Of Bullwhips and White Tails

B-School Professor Hau Lee with teaching aid

Stanford Business School Professor Hau Lee's paper on the bullwhip effect was "voted one of the 10 most influential papers in the history of Management Science":

When you are a cowboy and you crack the whip, you move the handle 60 degrees and the tip will move more than 360 degrees. Sometimes, a signal can move a little bit from consumer to retailer to distributor to wholesaler to manufacturer to supplier. Everyone adds something to the signal, and it results in a big surge, up and down.

The pandemic is a great illustration of this. Even the media used the term “bullwhip”: bullwhip of toilet paper, bullwhip of hand sanitizers, bullwhip of everything. We were relying on short-term data and then we produced a whole lot more. Consumers panicked, too. They didn’t realize there was ample supply coming in. Some students told me they’re still using the toilet paper that they bought in 2020.

Small imbalances in supply and demand can manifest in upstream surges and shortages. Every link in the supply chain "adds something."

Your humble blogger saw this boom-bust phenomenon when he worked in commercial aviation, when an uptick in summer travel, reinforced by low interest rates and an economy coming out of a recession, resulted in a surge of aircraft orders.

Aircraft require at least two years between order and delivery, and later new airplanes came off the line when the economy was softening. If the glut was bad, buyers even preferred to lose their deposits by canceling orders, and new airplanes were "white-tailed" (painted without an airline's logo).

Boom and bust cycles have been studied for over a hundred years, and Prof. Lee's vivid metaphor helps to bring the concept home.