The importance of forecast uncertainty in understanding the Bullwhip effect

Abstract

The Bullwhip Effect, the magnification of demand variability throughout the supply chain, poses a challenge to firms. Inaccurate forecasts increase it, with forecast errors translating into higher inventory costs at a local level and impacting other members of the supply chain, as their decisions are based on mis-estimated incoming orders. The conventional measure for the Bullwhip Effect does not reflect how forecast uncertainty evolves in the supply chain. A new metric is proposed that overcomes many of the limitations of the Bullwhip Ratio: the Ratio of Forecast Uncertainty. It benchmarks the upstream forecast errors to the downstream's. An inventory simulation is deployed to study the properties and usefulness of this measure. It connects to inventory costs at the upstream level and holds more explanatory power than the standard Bullwhip Ratio and the complementary Net Stock Amplification. Managers can use it to better understand the upstream impact of the forecasting process.CC BY-NC-ND 4.0Published online: 09 Jul 2025Taylor &amp; Francis Group an informa businessContact: Patrick Saoud [email protected] Centre for Marketing Analytics and Forecasting, Department of Management Science, Lancaster University Management School, Lancaster LA1 4YX, UK</p