The bullwhip effect is the phenomenon of increasing demand variability in the supply chain from d... more The bullwhip effect is the phenomenon of increasing demand variability in the supply chain from downstream echelons (retail) to upstream echelons (manufacturing). The objective of this study is to document the strength of the bullwhip effect in industry-level U.S. data. In particular, we say an industry exhibits the bullwhip effect if the variance of the inflow of material to the industry (what macroeconomists often refer to as the variance of an industry's "production") is greater than the variance of the industry's sales. We find that wholesale industries exhibit a bullwhip effect, but retail industries generally do not exhibit the effect, nor do most manufacturing industries. Furthermore, we observe that manufacturing industries do not have substantially greater demand volatility than retail industries. Based on theoretical explanations for observing or not observing demand amplification, we are able to explain a substantial portion of the heterogeneity in the degree to which industries exhibit the bullwhip effect. In particular, the less seasonal an industry's demand, the more likely the industry amplifies volatility-highly seasonal industries tend to smooth demand volatility whereas nonseasonal industries tend to amplify.
ABSTRACT Previous research describes two key ways in which a new product may encroach on an exist... more ABSTRACT Previous research describes two key ways in which a new product may encroach on an existing market. In high-end encroachment, the new product first sells to high-end customers and then diffuses down-market; in low-end encroachment, the new product enters at the low end and encroaches up-market. This paper focuses on high-end encroachment, which can further be broken down into three subtypes, which are called the immediate, the new-attribute, and the new-market forms of high-end encroachment. This paper makes three key contributions. First, it provides a sound theoretical underpinning for the three distinct subtypes of high-end encroachment—a linear reservation price curve model (LRPCM) is used to establish this theoretical foundation. Second, this paper delineates and illustrates four different ways the high-end new-market diffusion process may progress over time. These four are: (1) the traditional type, where the new product diffuses relatively slowly and methodically over time; (2) the fad scenario, where the new product opens a new market but then fizzles out after a relatively short period of high sales; (3) the rapid diffusion outcome, where the new product opens a new market and then rapidly diffuses down-market; and (4) the prolonged-niche type, where the new product purposefully restricts itself to its own niche rather than diffusing down-market. The third key contribution of this paper is to offer managerial insights into the new-market high-end encroachment process by discussing two short case studies; namely, a retrospective look at the introduction of the iPhone, and a prospective look at Tesla's challenges in growing the market for its electric car. With regard to the iPhone, it helps explain why Apple precipitously dropped the price of the iPhone by one third only 68 days after its introduction. With regard to Tesla, it discusses how Tesla must leverage the revenues that stem from its current high-end pricing power. Tesla must be able to progress down the learning curve fast enough so that it can create a virtuous cycle; a cycle in which cost reductions and technology improvements lead to price reductions and increased sales, which in turn lead to further cost reductions. At the conclusion of the paper, a step-by-step approach is offered to aid in determining which type of encroachment should be pursued and in determining how the encroachment pattern will eventually develop. The encroachment framework and the step-by-step approach are intended to help managers better assess and mitigate the risks inherent with a new product introduction.
Purpose The popular “beer game” illustrates the bullwhip effect where a small perturbation in dow... more Purpose The popular “beer game” illustrates the bullwhip effect where a small perturbation in downstream demand can create wild swings in upstream product flows. The purpose of this paper is to present a methodical framework to measure the bullwhip effect and evaluate its impact. Design/methodology/approach This paper illustrates a framework using SKU-level data from an industry-leading manufacturer, its distributors, end-users and suppliers. Findings Firms benefit from tracking multiple intra-firm bullwhips and from tracking bullwhips pertinent to specific products, specific suppliers and specific customers. The framework presented in this paper enables managers to pinpoint bullwhip sources and mitigate bullwhip effects. Research limitations/implications This paper presents a framework for methodically measuring and tracking intra-firm and inter-firm bullwhips. Practical implications A disconnect exists between what is known and taught regarding the bullwhip effect and how it is ac...
A key insight of basic inventory models and of the G/G/m queueing model is the effect of "pooling... more A key insight of basic inventory models and of the G/G/m queueing model is the effect of "pooling." That is, these models suggest that pooling of customer demands, along with pooling of the resources used to fill those demands, may yield operational improvements. While there are many research papers that articulate and quantify the benefits of pooling, a review of popular texts in operations management suggests that most texts lack simple examples that illustrate this important concept. This note is intended to fill this void by articulating the "pooling principle" in an intuitive, straightforward fashion. This note is comprised of a brief instructor's note, followed by a note that can be included in a course pack or handed out to students. Earlier versions of the note have been used successfully in core operations courses at both the undergraduate business and MBA levels.
In technology markets, new features targeted at existing high-end customers are often introduced ... more In technology markets, new features targeted at existing high-end customers are often introduced with each new generation of product. For example, Microsoft's Xbox 360 gaming system was not only able to play games in High De…nition, it also came with a more sophisticated controller. We call this accelerating the technology treadmill. On the other hand, sometimes the new feature emphasizes an alternate performance dimension to attract new customers: Nintendo's new Wii video game system introduced an easier-to-use interface targeted at new customers. We refer to this as stepping o¤ the technology treadmill. We model a situation where each of two …rms chooses whether or not to introduce one type of new feature or the other or neither, and each …rm simultaneously sets product performance along the traditional dimension. We …nd that the …rms either both accelerate the technology treadmill, both step o¤ the technology treadmill, or they introduce opposite feature types. Interestingly, in the latter case the …rm introducing the new feature targeted at new customers prefers that it be only marginally attractive.
The literature suggests an incumbent is susceptible to being displaced by an entrant in the face ... more The literature suggests an incumbent is susceptible to being displaced by an entrant in the face of an innovation that is competence-destroying, drastic in magnitude (i.e., radical), and/or disruptive. Another possible factor is a lack of complementary assets in marketing and manufacturing. Our model simultaneously examines the impact of all four factors, finding: 1) In overcoming the replacement effect, complementary
The bullwhip effect is the phenomenon of increasing demand variability in the supply chain from d... more The bullwhip effect is the phenomenon of increasing demand variability in the supply chain from downstream echelons (retail) to upstream echelons (manufacturing). The objective of this study is to document the strength of the bullwhip effect in industry-level U.S. data. In particular, we say an industry exhibits the bullwhip effect if the variance of the inflow of material to the industry (what macroeconomists often refer to as the variance of an industry's "production") is greater than the variance of the industry's sales. We find that wholesale industries exhibit a bullwhip effect, but retail industries generally do not exhibit the effect, nor do most manufacturing industries. Furthermore, we observe that manufacturing industries do not have substantially greater demand volatility than retail industries. Based on theoretical explanations for observing or not observing demand amplification, we are able to explain a substantial portion of the heterogeneity in the degree to which industries exhibit the bullwhip effect. In particular, the less seasonal an industry's demand, the more likely the industry amplifies volatility-highly seasonal industries tend to smooth demand volatility whereas nonseasonal industries tend to amplify.
ABSTRACT Previous research describes two key ways in which a new product may encroach on an exist... more ABSTRACT Previous research describes two key ways in which a new product may encroach on an existing market. In high-end encroachment, the new product first sells to high-end customers and then diffuses down-market; in low-end encroachment, the new product enters at the low end and encroaches up-market. This paper focuses on high-end encroachment, which can further be broken down into three subtypes, which are called the immediate, the new-attribute, and the new-market forms of high-end encroachment. This paper makes three key contributions. First, it provides a sound theoretical underpinning for the three distinct subtypes of high-end encroachment—a linear reservation price curve model (LRPCM) is used to establish this theoretical foundation. Second, this paper delineates and illustrates four different ways the high-end new-market diffusion process may progress over time. These four are: (1) the traditional type, where the new product diffuses relatively slowly and methodically over time; (2) the fad scenario, where the new product opens a new market but then fizzles out after a relatively short period of high sales; (3) the rapid diffusion outcome, where the new product opens a new market and then rapidly diffuses down-market; and (4) the prolonged-niche type, where the new product purposefully restricts itself to its own niche rather than diffusing down-market. The third key contribution of this paper is to offer managerial insights into the new-market high-end encroachment process by discussing two short case studies; namely, a retrospective look at the introduction of the iPhone, and a prospective look at Tesla's challenges in growing the market for its electric car. With regard to the iPhone, it helps explain why Apple precipitously dropped the price of the iPhone by one third only 68 days after its introduction. With regard to Tesla, it discusses how Tesla must leverage the revenues that stem from its current high-end pricing power. Tesla must be able to progress down the learning curve fast enough so that it can create a virtuous cycle; a cycle in which cost reductions and technology improvements lead to price reductions and increased sales, which in turn lead to further cost reductions. At the conclusion of the paper, a step-by-step approach is offered to aid in determining which type of encroachment should be pursued and in determining how the encroachment pattern will eventually develop. The encroachment framework and the step-by-step approach are intended to help managers better assess and mitigate the risks inherent with a new product introduction.
Purpose The popular “beer game” illustrates the bullwhip effect where a small perturbation in dow... more Purpose The popular “beer game” illustrates the bullwhip effect where a small perturbation in downstream demand can create wild swings in upstream product flows. The purpose of this paper is to present a methodical framework to measure the bullwhip effect and evaluate its impact. Design/methodology/approach This paper illustrates a framework using SKU-level data from an industry-leading manufacturer, its distributors, end-users and suppliers. Findings Firms benefit from tracking multiple intra-firm bullwhips and from tracking bullwhips pertinent to specific products, specific suppliers and specific customers. The framework presented in this paper enables managers to pinpoint bullwhip sources and mitigate bullwhip effects. Research limitations/implications This paper presents a framework for methodically measuring and tracking intra-firm and inter-firm bullwhips. Practical implications A disconnect exists between what is known and taught regarding the bullwhip effect and how it is ac...
A key insight of basic inventory models and of the G/G/m queueing model is the effect of "pooling... more A key insight of basic inventory models and of the G/G/m queueing model is the effect of "pooling." That is, these models suggest that pooling of customer demands, along with pooling of the resources used to fill those demands, may yield operational improvements. While there are many research papers that articulate and quantify the benefits of pooling, a review of popular texts in operations management suggests that most texts lack simple examples that illustrate this important concept. This note is intended to fill this void by articulating the "pooling principle" in an intuitive, straightforward fashion. This note is comprised of a brief instructor's note, followed by a note that can be included in a course pack or handed out to students. Earlier versions of the note have been used successfully in core operations courses at both the undergraduate business and MBA levels.
In technology markets, new features targeted at existing high-end customers are often introduced ... more In technology markets, new features targeted at existing high-end customers are often introduced with each new generation of product. For example, Microsoft's Xbox 360 gaming system was not only able to play games in High De…nition, it also came with a more sophisticated controller. We call this accelerating the technology treadmill. On the other hand, sometimes the new feature emphasizes an alternate performance dimension to attract new customers: Nintendo's new Wii video game system introduced an easier-to-use interface targeted at new customers. We refer to this as stepping o¤ the technology treadmill. We model a situation where each of two …rms chooses whether or not to introduce one type of new feature or the other or neither, and each …rm simultaneously sets product performance along the traditional dimension. We …nd that the …rms either both accelerate the technology treadmill, both step o¤ the technology treadmill, or they introduce opposite feature types. Interestingly, in the latter case the …rm introducing the new feature targeted at new customers prefers that it be only marginally attractive.
The literature suggests an incumbent is susceptible to being displaced by an entrant in the face ... more The literature suggests an incumbent is susceptible to being displaced by an entrant in the face of an innovation that is competence-destroying, drastic in magnitude (i.e., radical), and/or disruptive. Another possible factor is a lack of complementary assets in marketing and manufacturing. Our model simultaneously examines the impact of all four factors, finding: 1) In overcoming the replacement effect, complementary
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