Analysis of the Bullwhip Effect in a Multiproduct Setting with Interdependent Demands

The bullwhip effect has been extensively studied primarily based on the analysis of various single-product models with a few exceptions. We extend the single-product analysis to the multiproduct setting of interdependent demand streams with auto-correlation and cross-product correlation, as well as contemporaneous correlation across forecasting errors. We find that interdependency between demand streams plays a critical role in determining the existence and magnitude of the bullwhip effect. Specifically, we consider two operating environments: (a) The firm orders product-specific materials so that the ordering decision is based on the product level; and (b) the firm orders generic materials so that the order decision is based on the category level. We show that, even with demand pooling, a firm operating at the category level can experience a larger bullwhip effect and a larger order variance under certain conditions that depend on the number of products in the category and the demand dependencies.