MIT System Dynamics Seminar | Unraveling Behavioral Ordering: Relative Costs and the Bullwhip Effect

Please visit the MIT System Dynamics Seminars page for more information.

You are invited to attend the System Dynamics Seminar being held this Friday from 12:00-1:30pm ET in the Jay W. Forrester conference room, E62-450, or via Zoom: https://mit.zoom.us/j/96947695163 (Password: SDFall2002).

Our guest speaker will be Brent Moritz (Penn State University) presenting Unraveling Behavioral Ordering: Relative Costs and the Bullwhip Effect (see abstract and brief bio below). Lunch will be provided to those attending in person.

If you would also like to schedule a 30-minute 1:1 meeting with Brent Moritz, please fill out this Doodle poll https://doodle.com/meeting/participate/id/b2vWmxAb by COB Wednesday and I will confirm times with a calendar invite.

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Abstract

Behavioral ordering results in poorer supply chain performance. However, how might one separate and evaluate the behavioral causes of increased orders from the effect of increased orders elsewhere in the supply chain?  In this paper, we investigate several related questions: (i) What is the impact of behavioral ordering in a multi-echelon supply chain? Although prior literature has shown that behavioral ordering is detrimental to performance, we show how much worse it is than rational ordering. (ii) How does behavioral ordering in one echelon impact the costs elsewhere in the supply chain? Answering this question is not straightforward, as it requires separating the impact of a rational response to incoming orders (such as increasing safety stock) from additional behavioral ordering. (iii) Does the cognitive reflection level of each decision maker impact costs in heterogeneous supply chains? (iv) What is the impact of having more than one behavioral decision maker in a supply chain? We provide evidence to show the impact of adding additional behavioral decision-makers to a supply chain. We also investigated if human behavior is consistent with a policy of dynamic updating of inventory, such as changing the amount of safety stock in response to changes in incoming demand.

We use data from a laboratory experiment, estimate behavioral parameters, and use a simulation to evaluate the cost impact of bullwhip behavior on the supply chain and by echelon. Unsurprisingly, behavioral ordering anywhere in the supply chain increases cost. However, these costs are not shared equally: Behavioral ordering by a retailer results in a larger relative cost increase elsewhere in the supply chain. In contrast, behavioral ordering by a wholesaler or distributor tends to increase the cost within that echelon. Individual decision-makers with high cognitive reflection tend to have lower costs for their supply chain, and these individuals also have lower costs for their individual echelons. We also provide initial evidence regarding the cost of multiple human decision makers in a supply chain. Adding additional behavioral decision makers increases cost, though the cost increases show a diminishing return to scale.

Brent Moritz is an Associate Professor of Supply Chain Management at the Smeal College of Business at Pennsylvania State University. He is a faculty affiliate of the Laboratory for Economics, Management and Auctions (LEMA) and is Co‐Director of Research for the Center for Supply Chain Research (CSCR) at Penn State. He earned his PhD (Operations and Management Science) at the Carlson School of Management at the University of Minnesota. He also holds a BS in Mechanical Engineering from Valparaiso University and an MBA from the Weatherhead School of Management at Case Western Reserve University. Prior to obtaining his PhD, he held positions in manufacturing operations and supply chain management at BorgWarner, Eaton and Parker Hannifin. This included international experience working in Mexico, England and Germany.

Dr. Moritz has research interests including supply chain management, behavioral operations, risk management and cognitive decision processes. His research is focused on decision‐making in contexts such as inventory, forecasting and supplier selection. His research has been published in Management Science, Journal of Operations Management, Decision Sciences Journal, Manufacturing and Service Operations Management, and Production and Operations Management. For further information: https://directory.smeal.psu.edu/bbm3