Supply Chain Engineering

Principal Investigators: Ulrich Thonemann, Elena Katok

Supply chain management analyzes the coordination of actions across companies. Traditional supply chain models assume expected profit-maximizing decision makers and analyze coordination mechanisms that optimize decision making under this assumption. However, recent studies using laboratory experiments suggest that actual decisions deviate from predictions of those traditional models. During the first phase of the project, we have analyzed one of the main coordination mechanisms, supply contracts, in detail. We have studied the role of cognitive limitations and decision biases, such as anchoring, and motivations such as risk- and loss aversion in individual decision making and social preferences, such as fairness and trust, in social contexts for supply chain models. In our research on service level contracts, for instance, we studied the anchoring bias, and in our research on wholesale price contracts and forecast sharing, we studied social preferences and the role of fairness concerns on decision making. The results of the first funding period have provided us with a good understanding of the decision biases and selfish and social preferences that are relevant. Most results were obtained using mathematical models in combination with laboratory experiments, but we also used field data.
During the second phase of the project, we will extend our research in two directions. In the first subproject on optimizing supply chain contract design, we will use the insights that we have gained from the first phase to design contracts and implement them in the field. At a major German retailer, we will design and implement a service level contract in a randomized field experiment. Besides analyzing the effect of contract parameters on order decisions, we will analyze how information should be pre-processed to reduce decision biases. At a global pharmaceutical company, we will analyze the effect of the sales incentive scheme on forecasting, again in a randomized field experiment. Both field experiments will be an important validation of theoretical and laboratory results. In the second subproject on supply chain contract negotiations, we will build mathematical models and conduct laboratory experiments to analyze the interaction between supply chain partners. While we have analyzed how decisions makers respond to given contracts in the first phase of the project, we will allow for negotiation on the contract parameters in the second phase and analyze how negotiation protocols affect the outcomes. We will also analyze the effect of bargaining protocols when contracts are incomplete. The results of the first phase of the project have allowed us to gain a solid understanding of the biases and preferences that are relevant in supply chain management. In the second phase, we will use the insights to engineer actual contracts and incentive systems and we will analyze how negotiations of contracts should be structured to improve overall efficiency.