Bracing for demand shocks: An experimental investigation
| Author | Brent Williams,Matthew Waller,Travis Tokar,John Aloysius |
| Date | 01 May 2014 |
| DOI | http://doi.org/10.1016/j.jom.2013.08.001 |
| Published date | 01 May 2014 |
Journal
of
Operations
Management
32
(2014)
205–216
Contents
lists
available
at
ScienceDirect
Journal
of
Operations
Management
j
o
ur
na
l
ho
mepage:
www.elsevier.com/locate
/jom
Bracing
for
demand
shocks:
An
experimental
investigation
Travis
Tokara,∗,
John
Aloysiusb,
Brent
Williamsb,
Matthew
Wallerb
aNeeley
School
of
Business,
Texas
Christian
University,
Fort
Worth,
TX
76129,
United
States
bWalton
College
of
Business,
University
of
Arkansas,
Fayetteville,
AR
72701,
United
States
a
r
t
i
c
l
e
i
n
f
o
Article
history:
Received
7
March
2012
Received
in
revised
form
2
August
2013
Accepted
14
August
2013
Available
online
27
August
2013
Keywords:
Demand
shock
Anticipated
feedback
Bracing
Judgment
bias
Behavioral
experiment
Inventory
control
a
b
s
t
r
a
c
t
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
overesti-
mating
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
magni-
tude
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
ele-
mental
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
(Experi-
ment
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
implica-
tion
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.
©
2013
Elsevier
B.V.
All
rights
reserved.
1.
Introduction
In
recent
years,
behavioral
operations
researchers
have
devel-
oped
a
robust
literature
investigating
inventory
ordering
decisions
under
a
variety
of
conditions,
including
stationary
and
non-
stationary
demand.
However,
one
lingering
question
remains:
how
do
inventory
decision
makers
anticipate
and
react
to
demand
shocks,
sudden
and
temporary
increases
in
a
product’s
demand?
As
we
will
discuss,
previous
explanations
for
biases
demonstrated
in
the
literature
are
not
sufficient
to
explain
behavior
in
this
context.
Promotions
(e.g.,
price
discounts,
bundling
with
complemen-
tary
product,
product
placement
in
an
end
cap
display),
and
competitive
events
(e.g.,
competitor
stock-outs)
are
pervasive
∗Corresponding
author
at:
Neeley
School
of
Business,
TCU
Box
298530,
Fort
Worth,
TX
76129,
United
States.
Tel.:
+1
817
257
7151;
fax:
+1
817
257
7227.
E-mail
addresses:
travis.tokar@tcu.edu
(T.
Tokar),
jaloysius@walton.uark.edu
(J.
Aloysius),
bwilliams@walton.uark.edu
(B.
Williams),
mwaller@walton.uark.edu
(M.
Waller).
causes
for
demand
shocks.1While
the
normative
literature
consid-
ers
the
joint
promotion-inventory
management
problem
(Cheng
and
Sethi,
1999)
as
well
as
the
joint
promotion-production
decision
(Sogomonian
and
Tang,
1993),
inventory
ordering
behavior
in
the
face
of
demand
shocks
has
not
been
previously
studied.
The
nature
of
such
event-based
spikes
has
unique
behavioral
implications
for
the
decision
processes
of
inventory
managers,
different
from
the
standard
processes
such
managers
face
with
standard
demand
processes
(Schweitzer
and
Cachon,
2000).
Being
unprepared
for
a
spike
in
demand
is
undesirable
due
to
the
increased
probability
of
demand
not
being
filled
from
on-hand
inventory
and
of
the
resulting
consequence
of
a
stock-out.
Thus,
while
a
salesperson
may
view
a
surge
in
demand
positively,
an
inventory
manager
may
view
a
demand
shock
negatively
because
it
may
result
in
stock-outs.
Therefore,
the
decision
maker
is
likely
to
take
action
to
cope
with
the
anticipated,
if
uncertain,
event.
1Negative
demand
shocks
due
to
events
such
as
catastrophic
events,
natural
disasters,
and
competitor
promotions
are
also
pervasive
but
the
current
research
confines
its
scope
to
decision
behavior
with
positive
demand
shocks.
0272-6963/$
–
see
front
matter
©
2013
Elsevier
B.V.
All
rights
reserved.
http://dx.doi.org/10.1016/j.jom.2013.08.001
To continue reading
Request your trial