Overordering and Phantom Demand in Supply Chains

Paulo Gonçalves

Management Science Department

School of Business Administration

University of Miami

Coral Gables, FL 33124

paulog@miami.edu

John Sterman

System Dynamics Group

Sloan School of Management

Massachusetts Institute of Technology

Cambridge, MA 02142

jsterman@mit.edu

When demand exceeds supply, customers often hedge against shortages by placing multiple orders with multiple suppliers. The resulting demand bubbles creates instability leading to excess capacity, excess inventory, low capacity utilization, and financial and reputation losses for suppliers and customers. This research contributes to the understanding of phantom demand caused by shortages by developing a formal model of the relationship between a single supplier and multiple retailers. The research combines simulation and game theory to explore equilibrium strategies that arise as a result of a dynamic game.

Our analyses suggest that a prisoner’s dilemma arises if appropriate incentives are not in place, allowing retailers to reach equilibrium with an aggressive ordering strategy (inflating their orders and later canceling them) even though a conservative ordering strategy (ordering just what they need) is mutually more profitable. The conservative strategy dominates the aggressive one when sufficient incentives are in place.

Back to Presenters’ Page