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J of Business Logistics - 2022 - Bendoly - Pulled in opposite directions A joint consideration of supply and demand
J of Business Logistics - 2022 - Bendoly - Pulled in opposite directions A joint consideration of supply and demand
DOI: 10.1111/jbl.12315
ORIGINAL ARTICLE
1
The Ohio State University, Columbus, Abstract
Ohio, USA
2
Supply chain inventory management decisions are complicated by the presence of
California State University, East Bay,
Hayward, California, USA
both downstream (demand) and upstream (supply) uncertainties. Prior research
shows that each type of uncertainty leads to specific decision biases. Demand uncer-
Correspondence tainty induces a pull-to-center bias, wherein orders are drawn away from the optimal
Elliot Bendoly, The Ohio State
University, 2100 Neil Avenue, ordering decision in the direction of expected demand. Supply uncertainty elicits a
Columbus, OH 43212, USA. diversification bias, wherein inventory managers tend to source from multiple sup-
Email: bendoly.2@osu.edu
pliers, even when sole sourcing is optimal. Our research employs a controlled labora-
tory experiment to study these biases when both types of uncertainty—that is, supply
and demand uncertainty—are present. Our results show that the presence of both
supply and demand uncertainty has a more nuanced effect on decision biases than
does either type of uncertainty alone. Demand uncertainty can elicit and influence
the diversification bias, even in the absence of supply uncertainty. Moreover, supply
uncertainty affects the magnitude of the pull-to-center bias. Our work reveals the
need for further attention from supply chain academics and managers on how sup-
ply and demand uncertainty jointly affect inventory managers’ decisions.
KEYWORDS
demand uncertainty, diversification bias, supplier uncertainty
This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided
the original work is properly cited.
© 2022 The Authors. Journal of Business Logistics published by Wiley Periodicals LLC.
448 | wileyonlinelibrary.com/journal/jbl
J Bus Logist. 2022;43:448–471.
PULLED IN OPPOSITE DIRECTIONS: A JOINT CONSIDERATION OF SUPPLY AND DEMAND
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UNCERTAINTY IN SUPPLY CHAIN DECISION-MAKING 449
deficiencies in human information processing imposed by promoting devil's advocacy and dialectical inquiry
by limits in knowledge, computational capacity, avail- (Ketchen & Craighead, 2022).
able information and time. In the presence of these defi- What kinds of biases in supply chain decision making
ciencies, biases lead human decision-makers to depart in would we expect to observe when upstream and down-
specific ways from mathematically optimal supply chain stream uncertainty are present? On the supply side, Wagner
decisions. and Bode (2008) describe distinct classes of supply chain
Research into the nature of these biases and errors, risk. In particular, poor logistics performance derived from
and the manner in which supply chain uncertainty ac- unsolved problems at suppliers (Lee & Billington, 1993)
centuates them, fills a critical gap in the emerging lit- and poor quality of products (Zsidisin et al., 2000) can have
erature. A recent review of the Behavioral Operations ripple effects through the supply chain. While there are a
and Supply Chain Management (SCM) literature by plethora of causes for supply-side risks, we focus on behav-
Fahimnia et al. (2019) identified 385 articles in eight op- ioral aspects related to upstream ordering as modeled by
erations and SCM journals. Only two of these journals Gurnani et al. (2014), wherein there is uncertainty regarding
fall into what Fahimnia et al. categorize as SCM-focused how much product an unreliable supplier will deliver. In an
(Journal of Business Logistics and Journal of Supply Chain experiment, Gurnani et al. asked participants to order from
Management), and account for only a handful of the arti- either a reliable or an unreliable supplier, finding that, while
cles reviewed by these authors. Nevertheless, these arti- the theoretical optimum is to sole source, there was a strong
cles provide a useful backdrop for extending discussions diversification bias, that is, a tendency for participants to
of human biases in supply chain contexts. As an example, diversify and order from both sources. In developing their
Kaufmann et al. (2009) provide an insightful field study of groundbreaking experiment, Gurnani et al. utilized a fixed
the methods companies use to mitigate bias in the supply demand for the focal product. We build on their work by in-
chain. Fahimnia et al. (2019) close by writing: corporating demand uncertainty, which is a second class of
supply chain risk per Wagner and Bode (2008).
From this inquiry, it is clear that decision On the demand side, uncertainty and associated risk
making in practice continues to be heavily has seen still greater consideration in the academic re-
influenced by human judgment, even with search literature. The newsvendor problem, for example,
regard to highly automated and supposedly provides a straightforward model for embodying demand
objective systems. There is a human element uncertainty and capturing decision making, and is, thus,
that links data to decision making, and doc- one of the most-studied decision contexts in the field of
umenting and better understanding this supply chain management (Donohue et al., 2020). In the
human element is a key objective for research newsvendor context, a perishable product has a price
in Behavioral Operations and Supply Chain and an acquisition cost. A manager must place an order
Management (p. 1155). to serve a random demand with the knowledge that un-
sold products and unfulfilled demand will be wasted.
Analytically, if the cost of being short one unit (i.e., the
Limitations in human judgment can certainly aggravate gross profit margin or understock cost, equal to price less
supply chain challenges and may, in fact, undermine a cost) is higher than the cost of having one excess unit un-
firm's strategic initiatives. This underscores the need for sold in the inventory (i.e., the unit cost less any salvage
empirical examinations of “the human element,” toward value or the overstock cost), the optimal order will exceed
better understanding, anticipation of effects, and counter- the expected demand. Conversely, when the overstock
measures. For example, as elaborated by Ketchen and cost outweighs the understock cost, the optimal order is
Craighead (2022), various cognitive biases and heuristics, less than expected demand.
such as escalating commitment, prior hypothesis, rea- Although the analysis of the newsvendor problem is
soning by analogy, inferences of impossibility, represen- straightforward, Schweitzer and Cachon (2000) show, in
tativeness, and illusion of control, impact the three steps their pioneering work, that humans tend to order in a
of the strategic decision- making process, namely goal characteristic manner. Namely, humans have a tendency
formulation, strategic alternatives generation, and evalua- to exhibit a pull-to-center bias, wherein orders are drawn
tion and selection. Depending on the effects these biases away from the optimal ordering decision in the direction
and heuristics cause, firms may need to decide to dis- of expected demand. Donohue et al. (2020) further discuss
courage human judgment in the decision-making process the research and its impacts for the 20th anniversary of
and substitute it with technology (Fahimnia et al., 2019). this early behavioral operations management experiment.
Alternatively, the decision-making process could be rede- Building on these burgeoning findings, the objective of
signed to minimize cognitive oversimplification tendencies our research is to study the combined effect of demand
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450 BENDOLY et al.
uncertainty and supply uncertainty on supply chain de- decide how much of the product to order and how to
cisions, with the consideration of both pull- to-
center source their order—i.e., whether one or both suppliers
and diversification biases in ordering, as summarized in should be used, and how much product to purchase from
Figure 1. We extend prior research, which focuses on one- each of the suppliers. We examine the ordering patterns of
sided models of uncertainty, by seeking insights into three participants as these levels of uncertainty vary.
questions. First, does demand uncertainty elicit or influ- While this context is somewhat stylized, it effec-
ence the diversification bias that prior research associates tively highlights the nature of human biases in decision
with supply uncertainty? Second, does supply uncertainty making—namely, the pull-to-center bias and the diversi-
affect the pull-to-
center bias that previous researchers fication bias—that have been identified in prior research.
have found in conjunction with demand uncertainty? Similar human biases and errors pose threats to a range
Our final research question asks, how does the presence of supply chain contexts, from forecasting to reorder-
of both supply and demand uncertainty, alongside the be- point planning, and even contract negotiation. It is also
havioral biases that such uncertainties induce, affect the a readily pliable context from which consideration of up-
performance of inventory managers' decisions? stream uncertainty (shipping delays or poor quality) can
Pursuit of these questions contributes to a call posed be extended. The current work builds on that of Wan and
by a number of articles in the Journal of Business Logistics. Evers (2011), who suggest that upstream uncertainty can
On the domain and scope of SCM's foundational disci- also trigger errors affecting downstream performance.
plines, Frankel et al. (2008) offered a definition of logis- We model the impact of uncertainty upstream on
tics as providing “industrial firms with time and space downstream ordering behavior. Similarly, we build on the
utilities, and refers to the inbound and outbound flow newsvendor problem, which offers insights into industries
and storage of goods.” In the same issue of the Journal that deal with a large amount of perishable products, such
of Business Logistics, Mentzer et al. (2008) noted the chal- as the grocery industry (Boyer et al., 2009). In particular,
lenge of ensuring a healthy dialog regarding all such as- we are the first to examine the impact of upstream un-
pects of SCM in discussions among logistics as well as certainty on downstream ordering. In a recent real-life ex-
non-logistics scholars. Contributing in support of this call, ample, demand and supply uncertainties associated with
our work provides a concise combination of upstream and COVID-19 affected Mount Sinai Hospital in New York
downstream uncertainty considerations that directly in- to the extent that, in March of 2020, the hospital leased
forms that dialog and the holistic perspective of logistics a 47,000 square foot warehouse in Manhattan to create
research (Frankel et al., 2008). a cross-docking facility. According to Chandrasekaran
Our approach to inquiry utilizes a controlled behav- et al. (2020), Mount Sinai Hospital's Vice President of
ioral experiment that exposes participants to levels of both Supply Chain notes:
downstream uncertainty (as modeled by the newsvendor
problem) and upstream uncertainty (as modeled by the di- We were truly cross-docking. I mean, there
versification problem). Two suppliers are made available were days where we almost ran out of
for sourcing. One supplier is perfectly reliable, delivering gowns. I went home, and I would pray that
whatever the participant orders, but more expensive. The we would have gowns the next day, and
other supplier is unreliable and delivers some fraction of come in the morning at seven o'clock, and
what the participant orders at a lower price. Participants there was a truck unloading 200,000 gowns,
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UNCERTAINTY IN SUPPLY CHAIN DECISION-MAKING 451
and we had people wheeling pallets to the extreme orders relative to expected demand. The result of
other side of the dock and loading the truck that tendency is a decrease in the magnitude of the pull-
that was going to the hospital to deliver the to-center effect.
gowns. Overall, our results show that the presence of both
supply and demand uncertainty has a more nuanced ef-
fect on decision-makers' biases than does either type of
A similar example is provided by Intel's plan to con- uncertainty alone. Biases often attributed to one type of
struct two massive fabrication plants in the Midwestern uncertainty—supply or demand—can arise from, and be
United States, seeking more reliable sources of microchips influenced by, the other type of uncertainty. We find the
(Ames, 2022). The move aligns with Boston Consulting's impact of these biases on supply chain performance, in
recommendation to supplement, rather than entirely terms of decision optimality and profitability, to be com-
reshore, less reliable sources in critical supply chains such plex. Consider, as an example, the impact of varying sup-
as that of the automotive industry (Boston Consulting ply uncertainty in the case wherein demand uncertainty
Group, 2021). In the wake of the pandemic that laid bare is high. Increasing supply uncertainty may counteract the
the risks associated with sole sourcing, the question of pull-to-center bias, pushing decision-makers toward more
how to build a supplier portfolio for effective risk man- reliable (easier to plan for) suppliers, and closer to optimal
agement has gained significant relevance (Richey & order quantities.
Davis-Sramek, 2022). We believe a better understanding of these biases has
Hence, while the context of our controlled behavioral ex- implications far beyond the decisions pertaining to in-
periment is necessarily stylized, it clearly pertains to a prob- ventory ordering amounts. For example, the presence
lem of substantial practical magnitude. That is, it is not the of devaluation of partially described alternatives bias is
specific numerical amount of uncertainty and incumbent discernible in our experiment as decision-makers seem
effects that the reader should focus on in this work. Rather, to order more from the reliable supplier compared with
the contribution of our work resides in the identification of its unreliable counterpart as supplier uncertainty level
patterns of behavior due to specific decision biases, and their increases. This systemic undervaluation of alternatives
accentuation due to specific forms of supply and demand- with uncertain outcomes and preference toward alterna-
side uncertainty. As such, we offer research in the synergis- tives with certainty occasionally leads to suboptimal de-
tic quadrant posited by Craighead et al. (2019). cisions (Ketchen & Craighead, 2022), as evident in other
On the surface, we observe adverse impacts of both supply chain contexts beyond inventory ordering, such as
supply uncertainty and demand uncertainty. In the pres- recalling all potentially affected product lots regardless of
ence of both types of uncertainty, participants continue their likelihood of containing defective items (Ketchen
to exhibit the diversification bias and the pull-to-center et al., 2014; Wowak et al., 2016). Similarly, the dynamic
bias. These results replicate and confirm (Frohlich & complexity which manifests itself as demand uncertainty
Dixon, 2006) prior research on decision making in the in our experiment may be present in a different business
newsvendor context as well as the recent results of setting as internal volatility, such as unpredictable man-
Gurnani et al. (2014). Moreover, we extend such prior re- ufacturing schedules and unstable capacities or yields
search with results regarding the interplay of supply and of the focal firm. In facing such growing complexity, the
demand uncertainties (Pagell, 2020). decision-maker could embrace an oversimplification heu-
Specifically, we find that each type of uncertainty— ristic akin to pull-to-center, as we notice in our experiment,
supply and demand—significantly influences behavioral leading to a highly uncertain outcome for a new strategic
biases that prior research has only to this point associ- initiative (Ketchen & Craighead, 2022). Our study has the
ated with the other type. For example, diversification bias potential to inform decisions when such uncertainties are
(Gurnani et al., 2014), rather than being a result of supply present together. Hence, our study has a much broader
uncertainty alone, increases with demand uncertainty, relevance beyond the inventory management literature
even in the absence of supply uncertainty. In particular, and may open up new avenues for future research.
we observe high levels of demand uncertainty to increase In the remainder of the paper, we first review the
decision-maker's diversification across supply sources, literature on supply chain risk and behavioral biases
regardless of the fact that it is not economically optimal (Section “Literature Review”). In Section “Hypothesis
to do so. Further, the pull-to-center bias, which prior re- Development”, we develop a series of research hypoth-
search has studied in the newsvendor context of random eses for examination. Section “Methodology” describes
demand (Schweitzer & Cachon, 2000), can be influenced our experimental approach and the methods we employ.
by supply uncertainty. As supply uncertainty increases, Section “Analysis” provides analysis of the experimen-
inventory managers tend to compensate by placing more tal outcomes, while Section “Discussion” discusses our
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452 BENDOLY et al.
findings and managerial insights stemming from our regarding pull- to-
center bias. Applying this concept,
dual-direction exploration of uncertainty. decision-makers treat the mean of demand as an anchor
and then adjust—insufficiently—from that anchor toward
the optimal order quantity. Explanations based strictly on
L I T E R AT UR E R E VIE W notions such as risk aversion, risk seeking, waste aver-
sion, stock- out aversion, underestimated opportunity
Our research builds primarily on two streams of literature. costs, or prospect theory preferences are inadequate for
The first stream studies behavioral decision making in the fully explaining results found in lab settings (Donohue
supply chain context. The second stream comprises re- et al., 2020). These results have been shown to be very ro-
search on supply chain risk and the rational mitigation of bust, with researchers including Bolton and Katok (2008),
that risk. In this section, we review each of these streams Lurie and Swaminathan (2009), Bolton et al. (2012), and
and describe the situation of our research within them. numerous others replicating and extending the original
findings. The tendency of decision-makers to use anchor-
ing and insufficient adjustment heuristics has been ob-
Behavioral decision biases in supply served in various settings that induce demand uncertainty,
chain management including service-level dependent, endogenous demand
Paul et al. (2022), and product proliferation Hyndman and
Research in the field of behavioral operations manage- Menezes (2022). Whereas 20 years of research examines
ment has revealed decision biases that lead individuals pull-to-center bias in the context of demand uncertainty,
to make suboptimal inventory management and sourcing our research extends this prior work by examining how an
decisions in certain predictable ways. A significant litera- additional source of uncertainty—that is, supply, rather
ture has examined the relationship between pull-to-center than demand uncertainty—affects the pull-to-center bias.
bias and demand uncertainty. In contrast, another bias, Recently, researchers have begun to study decision
the diversification bias, has only recently been studied biases that may affect sourcing decisions, reflecting real-
in the context of supply uncertainty. We discuss each of world ordering decisions that often involve considering
these biases and theories that may explain them, in turn. diversification in the presence of unreliable suppliers
The pull-to-center bias, identified by Schweitzer and (cf., Goldschmidt et al., 2020; Kalkanci, 2017). Gurnani
Cachon (2000), refers to the tendency of decision-makers et al. (2014) use a controlled laboratory experiment to
to order high- profit products in quantities below that study decision- maker's sourcing decisions in the pres-
which maximizes profit and to order low-profit products ence of supply uncertainty. In their experiment, inventory
in excess quantities. The authors explain these ordering managers service a fixed demand by sourcing from two po-
patterns as a propensity for focusing on the reduction of tential suppliers—a reliable and unreliable (albeit less ex-
ex-post inventory error, which is the absolute difference pensive) supplier—where subjects may sole-source from
between the amount an inventory manager orders and either supplier or, instead, dual-source. The authors find
realized demand. Overall, this behavior leads decision- that individuals tend to exhibit a diversification bias by
makers to choose order quantities that are too close to dual sourcing, even when it is rationally optimal to source
mean demand. from a single supplier. Further, our study complements
Bounded rationality provides one theoretical founda- that of Goldschmidt et al. (2020), which demonstrates a
tion for explaining such behavior. Simon (1982) proposed related bias, under-diversification, in a study of a different
the concept of bounded rationality as a reflection of the supply chain scenario involving severe supply disruptions
restrictions in human information processing imposed without demand uncertainty.
by limits in knowledge, computational capacity, available Gurnani et al. (2014) suggest that risk aversion alone
information, and time. Simon's (1990) scissors metaphor cannot explain this behavior, since, when it is theoretically
presents bounded rationality as ecological rationality: optimal to source solely from the reliable supplier, subjects
individuals make “good enough” decisions by exploiting still order from both unreliable and reliable suppliers, thus
the structure of the environment using fast and frugal introducing risk into the system. Similarly, the authors
heuristics. Bendoly et al. (2010) prescribe integrating the suggest that loss and regret aversion theoretically predict
concepts of bounded rationality in logistics/supply chain sole sourcing to be the optimal strategy and, therefore,
models and empirical research to improve their predic- cannot explain the phenomenon. Gurnani et al. (2014)
tive power and deepen our understanding of supply chain contend that bounded rationality is somewhat capable of
management systems and behavior. explaining decision-makers' split ordering behavior: fol-
Anchoring and insufficient adjustment heuris- lowing Su (2008), they suggest noisy decision making as
tics (Kahneman et al., 1982) may also provide insight one possible way of incorporating bounded rationality in
PULLED IN OPPOSITE DIRECTIONS: A JOINT CONSIDERATION OF SUPPLY AND DEMAND
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UNCERTAINTY IN SUPPLY CHAIN DECISION-MAKING 453
the model while postulating that better choices are made importance of optimal decision making in our research
more often. setting, in which demand and supply uncertainty are pres-
In summary, prior research in behavioral operations ent alongside multiple sourcing options.
management has identified decision biases— the pull- Collaboration within supply chains is a principal ap-
to-center bias and the diversification bias— that affect proach to addressing supply and demand uncertainty.
inventory managers when demand is uncertain (i.e., the The past three decades have produced a copious litera-
pull-to-center bias) or supply is uncertain (i.e., the diver- ture on how organizational partners can work together
sification bias). In practice, decision-makers often face for mutual benefit. Zacharia et al. (2009) examined how
scenarios wherein both demand and supply are random. buyers integrate with key suppliers to attain competitive
Hence, our research augments the literature by studying advantage. In a seminal work, Dyer and Singh (1998)
how the presence of both demand and supply uncertainty deemed such advantages as the attainment of relational
affects the decision biases that prior research associates rents. Collaboration between supply chain partners can
with either demand or supply uncertainty. be considered one of the bedrocks of supply chain the-
ory. Writing in an influential article, Stank et al. (2001)
state, “it is generally believed that increased collaboration
Supply chain risk and its among supply chain participants leads to lower cost and
rational mitigation enhanced service performance.”
Despite theory substantively agreeing on the linkage
Deviations from anticipated levels of supply and demand between collaboration and performance, practice is rid-
are often at the core of supply chain risk discussions (c.f., dled with hurdles to this integration. Whipple et al. (2015)
Nyaga et al., 2007). These deviations not only create near- offer a rare empirical study that links upstream and
term costs (e.g., holding costs) but also may have broader, downstream partners, building on the limited num-
systematic implications. Both academic and industry-led ber of multi-stakeholder studies (Carter, 2000; Ellram &
research efforts have devoted considerable resources to Hendrick, 1995; Nyaga et al., 2013). Given the substantial
studying the costs and implications of supply chain risk as difficulty of empirically linking multiple stakeholders
well as approaches to mitigating supply chain risk (Brewer from across the supply chain and the relative paucity of
et al., 2019; Manuj et al., 2014). extant research, we posit that our experimental linkage of
The seminal work of Hendricks and Singhal (2005), upstream and downstream uncertainty represents a new
for example, finds that supplier “glitches,” which often path for exploration.
indicate supply–demand mismatches, significantly drive
down operating income, return on sales, and return on as-
sets. Their research finds that firms tend to suffer lengthy HYPOTHESIS DEV ELOPMENT
financial penalties from such supply chain glitches and
that smaller firms can face even more severe losses. For all The overarching goal of our research is to examine how
firms, the ability to anticipate and guard against supply– the presence of both supply and demand uncertainty
demand mismatches is crucial (Bendoly et al., 2018). In a affects managers' behavioral biases and decision per-
related vein, Wagner and Bode (2008) conducted a survey formance. Specifically, we assess (i) whether demand un-
examining both supply-and demand-side risks, and they certainty influences the diversification bias, (ii) whether
find these risks to be significant predictors of poor supply supply uncertainty affects the pull-to-center bias, and (iii)
chain performance. Empirical findings such as these un- how the joint presence of supply and demand uncertainty,
derscore the importance of managing supply and demand alongside the aforementioned behavioral biases, affects
risk in inventory procurement planning. the performance of inventory managers' decisions. In this
Prior researchers have analytically studied the issues section, we develop a series of research hypotheses that
of sourcing and inventory management when both supply address these research goals.
and demand are random, providing a rational framework
for our behavioral study. Agrawal and Nahmias (1997)
and Gurnani et al. (2000), for example, compare the use Demand uncertainty's impact on
of multiple unreliable suppliers to sole sourcing from diversification bias
a consolidated supplier when demand is random. Yu
et al. (2009) study how to choose between single and dual In keeping with prior literature, we draw upon bounded ra-
sourcing when a primary supplier has disruption risk, as- tionality to theorize how demand and supply uncertainty
suming demand that is both random and price-sensitive. may affect decision-makers' behavioral biases in our re-
Such analytical research demonstrates the complexity and search context. Bounded rationality contends that, when
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21581592, 2022, 4, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/jbl.12315 by Akdeniz University, Wiley Online Library on [31/05/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
454 BENDOLY et al.
facing information processing challenges, individuals rely explaining the pull-to-center bias; a phenomenon that
on inherent biases and heuristics to make decisions (Todd prior research observes in the presence of demand uncer-
& Gigerenzer, 2003). The literature on bounded rational- tainty in the newsvendor context (Donohue et al., 2020).
ity provides several examples of such biases and heuristics Decision-makers tend to “anchor” on an initial piece of in-
when individuals make decisions involving uncertainty formation, using that information as a reference point for
and risk. subsequent decisions. In particular, inventory managers
Thaler's (1999) discussion of myopic loss aversion anchor on mean demand then adjust their order quantity
presents a theoretical framework for understanding indi- upward or downward based on the relative costs of over-
viduals' tendency to diversify risks. According to Thaler, ages and underages.
loss-averse decision-makers prefer to combine risks into a Applying the anchoring and adjustment heuristic to
“bundle,” even when doing so is not optimal according to our research context, wherein both supply and demand
expected utility. In other words, individuals often seek to are uncertain, we anticipate that inventory managers
bundle risk across a potentially diverse set of events rather will continue to anchor on mean demand, due to the sa-
than to experience the isolated risk from a single event. lience of demand (cf., Thaler & Sunstein, 2008; Tversky &
The author explains this bias as a “failure of predicted util- Kahneman, 1973). In addition to any impact from anchor-
ity to accurately forecast subsequent experienced utility.” ing, we expect supply uncertainty to affect how inventory
The conclusions of Benartzi and Thaler (1999) are similar, managers adjust their orders. Notably, we argue that the
as are perspectives that emerge from evolutionary psy- directionality of supply uncertainty's effect on adjustment
chology. The latter might posit diversification as “deeply depends on the balance of the newsvendor overage and
rational” (c.f., Kenrick & Griskevicius, 2013), and, indeed, underage costs.
to be expected when multiple options are available, sim- The logic of our argument proceeds along the follow-
ply because humans have a deeply rooted bias toward dis- ing lines. When the cost of underage is high relative to
tributing reliance when it comes to factors outside their the cost of overage, it is preferable to overstock and to
control. order a quantity of product that is larger than expected
In our research context, demand uncertainty presents demand. Prior research shows that inventory managers
a risk, adding a factor that is outside inventory managers' adjust their orders in the correct direction (Schweitzer
control. The perspectives of bounded rationality and evo- & Cachon, 2000), indicating a preference for having ex-
lutionary psychology suggest that individuals will seek cess inventory to potentially reap the benefits of large
diversification—that is, by distributing their reliance on margins. In the case of high underage to overage costs,
suppliers, even if such diversification is not rational. We, we anticipate that supply uncertainty will (appropriately)
therefore, anticipate that demand uncertainty will elicit a increase the magnitude of the upward adjustment of or-
supplier diversification bias, even in the absence of supply ders away from expected demand as decision-makers at-
uncertainty, and that the impact of the diversification bias tempt to avoid having too little inventory to capitalize on
on inventory managers' decisions will increase with the high margins. This reduced impact of the pull-to-center is
level of demand uncertainty. facilitated by tendency to engage more with the reliable
supplier and toward more straightforward estimations
Hypothesis 1 (H1) Increases in demand uncertainty in- of optimal order quantities. Similarly, when the cost of
crease the tendency of inventory managers to diversify underage is low relative to the cost of overage, and it is
across sources of supply, even when it is not optimal optimal to order less than the mean of demand, prior re-
to do so. search shows that inventory managers adjust their orders
downward from mean demand, suggesting a preference
Should there be support for this hypothesis, we believe for stockouts instead of overages. When decision-makers'
it offers an important extension to the work of Gurnani adjustment goal is to avoid having too much inventory,
et al. (2014) by examining the effect of demand uncer- uncertainty in supply will cause them to decrease overall
tainty on upstream supplier diversification. order quantities still further, aligned with increased use of
the reliable supplier.
As a result, we anticipate that supply uncertainty will
Supply uncertainty's impact on pull-to- yield an overall decrease in the magnitude of the pull-to-
center bias center effect: that is, decision-makers will (i) place larger
orders when the optimal order quantity is greater than
The anchoring and adjustment cognitive heuristic expected demand and (ii) place smaller orders when the
(Tversky & Kahneman, 1974) provides a framework for optimal order quantity is less than expected demand.
PULLED IN OPPOSITE DIRECTIONS: A JOINT CONSIDERATION OF SUPPLY AND DEMAND
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UNCERTAINTY IN SUPPLY CHAIN DECISION-MAKING 455
Hypothesis 2 (H2) Increases in supply uncertainty de- Hypothesis 3a (H3a) The change in an inventory man-
crease the magnitude of the pull-to-center effect—i.e., ager's decision performance when increasing de-
decrease the tendency of inventory managers to place mand uncertainty depends upon the level of supply
orders that are “pulled” away from the optimal order uncertainty.
quantity and towards expected demand.
Hypothesis 3b (H3b) The change in an inventory man-
ager's decision performance when increasing sup-
ply uncertainty depends upon the level of demand
Joint impacts of demand and supply uncertainty.
uncertainty on performance
FIGURE 2 Potential effects of supply and demand uncertainty on the pull-to-center bias
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456 BENDOLY et al.
experimental task to participants. Third, we performed The fourth phase involves the inventory manage-
a final round of beta testing, utilizing a combination of ment task, which we structure as a 30-period simulation,
doctoral students and the research team, which provided wherein outcomes are independent across periods—that
confidence that the platform and experiment were func- is, there is no inventory carrying. Downstream we are
tioning in the desired manner. modeling the classic newsvendor problem, single period
Primary data collection for analytical testing focused on with perishable inventory. As such, participants implic-
the involvement of professionals holding operations po- itly have two decisions—first the total quantity to order
sitions at organizations. Professional qualifications were and second how to split that order across two suppliers.
vetted through pre-paid MTurk premium criteria access. In practice, each period participants are asked to order
We also solicited self-identification of specific job roles in identical products from two suppliers, where one supplier
supply chain management. An additional pre-screening is perfectly reliable and the other is unreliable. Hence,
criteria of MTurk human intelligence task completion participants may place their order in one of three man-
rates of 95% or higher was also applied to prospective par- ners: (a) using only the reliable supplier, (b) using only the
ticipants. All participants meeting the selection criteria unreliable supplier, or (c) spreading the orders across the
were compensated at $5 for complete responses, provided two suppliers, with a non-zero quantity ordered from both
such responses met all validation checks embedded in the the reliable and unreliable suppliers. Thus, the aggregate
Qualtrics instrument. Additional fees for premium crite- total of orders across two suppliers is equivalent to the
ria use and per-subject payments were also incurred. total order quantity in the classic newsvendor problem in
We initially ran the experiment using student partic- which there is no supply uncertainty. Since the aggregate
ipants; however, due to concerns that a student sample order is spread across one or two suppliers, this is also a
might not be representative of practice, we invested in supplier diversification decision.
collecting the practitioner sample through MTurk. The Table 1 provides an overview of the three treatment
results regarding the research hypotheses are highly con- variables. The first, demand uncertainty, is straightfor-
sistent across the two data samples. Hence, we believe that ward and consistent with prior literature. We vary demand
the outcomes for the student sample indicate the robust- uncertainty by adjusting the standard deviation of a set of
ness of the findings (see the guidance of Thomas (2011) equally likely demand outcomes.
regarding the use of student samples). We present the The supply uncertainty treatments, in keeping with
analysis of the practitioner data from MTurk in the re- Gurnani et al. (2014), vary the standard deviation of the
mainder of this paper, and we summarize the data from performance of the unreliable supplier. When there is no
the original student sample in Appendix A. supply uncertainty, the unreliable supplier always deliv-
The experiment proceeds through five phases as shown ers 75% of an order. In contrast, when supply uncertainty
in Figure 3. Stage 1 consists of a short pre-survey to collect is high, the unreliable supplier may deliver 50%, 75%, or
basic demographic information and to assess elements of 100% of an order, with equal probabilities. Consider the
participants' psychological profile, including measures situation with no supply uncertainty, wherein the unreli-
capturing deductive reasoning (Clark, 1998), risk tolerance able supplier always delivers 75% of the order. Hence, the
(Barsky et al., 1997), cognitive reflection (Frederick, 2005), supplier is “reliably unreliable,” akin to a person who is
and ambiguity aversion (Eckles & Schaffner, 2014). Stage habitually 15 min late. A logical and intuitive approach
2 involves a presentation on the newsvendor problem to sole sourcing from such a supplier would be to order
and a comprehension check, which is standard practice 133% of the intended inventory position. That is, suppose
in newsvendor experiments (Eckerd et al., 2021; Lurie & the desired inventory position is 300. Then, ordering 400
Swaminathan, 2009). Figure B1 of Appendix B exhibits will yield that inventory position, since the supplier will
the educational material about the newsvendor model as deliver 75% × 400 = 300. Yet, as we will see later, even in
well as the corresponding comprehension check. this simple situation, respondents often appear to prefer
Stage 3, involving the supply-side vendor selection and to hedge their bets by spreading their order across two
comprehension quiz, is modeled after the work of Gurnani suppliers.
et al. (2014). Figure B2 of Appendix B presents a portion The final treatment variable, margin, reflects the com-
of the lesson and comprehension check for the supplier bination of the sales price of the item, p, and the unit costs
selection problem. It is important to note that, in the les- of the unreliable supplier, cu, and the reliable supplier,
son's scenario, demand was not random. In contrast, our cr. We selected values of price and costs with two con-
experiment presents participants in some treatments with siderations in mind. First, we should observe situations
random demand, since one goal of our study is to examine wherein sole sourcing from the reliable supplier is opti-
how the joint presence of supply and demand uncertainty mal, and other scenarios wherein sole sourcing from the
influences behavioral biases and decision performance. unreliable supplier is optimal. Second, we should observe
PULLED IN OPPOSITE DIRECTIONS: A JOINT CONSIDERATION OF SUPPLY AND DEMAND
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UNCERTAINTY IN SUPPLY CHAIN DECISION-MAKING 457
situations wherein the optimal order quantity is on either newsvendor model, the total amount of product the sub-
side of the expected demand. Hence, we include combina- ject may sell is the minimum of demand and the subject's
tions of cost and price such that the critical fractile—that inventory position. For simplicity, we assume that unsold
is, the ratio of underage cost to the sum of overage and un- products have no salvage value, a point also made clear to
derage costs—is above and below 1/2. Based on these two subjects.
principles, we selected four combinations of price and cost The objective of the decision problem is to select order
(see the final row of Table 1). Table 2 describes the optimal quantities, q∗u and q∗r , that maximize expected profit in any
order quantities for each combination of the demand un- period. The expected profit function is
certainty, supply uncertainty, and margin treatments.
[ ]
( ) y x ( )
∫y ∫x
Π qu ,qr = pmin X ,Yqu + qr f (x)dx − cu Yqu g(y)dy − cr qr .
Mathematical model
In this section, we develop the mathematical formulation There is no closed-form solution for determining the profit-
of the inventory management model we study. We use this maximizing orders, q∗u and q∗r . However, for the parameters
formulation to determine the optimal order quantities in of the experiment, it is straightforward to determine numer-
each treatment. Moreover, the model allows us to assess ically the optimal orders. In keeping with prior research on
the expected profitability of subjects' inventory manage- the diversification bias (Gurnani et al., 2014), a key feature
ment decisions. of the decision problem is that the optimal solution involves
Demand, X ≥ 0, is a random quantity with density f(x) ordering from a single supplier.
over the support x,x , where 0 ≤ x ≤ x ≤ ∞. The subject
[ ]
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458 BENDOLY et al.
(0, 200)
(0, 100)
(0, 200)
(0, 150)
High ager's orders across the unreliable and reliable suppliers
High
using a Herfindahl–Hirschmann index, which is a com-
mon approach in the literature on supplier diversification
(Ravenscraft, 1983; Schwieterman et al., 2020). The or-
(267, 0) ders for each supplier are not directly comparable, since
(133, 0)
(0, 200)
(0, 150)
the unreliable supplier delivers, on average, a fraction
High
Low
[ ]
High
( )2
Low
Low
to-
center effect when the orders fall between the opti-
mal order quantity and expected demand (Schweitzer &
Optimal order quantities by demand uncertainty, supply uncertainty, and margin treatments
tion affects the optimal order quantity. For instance, the op-
None
Low
qr. Specifically, ̂
qu and ̂qr maximize the profit function,
( )
Π qu ,qr , subject to a diversification constraint. The con-
straint requires that the diversification of ̂
qu and ̂qr match
(200, 0)
(200, 0)
(200, 0)
(200, 0)
None
Supply uncertainty:
qu +�
qr
qr < E[Y ]qu + qr ≤ E[X ]
� � ⎪
Pull − To − Center Indicator qu ,qr = ⎨ 1 E[Y ]�
qu +�
⎪ 0
TABLE 2
⎩ Otherwise.
D
A
C
B
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UNCERTAINTY IN SUPPLY CHAIN DECISION-MAKING 459
Finally, we measure the performance of a subject's orders differ markedly from theoretically optimal values. Rational
using the gap between the optimal expected profit and the behavior would lead decision-makers to order solely from
expected profit of the subject's orders. Since optimal ex- either the unreliable or the reliable supplier, but individ-
pected profit varies across treatments, we scale the measure uals, on average, order substantial quantities from both
of profit performance by the optimal expected profit. The suppliers (see the third column of Table 5). Hence, in the
measure of decision performance is vast majority of scenarios, subjects order more than they
( ) ( ) should from the non-optimal source while ordering less
( ) Π q∗u ,q∗r − Π qu ,qr than the ideal amount from the optimal source (see the
Profit Error qu ,qr = ( ) .
Π q∗u ,q∗r fourth and fifth columns of Table 5).
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460 BENDOLY et al.
1 2 3 4
Order for unreliable supplier (1)
Order for reliable supplier (2) −0.311***
Diversification index (3) 0.247*** −0.417***
Pull-to-center (4) −0.036 −0.230* 0.008
Profit error −0.124* −0.530*** 0.368*** 0.190***
***p < .001; *p < .05.
Demand Uncertainty
25
Count of Subjects
20
15
10
0
0.00 0.25 0.50 0.75 1.00 0.00 0.25 0.50 0.75 1.00
Diversification Index
F I G U R E 4 Demand uncertainty elicits and affects the diversification bias in the absence of supply uncertainty. The figure depicts
results for treatments with no supply uncertainty. The black line depicts the mean of the diversification index for each panel of the figure
the quasi-binomial family with a logit link function, which uncertainty (z = 4.435) treatments. Hence, relative to the
is robust to over-or under-dispersion (Wooldridge, 2010). no demand uncertainty treatment, which is the omitted
The first model of Table 6 contains the estimates for category, subjects diversify more in both the low and high
the effects on diversification decisions of the supply un- demand uncertainty treatments. Contrasting the high and
certainty, demand uncertainty, and margin treatments. low demand uncertainty treatments, a hypothesis test of
We find the coefficients to be positive and significant for the null hypothesis that the two have equal effects rejects
the low demand uncertainty (z = 2.352) and high demand the null with a p-value of .03 (z = 2.113). Therefore, the
PULLED IN OPPOSITE DIRECTIONS: A JOINT CONSIDERATION OF SUPPLY AND DEMAND
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UNCERTAINTY IN SUPPLY CHAIN DECISION-MAKING 461
TABLE 6 Diversification index and pull-to-center as a function of supply uncertainty, demand uncertainty, and margin treatments
Profit
Diversification index Pull-to-center error
Demand uncertainty: Low 0.421* 0.109***
(0.179) (0.028)
Demand uncertainty: High 0.825*** 0.122 0.265***
(0.186) (0.189) (0.028)
Supply uncertainty: Low −0.279 −0.531* 0.114***
(0.186) (0.234) (0.027)
Supply uncertainty: High −0.398* −1.081*** 0.005
(0.186) (0.233) (0.028)
Margin Scenario B 0.111 −1.661*** 0.026
(0.215) (0.285) (0.019)
Margin Scenario C 0.173 −0.535 −0.007
(0.215) (0.282) (0.019)
Margin Scenario D −0.141 −1.135*** −0.005
(0.210) (0.275) (0.018)
Demand uncertainty: Low × Supply uncertainty: Low −0.053
(0.039)
Demand uncertainty: High × Supply uncertainty: −0.176***
Low (0.038)
Demand uncertainty: Low × Supply uncertainty: −0.058
High (0.038)
Demand uncertainty: High × Supply uncertainty: −0.153***
High (0.041)
N 392 257 392
Deviance 222.295 165.340
R2 0.303
Note: Standard errors in parentheses.
***p < .001; **p < .01; *p < .05.
effect on the diversification bias of the high demand un- effect, which occurs when inventory managers place or-
certainty treatment is statistically different, and larger, ders that are “pulled” from the optimal order quantity
than the effect on the diversification bias of the low de- toward expected demand. The pull- to-
center effect is
mand uncertainty treatment. only possible when demand is uncertain, which applies
In sum, we find substantial support for H1. Demand to 257 subjects we observe across the low and high de-
uncertainty can lead subjects to diversify suboptimally mand uncertainty treatments. The mean of the pull-to-
across suppliers, even in the absence of supply uncer- center indicator for those subjects is 0.64, indicating that
tainty. Moreover, controlling for the level of supply un- the substantial majority of orders exhibit pull-to-center
certainty, we observe that increasing demand uncertainty bias. This result corroborates prior research regarding the
increases subjects' tendencies to diversify across suppliers. prevalence of the pull-to-center bias, including Schweitzer
and Cachon (2000) and the meta-analysis of Zhang and
Siemsen (2019).
Supply uncertainty and the pull-to- Figure 5 visualizes how the pull-to-center bias changes
center bias with supply uncertainty. Each panel shows the distribu-
tion of subjects' tendencies to exhibit the pull-to-center
Our second research hypothesis states that supply un- bias for given supply and demand uncertainty treatments.
certainty decreases the magnitude of the pull-to-center In the top row of the figure, supply uncertainty is low
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462 BENDOLY et al.
Demand Uncertainty
Low (N = 86) High (N = 85)
Low (N = 86)
20
15
10
Supply Uncertainty
Count of Subjects
5
0
High (N = 85)
20
15
10
5
0
0% 50% 100% 0% 50% 100%
F I G U R E 5 Supply uncertainty affects the pull-to-center bias. A subject's order exhibits the pull-to-center bias if it is less extreme than
the optimal order quantity and, thus, shifted toward the expected demand. The black line depicts the mean percentage of orders that exhibit
the pull-to-center bias for each panel of the figure
while demand uncertainty is either low (top-left panel) bias rejects that null with a p-value of .015 (z = −2.432).
or high (top-right panel). In the bottom row of the figure, Therefore, subjects' tendencies to exhibit the pull- to-
supply uncertainty is high while demand uncertainty is center bias under the high supply uncertainty treatment
low (bottom-left panel) or high (bottom-right panel). The are diminished relative to their tendencies to exhibit that
vertical lines indicate the mean of the pull-to-center mea- bias under the low supply uncertainty treatment.
sure for each panel. Moving from the top row to the bottom Overall, we find evidence that supply uncertainty
row, we see that subjects' tendencies to exhibit the pull-to- diminishes the strength of the pull- to-
center effect.
center bias decrease as supply uncertainty increases. Controlling for the level of demand uncertainty, we ob-
To measure how increasing supply uncertainty affects serve that adding supply uncertainty (i.e., moving from
the pull-to-center bias, and to test Hypothesis 2, we model the no supply uncertainty treatment to the low supply
the means of subjects' pull-to-center indicators as a func- uncertainty treatment) causes subjects to employ more
tion of the treatment variables. Like the diversification extreme order quantities relative to expected demand,
index, the mean of a subject's pull-to-center indicator is and, thus, counteracts the pull-to-center bias. Moreover,
bounded between 0 and 1. Therefore, we use the same as supply uncertainty increases further from the low to the
fractional response variable approach to model fitting as high treatment level, the pull-to-center bias diminishes
we did for the diversification index. further. Overall, we conclude that there is substantial sup-
The second model of Table 6 contains estimates of the port for H2.
effects of the supply uncertainty, demand uncertainty, and
margin treatments on subjects' pull-to-center bias. The
coefficients are significant and negative for the low sup- Decision performance
ply uncertainty (z = −2.267) and high supply uncertainty
(z = −4.642) treatments, indicating that the pull-to-center Our final set of research hypotheses pertains to the joint
bias is weaker in the high and low supply uncertainty effect of supply and demand uncertainty on inventory
treatments relative to the no supply uncertainty treat- managers' decision performance, measured in terms
ment. Comparing the high and low supply uncertainty of profitability. Hypothesis 3a states that the effect of
treatments, a hypothesis test of the null hypothesis that increases in demand uncertainty on decision perfor-
the two treatments have equal effects on the pull-to-center mance will depend upon the level of supply uncertainty.
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UNCERTAINTY IN SUPPLY CHAIN DECISION-MAKING 463
Similarly, Hypothesis 3b states that the effect of increases in terms of profit error, depends on the level of demand
in supply uncertainty on decision performance will de- uncertainty.
pend upon the level of demand uncertainty. Overall, we find support for both H3a and H3b.
To measure the interaction effects of the supply and Regarding H3a, we observe that the magnitude of the ef-
demand uncertainty treatments on decision performance, fect on decision performance, measured by profit error, of
we model profit error as a function of the treatment vari- changes in demand uncertainty varies with the level of
ables while including interaction terms between the sup- supply uncertainty. With respect to H3b, we find that the
ply uncertainty and demand uncertainty treatments. We magnitude and the direction of the effect of changes in
use ordinary least squares regression to fit the model. The supply uncertainty on decision performance depends on
final column of Table 6 contains estimates of the effects the level of demand uncertainty.
on profit error of the treatment variables and the interac-
tions. However, it is more straightforward to assess H3a
and H3b by calculating the contrasts across the different DISC USSION
treatment levels.
Table 7 describes the effects on profit error, and their Our study extends prior research, which employs one-
statistical significance, when changing one treatment vari- sided models of uncertainty, to examine how the com-
able while holding the other constant. The left-hand panel bination of demand and supply uncertainty affects
of Table 7 contains the effects of changing demand un- inventory managers' decision biases and performance. In
certainty while holding supply uncertainty constant. The particular, we study the diversification bias that (Gurnani
right-hand panel contains the effects of varying supply et al., 2014) recently linked with supply uncertainty
uncertainty while holding demand uncertainty constant. paired with the pull-to-center bias that numerous studies
To evaluate H3a, we turn to the contrasts in the left-hand have linked with demand uncertainty (c.f., Schweitzer &
panel of Table 7. We observe that the impact of changes in Cachon, 2000). We use a controlled laboratory experiment
demand uncertainty on decision performance varies with to study how these “predictably irrational” biases are in-
the level of supply uncertainty. For example, when there fluenced by sources of uncertainty beyond those that prior
is no supply uncertainty, increasing demand uncertainty research identifies. Hence, in addition to extending prior
from the low treatment level to the high treatment level research (Pagell, 2020), the results of the experiment repli-
has a substantial effect on profit error (0.155 with p-value cate and enhance (Frohlich & Dixon, 2006) prior research
<.001). In contrast, when supply uncertainty is high, the on decision making in the newsvendor context as well as
impact on profit error of increasing demand uncertainty the recent results of Gurnani et al. (2014).
from low to high is smaller (0.061) with a p-value of .03. Our first research question asks whether demand
The right-hand panel of Table 7 contains the relevant uncertainty elicits or influences the diversification bias,
contrasts for evaluating H3b. When there is high de- which prior research associates with supply uncertainty
mand uncertainty, we find that increasing supply uncer- (Gurnani et al., 2014). We find that demand uncertainty—
tainty from none to low decreases profit error (an effect even in the absence of supply uncertainty—can lead sub-
of −0.062 with a p-value of .02). In contrast, when there jects to diversify across suppliers, despite the fact that
is no demand uncertainty, the same increase in supply such diversification is not optimal. Moreover, increasing
uncertainty— from none to low— increases profit error demand uncertainty increases the tendency of inventory
(an effect of 0.114 with a p-value <.001). Hence, we find managers to diversify.
that the magnitude and direction of the effect of changes The second research question examines whether
in supply uncertainty on decision performance, measured supply uncertainty affects the pull- to-
center bias that
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464 BENDOLY et al.
prior research associates with demand uncertainty (c.f., management performance and supplier selection, even
Schweitzer & Cachon, 2000). Our results show that supply under stylized and relatively straightforward assump-
uncertainty does affect the extent of inventory managers' tions. When both types of uncertainty are present, we
pull-to-center bias. Specifically, increasing supply uncer- observe an average loss in terms of expected profit of ap-
tainty causes inventory managers to place more extreme proximately 15%, which substantially exceeds the 1%–5%
orders relative to expected demand, which, in turn, de- loss observed in prior newsvendor experiments focused
creases the strength of the pull-to-center bias. only on demand uncertainty (Quiroga et al., 2019). Our
Our final research question asks how the combination findings shed light on the dual-versus sole-source litera-
of supply and demand uncertainty, alongside the behav- ture that has been a key stream in SCM for decades (Hofer
ioral biases that such uncertainties induce, affects the per- et al., 2009; Schwieterman et al., 2020). The results sug-
formance of inventory managers' decisions. We find that gest that managers should examine ways in which their
the impact of changing either type of uncertainty—that is, biases may influence their supplier selection and inven-
supply or demand uncertainty—depends upon the level tory ordering methods, as Schweitzer and Cachon (2000)
of the other type of uncertainty. In particular, the effect brought to light and linked to the anchoring heuristic first
of changing supply uncertainty is non-monotonic: that is, identified by Tversky and Kahneman (1974).
increasing supply uncertainty can counteract the pull-to- We find that demand uncertainty can play a role in
center bias and, surprisingly, in some situations, improve how individuals choose to diversify across suppliers, even
the performance of inventory managers' decisions. when it is not rational for a decision-maker to link de-
Aggregating our results, we find both supply and de- mand uncertainty to diversification decisions. The impact
mand uncertainty have a more nuanced effect on inven- of demand uncertainty may ultimately divert attention
tory managers than does either type of uncertainty alone. from supply uncertainty, thus illustrating the challenges
Biases often attributed to one type of uncertainty—supply of bounded rationality (Simon, 1982). As managers move
or demand—can arise from, and be influenced by, the toward real-life supply chains in which there is the combi-
other type of uncertainty. Moreover, the combined impact nation of upstream/downstream uncertainty across both
of these biases on supply chain performance in terms of multiple products and multiple suppliers, it is likely that
decision optimality and profitability is complex. Hence, the diversification and pull-to-center biases will be exac-
our results suggest the need for further attention from erbated. In particular, uncertainties may combine or com-
academics and managers regarding the joint impact of pound when affecting inventory management decisions.
supply and demand uncertainty on inventory managers' The “pooling” of two types of uncertainty and bias
decisions. suggests the potential for tools and processes that aid
Finally, the joint impacts of demand and supply uncer- decision-makers in partitioning the effects of different
tainty on decision biases have numerous potential impli- sources of uncertainty. Many techniques such as demand
cations for the critical issue of collaboration within supply forecasting and supply chain visibility focus on improving
chains. Collaboration has numerous impacts on how responses to a single source of uncertainty. Our research
decision-makers within a supply chain assess, communi- demonstrates the challenges individuals face in tracing
cate, and perceive demand and supply uncertainty (Stank the impacts of different sources of uncertainty, even in a
et al., 2001). Admittedly, our treatment is stylized, yet relatively simple decision context, suggesting there may
the clear cross-impacts of uncertainty on biases suggests be value in developing methods that support individuals
that supply chain research on both the micro (i.e., buyer– in partitioning uncertainty. In particular, as uncertainty
supplier on a single item) and macro (many partners and increases from both up and downstream our findings sug-
many items) levels can benefit from deeper examinations gest that decision-makers become overwhelmed, that is,
of individual decision biases. face bounded rationality. The findings suggest that man-
agers may best move toward more reliable suppliers as
uncertainty increases. Further, the data suggest that some
Managerial implications degree of dual sourcing may be “optimal” in situations
with extreme uncertainty.
Supply chain managers traditionally have focused on re-
ducing demand uncertainty—e.g., by implementing bet-
ter forecasting tools and/or developing more responsive Limitations and future research
suppliers, while relatively little attention has been focused
on supply uncertainty management. In this study, we find We conducted this study with two sets of participants:
that the combination of demand uncertainty and supply professionals and students (regarding the latter group,
uncertainty can have a marked influence on inventory please see the results of Appendix A) within a controlled
PULLED IN OPPOSITE DIRECTIONS: A JOINT CONSIDERATION OF SUPPLY AND DEMAND
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UNCERTAINTY IN SUPPLY CHAIN DECISION-MAKING 465
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UNCERTAINTY IN SUPPLY CHAIN DECISION-MAKING 467
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likelihood of winning depended upon their performance
How to cite this article: Bendoly, E., Boyer, K., on the experiment. In total, the experiment took approx-
Craig, N., & Paul, S. (2022). Pulled in opposite imately 1 h each for 526 subjects at a large, Midwestern
directions: A joint consideration of supply and University.
demand uncertainty in supply chain decision- We employ the analysis process of Section “Analysis” to
making. Journal of Business Logistics, 43, 448–471. evaluate the results of the student sample. Table A1 pro-
https://doi.org/10.1111/jbl.12315 vides summary statistics for the student sample. Table A2
contains correlations among the research variables.
Table A3 describes the subjects' ordering decisions across
APPENDIX A each combination of the supply and demand uncertainty
treatments.
STUDENT SAMPLE RESULTS Table A4 contains the result of fitting the regression
We implemented the experimental methodology of models of Section “Analysis” to the student sample. The
Section “Methodology” for two groups: practitioners and first model in the table provides a test of Hypothesis 1,
students. We describe the results for the practitioner sam which states that increases in demand uncertainty will
ple in the main text. In this appendix, we summarize the increase the diversification bias. The coefficients are
findings for the student sample. We conclude that the positive and significant for the low demand uncertainty
students exhibit similar behavior to the practitioners with (z = 3.201) and high demand uncertainty (z = 7.234)
respect to the research hypotheses. Hence, the student re- treatments. Relative to the no demand uncertainty treat-
sults suggest the robustness of our findings. In addition, ment, the students diversify more in both the low and
1 2 3 4
Order for unreliable supplier (1)
Order for reliable supplier (2) −0.862***
Diversification index (3) −0.105* 0.040
Pull-to-center (4) 0.037 −0.080 0.131**
Profit error 0.056 −0.081 −0.207*** 0.369***
***p < .001; **p < .01; *p < .05.
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468 BENDOLY et al.
TABLE A4 Diversification index and pull-to-center as a function of supply uncertainty, demand uncertainty, and margin treatments
Profit
Diversification index Pull-to-center error
Demand uncertainty: Low 0.444** 0.065*
(0.139) (0.029)
Demand uncertainty: High 0.974*** 0.426** 0.266***
(0.135) (0.146) (0.029)
Supply uncertainty: Low 0.488*** −1.042*** 0.058*
(0.138) (0.192) (0.029)
Supply uncertainty: High 0.686*** −1.639*** 0.020
(0.137) (0.191) (0.028)
Margin Scenario B −0.063 −0.501* 0.093***
(0.153) (0.206) (0.019)
Margin Scenario C −0.074 0.068 0.024
(0.155) (0.224) (0.019)
Margin Scenario D −0.042 −1.476*** 0.001
(0.157) (0.207) (0.020)
Demand uncertainty: Low × Supply uncertainty: Low −0.006
(0.040)
Demand uncertainty: High × Supply uncertainty: Low −0.145***
(0.041)
Demand uncertainty: Low × Supply uncertainty: High −0.021
(0.040)
Demand uncertainty: High × Supply uncertainty: High −0.179***
(0.040)
N 526 349 526
Deviance 193.013 175.337
R2 0.293
Note: Standard errors in parentheses.
***p < .001; **p < .01; *p < .05.
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UNCERTAINTY IN SUPPLY CHAIN DECISION-MAKING 469
high demand uncertainty treatments. A hypothesis test of results of Model 3 of Table A4 using contrasts, which we
the null hypothesis that the low and high demand uncer- calculate in Table A5.
tainty treatments have equal effects rejects the null with The left-hand panel of Table A5 contains the contrasts
a p-value below .001 (z = 4.126). Hence, the effect on the that are relevant to H3a. The effect of changes in demand
diversification bias of the high demand uncertainty treat- uncertainty on decision performance varies with the level
ment is statistically larger than the effect on the diversi- of supply uncertainty. For instance, when there is no sup-
fication bias of the low demand uncertainty treatment. ply uncertainty, increasing demand uncertainty from the
Overall, the results are consistent with H1. low treatment level to the high treatment level has a sub-
We employ the second model of Table A4 to evalu- stantial effect on profit error (0.201 with p-value <.001).
ate Hypothesis 2, which states that supply uncertainty In contrast, when supply uncertainty is high, the impact
decreases the magnitude of the pull- to-
center effect. on profit error of increasing demand uncertainty from low
Consistent with H2, the coefficients for the low supply to high is smaller and not statistically different from zero
uncertainty (z = −5.417) and high supply uncertainty (0.043 with a p-value .140).
(z = −8.578) treatments are significant and negative. A The right-hand panel of Table A5 contains contrasts for
hypothesis test of the null hypothesis that the two treat- evaluating H3b. When demand uncertainty is high, in-
ments have equal effects on the pull-to-center bias rejects creasing supply uncertainty from none to low decreases
that null with a p-value <.001 (z = −3.554). Subjects' ten- profit error (an effect of −0.087 with a p-value of .002).
dencies to exhibit the pull-to-center bias under the high When there is no demand uncertainty, the same increase
supply uncertainty treatment are suppressed relative to in supply uncertainty increases profit error (an effect of
their tendencies to exhibit that bias under the low supply 0.058 with a p-value of .048).
uncertainty treatment. In sum, the results of the student sample support for
The final model of Table A4 provides a test of both H3a and H3b. Regarding H3a, we find that the
Hypotheses 3a and 3b. H3a states that the effect of in- magnitude of the effect on profit error of changes in
creases in demand uncertainty on decision performance demand uncertainty changes with the level of supply
will depend upon the level of supply uncertainty, while uncertainty. In line with H3b, we find that the level of
H3b contends that the effect of increases in supply un- demand uncertainty affects the magnitude and the di-
certainty on decision performance will depend upon the rection of the effect of changes in supply uncertainty on
level of demand uncertainty. It is easier to interpret the profit error.
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470 BENDOLY et al.
APPENDIX B
EXPERIMENT MATERIALS
F I G U R E B 1 Newsvendor lesson and comprehension check. The comprehension check asked participants, “When making an inventory
decision, which of the following should you keep in mind?”. The potential responses to the newsvendor comprehension check and the count
of respondents that chose each response are the following: “The risk of having too few items in stock” (0). “The risk of having too many
items in stock” (0). “The risk of having too few or too many items in stock” (392).
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UNCERTAINTY IN SUPPLY CHAIN DECISION-MAKING 471
F I G U R E B 2 Supplier-selection lesson and comprehension check. The comprehension check asked participants, “Following the same
logic, how many pairs of boots would you order from Supplier R and Supplier U if buying a pair of boots from Supplier R cost $40, and
buying a pair of boots from Supplier U cost $38?”. The potential responses to the supplier selection comprehension check and the count of
respondents that chose each response are the following: “180 units from Supplier R, and 0 units from Supplier U” (108). “200 units from
Supplier R, and 0 units from Supplier U” (155). “0 units from Supplier R, and 200 units from Supplier U” (64). “90 units from Supplier R, and
90 units from Supplier U” (65). “None of the above” (0).