The impact of risk aversion on the value of information sharing to dampening the bullwhip effect

Abstract

We use mean-variance analysis to describe the bullwhip effect and verify the value of information in a sequential supply chain with multiple stages. We present the unique risk-averse ordering decision at each stage and then show that the risk-neutral solution is the upper bound of the risk-averse one with a reasonable assumption. Applying the considered demand forecasting approach, the risk-averse consideration do not affect the demand distribution, while the variance of profit is reduced due to the prudent order quantities. Information sharing benefits the decision makers in improving the expected profit and fill rate, while controlling the bullwhip effect, not only from reducing the demand deviation, but also from maintaining the safety factors in the risk-averse scenario. The value of information sharing is more significant as the risk-averse ratio or demand deviation increases.