Variations of the Bullwhip Effect Across Foreign Subsidiaries

Problem definition: We investigate variations of the bullwhip effect of foreign subsidiaries and explore how it is affected by various features of foreign subsidiaries. Academic/practical relevance: During the era of global supply chain restructuring, researchers and executives of multinational firms should understand variations of the foreign subsidiary's bullwhip effect, given that its reduction is a key strategy for coordinating supply chains.Methodology: Our work is based on a balanced panel dataset of Korean-owned subsidiaries that provides distinguishable information on subsidiary purchases. It enables us to estimate an alternative measure for the bullwhip effect by the ratio of volatility of purchases to that of demand and compare it with the traditional measure of the ratio of volatility of production to that of demand. Results: Our alternative measure differs significantly from the traditional measure and better reflects the prevalence of the bullwhip effect across foreign subsidiaries. Using this measure, we find that the bullwhip effect is strongly affected by country-specific factors such as wages and political stability, as well as foreign subsidiary-specific factors such as import distance and expatriate managers from the parent firm. These findings not only support previous analytical findings on the bullwhip effect but also provide new remedies to reduce the bullwhip effect. Managerial implications: Our study advises managers of multinational firms. First, although locating foreign subsidiaries in developing countries tends to reduce production costs, it could rather increase the bullwhip effect, especially if those countries are politically unstable or have lower import penetration. Second, we provide empirical evidence that relocating a subsidiary to a country close to its main suppliers or to one that incurs lower transportation costs will reduce the bullwhip effect. Finally, deploying expatriate managers or wholly owning the subsidiary is recommended strategies to reduce the bullwhip effect of foreign subsidiaries