Ordering behavior and the impact of allocation mechanisms in an integrated distribution system

39 Pages Posted: 11 Aug 2021

See all articles by Eirini Spiliotopoulou

Eirini Spiliotopoulou

Tilburg University - Tilburg University School of Economics and Management

Karen L Donohue

University of Minnesota - Twin Cities - Carlson School of Management

Mustafa Cagri Gurbuz

Zaragoza Logistics Center (ZLC) - MIT-Zaragoza International Logistics Program

Date Written: April 18, 2019

Abstract

We study the impact of three well-known inventory allocation mechanisms, including proportional, linear, and uniform, on the ordering behavior of retailers serviced from a central distribution center. Based on the allocation mechanism, retailers may have an incentive to adjust (either inflate or deflate) their orders to gain a more favorable allocation, a behavior that may reduce allocation efficiency from a system perspective. We find that while all three mechanisms are centrally optimal under common knowledge of local demands, only the uniform allocation incentivizes retailers to set orders truthfully. Consistent with theory, our experimental results show that using proportional or linear allocation results in larger and more frequent order adjustments, with the degree of strategic ordering being largest under the linear mechanism. Across all mechanisms, order adjustments decrease both allocation efficiency and local retail profits. While uniform allocation results in smaller and less frequent adjustments overall, it may not be feasible to implement in more general settings. Hence, we propose and test a new mechanism, tailored uniform, that leverages the uniform principle while overcoming some practical limitations. It provides more flexibility by allowing for differences in the allocated quantities among retailers, while still providing no incentive for order manipulation. The tailored uniform mechanism performs similarly to uniform in terms of order adjustments, and further increases allocation efficiency when retailers have heterogeneous demands.

Keywords: inventory allocation, strategic ordering, behavioral operations, laboratory experiments

Suggested Citation

Spiliotopoulou, Eirini and Donohue, Karen L and Gurbuz, Mustafa Cagri, Ordering behavior and the impact of allocation mechanisms in an integrated distribution system (April 18, 2019). Available at SSRN: https://ssrn.com/abstract=3374813 or http://dx.doi.org/10.2139/ssrn.3374813

Eirini Spiliotopoulou (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Karen L Donohue

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Mustafa Cagri Gurbuz

Zaragoza Logistics Center (ZLC) - MIT-Zaragoza International Logistics Program ( email )

Avenida Gomez Laguna 25
Zaragoza, 50009
Spain

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