Debiasing Strategy System to Improve Inventory Decision in the Newsvendor Problem (an Experimental Study)

Abstract

One of the foundational models for the study of inventory management is the newsvendor problem. Since the newsvendor problem involving perishable goods, one application that might be very concerning nowadays is food inventory management. Particularly, the food and culinary industries face the problem associated with the setting: supply--demand mismatch which causes business performance reduction due to profit loss. Thus, the developing of mathematical models in the newsvendor problem could be the solution to the problem since it can provide a good insight to determine optimal order quantities. However, inventory managers' order decision might deviate from the assumption in newsvendor setting which claims that individuals would make a rational decision that can maximize their utility and profit as well. Schweitzer & Cachon [1] is one of the earliest works that provides evidence of this deviation and concludes that there is a mismatch between newsvendor theory and experimental observations which causes non-optimal decisions due to the decision biases that occur in the newsvendor context. Thereafter, a growing number of studies in newsvendor problem have started to move toward experimental studies. However, most of the existing studies only involve students as the subject, leaving an important question of how the result of such studies can be implemented in the real world where the manager really works. In this study, we conduct an experiment to investigate the inventory managers' order decision in newsvendor settings in small fast-food restaurants in Yogyakarta, Indonesia. Afterward, we conduct the same experiment with students to provide a structured comparison between manager and student on decision making in the newsvendor problem. After obtaining the order decision pattern, which is not optimal due to anchoring and insufficient adjustment bias that occur, this study will also come up with a debiasing strategy in the form of Decision Support System (DSS). The DSS we propose aims to provide an alternative order for the inventory manager so that the overall inventory performance can be improved. To prove the effectiveness of the DSS we propose, we will also conduct an experimental work to compare the result of the order decisions with and without DSS provided.