Post by Nikolay Osadchiy on Sept 30, 2011 2:58:05 GMT 4
Systematic Risk and the Bullwhip Effect in Supply Chains
Nikolay Osadchiy
Emory University Goizueta Business School
Vishal Gaur
Cornell University - Samuel Curtis Johnson Graduate School of Management
Sridhar Seshadri
University of Texas at Austin - McCombs School of Business
April 1, 2011
Johnson School Research Paper Series No. 41-2011
Abstract:
The variance of demand can be divided into two components, a systematic risk component that occurs due to economic factors, and an idiosyncratic noise component. Operational hedging addresses the total variance of demand, whereas financial hedging is useful against systematic risk. We investigate the systematic risk component of demand uncertainty using industry-level data for the manufacturing, wholesale trade, and retail trade sectors of the U.S. economy, and applying sales as a proxy for demand. We show that the degree of systematic risk increases substantially from retailers to wholesalers to manufacturers. Investigating two potential sources of this phenomenon, amplification of production series as predicted by the bullwhip effect and aggregation of orders placed by downstream industries, we find evidence supporting the latter. Our result have implications for the relative values of different operational and financial hedging strategies chosen by a firm. It is particularly relevant to events such as the 2008-09 economic recession and the post-recession recovery.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1931737_code362528.pdf?abstractid=1931737&mirid=2
Nikolay Osadchiy
Emory University Goizueta Business School
Vishal Gaur
Cornell University - Samuel Curtis Johnson Graduate School of Management
Sridhar Seshadri
University of Texas at Austin - McCombs School of Business
April 1, 2011
Johnson School Research Paper Series No. 41-2011
Abstract:
The variance of demand can be divided into two components, a systematic risk component that occurs due to economic factors, and an idiosyncratic noise component. Operational hedging addresses the total variance of demand, whereas financial hedging is useful against systematic risk. We investigate the systematic risk component of demand uncertainty using industry-level data for the manufacturing, wholesale trade, and retail trade sectors of the U.S. economy, and applying sales as a proxy for demand. We show that the degree of systematic risk increases substantially from retailers to wholesalers to manufacturers. Investigating two potential sources of this phenomenon, amplification of production series as predicted by the bullwhip effect and aggregation of orders placed by downstream industries, we find evidence supporting the latter. Our result have implications for the relative values of different operational and financial hedging strategies chosen by a firm. It is particularly relevant to events such as the 2008-09 economic recession and the post-recession recovery.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1931737_code362528.pdf?abstractid=1931737&mirid=2