Does the bullwhip matter economically? A cross-sectional firm-level analysis

One of the critical factors that impacts outsourcing decisions in supply chains is the bullwhip effect (BE). This effect refers to the ubiquitous phenomenon whereby firm-level production is more volatile than its demand. The literature assumes that the BE increases costs and reduces profitability. We examine the relations between the intra-firm BE and various accounting/financial performance measures using a large panel of cross-sectional firm-level data. Our analyses yield results that are inconsistent with the notion that the BE has significant negative consequences for profitability at the firm level. Specifically, we find almost no significant (statistical/economic) negative relation between accounting/market measures of profitability and the bullwhip at the firm level. Our results hold even after accounting for the endogeneity of the bullwhip using advanced matching techniques and a natural experiment (the Fukushima disaster). These results suggest that either the BE has little effect if any on profitability at the firm level, or that the BE is a natural outcome of firms’ optimization strategy and need not be actively managed.