Ordering decisions under supply uncertainty and inventory record inaccuracy: An experimental investigation

Abstract

Uncertainty on the supply side is a common issue planners face. How do decisionmakers incorporate inventory uncertainty when placing orders? We investigate ordering decisions under two forms of uncertainty regarding total inventory available to satisfy demand: supply uncertainty (SU; unreliability in incoming shipments) and inventory record inaccuracy (IRI; internal inefficiencies leading to a discrepancy between physical and recorded inventories). The experimental results reveal behavioral regularities in ordering decisions under both forms of total inventory uncertainty. We find that subjects overstock in settings with low profit margins, and overstocking is more pronounced under IRI than under SU. This overstocking under low profit margins is similar to observed ordering decisions under demand uncertainty. In these settings, subjects show a stronger shortage aversion under IRI (which is internal uncertainty) than under SU (which is external uncertainty). Furthermore, we find that subjects chase past realizations of supply/on-hand inventory, although the effect depends on the uncertainty type. Although SU and IRI are, in practice, often simultaneously present, their causes are different. By providing insight into the relative effect of the types of uncertainty on the quality of inventory replenishment decisions, this study highlights the importance of reducing SU and IRI for products with low profit margins.

Implications of social network structures on socially influenced decision-making

“…In the decision-making process, uncertainty is an unavoidable characteristic (Fattahi and Govindan 2022;Hofstra et al 2022). For example, Simon (1955) proposed the 'bounded rationality', which refers to the fact that individuals' rationality is constrained by some natural factors such as their intelligence and time.…”

The impacts of inventory record inaccuracy and cycle counting on distribution center performance

“…It can generate low productivity losses in corporate profits (Kang & Gershwin, 2005), low service level (Waller et al, 2006), increased costs (Waller et al, 2006), and lost sales (DeHoratius & Raman, 2008;Waller et al, 2006). In addition, IRI undermines decision-support tools such as automated replenishment (Hofstra et al, 2022). Therefore, IRI should be used to evaluate operational warehouse performance (Staudt et al, 2015) since the elimination of IRI reduce supply chain (SC) costs and the level of stock unavailability (Fleisch & Tellkamp, 2005).…”

“…In recent years, the topic of IRI has received increasing attention (Aguirre et al, 2021;Hofstra et al, 2022). The academic literature has adopted different approaches to investigate how inventory managers assess, monitor, and deal with IRI (Barratt et al, 2018;Best et al, 2022;Hofstra et al, 2022;Rekik et al, 2019a).…”

“…In recent years, the topic of IRI has received increasing attention (Aguirre et al, 2021;Hofstra et al, 2022). The academic literature has adopted different approaches to investigate how inventory managers assess, monitor, and deal with IRI (Barratt et al, 2018;Best et al, 2022;Hofstra et al, 2022;Rekik et al, 2019a). One of the methods is the System Dynamics (SD) simulation, which formalizes and explores interactions within the dynamic inventory system and underlies structures that generate inferences about the ongoing dynamics of the same system (Barratt et al, 2018).…”