Two New Working Papers of KCG Professor Horst Raff Are Now Online

Professor Horst Raff and his co-authors have recently finished two working papers. Both papers examine, with the help of microeconomic models, some important aspects of inventory management within supply chains.

The first paper “Centralized versus Decentralized Inventory Control in Supply Chains and the Bullwhip Effect”, co-authored with Zhan Qu from the Technical University Dresden, looks at how demand volatility is passed upstream through the value chain. In particular, they look at under which circumstances this volatility is enhanced so that the variance of upstream production is greater than the variance of downstream sales (bullwhip effect). They find that a bullwhip effect is more likely to occur in vertically integrated supply chains (centralized inventory control) than in the decentralized case, when inventory control is exercised by the downstream firm.

The starting point of the second paper, “Incentives through Inventory Control in Supply Chains”, co-authored with Nicolas Schmitt from the Simon Fraser University and Zhan Qu, is that the incentives of the upstream and downstream firms are not aligned in the intertemporal allocation of inventories. The authors ask how to solve such incentive problems so that the value of the supply chain is maximised. They find that assigning inventory control to the upstream firm increases the value of the supply chain, and it is especially so for goods whose demand is highly volatile.

The KCG team has so far produced seven working papers, all of which can be downloaded from here.