Pricing strategy and product substitution of bullwhip effect in dual parallel supply chain: aggravation or mitigation?

Abstract

The bullwhip effect (BE) affects not only the revenue of the retailer but also the revenue of the manufacture. Thus, a lot of retailers and manufacturers aim to attenuate the negative impact of the BE. In this research, two parallel supply chains distributing two substitutable products with price-sensitive demands are considered, the order-up-to inventory policy, as well as the MMSE forecasting method, are employed by retailers in these chains. The retailer’s price-setting follows the first-order vector autoregressive process, suggesting that its pricing decision depends on its previous price as well as its rival’s price, owing to the BE. The analytical expression of the BE is calculated by the statistical method. Besides, the effects of pricing strategy and product substitution on the BE are studied through simulation. A conclusion can be drawn that the BE of the two parallel supply chains will be affected by lead time, product substitution rate, and pricing coefficient. Of particular interest is that the BE can be efficiently alleviated by adopting a price strategy with many correlations and a small coefficient of autocorrelation.