In this research, we examine the impact of a third-party warehouse on the bullwhip effect in a three-stage supply chain with one supplier, one third-party warehouse and two retailers. We compare the bullwhip effect in this three-stage supply chain and that in a two-stage supply chain with only one Supplier and two retailers. It is assumed that the demand process can be modeled with an AR(I) model and the base stock inventory policy is employed for both the third-party warehouse in the three-stage system and the two retailers in the two-stage system. It is found that the existence of the third-party warehouse has no influence on bullwhip effect when the lead times of the third-party warehouse and the two retailers are equal. For cases in which the third-party warehouse does not have any impact on bullwhip effect, we examine the impact of the third-party warehouse on the inventory cost in the supply chain by analyzing inventory cost savings obtained by the existence of the warehouse. (C) 2009 Elsevier B.V. All rights reserved.