A Behavioral Perspective on Inventory Sharing

Abstract

Effective transshipment of inventory is a way to take advantage of aggregation effects in decentralized inventory systems. Previous research in the inventory sharing area has been mostly analytical in nature, focused on optimal stocking and sharing decisions and the coordinating role of transfer prices. We examine inventory sharing effectiveness from a behavioral perspective. Four conditions are necessary to create an effective inventory sharing system: adequate inventory in the system, sufficient requests for sharing, reasonable transshipments upon requests, and responsiveness of initial orders to the transfer price. Using behavioral experiments, we examined these four conditions. Our results show that without a carefully designed system, inventory sharing may be neither effective nor a route to enhanced profitability. In general, decision makers do not stock enough to benefit from sharing, and the opportunity to share inventory leads to an even further reduction in the initial inventory stock. Further, decision makers tend not to react to the transfer price unless inventory is not transparent in the supply chain. In addition, decision makers are more likely to under-request inventory, leading to reduced demand signal processing among decision makers. Finally, we provide evidence that by reducing inventory transparency in the system and providing decision support, inventory sharing can become effective and increase profitability for participants.