Modelling supply networks and business cycles as unstable transport phenomena

Abstract

Physical concepts developed to describe instabilities in traffic flows can be generalized in a way that allows one to understand the well-known instability of supply chains (the so-called 'bull-whip effect'). That is, small variations in the consumption rate can cause large variations in the production rate of companies generating the requested product. Interestingly, the resulting oscillations have characteristic frequencies which are considerably lower than the variations in the consumption rate. This suggests that instabilities of supply chains may be the reason for the existence of business cycles. At the same time, we establish some links to queueing theoryand between micro- andmacroeconomics.