Durability, Transit Lags, and Optimality of Inventory Management Decisions

Two laboratory experiments on a single-echelon inventory task show that inventory durability interacts with transit lags to create order volatility that exceeds demand volatility. Thus, inventory durability and transit lags cause managers to deviate from inventory decision optimality. Durability creates a large increase in order volatility because players adjust orders insufficiently to reflect current inventory and backlogs, much as they adjust orders insufficiently to reflect holding and backlog costs in newsvendor studies (e.g., Schweitzer and Cachon 2000). Transit lags exacerbate non-optimal ordering by interfering with players' ability to correct prior errors. Our results suggest that non-optimal inventory decisions can be driven by inventory and supply chain characteristics, even in the absence of the coordination and information sharing problems studied by Croson etal. (2005) and Sterman (1989a,b). We also examine the influence of features related to personality. We find little evidence that the interactive effects of durability and transit lags are altered by need for cognition, impulsiveness, or locus of control, suggesting that these features make supply chain management extremely difficult. These results imply that retailers and their upstream partners must consider the characteristics of their product and supply chains when interpreting demand signals received from downstream partners.