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Springer Series in Supply Chain Management

Albert Y. Ha
Christopher S. Tang Editors

Handbook of
Information
Exchange in
Supply Chain
Management
Springer Series in Supply Chain Management
Volume 5

Series Editor
Christopher S. Tang
University of California
Los Angeles, CA, USA

More information about this series at http://www.springer.com/series/13081

Albert Y. Ha • Christopher S. Tang
Editors

Handbook of Information
Exchange in Supply Chain
Management

123
Editors
Albert Y. Ha Christopher S. Tang
Hong Kong University of Science University of California
and Technology Los Angeles, CA, USA
Kowloon, Hong Kong

ISSN 2365-6395 ISSN 2365-6409 (electronic)

Springer Series in Supply Chain Management
ISBN 978-3-319-32439-5 ISBN 978-3-319-32441-8 (eBook)
DOI 10.1007/978-3-319-32441-8

Library of Congress Control Number: 2016943081

© Springer International Publishing Switzerland 2017

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Preface

To mitigate the “bullwhip effect” along a supply chain, Lee et al. (1997) develop
stylized models so that they can generate analytical results to argue for the impor-
tance of information sharing among supply chain partners. Since then, many supply
chain academic research has focused on the interaction between information sharing
and operations planning. For example, Lee et al. (2000) investigate further about
the conditions under which sharing information about market demand is beneficial;
and Aviv (2001) examines the benefits of collaborative forecasting (via sharing in-
formation about a firm’s demand forecast with other firms).
On September 8, 2015, our simple search of the keywords “information sharing”
and “supply chain” through Google Scholar yields 42,700 articles. This search result
reveals that many researchers are interested in several fundamental questions about
information sharing in supply chains. For instance, what is the magnitude of the
bullwhip effect observed in practice? Do different industries experience different
magnitudes of the bullwhip effect? Besides information about demand and fore-
casts, should firms share information about its capacity, inventory level, and product
development with its supply chain partner? How do firms facilitate collaborative
forecasting in practice?
To gain a better understanding about these questions, we have invited leading
scholars who have shaped their respective fields of research. This book contains
the state-of-the art research in operations management that deals with information
sharing in supply chains. It consists of comprehensive surveys of empirical and
analytical studies and novel models of various problems arising from information
asymmetry so that there is a need to exchange information.
We enjoyed the experience working on this book, and we hope that this book will
stimulate further work in this exciting area of research.

Kowloon, Hong Kong Albert Y. Ha

Los Angeles, CA, USA Christopher S. Tang
October 2015

v
vi Preface

References

Aviv Y (2001) The effect of collaborative forecasting on supply chain performance. Manag Sci
47(10):1326–1343
Lee HL, Padmanabhan V, Whang S (1997) Information distortion in a supply chain: the bullwhip
effect. Manag Sci 43(4):546–558
Lee HL, So KC, Tang CS (2000) The value of information sharing in a two-level supply chain.
Manag Sci 46(5):626–643
Introduction

In the instant classic “Bullwhip” paper, Lee et al. (1997) suggested that firms can
mitigate the bullwhip effect if demand information is shared among supply chain
partners. Since then, the rapid advancement in Information and Communication
Technology (ICT) has enabled supply chain partners to explore different mecha-
nisms to share different types of information (product design, production capacity,
inventory status, shipment status, realized demand, and forecasted demand). At the
same time, the research community expressed interest in evaluating the benefits of
sharing different types of information by using different mechanisms (including in-
centive contracts). Based on our Scopus search, there were over 1400 journal articles
published between 1997 and 2014 that contain keywords “information sharing” and
“supply chain.” (See the Fig. 1 below for details.) This finding revealed that infor-
mation sharing in supply chain management continued to be an important research
area of interest. This observation motivated us to invite leading scholars in this area
to share their perspectives through comprehensive surveys or novel models so that
our community can gain a clear understanding about the state-of-the-art research in
this area.

Overall Structure

This book is comprised of 17 chapters that are divided into 4 sections. The first sec-
tion (Chaps. 1–3) provides comprehensive reviews of research literature that deal
with different issues arising from information sharing in supply chains. The sec-
ond section (Chaps. 4–9) investigates different types of incentive contracts that are
intended to enable the principal to entice the agents to behave in a certain manner
when certain information about the agents are not perfectly known to the princi-
pal. The third section (Chaps. 10–13) examines situations when a firm can credibly
convey unverifiable information (e.g., demand forecast) via signaling or cheap talk

vii
viii Introduction

Fig. 1 Number of published journal articles with keywords “information sharing” and “supply
chain” (from 1997 to 2014)

to the recipients (e.g., customers). Finally, the fourth section (Chaps. 14–17) ana-
lyzes how certain issues (e.g., competition, trust, etc.) can affect the incentive for
information sharing.

Chapter Highlights

Part I: Value of Information Sharing

In Chap. 1, Li Chen and Hau Lee review both theoretical and empirical research
studies that are intended to examine the following questions: What causes the bull-
whip effect in a supply chain? What is the magnitude of the bullwhip effect in
practice? In addition, they identify approaches that are necessary to measure and
evaluate the bullwhip effect properly. In Chap. 2, Justin Ren assesses different em-
pirical studies of information sharing in supply chains. Specifically, he classifies the
relevant literature according to the type of information (realized customer demand,
demand forecasts, inventory status, and product development) that firms can share
in order to improve various supply chain performance measures. By focusing on
the issue of information sharing in retail supply chains, Mümin Kurtuluş in Chap. 3
reviews the existing literature on collaborative forecasting (CF): a process that en-
ables supply chain partners to share their individual demand forecasts to develop a
“joint” demand forecast. By highlighting the models that capture the essence of CF,
he summarizes the key findings and insights about the value of CF.
Part I sets the stage by reviewing the literature that examines the following fun-
damental questions: What causes the bullwhip effect? What is the proper way to
measure the bullwhip effect? How can firms use the shared information to improve
supply chain performance? What type of information should a firm share with its
Introduction ix

supply chain partners? However, due to self-interest, a firm is reluctant to share or

to reveal private information. Therefore, how can one firm provide incentives for
other firms to either share information truthfully or to behave in a certain manner?
This is the focus of the remainder of this book.

Part II: Contracting Under Asymmetric Information

In this section, different contributing authors analyze different types of incentive

contracts arising from different contexts. First, motivated by dissatisfaction with the
level of after-sales support from key suppliers, many firms are considering chang-
ing the service contracts from the traditional resource-based contracts (RBC) to
performance-based contracts (PBC). In Chap. 4, Sang-Hyun Kim, Morris Cohen,
and Serguei Netessine investigate the value of performance-based contracting (PBC)
in the context of after-sales product support services. Specifically, under RBC, the
price of the after-sales service is based on pre specified unit prices of the service
parts, labor, and other consumable resources. However, under PBC, the compensa-
tion is based on the actual availability of the product realized by the customer. By
considering the case when the supplier can exert costly effort to improve product re-
liability, the authors find that PBC is more cost-efficient to the customer especially
because PBC incentivizes the supplier to invest more in reliability. Also, PBC can
generate maximum benefit when the spare parts are fully owned by the supplier.
In the operations management literature, most analytical models tend to focus
on the dynamics between one customer and one supplier. However, in the context
of project management, many projects involve multiple suppliers (agents) with un-
observable efforts. Because of potential free riding, it is challenging for the cus-
tomer (principal) to develop effective incentive contracts that yield maximum pay-
off. George Georgiadis and Christopher Tang tackle this problem in Chap. 5 by con-
sidering a team dynamics problem in which multiple agents collaborate over time to
complete a project. They show that, when the size of project is exogenously given,
it is optimal for the customer to compensate the agents only upon completion of the
project. In other words, the “pay as you go” contract is not optimal. Also, when the
size of the project is endogenous and when the customer cannot commit to the size
of the project, they find that the customer is better off delegating the decision rights
over the project size to the agents.
In project management (PM), customers do not have perfect information about
the capability and the cost efficiency of different potential contractors. As such, how
can a customer develop incentive contracts to entice the contractor to exert costly
effort so that the project can be completed in a time-efficient and cost-effective man-
ner? Recently, a novel reverse auction idea has emerged under which each contractor
is invited to submit a bid that consists of two elements: a quoted price and a quote
completion time. In this two-bid auction, the winning bid is the one that yields the
lowest composite score (i.e., a weighted average of the quoted price and the quoted
completion time). However, the winning contractor is subject to a penalty if the
x Introduction

project is completed late. Christopher Tang, Kairen Zhang, and Sean Zhou evalu-
ate this time-based incentive contract in Chap. 6 for the case when the amount of the
work involved is inherent uncertain. They show that this two-bid auction is efficient;
however, they find that a simple auction mechanism can yield the same benefit.
Rapid new product development (NPD) is an important strategy for a firm to sus-
tain its revenue growth. Because NPD projects often involve internal stakeholders
and external partners, a firm needs to develop contracts to align the incentives of
different agents. For instance, if the incentive is based on the number of new prod-
uct launches in a year, then the NPD program manager would focus on developing
incremental products that can be launched quickly. Similarly, if the development in-
volves the collaboration of two different firms, then the free-riding issue will emerge
so that both firms will under invest in the NPD project. In Chap. 7, Sameer Hasija
and Shantanu Bhattacharya review the existing NPD literature that deals with in-
centive contracts for coordinating the agents’ efforts to attain higher profits. They
also discuss different types of incentive contracts examined in the literature that are
intended to deal with the issue of information asymmetry, the timing of different
decisions, etc.
Most supply contract models tend to focus on ways to govern interactions be-
tween a manufacturer and a supplier. In the OM literature, it is well known that the
buy back contracts and revenue-sharing contracts can coordinate the supply chain
by sharing the demand risks. Volodymyr Babich and Zhibin Yang examine the is-
sue of supply disruptions (e.g., bankruptcy) and the role of procurement contracts
to mitigate this form of supply risks in Chap. 8. Specifically, they discuss how firms
deal with the issues of supply chain risks and contracting in practice. Also, they
present various procurement contracts that can enable firms to cope with various
types of supply chain risks.
In the final chapter of Part II (Chap. 9), Guoming Lai and Wenqiang Xiao con-
sider a situation in which a manufacturer sells its product through a retailer who
engages in two types of activities: collect market information for developing more
accurate demand forecast, and generate sales for creating more revenue. When both
activities require costly efforts, what kind of incentive contract should the manufac-
turer offer to the retailer? The authors compare the performance of forecast-based
contracts and the traditional linear contracts. They show that there are situations
under which forecast-based contracts dominate linear contracts.

Part III: Information Signaling and Cheap Talk

In this section, several contributing authors investigate how a firm can credibly con-
vey private and unverifiable information to outside parties such as its supply chain
partners, competitors, customers, and investors. This is done by either signaling (i.e.,
undertaking costly actions such as inventory or committing on a contract) or cheap
talk (i.e., costless communication).
Introduction xi

In Chap. 10, Mehmet Gümüş considers the issue of signaling information about
demand and supply in a supply chain with two suppliers competing to sell to a single
buyer. The suppliers differ in reliability and cost. The author obtains conditions
under which it is beneficial for a firm to share private demand or supply information
with other firms in the supply chain. He shows that quantity flexible contract and
price and quantity guarantee contract can be used as an instrument for signaling
information. He also evaluates how the provision of these contracts can affect a
firm’s performance.
In Chap. 11, Guoming Lai and Wenqiang Xiao study a firm’s problem of convey-
ing unverifiable demand information to investors so that they can properly determine
the firm’s market valuation. They show that when the firm uses inventory to signal
demand information, the inventory decision is distorted which leads to operational
inefficiency. They also show that it is possible for a supplier to design a contract
menu that allows the firm to signal demand information via its contract choice deci-
sion, thus restoring inventory to the efficient level.
Gad Allon and Achal Bassamboo in Chap. 12 examine a retailer’s strategy of
disclosing inventory availability information to customers who are strategic in pro-
cessing the information and making their purchasing decisions. They show that the
retailer cannot credibly convey any information when customers are homogenous
and establish the conditions under which the retailer can do so to influence customer
behavior when they are heterogeneous.
In Chap. 13, Noam Shamir and Hyoduk Shin investigate how firms in a supply
chain can exchange information using cheap talk under linear wholesale price. In
a single supply chain, they show that a retailer cannot credibly share unverifiable
demand forecast with a manufacturer who makes either capacity or wholesale price
decision. However, when the manufacturer makes both decisions, it is possible for
credible information exchange to occur. In two competing supply chains, even when
each manufacturer makes only capacity decision, the authors show that credible in-
formation exchange can occur if a retailer publicly announces the demand forecast.
These results hold because the incentives for inflating and deflating demand forecast
balance each other.

Part IV: Incentives for Information Sharing

As shown in the previous sections, the benefits of information sharing to a supply

chain are well documented. However, firms may not want to share information be-
cause of self-interests. This section considers factors that influence the incentive for
a firm to share information in a supply chain.
One major hurdle to information sharing is the lack of trust between supply chain
partners. Özalp Özer and Karen Zhang in Chap. 14 examine the role of trust and
trustworthiness in facilitating credible information sharing in a supply chain. Based
on some recent research findings, they develop a set of principles that can help firms
establish trusting and cooperative supply chain relationships.
xii Introduction

Another major hurdle to information sharing is the fear of leaking information to

unintended parties such as the competitors. In Chap. 15, Guangwen Kong, Sampath
Rajagopalan, and Hao Zhang review the literature on information leakage in supply
chains. They propose a framework that classifies some existing papers according to
several factors such as the timing of information sharing decision, how information
is leaked, types of competition, etc. They highlight the main findings of these pa-
pers, provide a summary of the key insights from the literature, and offer several
directions for future research.
In Chap. 16, Anthony Dukes, Esther Gal-Or, and Tansev Geylani consider bilat-
eral information sharing in a supply chain with a manufacturer selling to one or
more retailers. They develop a modeling framework that allows both the manufac-
turer and the retailer to have private and imperfect information about the market
demand. They analyze the effect of sharing either the manufacturer’s or the retail-
ers’ private information and conclude that the manufacturer generally benefits from
information sharing at the expenses of the retailers and consumers.
Albert Ha and Hongtao Zhang in Chap. 17 explore how non linear production
cost and competition impact the incentive for demand information sharing in a sup-
ply chain. The authors first investigate the role of non linear production cost in
determining the value of information sharing in a single supply chain. Then they
extend their analysis to the case of two competing supply chains, demonstrate that
information sharing now has a competitive effect due to the rival chain’s reaction,
and show how this competitive effect depends on non linear production cost and
type of competition (price or quantity). They also discuss how the main insights can
be applied to the many-to-one and two-to-one supply chain structures.

References

Lee HL, Padmanabhan V, Whang S (1997) Information distortion in a supply chain: the bullwhip
effect. Manag Sci 43(4):546–558
Acknowledgements

This book cannot exist without the strong commitment from our colleagues. On this
note, we are grateful to each of the contributing authors for sharing their cutting-
edge research with us (see table below). Also, we are indebted to Mirko Janc for
typesetting each chapter beautifully and expeditiously. Of course, we are responsible
for any errors that may occur in this book.

Affiliation (in alphabetical order) Contributing authors (in alphabetical order)

Boston University Z. Justin Ren

Chinese University of Hong Kong Kairen Zhang, Sean X. Zhou
Cornell University Li Chen
Georgetown University Volodymyr Babich
Hong Kong University Albert Y. Ha, Hongtao Zhang
of Science and Technology
INSEAD Sameer Hasija, Serguei Netessine
McGill University Mehmet Gümüş
MIT Karen Zhang
New York University Wenqiang Xiao
Northwestern University Gad Allon, Achal Bassamboo, George Georgiadis
Singapore Management University Shantanu Bhattacharya
Stanford University Hau L. Lee
Tel Aviv University Noam Shamir
University of British Columbia Hao Zhang
University of California, Los Angeles Christopher S. Tang
University of California, San Diego Hyoduk Shin
University of Minnesota Guangwen Kong
University of Oregon Zhibin (Ben) Yang
University of Pennsylvania Morris A. Cohen
University of Pittsburgh Esther Gal-Or, Tansev Geylani
University of Southern California Anthony Dukes, Sampath Rajagopalan
University of Texas, Austin Guoming Lai
University of Texas, Dallas Özalp Özer
Vanderbilt University Mümin Kurtuluş
Yale University Sang-Hyun Kim

xiii
Contents

Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii

Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii

Part I Value of Information Sharing

1 Modeling and Measuring the Bullwhip Effect . . . . . . . . . . . . . . . . . . . . 3

Li Chen and Hau L. Lee
1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2 Survey of Empirical Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.3 Modeling the Bullwhip Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.3.1 Overview and Model Setup . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.3.2 AR(1) Demand Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1.3.3 IMA(0,1,1) Demand Process . . . . . . . . . . . . . . . . . . . . . . . . 14
1.3.4 General MMFE Demand Process . . . . . . . . . . . . . . . . . . . . 15
1.4 Measuring the Bullwhip Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
1.4.1 Seasonality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
1.4.2 Time Aggregation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
1.4.3 Product and Location Aggregation . . . . . . . . . . . . . . . . . . . 20
1.4.4 Material Flow Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
1.5 Future Research Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

2 Empirical Studies in Information Sharing . . . . . . . . . . . . . . . . . . . . . . . 27

Z. Justin Ren
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.1.1 Types of Information in a Supply Chain . . . . . . . . . . . . . . . 27
2.1.2 Key Questions for Empirical Research . . . . . . . . . . . . . . . . 29
2.2 Value of Demand Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

xv
xvi Contents

2.3 Value of Advance Orders Information . . . . . . . . . . . . . . . . . . . . . . . . 30

2.4 Sharing Forecast Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
2.5 Incentives and Contracts in Sharing Forecast Information . . . . . . . . 31
2.6 Value of Inventory Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
2.7 Value of Sharing Order Status Information . . . . . . . . . . . . . . . . . . . . 34
2.8 Sharing Information About Product Development . . . . . . . . . . . . . . 34
2.9 Sharing Inaccurate Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
2.10 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

3 Collaborative Forecasting in Retail Supply Chains . . . . . . . . . . . . . . . . 39

Mümin Kurtuluş
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
3.2 Value of CF When Supply Chain Members are Cooperative . . . . . . 44
3.2.1 Value of CF Relative to Decentralized Forecasting . . . . . . 45
3.2.2 Value of CF Relative to Vendor Managed Inventory
(VMI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
3.2.3 Value of CF Due to Inventory, Production Smoothing,
and Adherence-to-Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
3.3 Value of CF When Supply Chain Members are Strategic . . . . . . . . . 52
3.3.1 Incentives for Sharing Forecasts and Value of CF
Due to Better Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
3.3.2 Value of CF When the Forecasting Investments
are Endogenous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
3.4 Conclusions and Future Research Directions . . . . . . . . . . . . . . . . . . 57
3.4.1 Future Research Directions . . . . . . . . . . . . . . . . . . . . . . . . . 59
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Part II Contracting and Information

4 Reliability or Inventory? An Analysis of Performance-Based

Contracts for Product Support Services . . . . . . . . . . . . . . . . . . . . . . . . . 65
Sang-Hyun Kim, Morris A. Cohen, and Serguei Netessine
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
4.2 Related Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
4.3 Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
4.3.1 Repair Process and Performance Measurement . . . . . . . . . 71
4.3.2 Cost Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
4.3.3 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
4.4 Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
4.4.1 The First-Best Benchmark . . . . . . . . . . . . . . . . . . . . . . . . . . 74
4.4.2 Resource-Based Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
4.4.3 Performance-Based Contract . . . . . . . . . . . . . . . . . . . . . . . . 76
4.4.4 Comparisons of the Contracts . . . . . . . . . . . . . . . . . . . . . . . 78
Contents xvii

4.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Appendix 1: Mathematical Preliminaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Appendix 2: Proofs of the Main Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

5 Project Contracting Strategies for Managing Team Dynamics . . . . . . 89

George Georgiadis and Christopher S. Tang
5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
5.1.1 Related Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
5.2 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
5.3 Agents’ Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
5.3.1 Preliminaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
5.3.2 Markov Perfect Equilibrium (MPE) . . . . . . . . . . . . . . . . . . 95
5.3.3 Comparative Statics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
5.4 Manager’s Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
5.5 Project Design with and Without Commitment . . . . . . . . . . . . . . . . . 100
5.5.1 Full Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
5.5.2 No Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
5.5.3 Optimal Delegation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
5.6 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

6 Time-Related Incentive Contracts for Managing Projects with

Uncertain Completion Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Christopher S. Tang, Kairen Zhang, and Sean X. Zhou
6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
6.2 Model Preliminaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
6.3 The Combined Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
6.3.1 Bidding Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
6.3.2 Optimal Combined Contracts . . . . . . . . . . . . . . . . . . . . . . . . 115
6.4 An Extension: Delaying Work Rate Decision . . . . . . . . . . . . . . . . . . 116
6.4.1 Bidding Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
6.4.2 Optimal Combined Contracts . . . . . . . . . . . . . . . . . . . . . . . . 119
6.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122

7 Contracting for New Product Development . . . . . . . . . . . . . . . . . . . . . . 123

Sameer Hasija and Shantanu Bhattacharya
7.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
7.1.1 Notation and General Model . . . . . . . . . . . . . . . . . . . . . . . . 125
7.2 Internal Incentives for NPD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
7.3 Contracts for External NPD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
7.3.1 Management of Contractual Collaborations
for External NPD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
7.3.2 Contests for Contracting on External NPD by Freelance
Innovators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
xviii Contents

7.4 Conclusions and Future Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

8 Supply Disruptions and Procurement Contracting . . . . . . . . . . . . . . . . 145

Volodymyr Babich and Zhibin (Ben) Yang
8.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
8.2 Practice: Supply Chain Risk Management and Contracting . . . . . . . 147
8.3 Research: Standard Assumptions to be Reexamined
in the Presence of Supply Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
8.4 Insights on Contracting Under Asymmetric Information in the
Presence of Supply Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
8.4.1 Benchmark: Screening for Supplier Cost . . . . . . . . . . . . . . 155
8.4.2 Equivalent Model with Risk: What Assumptions
are Necessary? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
8.4.3 Screening for Supplier Risk: Why the Model
and the Insights are Different? . . . . . . . . . . . . . . . . . . . . . . . 158
8.4.4 Risk Management Tools and the Value of Information . . . 161
8.5 Multiple Dimensions of Asymmetric Information . . . . . . . . . . . . . . 165
8.6 Future Research Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168
9 Contracting for Information Acquisition . . . . . . . . . . . . . . . . . . . . . . . . 171
Guoming Lai and Wenqiang Xiao
9.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
9.2 Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
9.3 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
9.4 The First-Best Solution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
9.5 The Menu of Linear Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
9.6 The Forecast-Based Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
9.7 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185

Part III Information Signaling and Cheap Talk

10 A Tale of Two Information Asymmetries in Competitive Supply

Chains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
Mehmet Gümüş
10.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
10.2 Related Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
10.3 Model Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196
10.4 Symmetric Information Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199
10.5 Asymmetric Demand Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
10.6 Asymmetric Capacity Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 206
10.7 Conclusions, and Future Research Opportunities . . . . . . . . . . . . . . . 208
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
Contents xix

11 Supply Chain Information Signaling and Capital Market . . . . . . . . . . 215

Guoming Lai and Wenqiang Xiao
11.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
11.2 Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218
11.3 Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219
11.4 Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
11.4.1 The Single Contract Case . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
11.4.2 Restoring Efficiency with Operational Mechanism . . . . . . 226
11.5 Other Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229
11.5.1 Capacity Constraint and Equilibrium Refinement . . . . . . . 229
11.5.2 Characteristics of Information Asymmetry . . . . . . . . . . . . 230
11.5.3 Sales Channel Stuffing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231
11.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232

12 Buying from the Babbling Retailer? The Impact of Availability

Information on Customer Behavior . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235
Gad Allon and Achal Bassamboo
12.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
12.1.1 Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
12.1.2 Classical Cheap Talk Game . . . . . . . . . . . . . . . . . . . . . . . . . 240
12.2 Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
12.3 Providing No Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243
12.4 Cheap Talk Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244
12.4.1 Main Result . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245
12.5 Multiple Customer Classes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247
12.6 Multiple Channels of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253
12.7 Concluding Remarks and Future Directions . . . . . . . . . . . . . . . . . . . 256
Appendix: Proofs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261

13 Incentives for Forecast Information Sharing Under Simple Pricing

Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263
Noam Shamir and Hyoduk Shin
13.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263
13.2 Information Sharing with Multiple Decisions . . . . . . . . . . . . . . . . . . 266
13.2.1 The Basic Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266
13.2.2 Two-Point Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267
13.2.3 General Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270
13.3 Competition Between Supply-Chains . . . . . . . . . . . . . . . . . . . . . . . . . 274
13.3.1 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274
13.3.2 Benchmark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275
13.3.3 Public Forecast Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277
13.4 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283
xx Contents

Part IV Incentives for Information Sharing

14 Establishing Trust and Trustworthiness for Supply Chain

Information Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287
Özalp Özer and Yanchong Zheng
14.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287
14.2 Personal Values and Norms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291
14.3 Market Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294
14.4 Business Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298
14.4.1 Culture and Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298
14.4.2 Social Networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301
14.5 Business Process Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303
14.5.1 Information Exchange, Advice, or Delegation . . . . . . . . . . 303
14.5.2 Process-Driven Information Exchange . . . . . . . . . . . . . . . . 306
14.5.3 Engineering Reputation Information . . . . . . . . . . . . . . . . . . 307
14.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309

15 Information Leakage in Supply Chains . . . . . . . . . . . . . . . . . . . . . . . . . 313

Guangwen Kong, Sampath Rajagopalan, and Hao Zhang
15.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314
15.1.1 Basic Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 316
15.2 Ex-Ante Information Sharing Arrangement . . . . . . . . . . . . . . . . . . . . 319
15.2.1 Li (2002) and Zhang (2002) . . . . . . . . . . . . . . . . . . . . . . . . . 320
15.2.2 Li and Zhang (2008) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321
15.2.3 Jain et al. (2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323
15.2.4 Gal-Or et al. (2008) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324
15.2.5 Jain and Sohoni (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325
15.2.6 Shin and Tunca (2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325
15.2.7 Shamir (2012) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327
15.3 Ex-Post Information Sharing Arrangement . . . . . . . . . . . . . . . . . . . . 328
15.3.1 Anand and Goyal (2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . 328
15.3.2 Kong et al. (2013) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329
15.3.3 Shamir (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331
15.4 Other Dimensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332
15.4.1 Uncertain Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332
15.4.2 Auction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333
15.4.3 Competing Supply Chains . . . . . . . . . . . . . . . . . . . . . . . . . . 334
15.5 Discussion and Future Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335
15.5.1 Discussion of the Existing Literature . . . . . . . . . . . . . . . . . 335
15.5.2 Other Supply Chain Structures . . . . . . . . . . . . . . . . . . . . . . 337
15.5.3 Other Types of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 338
15.5.4 Long-Term Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340
Contents xxi

16 Bilateral Information Sharing and Pricing Incentives in a Retail

Channel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343
Anthony Dukes, Esther Gal-Or, and Tansev Geylani
16.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343
16.2 Modeling Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346
16.3 Single Retailer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348
16.3.1 No Sharing and Downward Sharing . . . . . . . . . . . . . . . . . . 348
16.3.2 Bilateral (Full) Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353
16.3.3 The Sharing Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355
16.4 Competing Retailers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355
16.5 Conclusions and Directions for Future Research . . . . . . . . . . . . . . . 358
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 366

17 Sharing Demand Information Under Simple Wholesale Pricing . . . . . 369

Albert Y. Ha and Hongtao Zhang
17.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 369
17.2 Single Supply Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 371
17.2.1 Linear Production Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372
17.2.2 Production Diseconomies of Scale . . . . . . . . . . . . . . . . . . . 374
17.2.3 Production Economies of Scale . . . . . . . . . . . . . . . . . . . . . . 376
17.2.4 Make-to-Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 378
17.3 Two Supply Chains Competing in Price . . . . . . . . . . . . . . . . . . . . . . . 380
17.4 Two Supply Chains Competing in Quantity . . . . . . . . . . . . . . . . . . . . 384
17.5 One-to-Many Supply Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387
17.6 Two-to-One Supply Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 388
17.7 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 390
 Part I
Value of Information Sharing
Chapter 1
Modeling and Measuring the Bullwhip Effect

Li Chen and Hau L. Lee

Abstract The bullwhip effect is a phenomenon commonly observed in industry. It

describes how the distortion of demand information in a supply chain amplifies de-
mand variance as it moves from consumption point up the supply chain to layers of
suppliers. The bullwhip effect has been a subject of intensive research activities. Re-
searchers have tried to address questions such as: What causes the bullwhip effect?
How would different types of demand signal processing in forecasting and replen-
ishment decisions affect the bullwhip effect? Can we explain the magnitude of the
bullwhip effect in terms of the characteristics of the product and the supply chain?
What is the magnitude of the bullwhip effect in practice, how does it differ across
industries and products, and how prevalent is the phenomenon? In this chapter, we
review both theoretical and empirical research done to address these questions, as
well as research done to identify important approaches and specifications that are
necessary to correctly measure and evaluate the true extent of the bullwhip effect.

1.1 Introduction

Demand variability and uncertainty is a driver of supply chain inventory. Manag-

ing supply chains can be a challenge when demand variability and uncertainty is
high. For a company in a supply chain consisting of multiple stages, each of which

L. Chen ()
Samuel Curtis Johnson Graduate School of Management, Cornell University, Ithaca,
NY 14853, USA
e-mail: li.chen@cornell.edu
H.L. Lee
Graduate School of Business, Stanford University, Stanford, CA 94305, USA
e-mail: haulee@stanford.edu

© Springer International Publishing Switzerland 2017 3

A.Y. Ha, C.S. Tang (eds.), Handbook of Information Exchange in Supply Chain
Management, Springer Series in Supply Chain Management 5,
DOI 10.1007/978-3-319-32441-8 1
4 L. Chen and H.L. Lee

is run by a separate organization (or company), the variability of demand faced by

this company can be much higher than the variability faced by downstream stages
(where “downstream stages” refers to the stages closer to the final consumption of
the product). The bullwhip effect refers to the phenomenon where demand vari-
ability amplifies as one moves upstream in a supply chain (Lee et al. 1997a, or
LPW). LPW described this as a form of demand information distortion. Lee et al.
(1997b) further discussed the managerial and practical aspects of the bullwhip ef-
fect, giving more industry examples. The bullwhip effect phenomenon is closely re-
lated to studies in systems dynamics (Forrester 1961; Sterman 1989; Senge 1990).
Sterman (1989) observed a systematic pattern of demand variation amplification
in the Beer Game, and attributed it to behavioral causes (i.e., misperceptions of
feedback). Macroeconomists have also studied the phenomenon (Holt et al. 1968;
Blinder 1981; Blanchard 1983).
According to LPW, the bullwhip effect has been observed extensively in many
industries. However, they provided only anecdotal references. LPW developed sim-
ple mathematical models to explain how the bullwhip effect could arise, and iden-
tified four causes: demand signal processing, order batching, price variations, and
the rationing game. Demand signal processing refers to a company using forecast
updates, and such updates would automatically lead to larger order fluctuations than
demand. Order batching refers to companies not ordering in every single time unit,
and, as a result, order variance would naturally be larger than demand variance.
Price variations result in companies making more than “normal” order quantities
when prices are lower than normal, and vice versa, leading to higher order fluc-
tuations. Rational game refers to companies anticipating supply shortages, and to
ensure adequate supply, exaggerate their needs through placing larger order quanti-
ties than otherwise. Hence, these models showed that the bullwhip effect could be
a result of “rational” decision making under limited information and myopic objec-
tives. Croson and Donohue (2006), using clever experimental setups, demonstrated
that there could also be additional behavioral causes, namely, the under-reaction to
lags and coordination stock. Under-reaction to lags refers to players ignoring inven-
tory in the pipeline when they made ordering decisions. Coordination stock refers
to players increasing their orders because they wanted to have higher safety stocks,
resulting from experiences of past delays in shipments from suppliers.
The main contention of LPW is that one needs to understand the causes of the
bullwhip effect in order to devise counter-strategies. Hence, each of the causes re-
quires a set of strategies for companies to use. These counter-strategies tend to fall
into two broad types. First, one needs to recognize the existence of the bullwhip
effect so that one is not “fooled” by the distorted demand information. Companies
would therefore be smarter in making capacity and inventory decisions accordingly.
Second, companies need to work, often collaboratively, to reduce the magnitude of
the bullwhip effect. One of the most commonly cited counter-strategies is informa-
tion sharing, a topic covered in other chapters of this book. In the ideal situation,
by information sharing, a company might not be misled by the distorted demand
information, and, as a result, might not “bullwhip” its upstream supplier.
1 Modeling and Measuring the Bullwhip Effect 5

Since the work of LPW, two streams of research have emerged: modeling
and empirical. In the modeling stream, researchers have expanded the LPW work
through more complex modeling of the demand process to show how the bullwhip
effect could arise. In the empirical stream, instead of anecdotal evidence, researchers
have tried to measure the extent of the bullwhip effect in real industry cases.
These two streams of research have reinforced each other in our deepened un-
derstanding of the bullwhip effect. Modeling research generates insights and forms
the bases of hypotheses in empirical research. Empirical research serves to confirm
or refute some of the results derived in modeling research, but it can also suggest
potential additional causes of the bullwhip effect or additional phenomena that can
lead to new modeling research. Hence, the two streams together have provided a
healthy path for both streams of research. In this chapter, we review both streams
of work.

Fig. 1.1 Illustration of information and material flows at a supply chain stage

In studying the bullwhip effect, we note that there have been two primary def-
initions of bullwhip effect measurement used in the literature. It is worthwhile for
us to clarify these two definitions as they affect how one interprets the results in the
literature. LPW originally described the bullwhip effect as a form of “demand infor-
mation distortion.” The amplification of demand variance is based on the measure of
demand variance faced by each stage in the supply chain. Hence, consider one stage
of the chain facing its own demand variance. This stage in turn makes its ordering
decision (where order can also be interpreted as production release in a manufac-
turing setting). The orders then become the demand faced by the upstream stage.
The existence of the bullwhip effect implies that the order variance is larger than
the original demand variance. This definition captures the distortion of information
flow that goes upstream (see Fig. 1.1). A second definition, used in many empirical
studies, compares the variance of order receipts (or shipments) with the variance of
sales. Sales represent the material outflow from the current stage under consider-
ation, while order receipts (or shipments) represent the material outflow from the
upstream stage, which become the material inflow to the current stage. In some
cases, the order receipt information, if not available, is inferred from the sales and
6 L. Chen and H.L. Lee

inventory data (see Blinder 1981; Cachon et al. 2007). This definition essentially
captures the distortion of material flow that goes downstream (see Fig. 1.1).
When the upstream stage can always supply perfectly the orders placed by the
current stage, and the current stage can always satisfy the demands that it faces, then
orders and order receipts are the same, and sales and demands also coincide. In that
case, the measures of information-flow and material-flow bullwhip effects would be
identical. But once there are shortages in either the upstream or the current stages,
the two measures would diverge.
The bullwhip effect measurements based on these two definitions also differ in
concept. The information-flow based definition has a direct linkage to supply chain
cost because the orders issued by a stage become a driver to the upstream inven-
tory/capacity decision. Hence, the information-flow bullwhip effect is a cost driver.
In contrast, order receipts (or shipment) information is the outcome of the upstream
order-fulfillment decision process, rather than an input to the decision process.
Hence, the material-flow bullwhip effect is the consequence of the information-flow
bullwhip effect. Moreover, in the information-flow based definition, the bullwhip
effect is a result of one decision maker, i.e., the stage in question. This decision
maker observes demand, and then makes order decisions based on various struc-
tural and economic factors. In the material-flow based definition, however, there
are three decision effects involved. First, the sales data is determined by the ac-
tual demand and the on-hand inventory, where the latter is a result of the inven-
tory decisions made in previous periods. Second, as in the information-flow based
case, the unit makes order decisions, based on structural and economic conditions.
Third, the actual order receipts from the supplier are the result of the supplier’s
previous production/stocking decisions, where the order receipts may not exactly
equal the orders (e.g., production shortfall, transportation constraints, etc.). In view
of these differences, we believe the information-flow based definition is more suit-
able for theoretical analysis purposes. However, we recognize the need for using
the material-flow based definition as an empirical surrogate in some cases, and thus
include a discussion of the implications of such an approximation in Sect. 1.4.
The rest of the chapter is organized as follows. In Sect. 1.2, we review the empir-
ical findings of the bullwhip effect. In Sect. 1.3, we review the literature of bullwhip
effect modeling, with an emphasis on the demand process modeling. Section 1.4
discusses various issues related to the empirical measurement of the bullwhip ef-
fect. We conclude the chapter by discussing some future research opportunities in
Sect. 1.5.

1.2 Survey of Empirical Findings

Empirical research concerning the bullwhip effect is a large literature and, rather
than giving a comprehensive review, we highlight some significant findings. There
are two classes of empirical research. The first one is closer to the field-based
approach, in which a single supply chain is the unit of analysis. The demand
1 Modeling and Measuring the Bullwhip Effect 7

information in this single supply chain, often with a single class of products in focus,
is analyzed to explore the existence of the bullwhip effect and measure its magni-
tude. The second one uses secondary data of many companies, often aggregated, to
pursue statistical analysis of the bullwhip effect.
LPW started with their anecdotal observation of excessive volatility in weekly or-
ders in both Procter & Gamble’s diaper supply chain and Hewlett-Packard’s printer
supply chain.
We highlight a few sample studies that are based on single supply chains. In a
landmark teaching case, Hammond (1994) documented how Barilla SpA, the largest
pasta producer in the world, observed strong bullwhip effects. The supply chain
members—Barilla and its customers—all processed demand signals, orders were
batched, and promotions were common. At one of the distribution centers (DC) of
its largest retail customer, the weekly orders placed by this DC to Barilla had a
mean of 300 quintals and a standard deviation of 227. But the weekly sell-through
at the DC (which can be viewed as shipments to the stores) had a mean of 300
and standard deviation of 60. Suppose that we define the “bullwhip ratio” to be
CVout /CVin , where CVout is the coefficient of variation (CV) of the outgoing orders,
and CVin is the CV of the incoming orders. The bullwhip effect exists if the bullwhip
ratio is greater than one. The bullwhip ratio at the Barilla case was 3.75, i.e., 73 %
of the variation at the DC could be explained as the distortion within the supply
chain, while the remaining 27 % was the variation faced by the DC. Through VMI
(vendor-managed inventory), Barilla was able to reduce the inventory at this DC by
47 %, while shortage rates dropped by 7 % to almost zero.
Lai (2005) also studied a single supply chain, that of a Spanish grocery chain
Sebastian de la Fuente. The study was based on monthly product-level data at the
DC, showing prices, markups, sales delivered to stores, supplies from suppliers,
inventories and promotion. The data set contained records of 3745 products over 29
months that pass through the DC. Regression analysis by Lai (2005) demonstrates
that the bullwhip effect existed and was mainly driven by batching by the store, as
well as two behavioral causes identified by Croson and Donohue (2006).
Fransoo and Wouters (2000) studied two supply chains of convenience foods
(salads and ready-made pasteurized meals) involving four companies in The Nether-
lands. The supply chain consists of three stages: the producer, the regional DC and
retail franchisees. Using the filtered daily sales data (from March 23 until June 5,
1998), they found that the bullwhip effect was prominent across the supply chain.
The bullwhip ratios found in their study are shown in Table 1.1.

Table 1.1 Summary of bullwhip ratios of different supply chain stages

Supply chain stage Bullwhip ratio (meals) Bullwhip ratio (salads)

Production 1.75 1.23

Distribution Center 1.26 2.73
Retail Franchisee 1.67 2.09
8 L. Chen and H.L. Lee

Note that both Lai (2005) and Fransoo and Wouters (2000) used sales data, and so
the bullwhip ratios that they measured were based on the material flow. Hammond’s
case was based on orders placed by the DC (information flow) and the sales to the
DC (material flow). It showed the challenges faced by empirical researchers as it is
not easy to truly measure the information distortion aspect of the bullwhip effect,
i.e., the information-flow bullwhip effect. The study of Fransoo and Wouters (2000)
also highlights how the bullwhip effect can vary across products. Hence, one has to
be careful when conducting empirical research with data aggregated over products.
Moving from the single supply chain approach, there also have been empiri-
cal accounts of the bullwhip effect that are based on two levels of aggregation of
secondary data. These studies usually used monthly or quarterly data aggregated
across various products or firms. The first level of aggregation was on time units.
In the sample studies of single supply chains described earlier, the time unit of the
data was based on the timing of order decisions. For example, it was a week in the
case of Barilla, since orders were generated on a weekly basis; and it was monthly
in the case of Sebastian de la Fuente, since the supply chain members order on a
monthly basis. The time unit used in the convenience food supply chain study was
a day, since the supply chain ordered on a daily basis, which was necessary given
the perishable nature of meals and salads. If companies orders on a monthly basis
or a quarterly basis, then the use of monthly or quarterly data may pose no poten-
tial problem. But this is rarely the case in real life. The second level of aggregation
was on products and often across firms as well, which can also be problematic on
the validity of bullwhip effect measurement. These two aggregation problems are
discussed in detail in Sect. 1.4.
Industry-based studies are anchored on data that are aggregated over products
and firms. High production volatility was found in the TV set industry (Holt et al.
1968), retail industry (Blinder 1981; Mosser 1991), automobiles (Blanchard 1983;
Kahn 1992), cement industry (Ghali 1987), high tech consumables (Hanssens 1998),
paper products (Carlsson and Fuller 1999), semiconductors (De Kok et al. 2005),
semiconductor equipment (Terwiesch et al. 2005), and many other industries (Miron
and Zeldes 1988; Fair 1989). In these studies, researchers searched for explana-
tions to reconcile the bullwhip effect with the classic production-smoothing theory
that posits that the motive for keeping inventory is to smooth production variability
rather than to amplify it. One of the leading explanations is that production smooth-
ing was missing because seasonality had been excluded from the data (e.g., Ghali
1987).
There are also studies that are at the multi-industry or economy level (Blinder
1986; Bivin 1996; Cachon et al. 2007). Here, there was even more extensive aggre-
gation of products and firms, as data from products and firms in different industries
have also been combined. Fine (1999) demonstrated the bullwhip effect using this
multi-industry approach, as shown in Fig. 1.2. The fluctuation of automobile pro-
duction was clearly greater than that of the GDP (mimicking the downstream stage
of the automobile industry), while the fluctuation of machine tools (mimicking the
upstream stage of the automobile industry) was even greater.
1 Modeling and Measuring the Bullwhip Effect 9

Fig. 1.2 Illustration of industry volatility

Several recent empirical studies are worth highlighting. Cachon et al. (2007) used
monthly sales and inventory data from the U.S. Census Bureau of 1992–2004 to ex-
amine the bullwhip effect in the manufacturing, wholesale and retail sectors. Hence,
there was aggregation of time units, and aggregation across products. The bullwhip
effect analysis was based on the material flow concept. They found that if season-
ality is included in the measurement, production smoothing indeed exists in the
retail industry and in some manufacturing industries, but not in the wholesale in-
dustry. With seasonally unadjusted data: 62 % of manufacturers have a bullwhip ra-
tio less than one, 86 % of retailers had a bullwhip ratio less than one, while 84 % of
wholesalers have a bullwhip ratio larger than one. Hence, there is empirical evidence
that while there was a tendency for companies to bullwhip the upstream suppliers,
sometimes the desire to smooth production may be even stronger, dampening the
bullwhip effect.
Bray and Mendelson (2012) reported that about two-thirds of firms bullwhip in
a sample of 4689 public U.S. companies over 1974–2008. Building on the model
of a generalized order-up-to policy proposed by Chen and Lee (2009), the authors
decomposed the bullwhip effect by information transmission lead time. They found
that demand signals with shorter time notice have greater impact on the bullwhip
effect.
Bray and Mendelson (2015) further investigated the bullwhip effect and produc-
tion smoothing in an automotive manufacturing sample comprising 162 car models
and found that 75 % of the sample smooth production by at least 5 %, despite the
fact that 99 % of the sample exhibit the bullwhip effect. They measured production
smoothing with a structural econometric production scheduling model based on the
generalized order-up-to policy. According to their structural estimation, there exist
both a strong bullwhip effect (on average, production is 220 % as variable as sales)
and robust smoothing (on average, production would be 22 % more variable absent
volatility penalty costs).
10 L. Chen and H.L. Lee

Shan et al. (2014) investigated the bullwhip effect using data from over 1200 pub-
lic companies in China during 2002–2009. They found that more than two-thirds of
the companies exhibit the bullwhip effect. Their regression analysis suggests that
the bullwhip effect magnitude is positively associated with average on-hand inven-
tory and persistence of demand shocks, and is negatively associated with degree of
demand seasonality.
Duan et al. (2015) collected a daily product-level dataset consisting of 487 indi-
vidual products from a supermarket chain in China. They found that the magnitude
of the bullwhip effect at the product level is much more significant than those mea-
sured at the firm or industry level, suggesting that product and time aggregation may
mask the bullwhip effect measurement.
Osadchiy et al. (2016) investigated the systematic risk in demand for different
industries and firms in the U.S. economy, including retail, wholesale, and manufac-
turing sectors. They used sales as a proxy for demand, and defined the systematic
risk in sales as the correlation coefficient of sales change with the contemporane-
ous market return. They found that demand signal processing does not amplify the
systematic risk, however, aggregation of orders from multiple customers and aggre-
gation of orders over time can result in the amplification of systematic risk upstream
along the supply chain.

1.3 Modeling the Bullwhip Effect

There are multiple ways of modeling the bullwhip effect along a supply chain.
For example, the bullwhip effect can be modeled as a result of judgmental errors
by human decision makers (e.g., Sterman 1989; Chen 1999; Steckel et al. 2004;
Croson and Donohue 2006). It can also be modeled as a result of suboptimal in-
ventory policies. Chen et al. (2000a,b) showed that, when certain demand forecast
methods, such as moving average and exponential smoothing, are used to determine
a (suboptimal) inventory policy for an AR(1) demand process, the resulting order
variability exceeds demand variability. De Kok (2012) considered a two-echelon
supply chain in which the downstream demand is stationary but the retailers fore-
cast demand using the exponential smoothing method. He quantified the bullwhip
effect as a function of the exponential smoothing parameter. Dejonckheere et al.
(2003) modeled a supply chain as an engineering system and studied the bullwhip
effect under certain (suboptimal) system replenishment rules. We refer the reader to
Geary et al. (2006) for a survey of the control engineering approach for modeling
the bullwhip effect.
While the above approaches can all account for the bullwhip effect, there is a
certain degree of arbitrariness in the assumed irrational human behaviors and sub-
optimal inventory policies. To eliminate such arbitrariness, a normative approach is
needed, whereby the decision maker is assumed to make rational decisions in opti-
mizing the system cost performance. In the remainder of this section, we shall take
this normative approach for modeling the bullwhip effect.
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Swiftly we released her from the tape and wire that silenced and
bound her; then, to our astonishment, we found that she was
chained by the ankle to an iron post of the bed. The Chief
immediately set to work to unfasten the chain, which looked like an
ordinary dog-chain.
By this time, McGinity had discovered a light fixture in the wall, near
the front window, containing one bulb, which he turned on. Mrs.
LaRauche stared dazedly from one to the other of us, giving me no
sign of recognition, although I addressed her by name. But she
appeared to comprehend what we were up to. Still unable to speak,
she raised one hand weakly, and pointed towards the window in the
back of the room, behind the bed.
In doing this, she furnished us with an important clue. LaRauche had
escaped through this window, which was set in the Mansard roof,
and gave on to a broadish ledge, sufficient wide for a person to walk
on. This ledge extended clear around the house.
"We've got to get LaRauche!" Chief Meigs exclaimed, but he couldn't
get through the window because of his rather portly physique. Nor
could I. McGinity, slim in figure, managed it nicely. He had such good
eye-sight that he could distinguish objects which were beyond the
view of normal-sighted people. And he was hardly outside, on the
ledge, and debating whether he should turn to the left or the right,
when he espied a figure, crouching in the dark, at the far end of the
roof extension.
"You see it?" he asked Chief Meigs, who was leaning out of the
window.
"I can't see a damn thing," the Chief replied.
"Next time, you'd better bring your opera-glasses," the reporter
suggested, ironically.
"I wonder if it is LaRauche?" said the Chief, thoughtfully.
"It's a man, at any rate," said McGinity. "Looks like he's wearing
black trousers and a white shirt. No coat or hat at all. He's got bushy
white hair."
"Then it's LaRauche," the Chief exclaimed. "Call to him, and tell him
to come back into the house. Say it's no use trying to escape."
McGinity did as the Chief requested, and there came in reply a
cackling laugh.
"I heard that," said the Chief. "It's the laugh of a maniac." Then he
added quickly: "What's he doing now?"
McGinity did not reply immediately. He had seen something very
strange happen. LaRauche had mysteriously disappeared—
vanished into the air.
"He's gone!" the reporter cried at last. "Escaped! He just flew off the
roof."
The Chief gave a groan of disappointment. "Oh, come back in!" he
ordered gruffly. "Don't be funny!"
McGinity came back through the window, his knees a little unsteady.
Then he explained what he had seen. LaRauche had floated off the
roof, into the air, lightly but swiftly, taking a downward course, and
had been swallowed up in the darkness below.
"You don't expect me to believe a fairy story like that?" Chief Meigs
growled. "Here, let's get downstairs. We're wasting time."
"It's the gospel truth, officer," McGinity declared, vehemently; "but
how he did it is a puzzle to me."
It was no puzzle to me. I had always considered LaRauche mad, and
mad scientists work in a strange, mysterious way. His vanishing into
the air, from the roof, might have a perfectly natural explanation.
Having my own views, which I was not inclined at the moment to
expose, for fear of further disgruntling the Chief, I said nothing.
Five minutes after the Chief and McGinity had gone downstairs, the
reporter to search for LaRauche in the back-yard, while Chief Meigs
reported the mysterious death of Orkins, and summoned medical aid
for Mrs. LaRauche, by telephone, my attention was again attracted
to the back window. This time it was by a bright glare of light.
Hurrying to the window, I was made speedily conscious of what was
happening. LaRauche had, indeed, escaped from the house by way
of the roof, in a manner yet to be revealed, and was now, apparently,
making a quick getaway in his plane.
He had set off a magnesium flare. The small hangar and flying field
were bathed in a weird and eerie silver-colored haze. His plane was
in sight. Even at this distance, I caught the glint of its wings in the
silver-colored light as it taxied across the field. With a roar, it shot
upward, and was lost in the blackness of the night.
McGinity had heard the noise of the take-off, and came running up,
to learn from me, and make sure his speculations, that LaRauche
had really vanished from the roof, as if by magic, and was now
escaping in his plane. I assured him on these two points very firmly
and quickly.
And while he hurriedly retraced his steps downstairs, to report to
Meigs, I again turned my attention to Mrs. LaRauche, whose mind,
although still in confusion, was slowly clearing.
Later, we were to hear some very remarkable things from her.

XXVIII
My intuitive feeling that we had a night's work before us, which I had
voiced prophetically to McGinity earlier in the evening, as we started
for the LaRauche place, with only the faint clue of a woman's voice
on the telephone to go on, proved conformable to fact. Dawn was
breaking when we returned to the castle, weary and heavy at heart.
The place was silent; the only sound that came to us was the swish-
swish of the incoming tide, as it broke against the rocks at the foot of
the cliff.
We were both so saddened and unstrung over our unpleasant and
tragic experiences during the past twenty-four hours, and so
physically dog-tired, that we were averse to talking them over.
The three tragedies, occurring so closely together, first, Niki, then Mr.
Zzyx, and now, Orkins, after all, seemed to have been so
unnecessary; or, as Henry had voiced his opinion about Mr. Zzyx's
fearful death, so senseless. And while there was a logical connection
between them and the perpetration of the Martian hoax, so far they
had contributed little or nothing in clearing up the mystery which was
still baffling us both.
It was here that Mrs. LaRauche came into the picture. My conviction,
from the time I recognized her voice on the telephone, was that she
knew more than any one else did. I had been shocked rather than
distressed at the death of Orkins. A providential death, perhaps, with
LaRauche gone now, and his wife holding the secret.
But where was LaRauche going? Evidently, after the systematic
manner of his escape, he had a set goal. He was an experienced
pilot, and a very expert one, considering his age, and probably knew
of many places where a man could land safely in the dark.
Word of his escape by plane had been broadcast; the machinery of
police watchfulness set in motion along the entire eastern seaboard,
and far inland, as well. Somewhere in the air, a man was flying—
wanted by the police.
Mrs. LaRauche was a badly shaken woman, but her condition was
not serious. I remained at her side until the arrival of an ambulance
physician from the county hospital. He was accompanied by a nurse,
who took her immediately in charge. But she had other ideas than of
going to the hospital. Her brain had cleared considerably, and she
insisted on remaining in her home. I agreed with her on this, and to
the inconvenience of the proprietor of an employment agency in the
village, who had retired for the night, I soon had a competent
manservant, with his wife, on the premises.
By the time they arrived, bringing ample provisions and milk, which I
had the foresight to order, the police had removed the body of
Orkins, as well as all traces of his death. The couple set to work at
once, systematically clearing up and setting things in order. By
midnight, the house was freshened up considerably, and Mrs.
LaRauche made as comfortable as possible in her own, redressed
bedroom, with the hospital nurse in attendance.
What she needed most, the physician decreed, was absolute rest
and quiet. The kindly attentions showered upon her appeared for the
moment to compensate for the loss of her demented husband. She
had come out of a horror, but she was not thinking—or allowing
herself to think—it seemed to me.
The house still seemed empty and queer as McGinity and I drove
away, around one o'clock, trailing Chief Meigs' car back to the
village. The Chief's last act was to station a policeman on guard,
which made me a lot easier in my mind.
The situation was still lamentable enough, but McGinity and I, with
an air of bravado, continued our inquiries on reaching the village.
With police assistance, we had no difficulty in locating the light truck
which Orkins had rented, and once located and properly inspected,
we found nothing to indicate that it had been used to transport the
stolen rocket from the Museum of Science to the East River.
And then McGinity suddenly found something, which was vitally
important. A screw from the rocket. Chief Meigs chuckled; he
couldn't see that a screw could possibly have any bearing on our
situation. When we returned to the police station, I showed him.
"Why, that's just an ordinary screw," he said, after inspecting the
screw more closely. "I don't see how it could mean anything."
"No?" I said. "Then you don't know how they make screws on Mars.
If you think it's just ordinary, here's a screw-driver and a piece of pine
wood. Now, drive it in!"
"That doesn't worry me at all," Meigs bantered. He went to his task
cheerfully, even whistling, and giving a wink to several policemen
who were looking on. But the screw refused to function in the
ordinary way. Finally, he gave it up. "Why the damn thing won't go
into the wood is a mystery to me," he remarked, as he handed the
screw and screw-driver back to me.
"Because it works in reverse to our screws," I explained, as I drove
the screw into the soft wood easily enough by a reverse motion.
"There, I've done the job," I concluded, "which proves conclusively
that only a Martian screw could be jolted out of a Martian rocket. And
as the screw was found in the truck, the van therefore must have
carried the rocket."
The Chief of Police grew pop-eyed in amazement.
"Everything about the rocket has this unusual element," I continued,
"except the metal from which it was constructed, and it is a scientific
fact that the metallic ores which abound on the earth are to be found
in other planets."
The Chief's look of blank astonishment prompted me to go on.
"Now, whatever we may have thought at first about this rocket
having originated on Mars, we know now that LaRauche
manufactured it himself. He had the brain power necessary to create
this fantasy in mechanism, and the means and method of carrying
out his motive, which was to bring my brother Henry to shame."
"All of which stirred the popular imagination, and increased the
circulation of the Daily Recorder half a million," McGinity interjected.
"Well," Chief Meigs drawled, "all I got to say is this. If making screws
that go in backwards is not the act of a lunatic, then I'm crazy
myself."
For several hours, McGinity and I remained at the police station,
occupying ourselves piecing together from this and that all the
information at our command; and at the end, it was as clear as
daylight that we knew no more about the actual perpetration of the
hoax than we did twenty-four hours back. The impression we both
had gained was that tragedy had been obtruded into LaRauche's
suave scheme that was shockingly disturbing, but had nothing
whatever to do with clearing up the case.
There was little or nothing at the LaRauche home for the police to go
on with. No trace of the revolver that had pierced Orkins' heart with
its deadly bullet; no firearms of any sort, in fact. Mrs. LaRauche
heightened the mystery by declaring her husband had an inherent
fear of the use of firearms, as he had of fire, and had never owned a
revolver. Nor was any sort of weapon discovered during the
inspection of his laboratory, or workrooms, in the observatory and
hangar, in which he operated outside his dwelling. No evidence even
was found that would in the slightest degree incriminate him in the
Martian fraud.
The city papers had come by plane, after midnight, and I read them
all with interest. McGinity, fed up on the story, waved them away.
They contained a very full account of what had occurred at the
castle, Orkins' mysterious death, and LaRauche's escape by plane.
About three o'clock, I succeeded in reaching Olinski on the
telephone, at his city home, and he was so upset over the whole
affair, as reported in the papers, that at first all he could seem to do
was to sputter into the mouthpiece.
"I fear, my dear Mr. Royce," he managed to say, finally, "that you and
that reporter fellow have made a great mistake—a serious error. You
have found nothing to prove that the radio message, and the rocket,
did not originate in Mars, now, have you?"
"Nothing," I replied, "except that water-mark we found in the scroll."
"That proves nothing," he fairly shouted. "Some utterly unscrupulous
and wicked person may have changed that scroll after it passed out
of my possession."
"That is your theory, Mr. Olinski?" I asked.
"Can you suggest any other?" he countered. "No; because there can
be no other. Unless you are accusing me of complicity—"
"I didn't say so, Mr. Olinski," I interrupted.
"Yet you believe this Dr. LaRauche, the scientist you've been telling
me about, is at the bottom of this so-called hoax?"
"That is highly possible," I answered. "I myself think so."
"But you have, of course, no idea just how he did it?"
"No idea whatever, but it's quite plain that for motives of his own he
had the opportunity."
"And that," Olinski declared, "that's as far as you've got?"
"At present," I replied.
"And that's as far as you'll ever get, my dear Mr. Royce," he rejoined
in a bitter, sardonic tone, and then suddenly hung up.
When we had thus made an end, a dead silence followed, during
which McGinity and I looked at each other for a moment or two, in
silence. After I had told him what Olinski had said, the reporter
spoke.
"I've put it out of my mind that Olinski had anything to do with this
affair," he said. "The more I think of it, Mr. Royce, the more I'm dead
certain that Mrs. LaRauche is our only hope. Finding her husband
will be a police detail, and several days may elapse before he's
apprehended. Now, if we could get to her, the first thing in the
morning. Do you think that would be possible?"
Before I could answer, Chief Meigs walked in to say that a plane,
answering the description of LaRauche's machine, had passed over
Montauk Point, heading south, a little before three o'clock, had been
picked up by a coast-guard searchlight, but had dodged out of the
light. With this announcement, all thoughts of Mrs. LaRauche
vanished, and—to me, at any rate—did not recur until we had driven
back to the castle at the break of dawn, after a weary vigil of waiting
at the police station to hear further word of LaRauche. But the
reports were blank and disappointing.

XXIX
Interviewing Mrs. LaRauche did not prove as difficult as we had
anticipated. At ten o'clock—McGinity and I were still in bed—the
manservant I had installed at the LaRauche house, telephoned that
Mrs. LaRauche was feeling much stronger, and was most anxious to
see Henry and me on a matter of very urgent business; and would
we please bring along the village Chief of Police, also the young
newspaper reporter who had accompanied the officer and me to the
house the night before.
At eleven o'clock, we drove off. On our way through the village, we
picked up Chief Meigs, and the first thing he did after boarding the
car was to give me a wink, and mutter: "Screws!" Henry was pallid
and trembling. He had been deeply shocked when he learned of
Orkins' death. He seemed to have aged ten years during the night.
McGinity was in a state of excitement. After a late and hasty
breakfast, he and Pat had taken a stroll on the terrace. In spite of the
tragedies and excitement, Pat had come downstairs looking as fresh
and as bright as I had ever known her. I met them as I came out to
get into the car. McGinity had just reached out to take her hand in
his, and she had not drawn it away. She seemed a little breathless.
The strain of the past twenty-four hours, and loss of sleep, had been
too much for me. As we breezed along in the crisp, morning air, I
was no more capable of keeping my eyes open than I was of writing
poetry. My conversation was limited to monosyllabic answers;
between monosyllables, I fell into a light doze.
Nearing the LaRauche place, I became more wide-awake, and
began to speculate whether Mrs. LaRauche knew, and was in a
position to tell, the whole truth. Doubt had entered my mind. Even
after we had been admitted into the house, and had gathered around
her, in a sitting-room adjoining her bedchamber, I felt certain that she
would be able to contribute very little to the sum of information which
we had.
She was dressed in a dark morning gown, and seated in an easy
chair. The heavy window curtains were drawn, to save her eye-sight,
after long imprisonment in a darkened room. In the dim glow of a
shaded lamp, her face appeared pale and worn. Yet her poise was
serene; to all appearances, she was very much mistress of herself.
This was a great relief to me. I was afraid we would have a
quivering, sobbing woman on our hands, and the thought was
terrifying. Only once, when she grasped Henry's hand, on our arrival,
did she show that she was under a strain which was almost at a
breaking point.
She was a comely woman, even in her present pitiable state, and
she had the voice of a woman of refinement and education. I had
often wondered why she had married a man so much older than
herself, and so eccentric. She was LaRauche's second wife. God
knows what became of the first one!
After we had quietly taken seats, Chief Meigs broke the tension of
silence. "Do you feel strong enough to answer our questions, Mrs.
LaRauche?" he inquired.
She nodded, and replied: "I think so."
Then Henry spoke. "I wish to heaven, Mrs. LaRauche, you'd got in
touch sooner with Livingston and me. We've always prized your
friendship very highly, and if it had not been for—"
"Yes; I know," Mrs. LaRauche broke in, as though anticipating his
closing remark; "but I've been unable to communicate with any one
on the outside for several weeks. A day or so ago, I managed to get
the front window open, and waved to a motorcycle policeman, but
apparently he did not see me." She stopped, and glanced nervously
over her shoulder, and added, with a little shiver: "Oh, you don't
know how I've grown to hate this house!" Then, quickly regaining her
self-possession, she looked at McGinity steadily for a moment, and
said: "I haven't the slightest idea who you are. I only know that you
were a very thoughtful and kind young man last night. Are you the
newspaper reporter?"
McGinity nodded, with an embarrassed smile, and was about to
reply when I interjected: "A thousand pardons, Mrs. LaRauche," I
said. "Allow me to present Mr. Robert McGinity, of the New York
Daily Recorder, a young but very capable reporter, in whom we place
every confidence. In fact, we've grown so fond of him, he seems like
one of the family." Turning to Henry for confirmation, I concluded: "I
am quite right, am I not, Henry?"
"Of course, you're right," Henry answered, loudly. "And I don't know
what we're going to do without him when this—er—Martian affair—I
was about to say, Martian inquest—is finished."
I gasped with astonishment at Henry's remarks, while McGinity
turned very red, and said, stammeringly: "Thanks, Mr. Royce." Then
he began to fumble nervously with his inevitable bunch of copy
paper and pencil.
Mrs. LaRauche smiled wanly, and addressed herself again to the
reporter. "I'm so glad you've come, Mr. McGinity," she said, "for what
I'm going to tell, I wish to be given as much publicity as possible. I
want the public to know that Henry Royce was imposed upon, and
that my husband, now a fugitive, although I refuse to believe he's a
murderer, was wholly responsible, with the connivance of Orkins, his
manservant, in carrying out this cruel deception, which, I know, is still
puzzling all of you."
"Even at that, it doesn't seem so incredulous," Henry commented. "I
guess I'm one of the die-hard kind."
There was a little pause, then Mrs. LaRauche turned to Chief Meigs.
"Tell me," she said, "how is the search going? Have the police
discovered any clue to my husband's whereabouts?"
"I'm afraid I can't give you any information," Meigs replied; "no clue
at all."
"It isn't that I want him back," she said firmly, "or would ever want to
see him again, after the many cruelties he practiced on me. But he's
been out of his mind—insane—I'm sure, for weeks now, and is really
unaccountable for his acts."
Her voice had grown shaky, and her face went whiter than it had
been. We remained silent, recognizing the futility of questioning her
until she got control of herself. Our chief interest, of course, lay in the
unraveling of the mystery which still baffled us, and when she finally
got to it, she answered all our questions in a cool collected way.
On my suggestion, McGinity began the questioning, giving us a
specimen of his powers of observation. He omitted no detail of
importance, carefully marshaling his facts and presenting them to
Mrs. LaRauche as expertly as a lawyer examining a witness before a
jury.
"Your married life has been a very unhappy one, hasn't it, Mrs.
LaRauche?" he began.
"Very unhappy," she replied, sighing. "Insolent, quarrelsome, Rene
LaRauche humiliated me in every possible way. I was simply his
housekeeper—a vassal. He was the mighty, brainy scientist, and he
never allowed me to forget it—not for one instant."
"Apparently he did not confide in you?"
"Orkins had been his manservant for some years prior to our
marriage, and to him he entrusted the secrets of his scientific
discoveries and inventions, rather than to me. This was only one of
his many eccentricities, and I submitted to the indignity with
exemplary patience."
"How do you account for his making Orkins a confidant?"
"He was too self-centered, too egotistical, to invite the confidence of
brainy people. He seemed to like to impress—startle—inferior minds
with his discoveries. Orkins was a highly trained servant, and a
general handy man, but he was not intellectual."
"But you could easily have escaped all this bullying and domineering
on the part of your husband?"
"I often considered divorce," was the reply, "but a latent sense of
duty to my marriage vows prevented me from taking that step."
Here McGinity suddenly switched off that line of inquiry, and turned
to another. "Why have you brought us here today?" he asked.
"To disclose certain facts which prove my husband tricked Henry
Royce shamelessly in these Martian revelations."
"When did you come into possession of these facts?"
"Less than a month ago. Up to that time I had been as keenly
interested in the matter, and as gullible as the rest of you, and the
public at large. When Rene found that I had acquired this
knowledge, and that, motivated by a deep sense of justice and fair
play, I meant to disclose the real meaning of these revelations, he
hid my clothes, and locked me up in that attic room, where you found
me."
"How did you manage to get downstairs and phone to the Royce
house, last evening?"
"Orkins, who served my meals, forgot to lock the door after him. He
seemed preoccupied and nervous. It was my first opportunity to seek
outside aid since my imprisonment. I stole out quietly, and crept
downstairs, to the phone in the library, unaware that my husband
was shadowing me."
"And he cut you short, it seems."
"Before I had a chance even to tell my name, he sprang upon me
and choked me off, and then, in his usual cruel manner, bound me to
the chair and bed. He acted like a maniac, I was terribly frightened."
She paused, a little breathlessly, then added: "I am still in some
dilemma as to how my unfinished message was understood."
"You may recall, Mrs. LaRauche, that you spoke to me," I answered.
"Your voice was familiar, yet I couldn't place it at first. Finally, when I
was convinced that it was your voice, the incident put us on the right
track. Mr. McGinity and I already were in possession of several vital,
suspicious facts, and your phone call gave us another important
clue."
Then Henry spoke. "About Orkins. Had you any misgivings, Mrs.
LaRauche, when he entered my service as butler? I took him, you
know, on your husband's recommendation."
"It was not clear at the time," she answered. "Rene invented some
explanation that Orkins wanted to make more money. Now, I know
that he was deliberately planted in your house as a spy, and that he
kept my husband advised on all your secret workings in science. He
betrayed your confidence, as he cold-bloodedly tried to betray Rene,
for that $5,000 reward."
"Do you know anything at all about Orkins' death?" Chief Meigs
broke in, abruptly.
It was a pertinent question to put, but a little cruel. "No," Mrs.
LaRauche replied, almost defiantly. "I do recall hearing a distant,
sharp sound of some sort—it may have been the shot that killed him
—but I associated it with the back-firing of an automobile on the
highway. About an hour later, I heard a noise downstairs."
"That was when I smashed a panel in your front door, probably," the
Chief put in.
"Shortly afterwards," Mrs. LaRauche went on, "my husband entered
the attic room, looking very excited. He threw a sheet over me, and
then I heard him open the back window, and climb through, on to the
roof. I had the uncomfortable feeling that something sinister had
occurred, and that he was bent on escape. But I was bound to the
chair and helpless, and in too much anguish to think clearly."
"Mrs. LaRauche!" McGinity asked suddenly. "We are very anxious to
know how your husband escaped so magically from the roof, like he
had flown to the ground. Have you any theory?"
She smiled faintly, and replied: "Rene invented many peculiar things,
like the robot, now used in all New York subway and railroad
stations, where the traveler's usual questions are answered by a
phonographic voice, by simply pressing a button. He had a great fear
of fire, of being trapped by fire. Some months ago, he installed a
safety device, in case of fire, on our roof."
"What was it like?" I asked, eagerly.
"Simply a heavy wire stretched tautly from the roof to the ground,
and terminating at some distance away from the house, to make the
descent more gradual," she replied. "In case of fire, you step into a
sort of trapeze, which is attached to the wire by a grooved wheel,
and your descent to the ground is something like the 'slide for life,'
often seen at the circus, or in film melodramas. I can see how, in the
dark, it would give the illusion of flying."
 XXX
After the concerted gasp of surprise over LaRauche's weird method
of escape from the roof had died away, McGinity put another
important question: "How did you first discover that your husband
was implicated in these Martian revelations, and that they were a
fraud? Did you find anything—papers?"
"Something like that," she replied.
She took out of the little bag, which lay in her lap, a charred slip of
paper, which she handed to McGinity; and while he passed it round
for our inspection, she continued: "I found this paper in the charred
rubbish, in the log fire-place, in my husband's laboratory, which
Orkins had neglected to clean out. You'll recognize the lettering it
contains as a portion of the code used for the radio messages from
Mars, and its deciphering into English. After I had studied this, I
began a secret investigation on my own, and gradually the scheme
was unveiled to me."
"This detecting business must have been a new and novel
experience," Henry remarked, good humoredly.
"Not exactly," Mrs. LaRauche replied. "You probably don't know—not
many do—that I have written several mystery novels under the pen
name of Martha Claxton."
This disclosure was followed by another concerted gasp of surprise.
After it had subsided, McGinity exclaimed: "Well, that's certainly a
knockout, Mrs. LaRauche! Why, I've read all of your novels, including
the latest one, 'The Country House Mystery,' and I consider Martha
Claxton—you—a close runner to the English Agatha Christie—a
feminine J. S. Fletcher. No wonder your husband, with his jealous
temperament, had this constitutional antagonism against any rival in
his household, in the field of fame."
"Combine jealousy and revenge," Mrs. LaRauche said, "and in these
two forces you have the most perverse evil in the world. Rene was
not only intensely jealous of Henry Royce for his successful findings
as an amateur scientist and astronomer, but he nursed a revenge
against him for the exposé of those faked African jungle films, and
his subsequent expulsion from the Exploration Club. He blamed—"
"Officially, I had nothing to do with it," Henry interrupted, vehemently.
"I simply voiced my belief to a fellow member of the club that the
films looked like fakes to me."
"What raised your suspicions?" Mrs. LaRauche asked.
"Well, I recognized, among those African jungle midgets," Henry
replied, "a Negro dwarf I had seen years ago at a circus side-show.
She was exhibited as a human crow. She had the remarkable
physiognomy and jet blackness of a crow, and she could caw like
one. She must be an old woman by now. In your husband's faked
film, she took the part of a chattering, pigmy grandmother, who was
thrown into the river and drowned because of her great age and
uselessness. As she was engulfed in the river torrent, and sank, I
recognized her pitiful 'caw-caw'."
"Fancy your remembering that," Mrs. LaRauche remarked.
Again Chief Meigs spoke abruptly. "Pardon me, Mrs. LaRauche," he
said, "but how long do you reckon your husband has been out of his
mind?"
She looked startled for a moment, then calmly replied. "He was silent
and brooding for some months past, but I attributed this to his being
deeply engrossed in some new scientific research. It's rather difficult
to say when he passed into the stage of actual insanity. It's my
opinion that all inventive scientists are a little bit cracked." She
hesitated a moment, and smiled apologetically at Henry. "It's my
belief, though," she went on, "that he became definitely deranged
when the success of his scheme centered the attention of the world
upon Henry Royce, and raised him to the heights of fame. Rene had
not figured on this. It was like a boomerang. When he realized that
his scheme was reacting to his own damage, then, perhaps,
something in his brain snapped."
"Have you any personal knowledge of the implication of your
husband and Orkins in the theft of the rocket?" McGinity asked.
She shook her head. "Only a suspicion," she replied. "There were
many, many nights, while I was locked in the attic, when I couldn't
sleep, so I used to listen for sounds from the lower part of the house.
The night the rocket was stolen, I remember distinctly the house was
as quiet as a tomb. I remained awake all night, terrorized at the
thought of being left alone. Towards morning, I heard familiar sounds
again—footfalls in the hall—voices—and went to sleep."
"I wonder what motive prompted LaRauche to do a crazy thing like
that?" I interrogated.
"Dispose of the rocket, and he would be less liable to detection,"
Mrs. LaRauche replied. "He must have become suddenly fearful of
some one tracing the workmanship of the rocket to him. It was public
knowledge that he had made considerable progress in the creation
of a metal rocket, which he hoped, eventually, to catapult to the
moon. No doubt he reconditioned this rocket to meet the
requirements of his mad Martian scheme."
"It's one of the most intricate and puzzling pieces of craftsmanship
and mechanism I've ever seen," I said, glancing at Chief Meigs, who
punctuated my remark with a smile and a wink, and the silent
mouthing of "Screws!"
By this time, McGinity was showing signs of impatience. "If there is
no reason why we shouldn't," he said, emphatically, "I think we'd
better get through with this business now, as quickly as possible.
Mrs. LaRauche is under a great strain, and we must spare her all we
can. So why not let her tell us, in as few words as she can, all she
knows. I leave it to her."
"Very well, Mr. McGinity," she assented, nodding her head two or
three times. Then she began. "There are a great many things I know
nothing whatever about. Some things I say may be true, or partly
true; the rest will be based on my deductions.
"As I've already told you," she continued, "my husband carried on
this work in the greatest secrecy. My curiosity, rather than suspicion,
was aroused when he began to collect scientific books on Mars, and
studies of the ancient inscriptions, cuneiforms and hieroglyphics, of
Babylon and Egypt. He began sending Orkins on frequent visits to
the city. It was Orkins, no doubt, who ordered the making of the
scroll. He fits the old bookseller's description to a nicety—'middle-
aged, well-dressed, well-bred.'
"The time came when Rene dropped his preliminary studies and
research, and applied himself wholly to his work, in the laboratory,
and at his workshop in the hangar. He worked at all hours of the day
and night, in a kind of frenzy. Finally, late in the summer, as I
reconstruct it, matters began to take shape. He must have had in his
possession by that time all the information Orkins had obtained,
surreptitiously, in relation to Henry Royce's and Serge Olinski's
experiments in trying to establish radio communication with Mars.
"Early in August, he did a lot of night flying, always accompanied by
Orkins. The trust he put in that scoundrel, and the money Orkins
must have bled him for! They were usually in the air from nine to
eleven. When I quizzed Rene on the purpose of these night flights,
he said he was conducting a series of meteorological experiments.
But what he was really doing—if my surmise is correct—was flying
high over the Royce castle, or Radio Center, and testing his carefully
thought out Martian code on Mr. Royce and Mr. Olinski, wherever
they happened to be conducting their radio experiments; sort of
baiting them.
"He was perfectly able to do this with the powerful wireless sending
outfit with which he had equipped his plane. Apparently Mr. Royce
and his co-worker were finally satisfied that these signals in code
came from Mars, for we next heard of Mr. Royce erecting two
stations, one designed for transmitting, the other for receiving
Martian radio messages.
"Now, comes the strange story of the public demonstration of direct
radio communication with Mars, at Radio Center. I happened to be in
town that night, having gone there to visit friends, over the week-end,
at Rene's persistent urging that I take a holiday, which was a rather
strange attitude for him to adopt. Up to that time, I was not in the
least suspicious, and listened in that night with a great deal of
enjoyment, although I thought the Martian message, as decoded and
broadcast—well, somehow it seemed perfectly incredulous to me.
"If any man was pleased with the success of this undertaking, Rene
must have been. He achieved it with great risk, in a hazardous flight
into the sub-stratosphere. We must at least give him credit for this
daring feat, also for the cleverness of his Martian code, which he
sent by wireless from this great height, and the perfect artistry of
English into which it was so easily transcribed by Mr. Olinski. My
suspicions of Rene's sub-stratosphere performance, in his plane,
were confirmed after I had discovered a visored aluminum helmet,
and a rubber fabric suit, in which he had received oxygen, hidden
under some rubbish in the hangar.
"It is perfectly amazing to me how he accomplished two such
remarkable feats in one night, transmitting the Martian message from
the sub-stratosphere, garbling it and fading out, to indicate ethereal
disturbance, and dropping the rocket on the water-front. Oh, he must
have dropped it from his plane while flying low over the beach! There
can be no other explanation. He had plenty of time in which to return
to the field, after the altitude flight, attach the rocket under the plane,
on the principle of a bomber, with Orkins' assistance, of course, and
soar off again. The rocket appears heavy, but, as you know, it is
constructed of comparatively light metal, and, without fuel, is easily
handled. The exterior of the rocket was purposely fired in advance, I
found, to give the effect of its having traveled through the earth's
atmosphere at great speed.
"In this stunt, he had the spectacular accessory of the falling
meteors, and he added to the realism by sending off a great quantity
of fire-works from the plane when he dropped the rocket on the
beach. There was little chance of his plane being detected at this
time of night; he was just another strange traveler in the sky. He
carried enough fire-works to equip a Fourth of July celebration. In my
investigation, I found a dozen or so burned out Roman candles, and
other unused fire-works, which he had secreted under his work-
bench in the hangar.
"His mission achieved, he went into retreat. For weeks we lived in
practical isolation, while the world buzzed with the great Martian
revelations, and honors were heaped upon Mr. Royce. It is not easy
for the mind to grasp how Rene managed to put over this
stupendous hoax, having as its object the humiliation of a bitterly
hated rival, unless one considers that it was the cold-blooded
scheme of a great mind gone wrong. And into that deranged mind
there must have gleamed some light of inspiration. His detailed
description of life as it exists at present on Mars, which he set forth in
the cuneiform code, contained in the scroll, I consider marvelous—
absolutely marvelous. It is logical, and it rings true. No scientist,
ancient or modern, has ever given a more plausible picture of the
history of Mars, and conditions of life there. No scientist in his right
mind would have been so fearless. But Rene—the madman—dared.
"I'm sorry it isn't true. I want it to be true. I want to think there are
people like ourselves living on Mars. We know now that it is
technically possible to bridge the space between us with radio, to
register our music, our ideas, in that planet. And we need the
Martian ideas, and their hopes and illusions, as well, to buoy up our
drooping spirit, just as much as they need ours. Perhaps, after we're
all dead and buried, this revelation from Mars will come. Radio was
given to the world to bring about universal harmony, to bring nations
closer together. Why not interstellar harmony? Oh, it's coming! Who
knows?
"And now, my friends, since I've given you every detail I can think of,
what have you to say?"
There was deep silence for a few moments, and then I spoke. "Your
findings and deductions, Mrs. LaRauche, are all very wonderful, and
very convincing," I said; "but there is still one very important matter
to be cleared up. It may be that your memory is at fault."
"Something important that I've overlooked?" Mrs. LaRauche asked,
thoughtfully.
"Quite so," I replied. "We have awaited breathlessly for your theory
regarding the passenger in the rocket—the man-ape."