Ordering decisions under supply uncertainty and inventory record inaccuracy: An experimental investigation

Abstract

Uncertainty on the supply side is a common issue planners face. How do decision-makers incorporate inventory uncertainty when placing orders? We investigate ordering decisions under two forms of uncertainty regarding total inventory available to satisfy demand: supply uncertainty (SU; unreliability in incoming shipments) and inventory record inaccuracy (IRI; internal inefficiencies leading to a discrepancy between physical and recorded inventories). The experimental results reveal behavioral regularities in ordering decisions under both forms of total inventory uncertainty. We find that subjects overstock in settings with low profit margins, and overstocking is more pronounced under IRI than under SU. This overstocking under low profit margins is similar to observed ordering decisions under demand uncertainty. In these settings, subjects show a stronger shortage aversion under IRI (which is internal uncertainty) than under SU (which is external uncertainty). Furthermore, we find that subjects chase past realizations of supply/on-hand inventory, although the effect depends on the uncertainty type. Although SU and IRI are, in practice, often simultaneously present, their causes are different. By providing insight into the relative effect of the types of uncertainty on the quality of inventory replenishment decisions, this study highlights the importance of reducing SU and IRI for products with low profit margins.