is applied only at the
fist node in the chain (node 1) – it reflects the situation
var[u2 ]  b2 (var[d 2 ]  var[u1 ]) depicted in Fig. 2. In the second series of simulations, all the
 b2 var[d 2 ]  b2 var[u1 ] controlled nodes are subjected to the external demand,
 b2 var[d 2 ]  b2 b1 var[d1 ] (9) according to the structure from Fig. 3. For clarity, in Fig. 4,
the external supplier is marked by a star symbol. The dotted
var[u3 ]  b3 var[ d 3 ]  b3b2 var[ d 2 ]  b3b2 b1 var[d1 ]
arrow represents the initial goods inflow from the outside
source (node 7), which is then relayed sequentially among
Finally, at the last node, nodes 1–6 to fulfil the demand.

var[un ]  bn var[d n ]  bn bn 1 var[ d n 1 ] A. Nominal operating conditions

  bn b1 var[d1 ] Current supply chains and goods distribution systems are
(10)
expected to provide a high level of customer satisfaction – a
n  
n
high degree of service. The fill rate, i.e., the fraction of
    b j  var[di ]. external demand satisfied from the resources available at the
i 1  j  i  nodes, is affected by the choice of the reference stock level.
In the tests, the reference xiref was determined through
numerical calculations according to the guidelines from [23]
In a vector form: so that a 100% fill rate is obtained with minimum holding
costs. With the estimate of maximum demand [10 15 20 17 9
 b1  13]T units the reference level was set as [80
 bb b2  60 235 258 436 262]T units.
 2 1 
b b b b3b2 b3 
var[u]   3 2 1  var[d]. (11)
 
 n n n 
  bi b i b i bn 
 i 1 i2 i  n 1 

If the OUT policy is applied to manage the flow of goods

in the chain, using (5), the ordering signal variance at the last
node preceding the external source

n
var[un ]   var[di ]. (12)
i 1

Thus, to allow one to properly quantity the BE formation at a

single – ith – echelon, including both internal and external
demand, the measure is used:
var[ui ]
bi  , (13)
var[di ]  var[ui 1 ]
where i ∈ Z.
Therefore, with the OUT policy in place, in the nominal
operating conditions, the orders variance at a node equals the
sum of demand variance at all the preceding echelons.
Although the BE is not generated, the system is at the margin
of stability. An improper assignment of the reference values
of the underlying ordering tactics used in the OUT policy
would result in a loss of the system stability. Also, an
erroneous decision made at one echelon, e.g., caused by
Fig. 4. Supply chain model used in the simulations.
The time of a single simulation run was set as 104 periods
to get a representative data sample. In order to conclude about
the system stability in the circumstances reflecting various
real-world scenarios, the demand signal applied at nodes 1–6
exhibit stochastic variations. In the tests, the demand is
generated by multiplying the estimate of maximum value by a
coefficient, as specified in Table I. In period k, for node i, the
demand value ω is determined via a two-step calculation:
 i  0.6* dimax ,
(14)
  round ( g ( i )),
round means rounding to the nearest integer, g reflects the
distribution function, and αi is the input parameter.

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 In order to discuss in more detail the fundamental system
response, an on-off signal is considered within first 60
periods, depicted in Fig. 5. The satisfied demand, denoted by
hi(k), is shown Fig. 6. In the nominal operating conditions,
hi(k) = di(k), implying the fill rate of one. The ordering signal
generated to replenish the stock is presented in Fig. 7, and the
stock level in Fig. 8. In the time interval from 40 up to 60 k,
the stock reaches the steady state corresponding to the
maximum demand. This is characteristic behavior of the
properly adopted OUT policy in the face of a constant
demand signal, in the analyzed case di(k) = dimax.
The logistic stability was evaluated quantitatively by
examining BI (2). The measured variance of di, ui, and xi at
nodes 1–6 in response to demand signal stipulated in Table I Fig. 7. Stock level at nodes 1–6, nominal case.
is given in the Table II. The system response to demand with
the same variance (and different distribution type) is marked
by A, B, and C. The various distribution used to generate the TABLE I. PARAMETERS OF SIMULATION SCENARIOS
external demand signal: Poisson, Gamma, Uniform, and
Normal, marked by the same color and set letter in Table I, Probability
No Input parameter Set
Distribution
resulted in the equivalent system variables. The lead-time
1 Poisson mean = 0.6 * dimax A
delays used in the simulation scenario are denoted by the
vector grouping the following delays from the node i to j, 2 Poisson mean = 0.1 * dimax B
where i,j ∈ Z: L = [61-2 12-3 43-4 34-5 55-6 26-7]T. The situation 3 Poisson mean = 0.3 * dimax C
of supplying the external source is excluded by restricting
dimension to (n + s, n), where s means the number of external 4 Gamma α = 0.6 * dimax A
sources. 5 Gamma α = 0.1 * dimax B
The numerical studies confirm that for the analyzed
6 Gamma α = 0.3 * dimax C
supply chain, relations (5) and (7) do hold. In the nominal
operating conditions, i.e., when the stock records are 7 Uniform max = 0.6 * dimax A
registered properly, one can ensure accurate OUT policy 8 Uniform max = 0.3 * dimax B
realization and relation (5) is satisfied. The system remains
stable, regardless of demand uncertainty, type of applied 9 Uniform max = 0.5 * dimax C
distribution function, and delivery delays. mean = 0.1 * dimax,
10 Normal A
std = 0.6 * dimax
mean = 0.3 * dimax,
11 Normal B
std = 0.3 * dimax
mean = 0.6 * dimax,
12 Normal C
std = 0.6 * dimax

TABLE II. VARIANCE OF SYSTEM VARIABLES (NOMINAL CASE)

Parame
Measured value Set
ter
node i 1 2 3 4 5 6
var[di] 4.1 7.4 11.8 9 3.4 6.1 A
Fig. 5. Demand imposed on nodes 1–6 (equal to the satisfied one). var[ui] 4.1 11.4 23.4 32.5 36 42.4 A
var[xi] 28.9 22.9 118.9 130.4 226.1 128.3 A
var[di] 1 1.9 2.6 2.2 0.8 1.2 B
var[ui] 1.0 2.9 5.5 7.7 8.5 9.7 B
var[xi] 6.7 5.8 27.9 31.1 54.1 30 B
var[di] 2.5 4.7 6.9 5.3 2.3 3.6 C
var[ui] 2.5 7.2 14.2 19.5 22 25.7 C
var[xi] 17.7 14.4 72.5 79.8 143.3 78.8 C

B. Imprecise stock level records

Sometimes, the stock records registered in the system do
not reflect the actual level of accumulated resources, owing to
human mistakes, spoilage, or theft. Also, due to the distortions
in the process of information processing, product defects,
manufacturing imperfections, or improper transport, the
Fig. 6. Order quantity generated at nodes 1–6, nominal case.
useful quantity of merchandises obtained from suppliers for

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the sales purposes may differ from the ordered one [24]. In the An intriguing discovery has been made with examination
analyzed system, the information uncertainty was simulated of the opposite case, when the stock level value used in the
by introducing a random error in the calculations involving the calculations was enlarged to 120–125%, with respect to its
stock level xi(k) in (1). actual level in inventory. The BI increases much at all the
Two situations were examined – the case when the stock nodes in cases A, B, and C, as detailed in Table IV. The order
level used in establishing the order quantity by the OUT policy quantity fluctuates significantly (Fig. 11), as well as the stock
(1) is randomly decreased, and a complementary case of level (Fig. 12), which lead to unsatisfied demand (Fig. 13).
(random) stock increase. The actual stock value varies in the Since bi > 1, the system does not preserve stability in the
range [a b] according to logistic sense. In order to remedy the situation, alternative
control strategies would need to be applied, e.g., proportional
  (b  a) *   a , OUT policy [21], or robust LQ-based one [25].
(15)
x(k )  x(k ) * 
where ζ denotes the value obtained from a uniform
distribution and ϑ is an error intensity coefficient.
In the first analyzed scenario, the stock level was reduced to
75–80% of the original value. As a result, as shown in Fig. 9,
the order quantity begins to fluctuate, yet all the demands are
realized in full. Surprisingly, as documented in Table III, the
BI has decreased below 1 at every second node in cases A and
C, whereas in set B the BI has dropped below 1 only at the
second and sixth node. It occurs that the demand variations
have actually been throttled down the supply chain, yet the
dampening intensity correlates with the type of the
distribution function applied. The largest variance reduction
was observed for the Poisson distribution. The stock level Fig. 10. Order quantity generated at nodes 1–6, under increased stock level.
(Fig. 10) reaches a level above the expected minimal level,
implying higher holding costs with respect to the nominal
case.

Fig. 11. Goods stored at nodes 1–6, under increased stock level.

Fig. 8. Order quantity generated at nodes 1–6, under reduced stock level.

Fig. 12. Satisfied demand at nodes 1–6, under increased stock level.

Fig. 9. Stock level at nodes 1–6, under reduced stock level.

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