In a supply chain, the distorted demand information when it goes upstream is commonly known as the bullwhip effect. In this paper, the impact of demand substitution on the bullwhip effect in a two-stage supply chain is investigated. In our model, a single retailer observes inventory levels for two products, among which product 1 can be used to substitute product 2. The retailer places orders to a single manufacturer following an order-up-to inventory policy and uses a simple moving average forecasting method to estimate the lead-time demand. The customers’ demands are modeled by an autoregressive process. By analyzing the bullwhip effect in such settings, quantitative relations between the bullwhip effect and the forecasting method, lead time, demand process, and the product substitution are obtained. Numerical results show that demand substitution can reduce the bullwhip effect in most cases.
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