Production smoothing policies and the bullwhip effect
Abstract
The dynamic behaviour of the order-up-to (OUT) policy, frequently used in the retail sector, has been extensively studied in the literature. Since this policy exhibits a bullwhip effect, other policies, such as the proportional OUT policy and the full state OUT policy, have been proposed that are able to avoid this bullwhip effect. However, somewhat remarkably, the role that so-called “production smoothing” policies play in dampening the bullwhip effect is not well known. In this paper, two production smoothing policies are analysed, one similar to the smoothing policy proposed by Magee (1958), the other, inspired by the full state OUT policy, which has a much greater level of flexibility. The flexible, full-state, smoothing policy can avoid the bullwhip effect rather well. For Magee’s smoothing policy, however, this is not always guaranteed.