Abstract： A system dynamics model was established hereto and validated by comparing simulation results with practical data from a tool manufacturer in Shanghai. Then the sequent oscillation characteristics of stochastic demand information were analyzed. For sensitive customer, adjustment of production capacity amplifies the bullwhip effect. For insensitive customer, adjustment of production capacity decreases the inventory level with stable market segment share. Based on these principles, it is concluded that suitable production strategy should be performed in accordance with different customers’ behaviors. It is necessary to promote customer service in the long run without adjusting the production capacity instantly. A ballance should be stricken between decreasing the inventory cost and dampening the bullwhip effect.