Underestimating the bullwhip effect: a simulation study of the decomposability assumption

We investigate the assumption of decomposability as it pertains to modelling the bullwhip effect in multi-stage supply chains. Decomposing a multi-stage supply chain into a set of node pairs, each of which can be efficiently represented with a two-stage model, is a common modelling technique when analysing the bullwhip effect in supply chains. This approach depends on the validity of the decomposability assumption since most supply chains are coupled systems that are a logical fit for singular, or 'monolithic', multi-stage models. We utilise a simulation study to compare decomposition-based supply-chain models with monolithic models and determine if decomposition modelling significantly alters the predicted severity of the bullwhip effect. We find decomposition-based models exhibit a significantly lower level of bullwhip effect than monolithic models of the same supply chain. The systematic underestimation of the bullwhip effect by decomposition-based models indicates that the assumption of decomposability is flawed. Our study also confirms previous work showing the significant benefit of using actual, instead of approximate, lead-time demand information. We discuss implications for supply-chain modelling, supply-chain design, and data collection.