Upstream Volatility in the Supply Chain: The Machine Tool Industry as a Case Study
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anderson.pdf
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Author(s)
Anderson Jr., E.G.
Fine, C.H.
Gilboy, G.J.
Parker, G.G.
Date Issued
September 11, 2002
Abstract
Cyclicality is a well known and accepted fact of life in market-driven
economies. Less well known or understood, however, is the phenomenon of
amplification as one looks "upstream" in the industrial supply chain. This
paper discusses and explains the amplification phenomenon and its
implications through the lens of one "upstream" industry that is notorious
for the intensity of the business cycles it faces: the machine tool industry.
Using a sparse simulation model, we have replicated much of the behavior
seen in the industrial world in which machine tool companies operate. This
model has allowed us to test and confirm many of our hypotheses. Two
results stand out. Even though machine tool builders can do little to reduce
their production volatility through choice of forecast rule, a longer view of
the future leads companies to retain more of their skilled workforce. This is
often cited as one of the advantages that European and Japanese companies
have enjoyed: lower skilled employee turnover. The second, and most
important result is that machine tool customers can do a great deal to reduce
the volatility for machine tool builders through their choice of order forecast
rule. Companies which use a longer horizon over which to forecast orders
tend to impose less of their own volatility upon their supply base.
Description
Working Draft, May 1995
Subjects
Cyclicality
industrial supply chain
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