Crying Wolf and a Knowing Wink: A Behavioral Study of Order Inflation and Discounting in Supply Chains

Abstract

Two field case studies uncover information discounting in supply chains, which manifests in the form of schedule padding and order inflation. Buyers often exaggerate the urgency and quantity of their needs (“crying wolf”). However, both buyers and suppliers eliminate old, inflated orders from their behavioral ordering/supply system implicitly (“knowing wink”) even though they exist in the hyper-rational ordering system represented by the ERP system. This behavior results in (and from) low credibility of information exchanged between the buyers and suppliers and their subsequent actions, and settles in a suboptimal equilibrium. Eye tracking experiments based on these case studies unpack the psychophysiological mechanisms behind this behavior, specifically, how decision makers consider past UnFilled Orders under different experimental conditions. We find that merely improving the supplier behavior does not help: information discounting reduces only when we sensitize the buyer to the improvement in the supplier behavior. However, this comes with no financial performance improvements; performance improves by further educating the buyers of the optimal target inventory.