Does the Bullwhip Matter Economically? A Cross-sectional Firm-Level Analysis

Accounting

Speaker:Jeff Callen, University of Toronto
Date: Wednesday 14 March 2018
Time: 14:30 - 16:00
Location: Kolade Teaching Room, Building One

Further details

Problem Definition: The existence of the bullwhip effect in supply chains has been well documented. While the bullwhip effect is a supply chain phenomena, it also exists at the firm level- when the variability of inputs is higher than that of outputs. Indeed, recent studies empirically measure the bullwhip effect at the firm level. We investigate whether the bullwhip effect measured at the firm level impacts firm’s profitability.
Academic / Practical Relevance: The study of the bullwhip effect, and both the theory and practice of combating the bullwhip effect, presume that a high bullwhip effect increases costs and reduces profitability. We test this assumption empirically in an attempt to determine the importance of the bullwhip effect at the firm level.
Methodology: We examine the relations between the bullwhip effect and various accounting/financial performance measures, using a large panel of cross-sectional firm-level data. Performance is measured both in terms of first-moment mean effects and second-moment volatility effects on profitability.
Results: Our analysis yields results that are inconsistent with the notion that the bullwhip at the firm level has significant negative consequences on profitability. In particular, we find almost no significant statistical/economic negative relation between accounting/financial measures of profitability and the bullwhip, both with and without covariate controls.
Managerial Implications: If, indeed, the bullwhip effect has limited impact on profitability, there is a need to further scrutinize projects that aim at reducing the bullwhip effect at the firm level. We leave the question of whether the bullwhip impacts profitability in a supply chain unresolved.