For the future and from afar: Psychological distance and inventory decision-making

Abstract

Determining inventory ahead of knowing customer demand is a crucial decision for many businesses. Although it is possible to select the ideal order quantity given the costs of over and undersupplying demand, prior research demonstrates that decision-makers consistently make suboptimal inventory choices. Drawing on construal level theory and psychological distance, this paper explores how differences in the spatial distance (suppliers that are geographically near or far) and temporal distance (short or long lead time from order to receipt) impact newsvendor decision-making. Across four experiments (N = 663), we find that a far psychological distance increases order quantities, which improves performance for high-margin products but results in added costs for low-margin goods. Given that spatial and temporal distances occur naturally in supply chains, our research shows that psychological distance is a cognitive explanation for biased inventory ordering and can be applied to improve decision-making.