Competing for supply and demand: Understanding retailers' ordering decisions

Abstract

Supply chains require the interaction between retailers and suppliers in a dynamic environment. One frequent and costly source of inefficiencies produced by these interactions is known as the bullwhip effect. The bullwhip effect takes place when the variability of orders increases as one moves up the supply chain. However, the impact of this variability is influenced by retailers who compete both for supply and demand. This study systematically explores the impact of the bullwhip effect when there is horizontal competition among retailers. We develop a mathematical model in a competitive system and create two behavioral studies to evaluate the effect of supplier's responsiveness, customers' overreaction, and capacity allocation on retailers' decisions. We show evidence of participants' limited ability to reduce the bullwhip effect. Our results show that competition for supply has a strong effect on participants' ordering decisions, while competition for demand does not impact how retailers inflate their orders. Furthermore, we show that by adjusting the supplier's allocation mechanism, order variability decreases in up to 50%. Our econometric model shows that (i) more complex systems increase the bullwhip effect but decrease retailers' biases, and (ii) retailers underreact to shipments received from the supplier and ignore customers' order cancellations. We provide recommendations to decrease the impact of the bullwhip effect on supply chains.