Unraveling Behavioral Ordering: Relative Costs and the Bullwhip Effect

41 Pages Posted: 14 Jul 2018 Last revised: 29 Apr 2021

See all articles by Brent Moritz

Brent Moritz

Pennsylvania State University

Arunachalam Narayanan

University of North Texas

Chris Parker

American University - Kogod School of Business

Date Written: April 29, 2021

Abstract

Problem definition: We study the bullwhip effect and analyze the impact of human behavior. We separate rational ordering in response to increasing incoming orders from irrational ordering.

Academic/Practical Relevance: Prior research has shown that the bullwhip effect occurs in about two-thirds of firms, and impacts profitability by 10-30%. Most bullwhip mitigation efforts emphasize processes such as information sharing, collaboration and coordination. Previous work has not been able to separate the impact of behavioral ordering from rational increases in order quantities.

Methodology: Using data from a laboratory experiment, we estimate behavioral parameters from three ordering models. We use a simulation to evaluate the cost impact of bullwhip behavior on the supply chain and by echelon.

Results: We find that cost increases are not equally shared. Human biases (behavioral ordering) at the retailer results in higher relative costs elsewhere in the supply chain, even as similar ordering by a wholesaler, distributor or factory results in increased costs within that echelon. These results are consistent regardless of the behavioral models we consider. The cognitive profile of the decision maker impacts both echelon and supply chain costs. We show the cost impact is higher as more decision makers enter a supply chain.

Managerial Implications: The cost of behavioral ordering is not consistent across the supply chain. Managers can use the estimation/simulation framework to analyze the impact of human behavior in their supply chains and evaluate improvement efforts such as coordination or information sharing. Our results show that behavioral ordering by a retailer has an out-sized impact on supply chain costs, which suggests that upstream echelons are better placed to make forecasting and replenishment decisions.

Keywords: Bullwhip effect, inventory management, supply chain management, behavioral operations, simulation

Suggested Citation

Moritz, Brent and Narayanan, Arunachalam and Parker, Chris, Unraveling Behavioral Ordering: Relative Costs and the Bullwhip Effect (April 29, 2021). Available at SSRN: https://ssrn.com/abstract=3195282 or http://dx.doi.org/10.2139/ssrn.3195282

Brent Moritz

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

Arunachalam Narayanan

University of North Texas ( email )

Denton
Texas
United States

Chris Parker (Contact Author)

American University - Kogod School of Business ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States

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