Fairness ideals in inventory allocation

Abstract

ABSTRACTWe study fairness ideals in distribution systems where inventory is allocated to multiple retailers and there is supply–demand mismatch. In particular, we focus on (a) what is considered fair inventory allocation by retailers (e.g., equal profit, same fill rate, equal share of supply–demand mismatch?) and (b) how the supply chain context affects fairness perceptions. We consider an integrated supply chain setting where total inventory is allocated at the retail level and retailers may face either shortage or surplus, and a disintegrated supply chain where retailers may face supply scarcity when total demand exceeds available inventory. Our experimental data suggest that subjects, taking on the role of retailers in the same supply chain, are often motivated by fairness considerations: they claim for themselves inventory that is not exactly equal to their needs in more than one‐third of the instances. Across settings, “fair” allocations depend on retail demands rather than on profit comparisons, even when these are facilitated by a decision support tool. However, in cases of surplus, the most prevalent fairness ideal is that of equal split of inventory–demand mismatch, while in cases of shortage, the most prevalent fairness ideal is that of equal fill rates. Follow‐up experiments suggest that retailers under both cases of shortage and surplus are more likely to evaluate an allocation as fair when it is based on realized demands, and this is independent of whether it was determined by a rule or a human decision maker.