Modeling stock-out loss and overstocking loss generated by bullwhip effect

Document Type: Research Note

Authors

1 Robert H. Smith School of Business, University of Maryland, College Park, MD, USA

2 Department of Industrial Engineering, College of Engineering, University of Tehran, Tehran, Iran

3 Department of Industrial Engineering, Istanbul Sehir University, Istanbul, Turkey

Abstract

Although the literature of the supply chain is teemed with the analysis of the bullwhip effect, few studies regarding the impact of the bullwhip effect or demand distortion on the supply chain profit have been done. Hence, we introduce the concept of Distance to Loss (DL), which is a function of the retailer’s selling price, the manufacturer’s wholesaler price, the end item’s salvage value, the retailer’s expected demand and the retailer’s variance of demand. This concept can perfectly model both stock-out loss and overstocking loss emanated by the bullwhip effect and combines both the newsvendor model and credit risk concepts. Our findings are based on an experimental design and are profoundly in line with previous research. In particular, our model indicates that variations in demand parameters, retailer’s selling price and manufacturer’s wholesaler price impinge on the retailer’s DL, whereas a slight increase in the salvage value negligibly affect the retailer’s DL.

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