Pulled in opposite directions: A joint consideration of supply and demand uncertainty in supply chain decision-making

Abstract

Supply chain inventory management decisions are complicated by the presence of both downstream (demand) and upstream (supply) uncertainties. Prior research shows that each type of uncertainty leads to specific decision biases. Demand uncertainty induces a pull-to-center bias, wherein orders are drawn away from the optimal ordering decision in the direction of expected demand. Supply uncertainty elicits a diversification bias, wherein inventory managers tend to source from multiple suppliers, even when sole sourcing is optimal. Our research employs a controlled laboratory experiment to study these biases when both types of uncertainty—that is, supply and demand uncertainty—are present. Our results show that the presence of both supply and demand uncertainty has a more nuanced effect on decision biases than does either type of uncertainty alone. Demand uncertainty can elicit and influence the diversification bias, even in the absence of supply uncertainty. Moreover, supply uncertainty affects the magnitude of the pull-to-center bias. Our work reveals the need for further attention from supply chain academics and managers on how supply and demand uncertainty jointly affect inventory managers’ decisions.