 Decision making under service‐level contracts: The role of cost saliencyGary E. Bolton, Sabrina Bonzelet, Tobias Stangl and Ulrich W. Thonemann Production and Operations Management, 2023, vol. 32, issue 4, 1243-1261 Abstract: This study examines human ordering behavior in service‐level inventory contracts, a class of contracts important in practice. Studies of wholesale price contracts find that people tend to place orders that are suboptimal and biased toward mean demand. Unlike wholesale price contracts, service‐level contracts can be parameterized such that they have steep expected profit functions, making the expected profit‐maximizing order more salient, in the sense that deviations from optimal ordering are more costly. Utilizing an analytical model and results from existing literature, we hypothesize that people will order closer to optimality under service‐level contracts with steeper expected profit functions. In a laboratory experiment, we find that subjects achieve up to 97.2% supply chain efficiency under a steep service‐level contract, compared with 92.2% under a flat service‐level contract, and steep service contract ordering also exhibits lower variability. Our results suggest that managers can benefit by designing service‐level contracts with higher penalty costs and lower fill rates. Date: 2023 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bla:popmgt:v:32:y:2023:i:4:p:1243-1261 Ordering information: This journal article can be ordered from Access Statistics for this article Production and Operations Management is currently edited by Kalyan Singhal More articles in Production and Operations Management from Production and Operations Management Society |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.