Bracing for demand shocks: An experimental investigation |
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| Affiliation: | 1. Neeley School of Business, Texas Christian University, Fort Worth, TX 76129, United States;2. Walton College of Business, University of Arkansas, Fayetteville, AR 72701, United States;1. Raymond J. Harbert College of Business, Auburn University, 405 West Magnolia Avenue, Auburn, AL 36849, United States;2. Arizona State University, W.P. Carey School of Business, Tempe, AZ 85287-4706, United States;3. UAB School of Nursing, The University of Alabama at Birmingham, NB 1019F, 1720 Second Avenue South, Birmingham, AL 35294-1210, United States;1. University of Maryland, Robert H. Smith School of Business, 3411 Van Munching Hall, College Park, MD 20742, United States;2. The Ohio State University, Fisher College of Business, 600 Fisher Hall, 2100 Neil Avenue, Columbus, OH 43210, United States;3. University of Minnesota, Carlson School of Management, Suite 3-150, 321 Nineteenth Avenue South, Minneapolis, MN 55455-9940, United States;1. Jeff B. Bates Professor and Chair, Department of Management Science, Moore School of Business, University of South Carolina, Columbia, SC 29208, United States;2. Department of Management Science, Moore School of Business, University of South Carolina, Columbia, SC 29208, United States;3. Bank of America Professor of Business Administration, Department of Management, Moore School of Business, University of South Carolina, Columbia, SC 29208, United States;1. Business Division, Institute of Textiles and Clothing, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong;2. Department of Logistics and Maritime Studies, Faculty of Business, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong;3. Glorious Sun School of Business & Management, Donghua University, Yan An Road (West) 1882, Shanghai 200051, China;1. North Dakota State University, Department of Management and Marketing, College of Business, Richard H. Barry Hall, 811 2nd Avenue N., Fargo, ND 58108-6050, USA;2. Suffolk University, Information Systems and Operations Management Department, Sawyer Business School, 8 Ashburton Place, Boston, MA 02108, USA |
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| Abstract: | We investigate inventory ordering decisions when decision makers anticipated a demand shock. Decision makers anticipating an event have been shown to brace for an uncertain negative outcome by overestimating the likelihood of that event. Decision makers faced with a spike in demand may incur increased holding costs because they may brace, exhibiting a judgment bias, and consequently a decision bias by over-ordering inventory. Three studies span conditions of uncertainty regarding the timing and magnitude of a demand shock: Employing three between-subjects experiments, Study 1 investigates behavior when decision makers were faced with uncertainty in timing and in magnitude of demand at the most elemental level, manipulating holding and stock out costs. The three experimental tasks feature uncertainty about the magnitude of demand (Experiment 1.1), uncertainty about the timing of demand (Experiment 1.2), and uncertainty about both the magnitude and timing of demand (Experiment 1.3). Study 2 uses a dynamic, multi-period replenishment task and a between-subjects manipulation regarding the uncertainty of timing and magnitude of a demand shock. Study 3 also employs a multi-period decision environment, but compares behavior under a demand shock condition with that in a condition featuring only random variability. The collective results from the three studies identify a bias toward over-ordering in response to a demand shock, relative to the optimal orders. The between-subjects manipulations in Study 2 points toward a possible remedy as we found that providing information concerning the timing and magnitude of a shock ameliorated the bias. The primary revelation was that decision makers had more difficulty dealing with uncertain timing than with uncertain magnitude of demand. One implication is that it is particularly critical for retailers to carefully plan and manage how they share information with upstream supply chain partners regarding when they plan to introduce store-level promotions. |
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| Keywords: | Demand shock Anticipated feedback Bracing Judgment bias Behavioral experiment Inventory control |
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