Battling the Bullwhip Effect with Cryptography

Abstract

In real-world supply chains it is often observed that orders placed with suppliers tend to fluctuate more than sales to customers and that this deviation builds up in the upstream direction of the supply chain. This bullwhip effect arises because local decision-making based on orders of the immediate customer leads to overreaction. Literature shows that supply chain wide sharing of order or inventory information can help to stabilize the system and reduce inventories and stockouts. However, sharing this information can make a stakeholder vulnerable in other areas like the bargaining over prices. To overcome this dilemma we propose the usage of cryptographic methods like secure multiparty computation or homomorphic encryption to compute and share average order/inventory levels without leaking of sensitive data of individual actors. Integrating this information into the stylized beer game supply chain model, we show that the bullwhip effect is reduced also under this limited information sharing. Besides presenting results regarding the savings in supply chain costs achieved, we describe how blockchain technology can be used to implement such a novel supply chain management system.