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Contemporary Accounting Research Vol. 41 No. 1 2024

The bullwhip effect, demand uncertainty, and cost structure

Clara Xiaoling Chen1; Jing Liang2; Shilei Yang3; Jing Zhu4

1 Department of Accountancy, Gies College of Business University of Illinois at Urbana–Champaign Champaign Illinois USA · 2 College of Management Science Chengdu University of Technology Chengdu China · 3 School of Accounting, SWUFE‐UD Institute of Data Science Southwestern University of Finance and Economics Chengdu China · 4 Institute of Western China Economic Research Southwestern University of Finance and Economics Chengdu China

open access

Abstract

The firm‐level bullwhip effect is the amplification of demand uncertainty along a supply chain—that is, fluctuations in production (for manufacturing firms) or purchases from suppliers (for retailers or wholesalers) in a firm tend to be greater than its demand fluctuations. We predict that the bullwhip ratio (a proxy for the bullwhip effect) amplifies the relation between demand uncertainty and cost structure. We expect this amplifying effect because the bullwhip ratio determines the extent to which demand uncertainty translates into uncertainty in production or purchases, which, in turn, affects cost structure. Using data from public US firms over the 1990–2020 period, we find results consistent with our prediction. Specifically, we find that both the negative relation between demand uncertainty and cost elasticity in the manufacturing sector and the positive relation between the two in the retail/wholesale sectors are stronger for firms with higher bullwhip ratios. We contribute to the literature on cost structure by highlighting the important role of the bullwhip effect in cost structure decisions.

DOI
10.1111/1911-3846.12908
Volume
41
Issue
1
Pages
195-225
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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