How can we improve the performance of supply chain contracts? An experimental Study

Although optimal forms of supply chain contracts have been widely studied in the literature, it has also been observed that decision makers fail to make optimal decisions in these contract setups. In this research, we propose different approaches to improve the performance of supply chain contracts in practice. We consider revenue sharing and buyback contracts between a rational supplier and a retailer who, unlike the supplier, is susceptible to decision errors. We propose five approaches to improve the retailer’s decisions which are in response to contract terms offered by the supplier. Through laboratory experiments, we examine the effectiveness of each approach. Among the proposed approaches, we observe that offering free items can bring the retailer’s effective order quantity close to the optimal level. We also observe that the retailer’s learning trend can be improved by providing him with collective feedbacks on the profits associated with his decisions

Addressing the sample size problem in behavioural operational research: simulating the newsvendor problem

Laboratory-based experimental studies with human participants are beneficial for testing hypotheses in behavioural operational research. However, such experiments are not without their problems. One specific problem is obtaining a sufficient sample size, not only in terms of the number of participants but also the time they are willing to devote to an experiment. In this paper, we explore how agent-based simulation (ABS) can be used to address the sample size problem and demonstrate the approach in the newsvendor setting. The decision-making strategies of a small sample of individual decision-makers are determined through laboratory experiments. The interactions of these suppliers and retailers are then simulated using an ABS to generate a large sample set of decisions. With only a small number of participants, we demonstrate that it is possible to produce similar results to previous experimental studies that involved much larger sample sizes. We conclude that ABS provides the potential to extend the scope of experimental research in behavioural operational research

Experiments on supply chain contracting: effects of contract type and fairness concerns

In this thesis, we conduct experiments with human decision makers on supply chain contracting. We consider a simple manufacturer-retailer supply chain scenario where the retailer faces the newsvendor problem. Building on Sahin and Kaya (2011), we compare the experimental performance of three contract types (wholesale price, buyback and revenue sharing contracts) between the firms with theoretical predictions, and among each other. We are interested in the manufacturer’s contract parameter decisions, the retailer’s stock quantity decision, and the firms’ profits. In theory, in terms of supply chain efficiency, the buyback and revenue sharing contracts should be equivalent to each other, and should be superior to the wholesale price contract. Our experiments, however, find the wholesale price contract to perform better, and the revenue sharing contract to perform worse than theoretical predictions. The profit distribution between the firms is also much more equitable than predicted. The primary reason for these differences is the biases in retailers’ stock quantity decisions. We determine the factors that affect the retailer’s stock quantity decision using feature selection and classification techniques. Using a multiple regression model, we show how fairness concerns affect this decision. We also observe short-run relationships between the firms to cause better performance in experiments than long-run relationship, perhaps due to destructive gaming between the firms

Behavioral Implications of Demand Perception in Inventory Management

The newsvendor problem is one of the rudimentary problems of inventory management with significant practical consequences, thus receiving considerable attention in the behavioral operational research literature. In this chapter, we focus on how decision makers perceive demand uncertainty in the newsvendor setting and discuss how such perception patterns influence commonly observed phenomena in order decisions, such as the pull-to-center effect. Drawing from behavioral biases such as over precision, we propose that decision makers tend to perceive demand to be smaller than it actually is in high margin contexts, and this effect becomes more pronounced with increases in demand size. The opposite pattern is observed in low margin settings; decision makers perceive demand to be larger than the true demand, and this tendency is stronger at lower mean demand levels. Concurrently, decision makers tend to perceive demand to be less variable than it actually is, and this tendency propagates as the variability of demand increases in low margin contexts and decreases in high margin contexts. These perceptions, in turn, lead to more skewed decisions at both ends of the demand spectrum. We discuss how decision makers can be made aware of these biases and how decision processes can be re-designed to convert these unconscious competencies into capabilities to improve decision making

Explaining retailer's ordering behavior in supply chain experiments

In this thesis, we study the retailer’s ordering behavior in a manufacturer-retailer supply chain where the retailer faces the newsvendor problem. Analytical literature predicts that the retailer will use the critical ratio solution when determining her order quantity from the manufacturer. When real human beings play the roles of manufacturer and retailer in controlled experiments, however, the retailer decisions are observed to deviate from these theoretical predictions. The deviations are due to (1) individual biases and heuristics, (2) the strategic interaction between the two players. Literature has studied the effects of individual biases and heuristics using simple newsvendor experiments. However, very few researchers have conducted experiments where both sides are human. This extension is valuable because supply chain relations in practice depend on human-to-human interaction between managers. In this study, using data from the supply chain experiments of Şahin and Kaya (2011), we aim to answer the following questions: (1) Do retailer subjects follow the heuristics observed in simple newsvendor experiments? (2) What are the factors affecting retailer decisions? (3) Do retailer subjects learn to make better decisions over time? We find that retailer behavior is highly heterogeneous. While there is support for the use of decision heuristics at the aggregate level, we have mixed results at individual level. Likewise, the factors that affect retailer order quantity are found to be subject-dependent. The extent of learning is also found to differ from subject to subject

Experiments on supply chain contracting: effects of contract type and relationship length

In this thesis, we conduct experiments with human decision makers on supply chain contracting. We consider a manufacturer-retailer supply chain where the manufacturer sets contract parameters and the retailer faces the newsvendor problem. Contrary to theoretical predictions, we find the experimental performance of the wholesale price contract and the buyback contract to be close to each other. The buyback contract fails to fulfill its promise of inducing high order quantities leading to higher supply chain profits. The manufacturers offer more profitable buyback contracts to retailers, and as a result, the retailers make higher profit and the manufacturers make lower profit than predicted. On the contrary, the simple wholesale price contract resulted in higher retailer and total supply chain profits than predicted, thanks to the overstocking bias of the retailers. Another surprising observation is that experiments with short-run interaction between the manufacturer-retailer pairs resulted in higher profit than the experiments with long-run interaction. Finally, we did not find consistent evidence to support the existence of learning-by-doing, and of certain decision heuristics mentioned in literature

Behavioral analyses of retailers’ ordering decisions

The main objective I pursue in this thesis is to better understand how different factors may independently and in combination influence retailers' ordering decisions under different supply chain structures (single agent and multi agent), different demand uncertainty (deterministic and stochastic), and different interaction among retailers (no interaction, competition and cooperation). I developed three different studies where I build on different formal management model and then run multiple behavioral studies to better understand subjects’ behavior. The first study analyzes order amplification in a single-supplier single-retailer supply chain. I used a behavioral experiment to test retailers’ orders under different ordering delays and different times to build supplier’s capacity. Results provide (i) a better understanding of the endogenous dynamics leading to retailers’ ordering amplification, and (ii) a description of subjects’ biases and deviation from optimal trajectories; despite subjects have full information about the system structure. The second study analyzes how order amplification can also take place when there is fierce retailer competition and limited supplier capacity. I study how different factors (different time to build supplier capacity, different levels of competition among retailers, different magnitudes of supply shortage and different allocation mechanisms) may independently and in combination influence retailers’ order in a system with two retailers under supply competition. Results show that (i) the bullwhip effect persists even when subjects do not have incentives to deviate, (ii) subjects amplify their orders in an attempt to build an unnecessary safety stock to respond to potential deviations from the other retailers, and (iii) retailers’ underperformance varies with the allocation mechanism used by the supplier. In the last study, I analyze retailers’ orders in a system where there is uncertainty in the final customer demand. I experimentally explore the effect of transshipments among retailers in a single-supplier multi-retailer supply chain. Specifically, I explore retailers’ orders under different profit and communication conditions. In addition, I integrate analytical and behavioral models to improve supply chain performance. Results show that (i) the persistence of common biases in a newsvendor problem (pull-to-center, demand chasing, loss aversion, psychological disutility), (ii) communication could improve coordination and may reduce demand chasing behavior, (iii) supply chain performance increases with the use of behavioral strategies embedded within a traditional optimization model, and (iv) dynamic heuristics improve overall coordination, outperforming a simple Nash Equilibrium strategy

Strategic risk in contract design

Supply chains facing asymmetric information can either operate in a cooperative mode with information and benefit sharing or can choose a non-cooperative form of interaction and align their incentives via screening contracts. In the cooperative mode, supply chain efficiency can be achieved, but high levels of trust and trustworthiness are required. In the non-cooperative mode, the contract mechanism guarantees a second best supply chain performance, but only if all parties choose their equilibrium strategies without trembles. Experimental evidence, however, shows that both operating modes often fail due to strategic risk. Cooperation is disrupted by deceptive signals and the lack of trust, whereas non-cooperative strategies suffer from persistent out-of-equilibrium behavior. We present an experiment on supply chain interaction with reduced strategic risk in both operating modes. We find that supply chain performance can reach a second-best level in either operating mode, if strategic risk is sufficiently reduced. We present two means to reduce strategic risk. First, a punishment mechanism leads to a better matching of trust and trustworthiness and supports the cooperative operating mode. Second, an enforcement of self-selection supports the non-cooperative equilibrium by increasing the attractiveness of screening contracts. We conclude that supply chain managers should seek to reduce the variability of the supply chain partners\u27 behavior no matter what operating mode is considered

Decision-making experiments on dual sales channel coordination

In this thesis, we conduct an experimental study with human decision makers, on dual sales channel coordination. We aim to determine dual channel strategies for a manufacturer who sells its product thorough both an independent retailer channel and its totally owned direct online channel. The two channels compete on service, where the service level of the retailer channel is measured with its product availability level, and the service level of the direct channel is measured with its delivery lead time. This multi-stage game-theoretical model was previously solved for the wholesale price contract (Chen et al. 2008) and buyback contract (Gökduman and Kaya 2009) cases. We compare these models' theoretical predictions with the outcome of our experiments with human decision makers. In particular, we analyze the theoretical and observed coordination performance of the wholesale price and buyback contracts between the two firms. We identify deviations from theoretical predictions that can be attributed to behavioral factors, such as risk aversion

The Vendor in a Retail Setting: A Survey

We consider the problem of managing nonperishable inventory as a vendor in a grocer setting. To manage inventory effectively, we must meet the demand of our customers as closely as we can. Too much inventory results in holding costs and ties up a large amount of capital and too little inventory results in lost sales or substitution. It is typical in a retail setting for the vendor to have access to past ordering data, but this data is only representative of the demand when we have sufficient inventory. Otherwise, the demand exceeds the inventory on hand and we lose, in addition to the sale, the observation of the true demand. However, we get ahead of ourselves since the ability for the vendor to even know if there is an out-of-stock situation is questionable. This can be addressed through cooperation with the store and access to point of sale systems. The setting is further complicated by such things as the presence of multiple products, a backroom, and positive leadtimes. We conduct a survey on these topics as well as others pertaining to a vendortype situation such as periodic review, service level constraints, fixed order costs, and the joint replenishment problem