Cognition and Heterogeneity in Supply Chain Planning: A Study of Inventory Decision Making

This dissertation investigates supply chain inventory decision making using behavioral experiments. Within inventory management, selecting the order quantity in advance of unknown future demand is a central question. If a decision maker knows the cost of having too much inventory, the cost of lost sales due to a shortage and an estimate of future demand, the newsvendor model provides a normative order quantity. Prior research shows that individuals regularly order too much in low margin settings and too little in high margin settings relative to the optimal quantity. Prior research has suggested several heuristics and preferences which may correlate with observed behavior, but little research explains reasons why individuals order as they do. This research is an investigation of that behavior in three areas. Chapter two finds that cognitive reflection explains a significant amount of the variance in performance for industry professionals in a high margin repeated newsvendor problem setting. Chapter three considers inventory ordering behavior across a range of margin settings and specifically investigates cognitive dissonance relative to customer service expectations. While cognitive reflection predicts performance in medium and high margin settings, minimizing cognitive dissonance appears to guide behavior in low margin settings. Chapter four looks at forecasting behavior, which is an antecedent to inventory ordering decisions. Specifically, this research finds that while system neglect appears to drive forecasting behavior, individuals with high cognitive reflection exhibit less system neglect and also have decision times closer to the predicted optimal time.