Behavioral Causes of Demand Amplification in Supply Chains:

“Satisficing” Policies with Limited Information Queues

Rogelio Oliva

Texas A&M

College Station, TX

Paulo Goncalves

University of Miami

Coral Gables, FL

Overreaction to supply shortages can create havoc in supply chains, costing millions of dollars in excess inventory and manufacturing capacity. In an experiment with the Beer Distribution Game, we explore overreaction to shortages as a complementary behavioral cause of supply chain instability. As in previous studies, we find that players ignore the supply line. We find, however, that instead of overreacting to shortages, players limit the size of their order adjustment while aiming for higher than necessary inventory level; a policy that is more stable than the linear response suggested in previous studies. Since an ordering rule that fails to account for the supply line leads to higher than necessary costs and order amplification, our results suggest that players are not fully rational. However, evaluating the performance of the estimated policy we find that, given the information cues available, players show bounded rationality and develop a “satisficing” replenishment decision rule that minimizes local cost at the expense of higher upstream cost. We explore the implications of these findings for the design of information and incentive systems for supply chain management.

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