Behavioral Causes of Information Distortion
in Supply Chains
Rachel Croson (Wharton), Karen Donohue (Univ. of
Minnesota), Elena Katok (Penn State) John Sterman (MIT)
Managing
a supply chain has been shown to be prone to systematic errors that often
lead to spectacularly dysfunctional outcomes. For example, the drilling
for oil and gas fluctuates three times more than the actual petroleum production,
the demand for machine tools is at least twice as variable as automobile
sales. This pattern of “oscillation, amplification, and phase lag,”
known collectively as the bullwhip effect, has been also noted in
individual firms’ supply chains (see Lee et al. 2000), as well as in the
laboratory; Sterman (1989). Sterman’s results demonstrated that individuals
do not act optimally even in the relatively simple laboratory setting,
but significantly underweight inventory they already ordered that has not
yet arrived (called the supply line). He concluded, “…the
key to improved performance lies within the policy individuals use to manage
the system and not in the external environment. Even a perfect forecast
will not prevent a manager who ignores the supply line from over ordering.”
(Sterman 1989, p. 336).
The
bullwhip effect is costly because it causes excessive inventories, poor
customer service, and unnecessary capital investment. We separate
explanations of the causes of the bullwhip effect into those that rely
on participants’ own cognitive limitations—their inability to determine
the optimal way to adjust their inventory position—and those that rely
on coordination, participants’ beliefs about others’ abilities or actions.
We investigate these issues in the laboratory and find that participants’
beliefs about the actions of others has a substantial explanatory power.