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Empirical Results on Drivers of Retail Sales and Customer Satisfaction Marshall Fisher (Wharton) Abstract We discuss results of analysis conducted with a retailer to understand the drivers of sales and customer satisfaction using data from 500 stores over 29 months. We find that the primary drivers of sales are payroll for store associates, in stock rate and customer satisfaction. This project is part of a larger initiative involving 5 retailers to understand what policies lead to effective in-store execution. Co-researchers are Serguei Netessine and Jayanth Krishnan of The Wharton School and Nicole DeHoratius of the University of Chicago.
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Outsourcing Traps Charlie Fine (MIT) How can outsourcing be a trap? Many firms outsource activities to entities that might ultimately supplant the original outsourcing firm. Knowing this, firms outsource anyway. This talk will explore three levels of outsourcing traps: corporate, national and personal. At the corporate level, companies may outsource capabilities that later prove to be critical to the control and profitability of the value chains in which they operate. An historical example is IBM's outsourcing of key subsystems in the PC to Wintel. At the national level, with knowledge assets becoming more important than physical assets in determining the wealth of nations, outsourcing patterns in the global economy will influence the geography of knowledge, possibly leaving some outsourcing nations poorer relative to the nations that perform the knowledge work. At the personal level, professionals in developed countries who choose careers that once seemed to offer a guarantee of employability, e.g., software engineer, may find that they are easily replaceable by someone overseas who will do that same work for one-tenth of the wage. |
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Contracting in Supply Chains: A Laboratory Investigation Elena Katok and Diana Wu (Penn State) Abstract We investigate the performance of two commonly-used mechanisms for coordinating the supply chain: the buyback and the revenue-sharing contracts. The simple setting we consider is the one with a two-member supply chain in which the retailer faces the newsvendor problem, the supplier has no capacity constraints, and the delivery occurs instantaneously. This is the setting for which clear theoretical benchmarks are known: there exists a family of contracts of each type that coordinates the supply chain and differ only in how the profit is distributed between the retailer and the supplier. The two types of contracts are also mathematically equivalent, meaning that for each instance of a coordinating buyback contract, there exists an equivalent revenue-sharing contract. In order to coordinate the supply chain, these two contracts have to be constructed in a way that the risk is shared sufficiently between the retailer and the supplier. The theory relies on the behavioral assumption that both players act in a way that maximizes their individual expected profits (implying, among other things, risk neutrality). We test the two contracting mechanisms in a laboratory setting that controls for strategic considerations and find that the two contracts are not equivalent in terms of performance. The revenue-sharing contract is better able to induce the optimal behavior by the retailer than the equivalent buyback contract. However, suppliers are unwilling to share the sufficient amount of risk to coordinate the supply chain, and as a result, both, the revenue-sharing and the buyback contracts our laboratory suppliers offer are sub-optimal, suggesting (among other things) risk aversion.
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Linking Laboratory and Field Behavior: Bargaining and Auctions in Controlled Experiments on EBay Gary Bolton (Penn State) and Axel Ockenfels (U of Cologne) Abstract We conducted a controlled field experiment on eBay to investigate first, whether basic laboratory results on equitable bargaining and competitive bidding surface in a naturally occurring market environment among experienced traders, and second, whether trading strategies observed in the experiment can be linked to trading patterns observed outside the experiment.
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Order stability in supply chains: Coordination risk and the role of coordination stocks Rachel Croson (Wharton), Karen Donohue (Minnesota), Elena Katok (Penn State), John Sterman (MIT) Abstract The bullwhip effect describes the tendency for the variance of orders in supply chains to increase as one moves upstream from consumer demand. Previous research attributes this phenomenon to both operational and behavioral causes. Operational causes are features of the institutional setting that lead rational agents to amplify changes in demand, while behavioral causes arise from suboptimal decision-making. This paper examines causes of the bullwhip through experiments with a serial supply chain, using the Beer Distribution Game. Unlike prior studies, we control for all four commonly cited operational causes of the bullwhip, including uncertainty about customer demand. We eliminate demand uncertainty completely by making customer demand constant and known to all participants. Despite these controls, order amplification, instability, and supply line underweighting remain pervasive. We propose a new behavioral cause of the bullwhip, coordination risk, that arises when players place excessive orders to address the perceived risk that others will not behave optimally. We test two strategies to mitigate coordination risk: (1) holding additional on-hand inventory, and (2) creating common knowledge by informing participants of the optimal policy. Both strategies reduce, but do not eliminate, the bullwhip effect. Holding excess inventory reduces order amplification by providing a buffer against the endogenous risk of coordination failure. Such coordination stock differs from traditional safety stock, which buffers against exogenous demand uncertainty. Surprisingly, neither strategy reduces supply-line underweighting. We conclude that the bullwhip can be mitigated but its behavioral causes appear robust.
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The Good, the Bad, and the Ugly of Perspective Taking Max Bazerman (HBS) & Eugene Caruso (Harvard) Abstract Group members often reason egocentrically, believing that they deserve more than their fair share of group resources. Much previous research suggests that perspective taking is an effective strategy for reducing conflict in such situations. However, the present research finds that the effects of perspective taking may not be that straightforward. Specifically, leading people to consider other members’ thoughts and perspectives can reduce egocentric (self-centered) judgments, such that people claim that it is fair for them to take less, but it actually increases egoistic (selfish) behavior, such that people actually take more of available resources. A series of experiments demonstrates this pattern in competitive contexts where considering others’ perspectives activates egoistic theories of their likely behavior, leading people to counter by behaving more egoistically themselves. This reactionary selfishness is attenuated in cooperative contexts. We discuss the implications of these findings and consider strategies for alleviating the potentially deleterious effects of perspective taking.
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Detecting Regime Shifts: The Causes of Under- and Overreaction George Wu (Chicago) Abstract Many decision makers operate in dynamic environments in which markets, competitors, and technology change regularly. The ability to detect and respond to these regime shifts is critical for economic success. We conduct three experiments to test how effective individuals are at detecting such regime shifts. Specifically, we investigate when individuals are most likely to underreact to change and when they are most likely to overreact to it. We develop a system-neglect hypothesis: Individuals react primarily to the signals they observe and secondarily to the environmental system that produced the signal. The experiments, two involving probability estimation and one involving prediction, reveal a behavioral pattern consistent with our system-neglect hypothesis: Underreaction is most common in unstable environments with precise signals, and overreaction is most common in stable environments with noisy signals. We test this pattern formally in a statistical comparison of the Bayesian model with a parametric specification of the system-neglect model.
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Structural Estimation in the Newsvendor Model: Theory and Application Christian Terwiesch (Wharton) and Marcelo Olivares (Wharton) Abstract The Newsvendor model captures the trade-off faced by a decision maker that needs to place a firm bet prior to the occurrence of a random event. Previous research in Operations Management has mostly focused on deriving the decision that minimizes the expected mismatch costs. In contrast, we present two methods that estimate the unobservable cost parameters characterizing the mismatch cost function. We present a structural estimation framework that accounts for heterogeneity in the uncertainty faced by the newsvendor as well as in the cost parameters. We develop statistical methods that give consistent estimates of the model primitives, and derive their asymptotic distribution, which is useful to do hypothesis testing. We apply our econometric model to a hospital that balances the costs of reserving too much vs. too little operating room capacity to cardiac surgery cases. Our results reveal that the hospital places more emphasis on the tangible costs of having idle capacity than on the costs of schedule overrun and long working hours for the staff.
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Behaviorally Realistic Modeling for Operations Disruptions: Avian Flu (Work in Progress) Baruch Fischhoff (Carnegie
Mellon)
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Sendhil Mullainathan
(Harvard) A vast array of psychological research takes place in laboratories. In this talk, I will describe experiments in the field, what hastraditionally been called "action research" by psychologists. I'll highlight using several completed and in progress experiments the potential lessons for economics and psychology.
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I'm not hoarding, I'm just stocking up before the hoarders get here John Sterman (MIT) Behavioral operations management requires integration of multiple disciplinary perspectives and methods, including formal modeling, laboratory experiments, fieldwork, and large-sample empirical studies. Here we report an experimental study with the Beer Distribution Game to explore the phenomenon of phantom orders. Phantom orders arise in real supply chains when suppliers are unable to fill orders on time. Customers respond to product shortages by increasing orders and ordering through different channels in an attempt to gain a larger share of the shrinking production pie. These phantom orders cause still longer delivery times and smaller allocations: a positive feedback through which scarcity becomes self-reinforcing. Suppliers, often unaware of the underlying demand, respond by increasing output. As allocations increase customers cancel their phantom orders, leaving suppliers and distributors with large surplus stocks. Phantom ordering is common in supply chains including semiconductors, computers, pulp and paper, chemicals, and others, and played a major role in the collapse of the technology bubble in 2001. As the title indicates, such behavior can be rational, as multiple customers compete for limited supply. Here we examine the behavior of subjects in the beer distribution game for evidence of phantom ordering. Phantom ordering is never a rational response to shortage in the experiment because there is only one customer for each supplier, no randomness, no production capacity limit, and, in this implementation, customer demand is constant and publicly announced to all players. Yet we find that a significant minority exhibits phantom ordering. Estimated decision rules show these subjects increase their orders when delivery times increase, though such orders raise costs and reduce the reward earned by each player. We speculate that the urge to hoard evolved early in human history as a locally rational response to scarce resources, and that the brain center responsible for the hoarding response is likely to be distinct from the loci of economic decision making.
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