Unraveling Behavioral Ordering: Relative Costs and the Bullwhip Effect

Problem definition: We study the bullwhip effect and analyze the impact of human behavior. We separate rational ordering in response to increasing incoming orders from irrational ordering. Academic/Practical Relevance: Prior research has shown that the bullwhip effect occurs in about two-thirds of firms, and impacts profitability by 10-30%. However, previous work has not been able to separate the impact of behavioral ordering from rational increases in order quantities. Methodology: Using data from a laboratory experiment, we estimate behavioral parameters from three ordering models. We then perform a simulation study to evaluate the cost impact of bullwhip behavior by echelon and on the supply chain. Results: We find that relative costs are not equally shared. Behavioral ordering by a retailer results in higher relative costs elsewhere in the supply chain, even as similar ordering by a wholesaler, distributor or factory results in increased costs within that echelon. We also find that individuals dynamically adjust the desired inventory position based on incoming demand. Although prior research has suggested individuals only use the most recent demand observation (a na\"ive forecasting approach), this assumption is largely rejected in our data. The cognitive profile of the decision maker impacts results in heterogeneous teams. We show that cost increases are not linear as more decision makers are placed in a supply chain. Managerial Implications: The cost of behavioral ordering is not consistent across the supply chain. Managers can use the estimation/simulation framework to analyze the impact of human behavior in their supply chains and evaluate improvement efforts such as coordination or information sharing. Our results show that behavioral ordering by a retailer has an out-sized impact on supply chain costs, so a firm considering a retail-focused strategy must ensure its retail locations can be successful or incur unexpectedly high costs.