Forward or backward: The Impact of Vertical Integration Direction on the bullwhip effect

Abstract

The bullwhip effect represents a major source of supply chain inefficiency. Traditional OM analytical approaches and theories view vertical integration as a countermeasure to the bullwhip effect. Despite its intuitive appeal, this relationship has yet to be rigorously examined. To be specific, a firm may choose backward integration to tighten its grip on the supply and production side, or forward integration to control over the demand and distribution side. The effect of different integration could be diverse depending on the firm’s supply chain position, but research on this link is limited. Driven by a large dataset containing 292,080 detailed business information of listed firms in China, we empirically examine the impact of forward and backward vertical integration on the bullwhip effect, as well as the moderating role of the firms’ supply chain positions. We find that: (1) forward vertical integration does reduce the bullwhip effect, and this mitigation effect is more pronounced for firms located further downstream; (2) the magnitude and direction of backward vertical integration effects are diverse. It has a strong mitigation effect on the bullwhip effect for upstream firms, and when firms are located further downstream, backward vertical integration will surprisingly increase the bullwhip effect.

KEYWORDS:

• Forward vertical integration
• backward vertical integration
• bullwhip effect
• supply chain position
• Empirical operation management

Data availability statement

The data that support the findings of this study are openly available in figshare at https://doi.org/10.6084/m9.figshare.17003488.v2.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This research was supported by the National Natural Science Foundation of China (71871186 and 71771188), and the Fundamental Research Funds for the Central Universities (JBK2202063, JBK190504, JBK18JYT02, JBK2202025 and JBK1805008).

Notes on contributors

Jing Liang

Jing Liang is currently a lecturer at the College of Management Science, Chengdu University of Technology. She received her Ph.D. from Logistics and Supply Chain Management, Southwestern University of Finance and Economics, China. Her research interests include supply chain management, and the interface between operations management and strategy, accounting, finance.

Shilei Yang

Shilei Yang is a Professor of Operations Management at Southwestern University of Finance and Economics, China. He received his Ph.D. in operations management from Washington State University. His research interests involve supply chain management, interface between operations and other functional areas, and applied business modeling. His researches have been published in leading field journals, such as Production and Operations Management, European Journal of Operational Research, Omega, etc.

Xiaowen Huang

Xiaowen Huang is Bill Moeckel Business Professor and Chair of the Management Department at the Richard T. Farmer School of Business, Miami University. Dr. Huang received her Ph.D. from Operations and Management Science, University of Minnesota. After graduating, she has been teaching in the area of supply chain and operations management. Her research interest primarily revolves around understanding how companies can effectively deploy their supply chain, technology, and operations strategies to achieve competitive advantage. Her research appears in Journal of Operations Management, Production and Operations Management Journal, Journal of Supply Chain Management, Journal of International Business Studies, International Journal of Operations & Production Management, Journal of Management Information Systems, Journal of Business Logistics, and other academic journals. Dr. Huang is also a co-author on the first empirical research handbook in the Operations Management field, “Handbook of Metrics for Research in Operations Management: Multi-item Measurement Scales and Objective Items,” and a winner of multiple teaching, research, and service awards.

Jing Zhu

Jing Zhu is a Professor at West Institute for Economic Research, Southwestern University of Finance and Economics, China. His research interests involve operations management, marketing strategy, and industrial economics. His research has been published in journals such as European Journal of Operational Research, Omega, Annals of Operations Research, International Journal of Production Economics, Journal of Retailing and Consumer Services, Electronic Markets, among others.