The impact of alternative performance measures on single-period inventory policy

Abstract

While many firms and researchers have developed various supply chain solutions, there are many underlying reasons why these solutions have not been adopted in practice. Some key reasons, as articulated by Lee and Billington (1992), include organizational barriers, coordination challenges among marketing, manufacturing, and logistics, technical challenges in the area of information systems, as well as conflicting supply chain performance metrics. Other key reasons are due to alternative performance measures besides total expected relevant cost, which include sales target, product substitution, product clearance, sales per square foot, etc. In order to understand how these alternative performance measures affect the supply chain solution, we make an initial attempt to analyze how alternative measures would affect the simplest form of inventory policy, namely, the newsvendor solution. To identify various alternative measures and to explore how such order decisions are made, we conducted a simple experiment by giving a single-period inventory problem to 250 MBA students and 6 professional buyers who order fashion items. We observed that both groups select their order quantities less than the newsvendor solution and made their ordering decisions based on various specific performance metrics besides total expected cost. These observations have motivated us to analyze how these performance metrics would affect the ordering decision. Our analysis indicates that, under these performance metrics, it is rational for the decision maker to order less than the newsvendor solution.