Promet – Traffic&Transportation, Vol. 23, 2011, No. 2, 131-140 131 F. Campuzano Bolarín et al.: Assessing the Impact of Prices Fluctuation on Demand Distortion within a Multi-Echelon Supply Chain FRANCISCO CAMPUZANO BOLARÍN, Ph.D. E–mail: francisco.campuzano@upct.es Technical University of Cartagena, Department of Business Economics ANTONIO GUILLAMÓN FRUTOS E–mail: antonio.guillamon@upct.es Technical University of Cartagena, Department of Applied Mathematics and Statistics Campus Muralla del Mar s/n, 30201 Cartagena, Spain ANDREJ LISEC, Ph.D. E–mail: andrej.lisec@fl.uni-mb.si University of Maribor, Faculty of Logistics Hočevarjev trg 1, SI – 8271 Krško, Slovenia Distribution Logistics Review Accepted: Jan. 29, 2010 Approved: Mar. 8, 2011 ASSESSING THE IMPACT OF PRICES FLUCTUATION ON DEMAND DISTORTION WITHIN A MULTI-ECHELON SUPPLY CHAIN ABSTRACT Price fluctuation is a practice commonly used by compa- nies to stimulate demand and a main cause of the Bullwhip effect. Assuming a staggered step demand pattern that re- sponds elastically to retailer’s price fluctuation, and by using a supply chain management dynamic model, we will anal- yse the impact of these fluctuations on the variability of the orders placed along a traditional multilevel supply chain. Subsequently, the results obtained will serve to propose a forecasting model enabling to calculate the potential vari- ability of orders placed by each echelon on the basis of the price pattern used. Finally, under the hypothesis of an en- vironment of collaboration between the different members of the chain, we propose a predictive model that makes it possible to quantify the distortion of the orders generated by each level. KEYWORDS Bullwhip effect, systems dynamics, price fluctuation, supply chain management 1. INTRODUCTION Companies nowadays are confronted with many challenges. Growing competitiveness and globaliza- tion require from companies more and more efficient responses and solutions (processes and strategies) that enable them to interact in a continuously chang- ing world, where customers increasingly hold bargain- ing power and, at the end, determine the success or failure of the whole business mechanism which un- derlies the manufacturing of a product. This scenario becomes even more complex, considering that the production and marketing work do not finish at the mo- ment of the sales only after the client has accepted, is entirely satisfied with the product, and has paid all this forward manufacturing flow has fulfilled its mis- sion, regardless from the closed-loop or reverse supply chain model. Adequate Supply Chain Management is crucial for companies to remain competitive. Currently, competi- tion is not only among companies but also among sup- ply chains new management tools (based on IT), are fostering the integration of companies in supply chains and the emergence of entities capable of responding more efficiently, Vaculik et al. [1]. Nevertheless, some underlying issues should be resolved to achieve effi- cient operation of a Supply Chain. When Forrester [2] analysed a Traditional Supply Chain, he observed that a small variation in customer’s demand pattern became amplified as it flowed through the production, supply and distribution processes. At each level of the chain this deviation became ampli- fied upstream, in the form of replenishment orders. This effect is known as the Forrester Effect. According to Forrester, the amplification was due to problems arising from non-zero lead times and in- accurate forecasting by each member of the chain re- garding the demand variability. Some decades later, Lee et al. [3] identified that demand distortion relative to sales caused by the Forrester effect became even more amplified because of some or all of the following factors, which can be simultaneously present in the Supply Chain: order batching, product price fluctua- tions, rationing and shortage of finished products. This distortion in replenishment orders of products relative

F. Campuzano Bolarín et al.: Assessing the Impact of Prices Fluctuation on Demand Distortion within a Multi-Echelon Supply Chain 132 Promet – Traffic&Transportation, Vol. 23, 2011, No. 2, 131-140 to end customer’s demand resulting from the combi- nation of the mentioned elements (distortion which keeps on increasing as we move from end customer along the supply chain), is called the Bullwhip effect. The study of the Bullwhip effect has given rise to numerous works, aimed at both analysing its causes and solving it by means of various management strat- egies. All these contributions can be classified as fol- lows: – Studies focused on how to reduce the Bullwhip effect, which put forward the smoothing of replen- ishment orders or new collaborative structures for information exchange among the supply chain members. The works of Deziel and Elion [4], Ster- man [5], John et al. [6], Lee et al. [7], Kelle and Milne [8], Lee et al. [9], Disney and Towill [10, 11], Disney et al. [12], Dejonckheere et al. [13] are worth mentioning. – Works focused on analysing the impact of several factors on the Bullwhip effect, such as variable lead times, inaccuracy of forecasts and lack of in- formation among the members of the chain. In this respect, the studies by Chen et al. [14], Lee et al. [7], Metters [15], So and Zheng [16], Chatfield et al. [17], Hosoda and Disney [18] are the most out- standing ones. Many of these authors’ analytical models provide satisfactory results, although some methodological difficulties could arise from the structure of the models developed when it comes to applying them, as well as considerable constraints in their field of application, owing to some rigid conditions established, such as, for example, the fact that they concentrate only on one parameter [19]. It should also be noted that the article by Lee et al. [20] provides an excellent approach to the analysis of the causes and potential solutions of the Bullwhip effect. As previously mentioned, price fluctuation is one the major causes of the appearance of Bullwhip ef- fect in the supply chain. This practice is used by busi- nessmen to stimulate the demand [21] to the extent that in many companies the budget allocated for sales promotion is higher than the budget allocated for ad- vertising [22]. It is very common that wholesalers and manufac- turers establish product pricing policies. Depending on each individual case, the manufacturer can offer discounts, usually by product volume, to encourage the wholesaler to purchase an amount larger that they need. If the difference between the real price of the item and the purchase price is bigger than the holding costs of the item, this strategy could prove profitable for the wholesaler in the first moment, but if they have not carried out a study to know what their real demand is, the holding costs could exceed the mentioned price difference and the expected benefits would not ma- terialize [23]. Furthermore, it could also happen that the wholesaler goes on purchasing products until their warehouses are full. In that case, the wholesaler’s ac- tual demand information would not be reflected in their purchases to the manufacturer, with the subsequent appearance and/or magnification of the Bullwhip ef- fect, since the size of the wholesaler’s replenishment orders will bear no relation with the retailer’s demand, thus leading to wrong forecasting upstream the sup- ply chain. The wholesaler will just satisfy the demand by disposing of the stored products and this will dis- tort the manufacturer’s forecasts, which sees a sales decrease when compared to previous periods. These forecasts will prompt the manufacturer to reduce their production activity, and this might subsequently result in stock disruptions in their warehouse. The wholesal- er can carry out such price policies for retailers and the latter for end-customers. Price variation or modification by the members downstream the chain has been particularly studied by Özelkan et al. [24], who analyse the increase of this variation as we move downstream the supply chain, which becomes what the authors call “Reverse Bull- whip effect in Pricing” (RBP). This analysis comple- ments the studies by Cowan [25] on the impact of changes in demand patterns on the sale prices within the different types of economies and, consequently, on the benefits these changes entail. For Özelkan et al. [15] price fluctuation can be the cause behind an increase of distortion in replenishment orders or, in other words, a magnification of the Bullwhip affects upstream the supply chain. The present paper complements both authors’ anal- ysis, by studying the fluctuation of the retailer’s prices, and its impact on the proper management of a tradi- tional multilevel supply chain (made up of manufactur- er, wholesaler, retailer and end customer). By using a staggered step demand pattern, which responds elasti- cally to retailer price fluctuation, the paper will analyze the influence of these fluctuations in the variability of the orders placed along the modelled supply Chain, by means of the supply chain management dynamic mod- el proposed by Campuzano et al. [26]. In order to quan- tify that distortion, we will calculate the Coefficient of Variation associated with each series (replenishment / manufacturing orders) and obtained from different simulations carried out with the dynamic model pro- posed, by using a seasonal price pattern disturbed by different variability levels. Finally, if we considered pos- sible an environment of collaboration between the dif- ferent members of the chain, we propose, using linear regression, predictive model techniques that enable quantification of the distortion of the orders generated using information about variability prices and orders at the level immediately downstream. The Bullwhip effect appears as the replenishment/ manufacturing orders Coefficient of Variation increas- es upstream the supply chain. The measurement of