- Volume 41 Issue 2
Irrational ordering decisions of supply chain members have been gaining growing importance in the area of supply chain management. Irrational ordering behaviors that deviate from the profit maximizing decisions in the newsvendor settings have observed with human experiments in recent research. These behaviors can be modeled with several typical decision bias elements. This bias in ordering decisions affects the performance of supply chain contracts designed based on the assumption that the supply chain members make optimal decisions, making it necessary to design supply chain contracts by considering the irrationality. The purpose of this research is to derive a method to design the revenue sharing contract that considers human irrationality in ordering decisions. This research considers a simple two-echelon supply chain consisting of one supplier and one retailer, where the supplier is assumed to be perfectly rational while the retailer making newsvendor type ordering decisions displays irrational ordering behaviors. Under this environment, this research analytically models the revenue sharing contract to maximize the total supply chain profit or the supplier's own profits while considering the three decision bias patterns of the retailer, which include the pull-to-center effect, the prospect theory, and the increased subjective sensitivity to the revenue sharing ratio. Irrationality parameters are measured through human experiments based on which and through numerical simulations, we showed that significant improvements in the supply chain performance can be achieved.
Supply Chain;Newsvendor Model;Irrational Ordering Behavior;Behavioral Experiment;Pull-to-Center Effect;Prospect Theory;Revenue Sharing Contract;Behavioral Operation Management
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