Experimental study on using advance demand information to mitigate the bullwhip effect via decentralised negotiations

This paper analyses experiment results to show that advance demand information (ADI) strategies have the potential to counteract the bullwhip effect and reduce supply chain costs in practice. The experiments are conducted with a new web-based interactive computer simulation game, where human players assuming the roles of suppliers not only make replenishment order decisions but also negotiate for agreements on ADI provision, consumption, and compensation. The game is designed with enhanced information provision and communication channels through which negotiations are conducted strictly between neighbouring suppliers. As such, the supply chain is kept decentralised (i.e. no information is shared across supply chain stages). The effectiveness of ADI strategies is tested in a variety of settings; e.g. when supply chain parameters are heterogeneous, when suppliers have (or do not have) partial knowledge on the customer demand, and when suppliers are inexperienced with the ADI strategy. It is observed repeatedly that the ADI negotiation mechanism significantly improves the supply chain performance, reducing not only the total chain-wide cost but also every individual supplier's cost. This improvement is generally achieved by the downstream suppliers (e.g. retailer) making future order commitments (while carrying higher inventory), which allows upstream suppliers to gain sufficient cost reduction and provide compensation to the downstream suppliers.