Oliva, Rogelio with Paulo Goncalves, "Behavioral Causes of Demand Amplification in Sypply Chains: 'Satisficing' Policies with Limited Information Cues", 2005 July 17-2005 July 21
Overreaction to supply shortages can create havoc in supply chains, costing millions of dollars in
excess inventory and manufacturing capacity. In an experiment with the Beer Distribution Game, we
explore overreaction to shortages as a complementary behavioral cause of supply chain instability. As
in previous studies, we find that players ignore the supply line. We find, however, that instead of
overreacting to shortages, players limit the size of their order adjustment while aiming for higher than
necessary inventory level; a policy that is more stable than the linear response suggested in previous
studies. Since an ordering rule that fails to account for the supply line leads to higher than necessary
costs and order amplification, our results suggest that players are not fully rational. However,
evaluating the performance of the estimated policy we find that, given the information cues available,
players show bounded rationality and develop a satisficing replenishment decision rule that minimizes
local cost at the expense of higher upstream cost. We explore the implications of these findings for the
design of information and incentive systems for supply chain management.
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- 2005 July 17-2005 July 21
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