Applied Mathematical Modelling 59 (2018) 319–340

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Applied Mathematical Modelling

journal homepage: www.elsevier.com/locate/apm

Analyzing the behavior of the bullwhip effect considering

different distribution systems
Marieh Kadivar, Mohsen Akbarpour Shirazi∗
Department of Industrial Engineering, Amirkabir University of Technology, Hafez 424, Tehran, 1591634311, Iran

a r t i c l e i n f o a b s t r a c t

Article history: Recently, researchers have shown increased interest in quantifying the bullwhip effect, and
Received 13 March 2017 several attempts have been made to alleviate this phenomenon within supply chain man-
Revised 18 January 2018
agement; however, absent from the current literature surrounding this topic is an in-depth
Accepted 31 January 2018
analysis of the impact of different distribution systems, particularly cross-docking systems,
Available online 7 February 2018
upon the behavior of the bullwhip effect. This research aims to investigate the measure of
Keywords: the bullwhip effect in three different supply-chains; (I) with a central warehouse, (II) with
Bullwhip effect a cross-docking system, and (III) without any distribution systems. These three different
Distribution systems supply chains are subsequently analyzed to discover which supply chain helps reduce the
Cross-docking bullwhip effect more. In doing so, the reasoning here is based on the premise that the
Autoregressive model demand process follows a mixed autoregressive-moving average model and all the stages
Market share employ the base stock policy for inventory replenishment, if necessary. In addition, the
above mentioned supply chains are assumed to have two members in the retailer stage,
with a different market share of the customer demand. It was found that factors such as
lead time, market share of each retailer, autoregressive coefficient and moving average pa-
rameter contribute to the selection of the most effective distribution system.
© 2018 Elsevier Inc. All rights reserved.

1. Introduction

Bullwhip effect (BWE) is a phenomenon in which the order deviation of each supply chain (SC) stage increases as one
moves upward through a SC. Its similarity to the bullwhip is the reason behind its naming. When one shakes a bullwhip,
the fluctuations grow as it gets closer to the end of the whip.
In fact, these fluctuations in order quantity can cause considerable additional costs, including production, inventory, and
transportation costs [1,2], and negatively affect the performance of the SC [3]. Therefore, investigating this phenomenon and
finding solutions designed to remediate the amplification thereof, has attracted increased attention within contemporary
analysis of SCs. Quantifying the BWE can play an important role in analyzing this phenomenon, identifying the factors
affecting it, and assessing subsequent factorial effectiveness [4].
In this research, the BWE is quantified based on ARMA demand process, under the base stock replenishment policy, and
considering two members at the retailer stage in two and three-stage SCs.
In fact, this research aims at investigating the impact of different distribution systems on the BWE. Therefore, some
sensitivity analysis is performed based on our extended mathematical model for quantifying the BWE. Results demonstrate
that choosing the proper distribution strategy for each SC can significantly affect the BWE.

∗
Corresponding author.
E-mail addresses: eng.m.k@aut.ac.ir (M. Kadivar), akbarpour@aut.ac.ir (M. Akbarpour Shirazi).

https://doi.org/10.1016/j.apm.2018.01.028
0307-904X/© 2018 Elsevier Inc. All rights reserved.
320 M. Kadivar, M. Akbarpour Shirazi / Applied Mathematical Modelling 59 (2018) 319–340

This paper is organized as follows. Section 2 presents a literature review. Section 3 describes some basic properties of the
ARMA (1,1) demand process and its stationary conditions. In Section 4, the BWE is quantified for the ARMA (1,1) demand
process and its behavior is contextually investigated within a three-stage SC with a central warehouse, three-stage SC with
a cross-dock, and lastly a two-stage SC (without considering any distribution systems). It should be noted that in all of
these SCs, two members are present within the retailer stage. In Section 5, the numerical results are presented for each SC
and the bullwhip behavior in each situation are discussed. Section 6 includes the discussion and managerial insights. Lastly,
Section 7 concludes the paper.

2. Literature review

The first recognition of the BWE can be dated back to the late 1950s. Forrester [5,6] pioneered the initial investigation of
the BWE and discussed its causes and possible remediation within the context of industrial dynamics [7]. Moreover, Sterman
[8] illustrated this effect throughout a well-known, role-playing simulation known as the “beer game” at MIT and showed
that irrational behavior of players and misconceptions about demand information can induce BWE.
Lee et al. [9] defined this phenomenon and identified four major sources of the BWE; demand forecast updating, order
batching, price fluctuations, and rationing and shortage gaming. Lee et al. [10] also provided a quantitative model of the
BWE considering a first-order autoregressive demand process (i.e., AR(1)) and the Moving Average (MA) forecasting method
in a simple two-stage SC. They analyzed the causes of the BWE, mentioned above and discussed some possible measures to
mitigate their impacts.
Chen et al. [11] quantified the BWE for the same SC, with Exponential Smoothing (ES) forecasting method and consid-
ering correlated demands (independent and identically distributed (iid)) and demand processes with a linear trend. They
found that in comparison with MA forecasts, ES forecasts lead to a larger increase in variability for both considered demand
patterns. Chen et al. [12] also quantified this effect, considering the iid demand process and the MA forecasting method and
demonstrated that access of each stage of the SC to the end-customer demand can bring a significant reduction in the BWE
without completely eliminating it.
To date, there has been plenty of research on quantifying and analyzing the causes of the BWE. Amongst those we can
name, Kahn; Metters; Carlsson and Fullér; Dejonckheere et al. ; Zhou and Disney; Kim et al. [13–18]. In order to facilitate
clarity and maximize efficiency, only those works more relevant to the concern of the current study were explored in a
comprehensive manner. This ensured a correspondingly comprehensive and representative view of the field and enabled the
recognition of existing gaps within the relative literature.
Table 1 summarizes many studies focused on measuring the BWE, assuming that demand processes follow different
autoregressive models. The table includes the main assumptions of these studies, such as the structure of SC, the number of
members in each stage of the SC, demand pattern, ordering policy, and forecasting technique. In addition, the last column
of the table illustrates different important factors, such as forecasting technique, ordering policy, lead time, the structure of
the SC, etc., which can affect the BWE and are specifically investigated in each of these previous works.
Many of these studies have measured the BWE in simple SCs considering one member in each echelon. Therefore, there
are opportunities for measuring the BWE and analyzing the effect of important factors (such as those mentioned in the last
column of Table 1) on the behavior of this phenomenon in more complicated SCs with more than one member in each
stage. This helps us to analyze this effect in models which are closer to the real-word SCs.
Furthermore, studies focusing directly upon the impact of distribution strategies on the measure of the BWE are scarce
within the existing literature. Duc et al. [19] and Waller et al. [20] appear to be among the few researchers bucking this
considerable trend.
Duc et al. [19] examined the impact of a third-party warehouse upon the BWE in a three-stage SC with one supplier,
one warehouse, and two retailers with an AR (1) demand process model. They investigated the behavior of the BWE and
inventory cost to find out whether the existence of the third-party warehouse was beneficial to the whole system or not.
Their results showed that if the lead time of the warehouse and two retailers are equal, the existence of the warehouse has
no influence upon the exhibited BWE behavior. Their study can also be seen as a sequel to that of Luong [25], which had
measured the BWE for a simple two-stage SC with one supplier and one retailer, assuming the demand process follows an
AR (1) model.
Waller et al. [20] investigated the impact of cross-docking upon inventory within a decentralized SC. They developed
models to predict the changes in the retailer’s system wide-inventory in case of implementing a cross-docking strategy. It
should be noted that the primary goal of their study was not to measure and analyze the BWE. As part of their findings,
they declared that the cross-docking strategy can protect downstream members of the SC (i.e., retailers) from being directly
affected by the BWE. They justified this by noting that in a cross-docking situation, holding inventory in the distribution
center is not allowed, so retailers do not have to carry safety stock at the DC to deal with demand amplification and “cross-
docking allows them to pass the problem caused by the bullwhip upstream to suppliers”.
Overall, despite the abundance of research surrounding the measurement of the bullwhip effect within various autore-
gressive demand processes, no single study has particularly analyzed the impact of distribution strategies such as cross-
docking and warehousing upon the BWE in a three-stage SC which has more than one member at the retailer stage and
simultaneously considering the autoregressive moving average (ARMA) demand process.
Table 1
Studies on measuring the bullwhip effect considering autoregressive demand processes.

Study Structure of the Number of members in Demand pattern Ordering policy Forecasting method Distribution system Effective factors
Supply chain(SC) each stage

Zhang [7] Two echelon CS 1 AR (1) OUT MA-ES-MMSE – Forecasting methods

Disney et al. [23] Single-stage 1 AR (1)-MA-iid-ARMA (1,1) generalized-OUT ES – Ordering policy
policy
Hosoda and Disney Three-echelon SC 1 AR (1) OUT MMSE – -Number of levels of the SC
[24]
-Lead time
Loung [25] Two echelon CS 1 AR (1) Base-stock MMSE – -Autoregressive coefficient of demand

M. Kadivar, M. Akbarpour Shirazi / Applied Mathematical Modelling 59 (2018) 319–340

-Lead time
Luong an Phein “ 1 AR(2)-AR(p) Base-stock MMSE – -Lead time
[26]
-Autoregressive coefficient of demand
Duc et al. [21] “ 1 ARMA (1, 1) OUT MMSE – -Lead time
-Values of autoregressive and moving average
coefficients of the ARMA model.
Agrawal et al. [27] “ 1 AR (1) OUT MMSE Central warehouse -Lead time
-Correlation coefficient of demand
-Information sharing
Chaharsooghi and “ 1 VAR (1) OUT MA – -Number of observations used in MA
Sadeghi [28]
-Lead time
-Dependence between products
Duc et al. [19] Two and Two retailers- (one AR (1) OUT MMSE Third-party -Third-party warehouse
three-echelon SC warehouse)- and one warehouse
manufacturer
-Lead time
-Autoregressive coefficient of demand
-Market share of each retailer
Wang et al. [29] Single-stage 1 -ARIMA (1,0,0) OUT Correct, MA and ES – Forecast-updating methods
methods
-ARIMA (0,0,1)
-ARIMA (1,0,1)
Li et al. [30] Two-echelon SC 1 AR (1) OUT MA(p) – -Number of observations used in MA
-Lead time
-Autoregressive coefficient of each product
-demand substitution
Cho and Lee [31] Two-echelon SC 1 SARMA Base-stock MMSE – -Autoregressive coefficient
-Lead time
-Seasonal moving coefficient
-Seasonal cycle
Study Structure of the Number of members‌.in Demand pattern Ordering policy Forecasting method Distribution system Investigating the impact of… on the bullwhip
Supply chain(SC) each stage effect
Hussain et al. [32] Single-stage SC 1 AR (1) OUT ES-MMSE – Forecasting methods
Ma et al. [33] Two-echelon SC 1 Price-sensitive demand OUT MA-ES-MMSE – Forecasting techniques
process with AR (1)
model
(continued on next page)

321
 322
Table 1 (continued)

Study Structure of the Number of members in Demand pattern Ordering policy Forecasting method Distribution system Effective factors
Supply chain(SC) each stage

M. Kadivar, M. Akbarpour Shirazi / Applied Mathematical Modelling 59 (2018) 319–340

Cho and Lee [34] Multi-stage SC 1 SARIMA Generalized OUT MMSE – -Lead time
policy
-Autocorrelation of both seasonal and
non-seasonal demand
Costantino et al. Four-echelon SC 1 AR (1) OUT SPC-FS – Using the new SPC-FS method, instead of
[35] traditional forecasting techniques
Ma et al. [36] Two-echelon SCs 1 Price-sensitive AR (1) OUT MMSE – The interactions between the two competitive
SCs
Ma and Ma [37] Two-echelon SC two retailers and one AR (1) Base-stock MA – -Lead time
supplier
-The span of forecast
-Market competition and
-The consistency of demand volatility
Yuan and Zhu [38] “ two retailers and one AR (1) OUT MA-ES-MMSE – Forecasting techniques
manufacturer
Ma and Bao [39] “ “ “ “ MA – -Autoregressive coefficient
-Span (number of periods used in MA)
-Market share
-Self-acting price sensitivity coefficient
-Inter-acting price sensitivity coefficient
Sirikasemsuk and “ “ VAR (1) “ MMSE – -Autocorrelation and intercorrelation
Luong [40] coefficients
-Correlation coefficient between two error
terms
-Variances of error terms
Li et al. [41] Multi-stage SC 1 -AR (1) OUT MMSE – End-customer demand Lead time
-ARMA (1,1)
Gao et al. [42] Two-level-online SC 1 Price-sensitive AR (1) OUT MMSE – -On-line retail SC
-Price discounts in e-commerce
-Price autoregression Coefficient
-Price sensitivity coefficient
-Lead time
 M. Kadivar, M. Akbarpour Shirazi / Applied Mathematical Modelling 59 (2018) 319–340 323

Fig. 1. A two-stage supply chain model [19].

Fig. 2. A three-stage supply chain model with central warehouse [19].

The current study is a sequel to that of Duc et al. [21] and [19]. However, three features distinguish this study from
the two earlier ones. For one thing, this study attempts to measure the bullwhip effect in a two-stage SC consisting of
one supplier and two retailers, while Duc et al. [21] developed a BW measure for a simple two-stage SC with one supplier
and one retailer. For another, this study analyzes the impact of two different distribution strategies, namely warehousing
and cross-docking strategies, while Duc et al. [19] only considered the impact of the warehousing strategy on the BWE. In
addition, in their investigation of BWE behavior, Duc et al. [19] assumed that demand follows an AR demand process while
this study examines an ARMA model, which is a more realistic model for the demand process, thus more appropriate for
real-world applications. According to Pindyck and Rubinfeld [22], “an ARMA model often fits the time series of the demand
process better than an AR model because the demand process usually has characteristics of both MA and autoregressive
processes”.

3. SC model

The following notation will be employed throughout the remainder of the present analysis;
Dt Total customer demand quantity at period t;
Di,t Demand quantity of retailer i at period t;
qt Total ordered quantity received by the supplier at the start of period t;
qw,t , qCD , qr1,t , qr2,t Order quantity of downstream members at the beginning of period t, the warehouse, cross-dock, re-
tailer 1 and retailer 2
Si,t Order-up-to-level in period t at level i
φ First-order autocorrelation coefficient that is supposed to be of the same value at each stage in all SCs
θ First-order MA parameter that is supposed to be of the same value at each stage in all SCs
δ Constant of the autoregressive model at the warehouse and the cross-dock
μw , μCD , μr1 , μr2 Mean of the autoregressive process at the warehouse, cross-dock, retailer 1 and retailer 2, respectively
σ w , σ CD , σ r1 , σ r2 Standard deviation of demand quantities at the warehouse, cross-dock, retailer 1 and retailer 2, re-
spectively
Lw , LCD , Lr1 , Lr2 Order lead time at the warehouse, cross-dock, retailer 1 and retailer 2, respectively
L L L
DtLw , Dt CD , Dt r1 , Dt r2 Lead time demand at the warehouse, cross-dock, retailer 1 and retailer 2, respectively
L L L
Dˆ Lw , Dˆ CD , Dˆ r1 , Dˆ r2
t t t t Forecast for the lead time demand at the warehouse, cross-dock, retailer 1 and retailer 2, respectively
σˆtLw , σˆtLCD , σˆtLr1 , σˆtLr2 Standard division of forecast error for the lead time demand at the warehouse, cross-dock, retailer 1
and retailer 2, respectively
tc The time that cross-dock waits for the retailer’s orders to be consolidated

Three differential SCs are evaluated within the present analysis, which are presented in Figs. 1–3: (I) a two-stage SC with
one supplier and two retailers; (II) a three-stage SC with one suppler, one warehouse, and two retailers; and (III) a three-
stage SC with one supplier, one cross-dock and two retailers. In all of the aforementioned SCs an order-up-to inventory
policy is employed, in addition to the employment of the minimum mean-square error forecasting technique (if necessary).
Furthermore, each retailer also has a specific market share, which is respectively denoted as α and (1 − α ), for retailer 1 and
retailer 2. Let us also note that the demand process follows the ARMA (1, 1) model.
To simplify the problem, we have used the same assumptions applied in Duc et al. [19] such as; (a) retailers’ orders are
replenished instantaneously by the warehouse at the time when the orders are received by the warehouse (it means that
324 M. Kadivar, M. Akbarpour Shirazi / Applied Mathematical Modelling 59 (2018) 319–340

Fig. 3. A three-stage supply chain with cross-docking system.

we do not consider preparation, sorting and shipping times from the distribution center (DC) to the retailers); (b) there are
fixed order lead times for orders placed by the warehouse; and (c) the length of the lead time is an integer multiple of the
inventory review interval.
As the current study represents a sequel to that of Duc [19,21], a summary of the relevant rules is presented in this
section.
At the beginning of period t, the retailer places an order of quantity qi,t to the supplier. The order quantity qi,t can be
given as:
qi,t = Si,t − Si,t−1 + Dt−1 , (1)
where Si,t is the order-up-to level in period t, (i.e., the inventory position at the beginning of period t (after the order
is placed (at level i). If the base stock policy is employed, the order-up-to level Si,t can be determined by the lead time
demand as:
Si,t = Dˆ tLi + zσˆ tLi . (2)
In which z is normal z-score that specifies the probability that demand is fulfilled by the on-hand inventory, and it can
be determined based on a given service level.
In all of these mentioned SCs, the demand processes within each echelon follows the ARMA (1,1) model. Then we have

Dt = δ + φ Dt−1 + εt − θ εt−1 , (3)

where ɛt ’s (t = 1, 2, …) are normally and independently distributed with common mean 0 and variance (iid random σ2
variables from the normal distribution). For the mixed first-order autoregressive-moving average process to be stationary,
we must have:
E [Dt ] = E [Dt−1 ] = μd ∀t.
and hence, a stationary condition can be given as:
δ
μd = . (4)
1−φ
In addition, from (1), we have σd2 = φ 2 + σ 2 + θ 2 σ 2 − 2φθ σ 2 , which results in:

1 + θ 2 − 2φθ 2
σd2 = σ . (5)
1 − φ2
From (4) and (5), it can be seen that in order to have the demand process of ARMA(1, 1) model remain stationary, we
should also have |φ | < 1. Similarly, in order to have the demand process be invertible, we should have |θ | < 1.

4. Behavior of the bullwhip effect in each SC

In this section, we examine the behavior of the BWE in three different systems described previously. In fact, we would
like to know whether the distribution systems such as central warehouse or cross-docking systems can help us reduce the
BWE or not. In case of measuring the BWE, we follow the procedure used in Chen et al. [11] and Duc et al. [19,21].

4.1. Two-stage SC without any distribution center

In this subsection, the behavior of the bullwhip effect in a SC consisting of one supplier and two retailers is examined.
As stated above, retailer 1 and 2, with α and (1 − α ) market share respectively, face the customer demand which follows the
ARMA (1,1) model (see Fig. 1).
As shown in the study of Duc [21], the minimum mean square error forecast for the lead time demand of retailer 1, can
be given as;
      
φ 1 − φ Lr1 φ 1 − φ Lr1 θ 1 − φ Lr1
Dˆ tLr1 = μr1 Lr1 − + Dr1,−1 − εr1,t−1 . (6)
1−φ 1−φ 1−φ
 M. Kadivar, M. Akbarpour Shirazi / Applied Mathematical Modelling 59 (2018) 319–340 325

Whereas the variance of forecast error of lead time demand of this retailer is calculated as;
  ⎛  2 ⎞
σ 1−φ
2 2 r1 −2
L Lr1−i−2
σˆ tLr1 = 
Lr1
 ⎝ (1 + (1 + φ j ( φ − θ ) ⎠. (7)
1 + θ 2 − 2φθ i=0 j=0

Proposition 1. Order quantity of retailer 1 with α market share of customer demand with ARMA (1,1) model, can be expressed
as
      
1 − φ Lr1+1 φ 1 − φ Lr1 αθ 1 − φ Lr1 θ (1 − α ) 1 − φ Lr1
qr1,t = α Dt−1 − α Dt−2 − εt−1 + εt−2 (8)
1−φ 1−φ 1−φ 1−φ

Similarly, the lead time demand, variance of lead time demand forecast error and order quantity of retailer 2 can be
given, respectively, as;
      
φ 1 − φ Lr2 φ 1 − φ Lr2 θ 1 − φ Lr2
Dˆ tLr2 = μr2 Lr2 − + Dr2,t−1 − εr2,t−1 .
1−φ 1−φ 1−φ

  ⎛⎛  2 ⎞
σL2r2 1 − φ 2 r2 −2
L Lr2−i−2
σˆ tLr2 =   ⎝⎝1 + 1+ φ j (φ − θ ) ⎠.
1 + θ 2 − 2φθ i=0 j=0

And finally, since Dr2,t = (1 − α )Dt , ε r2,t − 1 = (1 − α )ε t − 1 and ε r2,t − 2 = (1 − α )ε t − 2 , we have:

      
1 − φ Lr2+1 φ 1 − φ Lr2 (1 − α )θ 1 − φ Lr2 θ (1 − α ) 1 − φ Lr2
qr2,t = (1 − α ) Dt−1 − (1 − α ) Dt−2 − εr2,t−1 + εr2,t−2 .
1−φ 1−φ 1−φ 1−φ

Hence the aggregated order of retailers, is

qt = qr1,t + qr2,t

     
  
1 − φ Lr1+1 φ 1 − φ Lr1
1 − φ Lr2+1 φ 1 − φ Lr2
qt = α + (1 − α )
Dt−1 − α + (1 − α ) Dt−2
1−φ 1−φ 1−φ 1−φ
         
αθ 1 − φ Lr1 (1 − α )θ 1 − φ Lr2 αθ 1 − φ Lr1 (1 − α )θ 1 − φ Lr2
− + εt−1 + + εt−2 . (9)
1−φ 1−φ 1−φ 1−φ

In order to effectively measure the bullwhip effect in this SC, we should thus obtain the variation of total quantity of
retailer’s order and also the variation of total demand encountered by these retailers.

Proposition 2. The variance of total order quantity of two retailers, can be given as:
    
2φ ( 1 − φ ) 1 + θ ( 1 − φ ) + θ 2 
Lr1 
Lr1−1

Lr1 
Lr2−1

Lr2 r1 −1
L
VAR(qt ) = σ 2
1+ α 2
φ.
i
φ + α (1 − α )
i
φ.
i
φ +
i
φ.
i
φ i
d
1 + θ 2 − 2φθ
i=0 i=0 i=0 i=0 i=0 i=0
   

Lr2 
Lr2−1
2θ 1 − φ 2 
Lr1−1
Lr1
+ (1 − α ) 2
φi. φi + α (θ − φ ) φ i − α (1 − φ + θ ) φ i + (1 − α ) (θ − φ )
1 + θ − 2φθ
2
i=0 i=0 i=0 i=0
 

Lr2−1

Lr2 
Lr1−1

Lr2−1
× φ i − (1 − α ) (1 − φ + θ ) φi α φ i + (1 − α ) φi . (10)
i=0 i=0 i=0 i=0

Proof. See Appendix A. 

As we know;
VAR(qt )
BW E = (11)
VAR(Dt )
326 M. Kadivar, M. Akbarpour Shirazi / Applied Mathematical Modelling 59 (2018) 319–340

Then, after some simplification, the bullwhip effect measured in this system, can be derived from (10) and (11) as;
  
φ−θ 2       
BW E = 1 +   1 − φ Lr1 +1 − φθ 1 − φ Lr1 −1 α2 1 − φ Lr1 + α(1 − α ) 1 − φ Lr2
(1 − φ ) 1 + θ − 2φθ
2


      
+ 1 − φ Lr2 +1 − φθ 1 − φ Lr2 −1 (1 − α )2 1 − φ Lr2 + α(1 − α ) 1 − φ Lr1 . (12)

This derived formula will be analyzed and discussed in further detail within Section 5.

4.2. Three-stage SC with a centralized warehouse

In this system, both retailers place their orders based on the exact quantity of customer demand (i.e., Dr1,t , Dr2,t ) to
the warehouse (see Fig. 2). “In reality the central warehouse can acquire the exact demand information from retailers if
a VMI system is established between the warehouse and each retailer"[19], and also, the retailer’s orders are replenished
instantaneously by the warehouse. Therefore, the lead time of this SC consists of the lead time between the warehouse
and the supplier (i.e., Lw which places in [Lwmin , Lwmax ]). Thus, the retailers are completely reliant upon this centralized
warehouse, hence the demand forecast will be performed only at this stage (i.e., the warehouse). Therefore, via concentrated
stock management, the central warehouse can enable the supplier (producer) to reduce the lead time of the SC through
balancing the lead times of the retailers, through rescheduling the production plan. In fact, because the supplier produces
the same product for both retailers, and in this SC the supplier does not have to provide the order of retailer 1(α Dt ) and
2((1 − α )Dt ) respectively in Lr1 and Lr2 , it can instead concentrate upon satisfying the demand of one customer (i.e., the
warehouse (Dt )) in Lwmax = [mean(Lr1 , Lr2 )]. In this case, inventory holding for the warehouse was accordingly not taken into
consideration. However, if different levels of safety stock for the warehouse are considered, the lead time of the warehouse
can be reduced to the value of Lwmin = min(Lr1 , Lr2 ).
If we put the Lw instead of Lr1 and Lr2 in Eq. 12, this BWE measure will be obtained
   
2 ( φ − θ ) 1 − φ Lw 1 − φ Lw +1 − φθ 1 − φ Lw −1
B ( Lw , φ , θ ) = 1 +   . (13)
(1 − φ ) 1 + θ 2 − 2φθ
So, the behavior of the BWE in this SC will be similar to that in the simple two-stage SC, which was considered in [21].
It can be concluded from Eq. (13) that the BWE occurs (i.e., B(Lw ,φ , θ ) > 1) only if φ > θ (for more information see [21]).

4.3. Three-stage SC with cross-docking

In this subsection, we consider a SC with one supplier, one cross-dock, and two retailers (see Fig. 3). In this particular
SC, customers face order lead times comprised of the order lead times from the DC to the retailers (i.e., Lr1 , Lr2 ) and the
order lead time from the supplier to the DC (i.e., LCD which is equal to Lwmax + tc ). As stated in assumption (a), we assume
that when there is a DC in the system, Lr1 and Lr2 (i.e., the time of operations in the DC and delivering the retailers orders)
are considered to be negligible. Therefore, the retailers only deal with LCD . Owing to the nature of the cross-docking system,
a different ordering policy in this SC is utilized. In this instance, the DC does not predicate order placement to the supplier
upon forecasted retailer’s demand, but instead waits to receive the orders of both retailers and then orders the exact quantity
of the retailer’s demand. Hence, in this SC, the tc is defined as the time that the cross-dock waits for the retailer’s orders
to be consolidated, therefore it would be equal for both retailers. Since the DC does not use any forecasting techniques,
and orders the exact quantity of the retailer’ demand, there will be no BWE in this stage (i.e., the cross-docking system).
From Eq. (11) and the fact that D r,t = D r1,t + D r2,t (D r1,t is the estimation of the demand of customer(α Dt ) by retailer 1) and
D r,t = qCD,t , we have: var(D r,t ) = var(qCD,t ), then BWE = 1. However, for examining the behavior of the BWE and making it
possible to compare it with two other SCs, we should consider the overall BWE occurring in this system. Since the retailer’s
orders are not instantaneously replenished by the distribution center, they have to forecast the customer’s demand (in order
to face less shortage and have a higher service level). Then we will have the BWE in this stage, and it can be measured as
   
2(φ − θ ) 1 − φ LCD 1 − φ LCD +1 − φθ 1 − φ LCD −1
B(LCD , φ , θ ) = 1 +   .
(1 − φ ) 1 + θ 2 − 2φθ
It should be noted that LCD in the current SC is equal to (Lwmax + tc ) (at which Lwmax is the defined lead time in the SC
with central warehouse). The lead time of the cross-dock is considered to be equal to the value of Lwmax + tc due to the fact
that inventory holding in the cross-docking system is prohibited, thus the minimum value of the lead time of cross-dock
is equal to the maximum value of the lead time of the warehouse (i.e., the case that we did not consider any inventory
holding for the warehouse).
 M. Kadivar, M. Akbarpour Shirazi / Applied Mathematical Modelling 59 (2018) 319–340 327

Table 2
Comparing the bullwhip measure in supply chains with cross-docking system and central warehouse.

LCD (tc = 1) Lw Using the cross-docking system instead of the central warehouse can reduce the bullwhip effect for…
2 1 φ<0
3 2 –
4 3 φ<0
5 4 –
6 5 φ<0
7 6 –
LCD (tc = 2) Lw Using the cross-docking system instead of the central warehouse can reduce the bullwhip effect for…
3 1 φ<0
4 2 –
5 3 φ<0
6 4 –
7 5 φ<0
LCD (tc = 3) Lw Using the cross-docking system instead of the central warehouse can reduce the bullwhip effect for…
4 1 φ<0
5 2 –
6 3 φ<0
7 4 –

Table 3
Analyzing the behavior of the BWE in case of using the central warehouse for Lwmin = [min(Lr1 , Lr2 )], Lwmin + 1 and Lwmin + 2.

LWmin (L1 ,L2 ) The effect of existence of the central warehouse on the reduction of the BWE for…
1 (1,2), (1,3), (1,4), (1,5), (1,6) All of the values of φ > 0
2 (2,3), (2,4), (2,5) All of the values of φ
3 (3,4), (3,5), (3,6) All of the values of φ > 0
LWmin + 1 (L1 ,L2 ) The of existence of the central warehouse is effective on the reduction of the BWE for…
2 (1,2) All of the values of φ < 0
(1,3) All of the values of φ except φ = 0.15, 0.35
(1,4), (1,5), (1,6) All of the values of φ except φ = 0.15
3 (2,3) –
(2,4) All of the values of φ > 0 except φ = 0.15, 0.35
(2,5), (2,6) All of the values of φ > 0 except φ = 0.15
4 (3,4) All of the values of φ < 0 except φ = -0.05 and θ = (−0.7, −0.5, −0.3, −0.1)
(3,5) All of the values of φ except φ = -0.05, 0.15, 0.35
(3,6) All of the values of φ except φ = -0.05, 0.15
LWmin + 2 (L1 ,L2 ) The effect of existence of the central warehouse on the reduction of the BWE for…
3 (1,2) φ = −0.25, −0.05
(1,3) All of the values of φ < 0
(1,4) φ = 0.95 and for φ < 0 except −0.85, −0.65
(1,5) φ = 0.95, 0.75 and for φ < 0 except −0.85
(1,6) φ = 0.95, 0.75, (φ = 0.55, θ = −0. 5) and for φ < 0 except −0.85, −0.65
4 (2,3) All of the values of φ < 0 except φ = -0.05, −0.25
(2,4) –
(2,5) φ = −0.85, −0.65, 0.95
(2,6) φ = −0.85, 0.95, 0.75
5 (3,4) (φ = −0.05, θ = −0.9) and (φ = −0.25, θ = −0.9, −0.7)
(3,5) All of the values of φ < 0 except φ = -0.05
(3,6) φ = -0.45, −0.25, 0.95

5. Results and discussion

In this section, a series of numerical experiments are performed for different values of Lr1 , Lr2 , α , φ , and θ in order to
observe and compare the behavior of the BWE, in three given SCs, which generated 26 resultant tables. Tables B.1–B.3 are
three samples of these 26 tables, which are presented in the Appendix. Our conclusion and discussion are based on these
numerical results, summarized and compared with each other in Tables 2–7.
As can be seen from Tables B.1–B.3, the BWE exists (i.e., BWE > 1) only if φ > θ . It should be mentioned that wherever
we talk only about the value of φ , it means φ and ∀θ , otherwise we mention the exact values of φ and θ .
For the case at which Lr1 = 1, Lr2 = {1, 3, 6}, α = 0.3, from Figs. 4–6, we can clearly observe that the function of the BWE
is a convex and then a concave function of φ and θ . Therefore, we cannot see a strict increasing or decreasing trend for the

φ>0
BWE for different values of φ and θ , but it can be observed that in the case at which and , the bullwhip effect increases
φ>θ
as the lead time of retailer 2 increases.
In order to effectively investigate the behavior of the BWE within scenarios involving both cross-docking and warehousing
strategies, we need to analyze and compare the obtained values for the BWE in the three assumed SCs.
328 M. Kadivar, M. Akbarpour Shirazi / Applied Mathematical Modelling 59 (2018) 319–340

Fig. 4. Effect of autoregressive coefficient and moving average parameter, in case of L1 = L2 = 1 and α = 0.3 (or α = 1).

Fig. 5. Effect of autoregressive coefficient and moving average parameter, in case of L1 = 1, L2 = 3 and α = 0.3.
 M. Kadivar, M. Akbarpour Shirazi / Applied Mathematical Modelling 59 (2018) 319–340 329

Table 4
Analyzing the behavior of the BWE in case of using the central warehouse for Lwmax = [mean(Lr1 , Lr2 )].

LWmax (L1 ,L2 ) The effect of existence of the central warehouse on the reduction of the BWE for…
1 (1,2) All of the values of φ > 0
(2,1) All of the values of φ > 0
2 (1,3) All of the values of φ except 0.15, 0.35
(3,1) φ<0
(1,4) All of the values of φ except φ = 0.15
(2,3) All of the values of φ
(3,2) All of the values of φ
3 (1,5) φ = 0.75, 0.95 and φ < 0 except φ = -0.85
(2,4) φ = 0.55, 0.75, 0.95
(1,6) φ = 0.75, 0.95 and φ < 0 except φ = -0.85, −0.65
(2,5) All of the values of φ > 0 except φ = 0.15
(3,4) All of the values of φ > 0
4 (2,6) φ = 0.75, 0.95, −0.85
(3,5) All of the values of φ except φ = -0.05, 0.15, 0.35
(3,6) All of the values of φ except φ = -0.05, 0.15

Table 5
Analyzing the behavior of the BWE in case of using the cross-docking system, for
LCD = Lwmax + tc = [mean(Lr1 , Lr2 )] + tc for the case at which tc = 1.

LCD (L1 ,L2 )

2 (1,2) All of the values of φ < 0

(2,1) All of the values of φ < 0
3 (1,3) All of the values of φ < 0
(3,1) All of the values of φ < 0
(1,4) φ = 0.95 and All of the values of φ < 0 except φ = -0.85, −0.65
(2,3) –
(3,2) –
4 (1,5) All of the values of φ < 0
(2,4) –
(1,6) All of the values of φ < 0and φ = 0.95
(2,5) φ = -0.86, −0.65, 0.95
(3,4) All of the values of φ < 0 except φ = -0.05
5 (2,6) –
(3,5) All of the values of φ < 0 except φ = -0.05
(3,6) φ = -0.65, −0.45, 0.95

Table 6
Analyzing the behavior of the BWE in case of using the cross-docking system, for LCD = Lwmax + tc =
[mean(Lr1 , Lr2 )] + tc for the case at which tc = 2.

LCD (L1 ,L2 )

3 (1,2) All of the values of φ < 0 except φ = -0.05

(2,1) All of the values of φ < 0
4 (1,3) All of the values of φ < 0
(3,1) All of the values of φ < 0
(1,4) All of the values of φ < 0
(2,3) φ < 0 except (φ = -0.25,θ = -0. 7and −0.25) and (φ = -0.05,θ = -0.9, −0.7 and −0. 5)
(3,2) φ = -0.85
5 (1,5) All of the values of φ < 0
(2,4) –
(1,6) All of the values of φ < 0 except φ = -0.85
(2,5) –
(3,4) (φ = -0.05, θ = −0.9) and (φ = −0.25, θ = -0.9, −0.7)
6 (2,6) –
(3,5) All of the values of φ < 0 except (φ = -0.05, θ = -0.7, −0.5, −0.1)
(3,6) All of the values of φ < 0 except (φ = -0.05, θ = -0.7, −0.5, −0.1)

5.1. the impact of warehousing strategy on the BWE

Firstly, we analyze the impact of warehousing strategy on the BWE. When there is a warehouse in the SC, there are two
cases which need to be considered.
(Case 1) Lr1 = Lr2 = Lw
Similar to the results for the impact of using warehousing strategy on the BWE in the same three-stage SC for the case
at which demand follows an AR(1) demand process, reported by Duc et al. [19], in this case the existence of the warehouse
330 M. Kadivar, M. Akbarpour Shirazi / Applied Mathematical Modelling 59 (2018) 319–340

Table 7
Analyzing the behavior of the BWE in case of using DCs, for the case at which α = 0.4.

Lw or LCD (L1 ,L2 )

1 (1,2), (1,3), (1,4), (1,5), (1,6) All of the values of φ > 0

2 (1,2) All of the values of φ < 0
(1,3) All of the values of φ except φ = 0.15, 0.35, 0.55
(1,4) All of the values of φ except φ = 0.15, 0.35
(1,5) All of the values of φ except φ = 0.15, 0.35
(1,6) All of the values of φ except φ = 0.15, 0.35
3 (1,2) φ = -0.25, −0.05
(1,3) All of the values of φ < 0
(1,4) φ < 0 except φ = -0.85, −0.65
(1,5) φ = 0.95 and φ < 0 except φ = -0.85
(1,6) φ = 0.75, 0.95 and φ < 0 except φ = -0.85, −0.65
4 (1,2), (1,3), (1,4), (1,5), (1,6) All of the values of φ < 0
5 (1,2) All of the values of φ < 0 except φ = -0.85, −0.65
(1,3) All of the values of φ < 0
(1,4) All of the values of φ < 0 except φ = -0.85
(1,5) All of the values of φ < 0
(1,6) All of the values of φ < 0 except φ = -0.85
6 (1,2), (1,3), (1,4), (1,5), (1,6) All of the values of φ < 0

Fig. 6. Effect of autoregressive coefficient and moving average parameter, in case of L1 = 1, L2 = 6 and α = 0.3.

has no impact on the BWE. Because when Lr1 = Lr2 = L, It can be observed from the following expression that the number of
retailers and the values of their market shares have no influence on the measure of the BWE in the 2-stage SC:


2 (φ − θ )      
B(Lr1 , Lr2 , α, φ, θ ) = 1 +   1 − φ L+1 − φθ 1 − φ L−1 α 2 1 − φ L + α (1 − α ) 1 − φ L
(1 − φ ) 1 + θ 2 − 2φθ
      
+ 1 − φ L+1 − φθ 1 − φ L−1 (1 − α )2 1 − φ Lr2 + α (1 − α ) 1 − φ Lr1

   
2 (φ − θ ) 1 − φ L 1 − φ L+1 − φθ 1 − φ L−1
B(Lr1 , Lr2 , α , φ , θ ) = 1 +  
(1 − φ ) 1 + θ 2 − 2φθ
 M. Kadivar, M. Akbarpour Shirazi / Applied Mathematical Modelling 59 (2018) 319–340 331

Which is the exact same measure for the BWE in the three-stage SC with a warehouse as a distribution center when
Lw = L. Therefore, we can also conclude that considering the ARMA demand process instead of AR does not make any differ-
ence in this case (i.e., Lr1 = Lr2 = Lw ).
In addition to considering a different demand process (i.e., ARMA(1,1), which is a more realistic demand pattern instead
of AR(1)), one crucial aspect which distinguishes the current study from that of Duc et al. [19]. is investigating the influence
of the existence of the warehouse on the BWE in the case at which Lr1 = Lr2 .
(Case 2) Lr1 = Lr2 .
In this case, when Lw ≤ Lri , the existence of the warehouse can reduce the BWE for all of the positive values of φ , and if
the Lw is an odd number, the reduction can also occur for negative values of φ in BWE.
When Lw = Lr1 or Lr2 and the lead time of the other retailer is an odd number and smaller than Lw , the warehousing
strategy can reduce the BWE, but when it is an even number, the BW is not affected by using the warehouse.
In other cases, when the warehouse can reduce the lead time of the retailer with a higher market share, it can reduce
the BWE for positive values of autoregressive coefficient, but it should be noted that when the Lw increases from Lw min to
Lwmax , as can be observed from Tables 2 and 3, the effectiveness of the warehouse on reducing the BWE declines for small
values of φ (see Fig 7).

5.2. The impact of Cross-docking strategy on the BWE

Another feature distinguishing the present study from other similar works is its analyzing the impact of cross-docking
strategy on the BWE.
As can be observed from Tables 5 and 6, when cross-docking can reduce the total lead time of the SC and Lw max <
mean (Lr1 ,Lr2 ) < LCD , the cross-docking strategy can cause reduction in the BWE for the highest value of autoregressive
coefficient (i.e., φ = 0.95).
When LCD = Lr1 or Lr2 and the lead time of the other retailer is odd, cross-docking can reduce the BWE for negative values
of φ , otherwise it doesn’t have any impact on the BWE.
Although a strict upward or downward trend for the BWE was not apparent when the lead time increased. However, in
the event of a negative autoregressive coefficient, it was observed that even if cross-docking causes an increase in the lead
time of the SC, in most cases it can still be effective in reducing the BWE.
It should also be mentioned that negative autocorrelation in the ARMA demand pattern implies that if a particular de-
mand is above average, the next demand is more likely to be below the average [43]. In other words, in this situation the
demand fluctuations are more likely to be high.

5.3. Common impacts of warehousing and Cross-docking strategies on the BWE

We can also discern two common trends in the behavior of the BWE in case of using cross-docking and warehousing
strategies.

(1) When the lead time of the retailer with a smaller market share is fixed, more reduction follows in the lead time of
the retailer with a higher market share, using cross-docking and warehousing strategies the more effective in reducing
the BWE. (see Fig. 8 as an example).
(2) Comparing the measure of the BWE for α = 0.4 and α = 0.3, in the case at which Lr1 = 1, Lr2 = {1, …, 6}, and considering
different values of LCD and Lw , we observed that the BWE is less positively affected by warehousing and cross-docking
strategies when the market share of the retailer with a higher lead time (i.e., (1 − α )) declines. and this effectiveness
remains for higher values of autoregressive coefficient (see Fig. 9 and Table 7). Therefore, it can be concluded that the
BWE is also affected by the value of each retailer’s market share.

The status of the BWE in two SCs that implemented cross-docking and warehousing strategies were also comparatively
evaluated (see Table 2). It can be observed that when the lead time of the warehouse and the cross-dock is an odd number,
despite the fact that the cross-docking system increases the lead time of the SC, it can improve the status of the bullwhip
effect for φ < 0. This happens for the case at which LCD − Lw = 2, when the LCD is odd and also for the case at which
LCD − Lw = 3, when the LCD is even.
It should also be noted that the reason for different behavior of the BWE for even and odd values of the lead time in
case the demand follows an ARMA demand process has been discussed at length in Loung’s study [21].

6. Discussion and managerial insights

According to the Computational results which have been presented in the previous section, the main findings of this
research are as follows:

(I) In most cases when the autocorrelation coefficient is positive, the existence of the warehouse in the SC can cause
reduction in the BWE due to a decrease in the overall lead time of the SC, especially in cases at which high values of
autocorrelation coefficients are observed for the demand process.
332 M. Kadivar, M. Akbarpour Shirazi / Applied Mathematical Modelling 59 (2018) 319–340

Fig. 7. Impact of using warehousing strategy on the BWE, when α = 0.3, θ = −0.9, Lw = 1, 2, 3 and L1 = 1, L2 = 5.
 M. Kadivar, M. Akbarpour Shirazi / Applied Mathematical Modelling 59 (2018) 319–340 333

Fig. 8. Impact of using warehousing strategy and cross-docking strategies on the BWE, when α = 0.3, θ = −0.9, Lw = 3, LCD = 4 and L1 = 2, L2 = 4, 5.

(II) Contrary to the initial presumption that longer lead time always leads to more BWE [26], we observed that when
using cross-docking strategy causes an increase in the lead time of the SC, the BWE reduces in most cases when the
autoregressive coefficient is negative, in this case (i.e., when φ < 0) cross-docking can be even more beneficial in
dampening the BWE than the warehousing strategy.
It should also be noted that implementing the cross-docking strategy does not always lead to an increase in the over-
all lead time of the SC, in this case when it can reduce the lead time of the retailer with a higher market share and
mean(Lr1 , Lr2 ) < LCD < [mean(Lr1 ,Lr2 )], it can reduce the BWE in case at which positive autocorrelation of the demand pro-
cess hits its highest value (i.e., φ = 0.95).
(III) Lastly, the amount of each retailer’s market share is a contributing factor in determining the effectiveness of these
considered distribution strategies on the BWE. Thus, this factor (α ) should be considered besides the other important
factors that affect the measure of the BWE in SCs with more than one member at the retailer stage.
334 M. Kadivar, M. Akbarpour Shirazi / Applied Mathematical Modelling 59 (2018) 319–340

Fig. 9. Impact of the value of market share (α ) on the bullwhip effect.

Managerial insight 1: Selecting a proper distribution system is an important strategic decision within SC management.
This decision is contingent upon many factors such as the product’s features, market share of the SC, the number of mem-
bers in each stage of the SC, etc. Choosing a proper distribution system can also significantly affect costs, lead time, prof-
itability, and the level of customer satisfaction of the SC. Based upon the findings of the current study, the pattern of demand
fluctuations can also be considered as one of the key factors in the process of decision making in selecting the distribution
system for each SC.
Managerial insight 2: Choosing an appropriate distribution system can also affect an important managerial issue referred
to as BWE, which can cause a lot of extra costs (e.g. production, inventory holding, transportation costs, etc.) for SCs. The
findings suggest that in industries and markets where managers are usually faced with high demand fluctuations, using the
cross-docking strategy can go a long way towards reducing and controlling the BWE. Otherwise (i.e., in the case at which it
 M. Kadivar, M. Akbarpour Shirazi / Applied Mathematical Modelling 59 (2018) 319–340 335

is less likely for them to face high demand fluctuations), the warehousing strategy can reduce the BWE, in particular when
the demand process is highly positively autocorrelated.
As a successful longstanding global enterprise and its success in reducing the BWE [44,45,46], Wal-Mart’s® positive
implementation of a cross-docking strategy effectively solidifies the findings uncovered within the present analysis and
thusly motivates managers to take advantage of the cross-docking strategy in dampening the BWE, in addition to exploiting
its other benefits.
Managerial insight 3: Another important finding indicates that contrary to the initial expectation that the BWE increases
as the number of stages in the SC increases, adding a distribution center as a new stage into the SC can help further dampen
the BWE.
Managerial insight 4: As outlined within the discussion above, it should be also mentioned that in the process of choosing
the proper distribution system for the SC, in order to dampen the BWE, retailer’s market share should also be considered
beside the other factors such as lead time, autoregressive coefficient, and MA parameters (e.g. parameters related to the
demand pattern), etc.

7. Conclusion and future research

In this study, we tried to extend the BWE for a two-stage SC consisting of two retailers with different market shares
and one supplier when the demand follows an ARMA (1,1) demand process, which had been originally developed by Loung
[21] for a simple 2-stage SC consisting of one retailer and one supplier. OUT ordering policy and MMSE forecasting technique
were implemented respectively for replenishment and forecasting lead time demand in this study. We also tried to simulate
situations in which the warehousing and cross-docking strategies were implemented in three-stage SCs consisting of two
retailers, one distribution center and one supplier, by making some assumptions in order to investigate the impact of these
two distribution strategies on the BWE.
Contrary to initial presumptions which assumed that eliminating the stages of a SC help expedite a minimization of the
BWE, this study demonstrated that adding a DC as a new stage to the SC can facilitate substantial reductions in the BWE.
The study comprehensively illustrated that the pattern of demand fluctuations plays an important role in decision making
processes which ensure appropriate selection of distribution system for SCs as a means of successfully reducing the BWE.
It should be also noted that increasing the lead time does not always necessarily result in an increasing of the BWE, as
it depends on many other factors such as market share of the retailers, the pattern of demand, its fluctuations, etc.
Quantifying the BWE and analyzing the impact induced by various factors can help us to find solutions for dampening
this effect in order to reduce the related costs and improve the performance of the SC in a comprehensive manner. As a
suggestion for future research, researchers could minimize some of the simplifying assumptions made in this study such as
the one related to retailers’ orders being replenished instantaneously by the warehouse. Once this assumption is eliminated,
other considerations such as preparation, sorting, and shipping times from the DC to the retailers will come to prominence,
requiring researchers to examine the effect of lead time with higher accuracy and more precision in SCs. Another interesting
area for research can be considering market competition between two retailers without assuming fixed market shares for
them. When new factors like these are called into play, our equations will be more complicated and more lifelike as a
result of which findings might turn out to be fundamentally different from the time we proceed with these reductive and
simplifying assumptions.

Acknowledgments

The authors are grateful to the reviewers for their valuable comments and suggestions that help improve the quality of
this paper.
This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.

Appendix A

Proof. for Proposition 1

From (1), (2) and (6) we have:
        
φ 1 − φ Lr1 φ 1 − φ Lr1 θ 1 − φ Lr1
qr1,t = μr1 Lr1 − + Dr1,t−1 − εt−1
1−φ 1−φ 1−φ
        
φ 1 − φ Lr1 φ 1 − φ Lr1 θ 1 − φ Lr1
− μr1 Lr1 + Dr1,t−2 − εt−2 + Dr1,t−1
1−φ 1−φ 1−φ
           
φ 1 − φ Lr1 θ 1 − φ Lr1 φ 1 − φ Lr1 θ 1 − φ Lr1
qr1,t = Dr1,t−1 − εt−1 − Dr1,t−2 − εt−2 + Dr1,t−1
1−φ 1−φ 1−φ 1−φ
336 M. Kadivar, M. Akbarpour Shirazi / Applied Mathematical Modelling 59 (2018) 319–340

      
1 − φ Lr1 +1 φ 1 − φ Lr1 θ 1 − φ Lr1 θ 1 − φ Lr1
qr1,t = Dr1,t−1 − Dr1,t−2 − εr1,t−1 + εr1,t−2
1−φ 1−φ 1−φ 1−φ

Since Dr1,t = α Dt , Dr2,t = (1 − α )Dt , we can obtain Eq. (8) 

Proof. for Proposition 2

VAR(qt ) = A + B

2        2
1 − φ Lr1 +1 1 − φ Lr2 +1 φ 1 − φ Lr1 φ 1 − φ Lr2
A = α + (1 − α ) VAR (Dt−1 ) + α + (1 − α ) VAR (Dt−2 )
1−φ 1−φ 1−φ 1−φ
         
1 − φ Lr1 +1 1 − φ Lr2 +1 φ 1 − φ Lr1 φ 1 − φ Lr2
−2 α + (1 − α ) α + (1 − α ) COV (Dt−1 , Dt−2 )
1−φ 1−φ 1−φ 1−φ

Where VAR (Dt−1 ) = VAR (Dt−2 ) = σd2 ,

COV (Dt−1 , εt−1 ) = COV (Dt−2 , εt−2 ) = σ 2

COV (Dt−1 , εt−2 ) = E [εt−2 , Dt−1 ] = E [εt−2 (δ + φ Dt−2 + εt−1 − θ εt−2 )] = (φ − θ )σ 2

COV (Dt−2 , εt−1 ) = E [εt−1 , Dt−2 ] = E [εt−1 (δ + φ Dt−3 + εt−2 − θ εt−3 )] = 0

COV (Dt−1 , Dt−2 ) = σd2 (φ1+

−θ )(1−φθ )
θ 2 −2φθ
(for more information see [21])

2        2
1 − φ Lr1 +1 1 − φ Lr2 +1 φ 1 − φ Lr1 φ 1 − φ Lr2
A= α + (1 − α ) σ + α
2
+ (1 − α ) σd2
1−φ 1−φ d
1−φ 1−φ
       
1 − φ Lr1 +1 1 − φ Lr2 +1 φ 1 − φ Lr1 φ 1 − φ Lr2 (φ − θ )(1 − φθ )
−2 α + (1 − α ) α + (1 − α ) σd2
1−φ 1−φ 1−φ 1−φ 1 + θ 2 −2φθ

σd2     2       2
= α 1 − φ Lr1 +1 + (1 − α ) 1 − φ Lr2 +1 + α φ 1 − φ Lr1 + (1 − α ) φ 1 − φ Lr2
1−φ

           (φ − θ )(1 − φθ )
− 2 α 1 − φ Lr1 +1 + (1 − α ) 1 − φ Lr2 +1 α φ 1 − φ Lr1 + (1 − α ) φ 1 − φ Lr2
1 + θ 2 − 2φθ

σd2     2       2
= α 1 − φ Lr1 +1 + (1 − α ) 1 − φ Lr2 +1 + α φ 1 − φ Lr1 + (1 − α ) φ 1 − φ Lr2
1−φ
          
− 2 α 1 − φ Lr1 +1 + (1 − α ) 1 − φ Lr2 +1 α φ 1 − φ Lr1 + (1 − α ) φ 1 − φ Lr2
          
+ 2 α 1 − φ Lr1 +1 + (1 − α ) 1 − φ Lr2 +1 α φ 1 − φ Lr1 + (1 − α ) φ 1 − φ Lr2

           (φ − θ )(1 − φθ )
−2 α 1 − φ Lr1 +1
+ (1 − α ) 1 − φ Lr2 +1
α φ 1−φ Lr1
+ (1 − α ) φ 1 − φ Lr2
1 + θ 2 − 2φθ

σd2            
= (1 − φ )2 + 2 α 1 − φ Lr1 +1 + (1 − α ) 1 − φ Lr2 +1 α φ 1 − φ Lr1 + (1 − α ) φ 1 − φ Lr2
(1 − φ ) 2

(φ − θ )(1 − φθ )
× 1−
1 + θ 2 − 2φθ

σd2         
= (1 − φ )2 + 2 α 2 1 − φ Lr1 +1 φ 1 − φ Lr1 + α (1 − α ) 1 − φ Lr1 +1 φ 1 − φ Lr2
(1 − φ ) 2

        (φ − θ )(1 − φθ )
+ α (1 − α ) 1 − φ Lr2 +1 φ 1 − φ Lr1 + (1 − α )2 1 − φ Lr2 +1 φ 1 − φ Lr2 1−
1 + θ 2 − 2φθ
 M. Kadivar, M. Akbarpour Shirazi / Applied Mathematical Modelling 59 (2018) 319–340 337

    

Lr1 r1 −1
L 
Lr1 r2 −1
L 
Lr2 r1 −1
L 
Lr2 
Lr2 −1
= σd2 1 + 2φ α 2 φi · φ i + α (1 − α ) φi · φi + φi · φ i + (1 − α )2 φi · φi
i=0 i=0 i=0 i=0 i=0 i=0 i=0 i=0

(φ − θ )(1 − φθ )
× 1−
1 + θ 2 − 2φθ
     2      2
αθ 1 − φ Lr1 (1 − α )θ 1 − φ Lr2 αθ 1 − φ Lr1 θ (1 − α ) 1 − φ Lr2
B= + VAR(εt−1 ) + + εt−2
1−φ 1−φ 1−φ 1−φ
         
θ α 1 − φ Lr1 θ (1 − α ) 1 − φ Lr2 θ α 1 − φ Lr1 θ (1 − α ) 1 − φ Lr2
−2 + +
1−φ 1−φ 1−φ 1−φ
     
1 − φ Lr1 +1 1 − φ Lr2 +1 θ α 1 − φ Lr1 θ (1 − α ) 1 − φ Lr2
× COV (εt−1 , εt−2 ) − 2 α + (1 − α ) +
1−φ 1−φ 1−φ 1−φ
     
1 − φ Lr1 +1 1 − φ Lr2+1 θ α 1 − φ Lr1 θ (1 − α ) 1 − φ Lr2
× COV (Dt−1 , εt−1 ) + 2 α + (1 − α ) +
1−φ 1−φ 1−φ 1−φ
            
φ 1 − φ Lr1 φ 1 − φ Lr2 θ α 1 − φ Lr1 θ (1 − α ) 1 − φ Lr2
× COV (Dt−1 , εt−2 ) − 2 α + (1 − α ) +
1−φ 1−φ 1−φ 1−φ

× COV (Dt−2 , εt−2 )

     2 
θ α 1 − φ Lr1 θ (1 − α ) 1 − φ Lr2 1 − φ Lr1 +1 1 − φ Lr2 +1
=2 + σ2 − 2 α + (1 − α )
1−φ 1−φ 1−φ 1−φ
     
θ α 1 − φ Lr1 θ (1 − α ) 1 − φ Lr2
× + σ2
1−φ 1−φ
    
1 − φ Lr1 +1 1 − φ Lr2 +1 θ α 1 − φ Lr1 θ (1 − α ) 1 − φ Lr2
+2 α + (1 − α ) + ((φ − θ ) )σ 2
1−φ 1−φ 1−φ 1−φ
           
φ 1 − φ Lr1 φ 1 − φ Lr2 θ α 1 − φ Lr1 θ (1 − α ) 1 − φ Lr2
−2 α + (1 − α ) + σ2
1−φ 1−φ 1−φ 1−φ

2θ σ 2
     2
= θ α 1 − φ Lr1 + (1 − α ) 1 − φ Lr2
(1 − φ ) 2
       
− α 1 − φ Lr1 +1 + (1 − α ) 1 − φ Lr2 +1 1 − φ Lr1 + 1 − φ Lr2 (1 − φ + θ )
          
− α φ 1 − φ Lr1 + (1 − α ) φ 1 − φ Lr2 1 − φ Lr1 + 1 − φ Lr2
   
2θ σ 2 1 − φ Lr1 + 1 − φ Lr2     
= θ 1 − φ Lr1 + θ 1 − φ Lr2
(1 − φ ) 2
           
− α 1 − φ Lr1 +1 + (1 − α ) 1 − φ Lr2 +1 (1 − φ + θ ) − α φ 1 − φ Lr1 + (1 − α ) φ 1 − φ Lr2
   r1 −1 i  r2 −1 i 
2θ σ 2 (1 − φ ) α Li=0 φ + (1 − α ) Li=0 φ     
= 1 − φ Lr1 α (θ − φ ) − α 1 − φ Lr1+1 (1 − φ + θ )
(1 − φ )2
    
+ 1−φ Lr2
(1 − α )(φ − θ ) − (1 − α ) 1 − φ Lr2+1 (1 − φ + θ )
  r1 −1 i  r2 −1 i  
2θ σ 2 (1 − φ ) α Li=0 φ + (1 − α ) Li=0 φ
2 r1 −1
L Lr1
= α ( θ − φ ) φ i
− α ( 1 − φ + θ ) φi
(1 − φ )2 i=0 i=0

r2 −1
L 
Lr2
+ (1 − α ) (θ − φ ) φ i − (1 − α ) (1 − φ + θ ) φi
i=0 i=0
338 M. Kadivar, M. Akbarpour Shirazi / Applied Mathematical Modelling 59 (2018) 319–340

 2  
2θ σd r1 −1
L Lr1 r2 −1
L Lr2
B= α (θ − φ ) φ i − α (1 − φ + θ ) φ i + (1 − α ) (θ − φ ) φ i − (1 − α ) (1 − φ + θ ) φ i
1 + θ 2 − 2φθ
i=0 i=0 i=0 i=0
 
r1 −1
L r2 −1
L
α φ i + (1 − α ) φi
i=0 i=0

Then we will have:

VAR(qt ) = A + B
     

Lr1 r1 −1
L 
Lr1 r2 −1
L 
Lr2 r1 −1
L 
Lr2 r2 −1
L
= σd2 1 + 2φ α 2 φi · φ i + α (1 − α ) φi · φi + φi · φ i + (1 − α ) 2
φi · φi
i=0 i=0 i=0 i=0 i=0 i=0 i=0 i=0

(φ − θ )(1 − φθ )
× −
1 + θ 2 − 2φθ
   
2θ σd2 r1 −1
L Lr1
+ ( θ − αφ ) φ i
− α ( 1 − φ + θ ) φ i + (θ − (1 − α )φ )
1 + θ 2 − 2φθ
i=0 i=0
 
r2 −1
L 
Lr2 r1 −1
L r2 −1
L
× φ i − (1 − α ) (1 − φ + θ ) φi φi + φi
i=0 i=0 i=0 i=0

This completes the prove for Eq. (10) 

Appendix B

Table B.1
Values of BWE measure, in case of Lr1 = Lr2 = 1 and α = 0.3 (or α = 0.4) (or α = 1).

θ Ø

−0.85 −0.65 −0.45 −0.25 −0.05 0.15 0.35 0.55 0.75 0.95

−0.9 1.0991 1.4512 1.7178 1.8961 1.9859 1.9869 1.8991 1.7224 1.4569 1.1025
−0.7 0.7225 1.0996 1.4637 1.7401 1.9132 1.9775 1.9307 1.7716 1.4995 1.1141
−0.5 0.5144 0.7113 1.0997 1.4688 1.7481 1.9077 1.9323 1.8138 1.5469 1.1285
−0.3 0.4737 0.4225 0.7082 1.0997 1.4705 1.7456 1.8775 1.835 1.5966 1.1468
−0.1 0.5045 0.2781 0.3932 0.707 1.0998 1.47 1.7313 1.8096 1.6412 1.1706
0.1 0.5532 0.2401 0.2025 0.3809 0.7066 1.0997 1.4668 1.6975 1.6613 1.2021
0.3 0.6011 0.2586 0.1204 0.1683 0.3766 0.7068 1.0997 1.4589 1.6152 1.2438
0.5 0.6432 0.3009 0.1087 0.0625 0.156 0.378 0.7075 1.0996 1.4375 1.2925
0.7 0.679 0.3503 0.1348 0.0319 0.0409 0.16 0.3858 0.7094 1.0994 1.3047
0.9 0.7092 0.3992 0.1781 0.0459 0.0025 0.0479 0.182 0.4046 0.7147 1.0975
−0.9 1.0991 1.4512 1.7178 1.8961 1.9859 1.9869 1.8991 1.7224 1.4569 1.1025
−0.7 0.7225 1.0996 1.4637 1.7401 1.9132 1.9775 1.9307 1.7716 1.4995 1.1141
−0.5 0.5144 0.7113 1.0997 1.4688 1.7481 1.9077 1.9323 1.8138 1.5469 1.1285
−0.3 0.4737 0.4225 0.7082 1.0997 1.4705 1.7456 1.8775 1.835 1.5966 1.1468
 M. Kadivar, M. Akbarpour Shirazi / Applied Mathematical Modelling 59 (2018) 319–340 339

Table B.2
Values of BWE measure, in case of Lr1 = 1, Lr2 = 3 and α = 0.3.

θ ø

−0.85 −0.65 −0.45 −0.25 −0.05 0.15 0.35 0.55 0.75 0.95

−0.9 1.0876 1.3362 1.5093 1.69 1.9248 2.228 2.5629 2.7975 2.636 1.525
−0.7 0.7247 1.0818 1.3531 1.5924 1.8628 2.1933 2.5571 2.8249 2.688 1.5496
−0.5 0.4656 0.7407 1.0811 1.3894 1.7119 2.0867 2.4991 2.8246 2.7379 1.5798
−0.3 0.3638 0.4371 0.7474 1.0859 1.4509 1.8751 2.3537 2.7697 2.7757 1.6176
−0.1 0.3473 0.2412 0.443 0.7388 1.0963 1.5405 2.0804 2.6162 2.7792 1.6655
0.1 0.363 0.1431 0.2264 0.4292 0.7149 1.1124 1.6592 2.3067 2.702 1.7267
0.3 0.3881 0.1073 0.101 0.208 0.3899 0.6765 1.1343 1.8032 2.4594 1.8018
0.5 0.414 0.1047 0.0426 0.0786 0.1683 0.3285 0.6251 1.1622 1.9496 1.8728
0.7 0.438 0.1183 0.0256 0.0192 0.0484 0.1129 0.2527 0.5627 1.1958 1.8161
0.9 0.4594 0.1387 0.0316 0.0043 0.0036 0.017 0.0581 0.1774 0.4956 1.2314
−0.9 1.0876 1.3362 1.5093 1.69 1.9248 2.228 2.5629 2.7975 2.636 1.525
−0.7 0.7247 1.0818 1.3531 1.5924 1.8628 2.1933 2.5571 2.8249 2.688 1.5496
−0.5 0.4656 0.7407 1.0811 1.3894 1.7119 2.0867 2.4991 2.8246 2.7379 1.5798
−0.3 0.3638 0.4371 0.7474 1.0859 1.4509 1.8751 2.3537 2.7697 2.7757 1.6176

Table B.3
Values of BWE measure, in case of Lr1 = 1, Lr2 = 6 and α = 0.3.

θ ø

−0.85 −0.65 −0.45 −0.25 −0.05 0.15 0.35 0.55 0.75 0.95

−0.9 1.0449 1.2437 1.4578 1.677 1.9246 2.2339 2.6653 3.3046 3.9837 2.5835
−0.7 0.7823 1.0659 1.3248 1.5829 1.8626 2.1985 2.6528 3.3148 4.0242 2.6218
−0.5 0.458 0.7737 1.0761 1.3842 1.7118 2.091 2.5845 3.2867 4.0505 2.6679
−0.3 0.2381 0.4772 0.7591 1.085 1.4508 1.8781 2.4243 3.1879 4.0437 2.7239
−0.1 0.1183 0.2586 0.4609 0.741 1.0963 1.5422 2.1311 2.9674 3.9658 2.7921
0.1 0.0568 0.1271 0.2415 0.4328 0.7149 1.1127 1.6863 2.5624 3.7441 2.873
0.3 0.0256 0.0581 0.1084 0.2114 0.3899 0.6758 1.139 1.9407 3.2599 2.9571
0.5 0.0102 0.0267 0.0406 0.0809 0.1684 0.3274 0.6146 1.1853 2.3987 2.9867
0.7 0.0031 0.0164 0.0145 0.0198 0.0484 0.112 0.2375 0.5147 1.2705 2.6925
0.9 0.0004 0.0173 0.0124 0.0033 0.0036 0.0165 0.0471 0.1188 0.3596 1.421
−0.9 1.0449 1.2437 1.4578 1.677 1.9246 2.2339 2.6653 3.3046 3.9837 2.5835
−0.7 0.7823 1.0659 1.3248 1.5829 1.8626 2.1985 2.6528 3.3148 4.0242 2.6218
−0.5 0.458 0.7737 1.0761 1.3842 1.7118 2.091 2.5845 3.2867 4.0505 2.6679
−0.3 0.2381 0.4772 0.7591 1.085 1.4508 1.8781 2.4243 3.1879 4.0437 2.7239

Supplementary materials

Supplementary material associated with this article can be found, in the online version, at doi:10.1016/j.apm.2018.01.028.

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