Upstream Volatility in the Supply Chain: The Machine Tool Industry as a Case Study

Cyclicality is a well known and accepted fact of life in market-driveneconomies. Less well known or understood, however, is the phenomenon ofamplification as one looks "upstream" in the industrial supply chain. Thispaper discusses and explains the amplification phenomenon and itsimplications through the lens of one "upstream" industry that is notoriousfor the intensity of the business cycles it faces: the machine tool industry.Using a sparse simulation model, we have replicated much of the behaviorseen in the industrial world in which machine tool companies operate. Thismodel has allowed us to test and confirm many of our hypotheses. Tworesults stand out. Even though machine tool builders can do little to reducetheir production volatility through choice of forecast rule, a longer view ofthe future leads companies to retain more of their skilled workforce. This isoften cited as one of the advantages that European and Japanese companieshave enjoyed: lower skilled employee turnover. The second, and mostimportant result is that machine tool customers can do a great deal to reducethe volatility for machine tool builders through their choice of order forecastrule. Companies which use a longer horizon over which to forecast orderstend to impose less of their own volatility upon their supply base.