Solving the Bullwhip Effect in Supply Networks by incentivizing behaviour through decentralized Forecast Accuracy Discount agreements

Abstract

Current research towards solutions on the Bullwhip Effect have focused mainly on the systemic and operational causes of the Bullwhip Effect, resulting in solutions that require high levels of organizational integration, central coordination and information sharing. However, Such solutions are not always feasible within actual complex Supply Network structures, effective within the bounded rational self-optimizing behaviour of companies, acceptable towards the strategic perception of sensitivity of operational information, nor suitable within the authority and responsibility structures of organizations. Therefore we have developed Forecast Accuracy Discount agreements as decentralized solutions which financially incentivize customers to smoothen their purchase orders by rewarding predictable ordering according to previously shared forecasts of their own expected future orders. We use a simulation model based on a case study to test the effects of the agreements on the operational behaviour of both suppliers and customers and the outcomes on the operational performance to demonstrate that the agreements are able to create Pareto Improvements for both parties and incentivize them to adopt the agreements and further exploit the potential benefits by adjusting their operational systems to further synchronize their operations.