Abstract for: Retailer’s Order Decisions under Delays: System Dynamics and Experimental Results
When final customer demand exceeds available supply, retailers often hedge against shortages by inflating orders to their suppliers. As several retailers compete for scarce supply, the amplification in orders lead to excess supplier capacity, high inventory variability, low capacity utilization, and financial and reputation losses for suppliers and retailers. While the amplification in orders caused by the competition for scarce resources has been described in the literature almost a century ago (Mitchell 1924), there is little research quantifying the impact of such order amplification by retailers. This paper quantifies retailer order amplification decisions during a surge in demand. First, we motivate the problem and present a simple formal mathematical model describing its dynamics. We then develop an experimental environment to test subject’s ordering decisions, when compared to a performance benchmark. Finally, results from different treatments (different ordering and supplier capacity acquisition delays) allow us to characterize subjects’ performance in this system and formulate a heuristic that closely replicates subjects’ ordering behavior in all treatments.