Decision behavior in supply chains with random production yields

Abstract

Dealing with supply risks is one of the challenges of decision makers in supply chains as producing and sourcing become more and more complex. Theoretical research on different types of supply uncertainty as well as their management is well covered. Behavioral aspects in this context, however, have not received much attention so far. In this paper, we present an experimental study which aims at investigating how subjects make decisions of ordering and producing in the presence of random production yields at a supplier, i.e. production output is a random fraction of production input. Subjects were confronted with the situation of either the buyer or the supplier in a simple two-tier supply chain with deterministic demand and had to make the respective quantity decisions. Results show that buyers have a good understanding of the situation and are likely to follow a probabilistic choice rule. In addition to that, hedging against supply risks drives their behavior of over-ordering. Suppliers on the other hand start off with moderate production decisions but improve over time which indicates learning effects. Furthermore, the study shows that additional sharing of information on yield rates is no cure for inefficient behavior of the buyer.