The Bullwhip Effect in Servitized Manufacturers

Abstract

The shift to a service-oriented economy has driven traditional product-oriented manufacturing firms to integrate various services into their businesses. This study aims to provide empirical evidence on how manufacturers’ service offerings impact demand variability and intrafirm bullwhip effects. Through “bag-of-words” text mining on 10-K filings of U.S.-listed manufacturing firms, we propose a novel measurement to identify annual services offered. We validate the measurement’s statistical and economic significance and verify its consistency with the results obtained using the large language model (i.e., GPT-4). Services are categorized as complementing product sales (e.g., maintenance and repair) or substituting product sales entirely (e.g., machine hours). Utilizing difference-in-difference techniques, we find robust evidence that manufacturers’ service offerings reduce the bullwhip effect in two steps: basic complementing services decrease demand variability, whereas advanced substituting services mitigate intrafirm bullwhip. Moreover, servitization mainly minimizes demand variability through information channels, whereas increased production efficiency decreases intrafirm bullwhip. Our findings contribute to understanding manufacturers’ business model innovations by demonstrating that servitization can smooth demand and mitigate intrafirm bullwhip. This paper was accepted by Karan Girotra, operations management. Funding: This work was supported by the National Natural Science Foundation of China [Grants 71931007, 72091214] and General Research Fund by Hong Kong Research Grants Council [Grant 14505320]. Supplemental Material: The data and the online appendix are available at https://doi.org/10.1287/mnsc.2023.01026 .