The analysis of bullwhip effect in supply chain based on hedging strategy compared with optimal order quantity strategy

Abstract

The bullwhip effect is one of the most important problems in the supply chain management. It can cause large inefficiency in supply chain. Although there are many researches about bullwhip effect, few studies have investigated this phenomenon caused by product price fluctuation. In this paper we consider a two-period supply chain consisting of one supplier, one wholesaler and one retailer. The wholesale price may increase greatly in the beginning of second period. If this happens, a large number of end customers will go to purchase the product from retailer. For managing the end customers' demands in the second period, we consider two ordering strategies available to the retailer including optimal order quantity strategy and hedging strategy with call option. For each strategy, we calculate the bullwhip effect ratio for two periods and compare the results. We found that the lower exercise price in hedging strategy compared with the wholesale price in the optimal order quantity strategy must not contribute to extra product purchase. The research provides new insights into how hedging strategy can reduce bullwhip effect.