Equivalent Inventory Metrics: A Behavioral Perspective

Tobias Stangl () and Ulrich W. Thonemann ()
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Tobias Stangl: Department of Supply Chain Management and Management Science, University of Cologne, 50923 Cologne, Germany
Ulrich W. Thonemann: Department of Supply Chain Management and Management Science, University of Cologne, 50923 Cologne, Germany

Manufacturing & Service Operations Management, 2017, vol. 19, issue 3, 472-488

Abstract: We analyze how performance metrics that contain equivalent information affect actual decisions. We consider two such performance metrics from supply chain management, days of supply and inventory turn rate, where one is the inverse of the other. We argue that individuals’ assessment of performance is also affected by the metric as opposed to solely based on the inventory value that actually matters. We perform three laboratory studies and analyze how decisions are affected by the metric used to indicate inventory performance. The first study considers alternative inventory optimizations, out of which one must be selected. The second study analyzes a decision maker who must decide on the effort to invest in optimizing inventory of a specific product. The third study corresponds to the economic order quantity model. Our behavioral models suggest that decisions are affected by the metric that is used to indicate performance, and we find support for the predictions in laboratory experiments with human subjects: Under the inventory turn rate metric, individuals overvalue inventory reductions. Compared to decisions under the days of supply metric, they choose worse inventory optimization options, invest more effort optimizing inventory of specific products, and choose higher ordering cost.

Keywords: behavioral operations management; decision biases; performance metrics; supply chain management (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (7)

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