Battling the Bullwhip Effect with Cryptography

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