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Int. J.

Production Economics 169 (2015) 169–178

Contents lists available at ScienceDirect

Int. J. Production Economics


journal homepage: www.elsevier.com/locate/ijpe

A behavioral experiment on inventory management with supply


chain disruption
Sourish Sarkar a,n, Sanjay Kumar b
a
Sam and Irene Black School of Business, Pennsylvania State University—Erie, 5101 Jordan Road, Erie, PA 16563, USA
b
College of Business, Valparaiso University, Valparaiso, IN 46383, USA

art ic l e i nf o a b s t r a c t

Article history: Various operational strategies for mitigating supply chain disruption have been studied theoretically, but
Received 10 February 2015 few studies have investigated behavioral decision-making in multi-echelon supply chains experiencing
Accepted 27 July 2015 disruptions. We explore the effects of communicating disruption information in real-time to supply
Available online 5 August 2015
chain members using the beer distribution game in a controlled laboratory setting. Both upstream
Keywords: (manufacturer) and downstream (retailer) disruptions are independently considered, and in each of
Bullwhip effect these scenarios, the difference between sharing and not sharing the disruption information is
Behavioral operations investigated. We find that supply chain disruptions may cause higher order variability when compared
Multi-echelon supply chain to the base case (no disruption). For a disruption at an upstream echelon, sharing the disruption
Disruption
information is found beneficial in reducing order variability and supply chain cost—upstream echelons
experience more benefits from information sharing than downstream echelons. Therefore, we advocate
that manufacturers share supply disruption information in real-time in order to benefit from a reduced
bullwhip effect and its associated costs. For a disruption at a downstream echelon, sharing disruption
information does not appear to have a significant benefit. Past studies have shown the importance of
sharing downstream inventory information with upstream supply chain members. In the event of
disruptions, our results demonstrate that sharing upstream disruption information with downstream
members is beneficial.
& 2015 Elsevier B.V. All rights reserved.

1. Introduction Peck, 2004; Kleindorfer and Saad, 2005; Tang, 2006; Gurnani et al.,
2012; Heckmann et al., 2015). However, today's supply chains are
Supply chain disruptions are a growing concern for firms, typically multi-echelon, and the disruption literature rarely addresses
especially those firms that depend upon global networks of the issues that arise from the dynamics of a multi-echelon serial
high-efficiency/low-inventory suppliers (Knemeyer et al., 2009). supply chain. The performance of such a supply chain is different
Announcements of supply chain disruptions have significant from that of a two-echelon system as the bullwhip effect (Lee et al.,
impacts on both short- and long-term financial performances 1997), which is an increase in order variability at the upstream
(Hendricks and Singhal, 2003, 2005). While supply chain man- echelon, is a typical observation for the former, but not latter. In
agers are well aware of the consequences of disruptions, a majority addition to the operational reasons, behavioral reasons also exist for
of them are reluctant to build resilient supply chains due to the bullwhip effect (Croson and Donohue, 2006). The scant literature
operational cost increases (Chopra and Sodhi, 2014). A recent available on multi-echelon supply chain disruption focuses only on
survey (Deloitte, 2013) found that 45% of the executives admit that analytical and simulation models (e.g., He and Zhao, 2012; Baghalian
their supply chain risk management programs are only somewhat et al., 2013; Schmitt and Singh, 2012; Schmitt et al., 2015). Research
effective or not effective at all; a majority of the surveyed on the behavioral aspects of firms in the wake of disruption is limited
executives identified organizational silos and lack of collaborations (Bode et al., 2011).
as the main barrier for effective risk management programs. Hendricks and Singhal (2005) found empirical evidence that
A large amount of academic literature has been devoted to firms typically postpone public announcements of disruptions.
studying risk mitigation strategies in general, and information shar- Anticipated stock price declines and high equity risks may drive
ing and collaboration strategies in particular (cf. Christopher and the managers of the disrupted facilities to conceal the information
related to disruption (or at least underreport the information to the
supply chain partners). Section 409 of the Sarbanes–Oxley Act of
n
Corresponding author. Tel.: þ 1 814 898 6800; fax: þ 1 814 898 6223. 2002 mandates real-time disclosure of any event that can affect a
E-mail address: szs15@psu.edu (S. Sarkar). publicly-listed firm's finance or share price. However, the reporting

http://dx.doi.org/10.1016/j.ijpe.2015.07.032
0925-5273/& 2015 Elsevier B.V. All rights reserved.
170 S. Sarkar, S. Kumar / Int. J. Production Economics 169 (2015) 169–178

of a supply chain disruption is still discretionary. Schmidt and with the upstream echelons gaining the larger share of the benefit.
Raman (2012) have shown that the managers disproportionately In contrast, little benefit is observed in sharing information about
underreport disruptions that are less damaging to the firm value. the downstream disruption.
The New York Times (Bunkley, 2011) reported that following the The remainder of this article is organized as follows: a theoretical
Japanese earthquake and tsunami in March of 2011, automobile part background is presented in Section 2, followed by the hypotheses
suppliers in Japan released only limited information to U.S. auto- development and description of experimental design in Section 3.
mobile companies on the extent of damage caused by disruption as The analysis and results are outlined in Section 4, and a discussion of
well as tentative timelines for resuming production. the results is undertaken in Section 5. The paper ends with conclud-
Underreporting or hiding of disruption information may affect ing remarks in Section 6.
supply chain performance. The disruption risk management lit-
erature has emphasized the importance of having “supply-chain
wide visibility of vulnerabilities” (Kleindorfer and Saad, 2005). A 2. Theoretical background
multi-industry empirical study by Blackhurst et al. (2005) also
indicated the importance of “real-time sharing of correct informa- Analytical techniques and theories in operations management
tion” across supply chains in mitigating disruptions. To study the often prescribe the optimal way in which a certain system or
effect of information sharing, we use laboratory experiments as process should function. However, practical supply chains and
this approach offers tight control over decision environments (Falk processes are “complex social systems where human behavior is a
and Heckman, 2009). A number of past studies conducted labora- central driver” (Gino and Pisano, 2008). Analytical research often
tory experiments to investigate behavioral decision making and ignores human behavioral aspects in modeling systems, which may
the bullwhip effect in serial supply chains; nevertheless, none of make the theories deviate from practice (Bendoly et al., 2006).
these studies, to our knowledge, examined the effect of real-time Therefore, it is important to compliment the theoretical analysis
disruption information sharing in a multi-echelon supply chain, with experimental observations (Tokar, 2010; Knemeyer and Naylor,
which is the central focus of our study. 2011). This research investigates the benefit of information sharing
A beer distribution game framework is followed in our experi- in the wake of disruption using a controlled laboratory experiment.
ments. The beer game was first introduced by Forrester (1958) and has In the remaining part of this section, we review the prior work in
been used in numerous studies on behavioral experiments. The basic three distinct areas in the supply chain management literature:
game mimics a serial supply chain using four players (i.e., a retailer, (i) supply chain disruption, (ii) behavioral research on serial supply
wholesaler, distributor, and manufacturer), who individually manage chains, and (iii) information sharing in supply chain. Taken together,
inventories and operating costs at four locations. Customer demand is these three areas provide us a basis for hypotheses development.
exogenous. The players are asked to minimize the supply chain costs
(i.e., sum of inventory holding and backorder costs incurred at all 2.1. Supply chain disruptions
echelons), which is a challenging task due to the presence of lead-
times in the supply chain. We incorporate supply chain disruption in Supply disruptions are unforeseen events that prevent the
the traditional beer game. Although practically any echelon of a supply normal operations in a supply chain. The current trends of rising
chain can face disruptions, we consider only two locations of disrup- outsourcing/offshoring and just-in-time initiatives are adopted to
tions in this research: the upstream (i.e., a manufacturer disruption) increase supply chain efficiency. However, these initiatives can
and downstream ends (i.e., retailer disruption) of the supply chain. also make the supply chains more vulnerable to disruptions. A
These disruptions are independently considered. significant amount of work has been done in recent years on
For each disruption location, we consider two scenarios. In the various risk identification and mitigation strategies in the event of
first scenario, when the disruption starts, the manager of the disruptions. Broadly speaking, operational strategies for managing
disrupted facility communicates the details of the disruption (i.e., disruptions can be proactive, such as inventory or sourcing
potential impact and anticipated downtime) to all members. We strategies, or reactive, such as rerouting and demand management
term this as “sharing disruption information” scenario. In the (Tomlin, 2006). For a recent review on the supply chain disruption
second scenario, no information transparency exists, and the literature, see Snyder et al. (2012).
manager decides not to reveal the disruption to the other Information transparency is critical in managing supply chain
members of the supply chain. This is described as “not sharing disruptions. Kleindorfer and Saad (2005) mentioned that achiev-
disruption information” scenario. Regardless of whether the dis- ing visibility of vulnerabilities throughout the entire supply chain
ruption information is shared, we assume that the disrupted is a difficult task, as “a company with special vulnerabilities may
facility is unable to perform any operational activities for the have every incentive to hide these from other supply chain
duration of the disruption. That means order placement for participants”. Risk sharing contracts may help in truthful reporting
inventory replenishment and fulfillment of demand from immedi- of risk-sensitivity information (e.g., Xiao and Yang, 2009) and
ate customers do not happen. Disrupted echelons are ‘inactive’ for thereby mitigating supply chain risk (e.g., Xia et al., 2011).
the duration of a disruption. Supply chain partners could only
suspect from this abnormal inactivity that a part of their supply 2.2. Behavioral research on serial supply chain
chain is temporarily nonoperational. Yet, they are unable to find
any clarification for this inactivity as the manager of the disrupted A number of studies used the beer distribution game in beha-
facility is not willing to disclose the information. Therefore, the vioral research on serial supply chains. Sterman's (1989) experimen-
exact location, potential impact and duration of the disruption are tal setup used a nonstationary customer demand function unknown
unknown to the echelons other than the disrupted echelon. to the participants—the demand jumped only once during the
By using a 2  2 experimental design (i.e., sharing/not sharing progress of the game. The analysis provided evidence of the
disruption information, upstream/downstream disruptions) along systematic underweight of pipeline inventories in ordering decisions
with a base case (no disruption), this research investigates the made by the participants. This underweight is a behavioral cause for
effect of sharing the disruption information on order quantities the oscillation and amplification of orders (i.e., the bullwhip effect).
and operating costs in a multi-echelon serial supply chain. Our Lee et al. (1997) identified four operational causes of the bullwhip
experimental data shows that sharing information about upstream effect (i.e., demand signal processing, inventory rationing, order
disruption provides significant benefit to the entire supply chain batching and price fluctuation). Croson and Donohue (2006) found
S. Sarkar, S. Kumar / Int. J. Production Economics 169 (2015) 169–178 171

that the bullwhip effect remained even if these operational causes increased bullwhip effect (Fiala, 2005). The game theoretic models
were removed from the system. Their work showed that the address the information sharing vs. private information issues. For
bullwhip effect is also caused by the behavioral reasons as the example, Li and Zhang (2008) considered a supply network
decision-makers underweight the supply line. Sharing inventory consisting of one manufacturer and multiple retailers, and showed
information cannot eliminate the underweighting bias. Sharing that sharing of the retail demand information by all retailers
point-of-sale (POS) data helps reduce the bullwhip effect even when maximized the supply chain profit. A simulation model by Zhao
the demand distribution is known in advance to all members in a et al. (2002) on a similar supply network showed that information
supply chain (Croson and Donohue, 2003), which is again due to the sharing and ordering coordination significantly improved the total
behavioral reasons. Regarding the inventory information sharing, cost and service level. Empirical research with firm-level survey
Croson and Donohue (2005) found that downstream information data also provided evidence of this improvement (e.g., Zhou and
sharing significantly reduced order oscillations, whereas upstream Benton, 2007; Prajogo and Olhager, 2012).
information sharing was not beneficial. The literature on information sharing in supply chains is exten-
Wu and Katok (2006) showed that only having experience with sive. However, a majority of the studies focused on the benefit of
the beer game might not be sufficient for improving supply chain sharing demand or inventory information. Sharing this information
performance. They found that experience together with supply chain helps the supply chain entities to make better ordering decisions,
collaboration helped to reduce the bullwhip effect. However, Tokar which can reduce order oscillation and amplification resulting in
et al. (2012) showed that training can improve the performance of lower supply chain costs. Various mechanisms developed for effec-
the participants. In this regard, a large number of past studies used tive information sharing are discussed in the literature, such as a
university students as the subjects in the beer game experiments (e. vendor-managed inventory system (e.g., Angulo et al., 2004), ERP
g., Croson and Donohue, 2003; Steckel et al., 2004; Zhao and Zhao, tools (e.g., Kelle and Akbulut, 2005), or advance demand information
2015). Only a few studies used industry practitioners: Croson and (e.g., Thonemann, 2002; Sarkar and Shewchuk, 2013). However, scant
Donohue (2006) used members of a professional organization of attention is paid to the effect of sharing disruption-related informa-
logistics managers, Tokar et al. (2011) used senior-level members of tion. As discussed earlier, managers are often unwilling to reveal the
consumer products manufacturer in the US, and Niranjan et al. operational vulnerabilities to the supply chain partners. However,
(2011) used an Asian supplier of automotive steering system. These sharing the information on vulnerabilities is an integral part of the
studies observed consistent outcomes regardless of the decision- risk assessment process (Sodhi and Tang, 2012). Therefore, it is
maker being a student or an experienced practitioner. important to understand the behavioral effect of sharing the infor-
Coordination and information sharing problems do not arise in a mation on supply chain disruptions. Exploring the operational
simple, single-echelon inventory system. Even for such a system, benefits in real-time sharing of disruption information serves as
non-optimal ordering decisions were made by the participants the motivation of the current paper.
(Bloomfield and Kulp, 2013). Ancarani et al. (2013) introduced a
demand uncertainty in the beer game setting and observed that the
participants held fewer inventories in response to the increased 3. Hypotheses development and experimental design
uncertainty. Consumer demand uncertainty and forecasting issues
were completely eliminated in Croson et al. (2014) by using a 3.1. Hypotheses
constant demand in each period that was known to every partici-
pant—the bullwhip effect still remained. This finding has been Humans tend to underestimate the chance of having a negative
explained by using the coordination risk, which acts as a buffer event and overestimate the chance of having a positive event
against the uncertainty about the way other members of a supply (Weinstein, 1980). When the decision makers have no prior
chain behave. Mitigating coordination risk factors and carrying information on the possibility of disruption, we do not expect them
coordination stock were found to moderate the bullwhip effect. to systematically plan for the disruption before it actually starts.
Behavioral experiments on a multi-echelon system by Zhao and Disruption contributes to the supply demand mismatch, which
Zhao (2015) showed that full information sharing (i.e., sharing every aggravates the bullwhip effect (compared to the base case). How-
echelon's orders, inventories and stockouts) might not improve ever, the effect of communicating the disruption information is not
supply chain performance. Unit inventory holding cost was assumed clear. An absence of information transparency creates ambiguity
equal to the unit stockout penalty cost in their experiments. over operational processes. Using natural-event experiments,
Participants were observed to focus more on reducing stockout for Abdellaoui et al. (2011) showed that people opt to take more
an information sharing scenario, and reducing on-hand inventory for insurance as the uncertainty and ambiguity increases. In inventory
a no-information sharing scenario. Rong et al. (2008) incorporated management context, accumulating stocks at present time can
supply uncertainty due to a limited production capacity of the provide insurance from future backordering. Sharing of disruption
manufacturer and introduced several capacity shocks during the information promotes transparency and reduces uncertainty, which
game. Participants were aware of the timing of these shocks and should result in lower order oscillations and mitigated bullwhip
responded with a reverse bullwhip type order variability. effects. We find some support for our conjecture from the supply
Several studies focused on the effect of demand fluctuations: chain management literature: lack of information transparency and
Tokar et al. (2011) investigated the effect of knowing the timing double-guessing by players contribute to the bullwhip effect (Geary
and magnitude of the demand spikes due to retail promotions in et al., 2006); an uncertainty of demand and supply also contributes
both single-echelon and multi-echelon systems. Sharing of the to it (Ancarani et al., 2013). The coordination risk increases with an
demand spike information was found helpful to the supply chain increase in the ambiguity and unpredictability of the partners
members. Tokar et al. (2014) extended this analysis and suggested (Croson et al., 2014). In our experiments, not sharing information
that sharing information on the timing of store-level promotions creates more ambiguity, thus providing rationale for accumulation
was critical for retailers to improve supply chain performance. of a larger inventory. This leads to our first set of hypotheses
regarding information sharing in the wake of retailer disruptions.
2.3. Information sharing in supply chain
H1A. In the event of a disruption at downstream echelon (retailer),
The literature considers information asymmetry and a lack of sharing of disruption information with supply chain members will
transparency as key reasons for supply chain inefficiency and reduce the level of order oscillations throughout the supply chain.
172 S. Sarkar, S. Kumar / Int. J. Production Economics 169 (2015) 169–178

H1B. In the event of a disruption at downstream echelon (retailer), tend to underweight the supply line while making ordering decision.
sharing of disruption information with supply chain members will This underweighting issue contributes to the bullwhip effect by
reduce the magnitude of amplification of order oscillations through- increasing the order variability at the upstream echelons (Croson
out the supply chain. and Donohue, 2006). Implications of a disruption to the upstream and
the downstream sides can be different (Schmitt and Singh, 2012).
H1C. In the event of a disruption at downstream echelon (retailer), Therefore, disruption impact may depend on the location of disrup-
sharing of disruption information with supply chain members will tion. We suspect that sharing of the disruption information may also
result in lower supply chain cost. play a role here. Particularly when disruption information is not
In a serial supply chain, the order information flows upstream shared, undisrupted echelons have little to no indication that the
and the material flows downstream. In addition, the upstream disrupted echelon is temporarily nonoperational. Specifically during
order variability is more than the downstream variability due to upstream disruptions, the upstream echelons cannot fulfill the orders
the bullwhip effect. The opposing direction of flows, together with placed by the downstream ones. The downstream echelons do not
the difference in order variabilities could produce different out- know the exact reason for this irregularity, which may create a
comes for the upstream disruptions, which led us to test a similar nervousness in the downstream echelons. These echelons may
set of hypotheses for manufacturer disruptions. provide even less weight to the supply line after experiencing the
irregularities, resulting in large order sizes and increased bullwhip
H2A. In the event of a disruption at upstream echelon (manufac- effect. Therefore, we expect to see a high level of order oscillation for
turer), sharing of disruption information with supply chain members the upstream disruptions. For downstream disruptions, the upstream
will reduce the level of order oscillations throughout the supply chain. echelons have no specific information regarding the disruptions.
However, these echelons are able to fulfill arriving orders as they
H2B. In the event of a disruption at upstream echelon (manufac-
remain operational. Since this normal behavior of upstream echelons
turer), sharing of disruption information with supply chain members
do not create irregularities, there is no additional cause for further
will reduce the magnitude of amplification of order oscillations
underweighting of the supply line. Therefore, when the disruption
throughout the supply chain.
information is not shared, we may expect to see a lower level of order
H2C. In the event of a disruption at upstream echelon (manufac- oscillation for downstream disruptions (compared to the upstream
turer), sharing of disruption information with supply chain members disruptions).
will result in lower supply chain cost. When the upstream disruption information is shared, the exact
reason for the irregularity is known to the downstream echelons.
In case there is an impact of information sharing on decision- Therefore the additional cause for underweighting the supply line
making, we would like to investigate the benefits for various supply should disappear. We may even expect the downstream echelons
chain echelons. Since the manufacturer receives the most distorted to help in reducing the overall cost of the supply chain by not
demand information among all echelons, the bullwhip effect should placing large orders immediately following the disruption. In pre-
have the most severe impact on the manufacturer (i.e., the disruption periods, supply chain echelons may attempt to accu-
manufacturer's operating cost is typically the highest in a supply mulate inventory as a protection from the demand variance.
chain). Information sharing promotes transparency, which should Carrying this additional inventory should be beneficial as it
provide the largest benefit to the echelon most affected by the provides protection from the impact of an upstream disruption.
distorted information. For example, Croson and Donohue (2003) For a downstream disruption, carrying such additional inventory
showed that the manufacturer is the primary beneficiary of sharing might not be very useful as the consumer orders cannot be
POS data. It can be similarly argued that regardless of the location of fulfilled due to the disruption. Immediately following the disrup-
a disruption, sharing disruption information should be most ben- tion, the entire supply chain should experience a spike in the order
eficial to the manufacturer. Therefore, we have the following set of level, as the retailer places a large order in an attempt to establish
hypotheses, one each for downstream and upstream disruptions. the normal condition. The spike in order level should aggravate
the bullwhip effect (as compared to an upstream disruption).
Downstream disruption: Therefore we have the following hypotheses.
H3A1. Sharing downstream disruption information with all supply
H4A. When disruption information is not shared, disruption at an
chain members will result in a larger reduction in order oscillation for
upstream echelon (manufacturer) results in a higher level of order
the upstream members (i.e., manufacturer and distributor) than that
oscillations than a disruption at a downstream echelon (retailer).
for the downstream members (i.e., wholesaler and retailer).

H3B1. Sharing downstream disruption information with all supply H4B. When disruption information is shared, disruption at an
chain members will result in a larger reduction in supply chain cost upstream echelon (manufacturer) results in a lower level of order
for the upstream members (i.e., manufacturer and distributor) than oscillations than a disruption at a downstream echelon (retailer).
that for the downstream members (i.e., wholesaler and retailer).
Upstream disruption: 3.2. Configurations
H3A2. Sharing upstream disruption information with all supply
chain members will result in a larger reduction in order oscillation We conduct a laboratory experiment with a setup similar to the
for the upstream members (i.e., manufacturer and distributor) than traditional beer distribution game, but with the addition that we
that for the downstream members (i.e., wholesaler and retailer). introduce supply chain disruptions. Therefore our experimental
design mimics a decentralized, periodic review, serial inventory
H3B2. Sharing upstream disruption information with all supply systems with four echelons—retailer (R), wholesaler (W), distri-
chain members will result in a larger reduction in supply chain cost butor (D) and manufacturer (M). Each echelon is managed by a
for the upstream members (i.e., manufacturer and distributor) than human participant, who places replenishment orders with
that for the downstream members (i.e., wholesaler and retailer). upstream echelon and fulfills the demand from the downstream
echelon over a set duration of the game. Manufacturer is uncapa-
Finally, we compare the impact of upstream and downstream citated. Lead times cause ordering delays and shipping delays
disruptions on supply chains. In a serial supply chain, decision-makers between each echelon. We assume two periods of ordering delays
S. Sarkar, S. Kumar / Int. J. Production Economics 169 (2015) 169–178 173

and another two periods of shipping delays for every echelon 3.3. Implementation
except the manufacturer, who takes three periods to produce the
items (Fig. 1 shows a schematic of the supply chain). The number We developed a web-based program using ASP.NET and uploaded
of echelons and the corresponding delays in our experiments are the program in a server, which can be accessed through internet. The
consistent with those assumed by the past researchers (e.g., participants used web browsers in individual computer terminals to
Croson and Donohue, 2003, 2006). place the order with the upstream echelons after observing the
During the experiments, the following sequence of activities incoming demands, current inventory levels, current shipment quan-
occurs in each echelon: (i) delivery of shipment from the upstream tities and the order quantities in the last 10 periods. Ten simultaneous
echelon, (ii) demand arrival from the downstream customer, (iii) replications for each of the five treatments can be conducted by the
shipment to fulfill the demand (items will be backordered in case program. Common random demand streams [ U(0,8)] are used across
of stockout), (iv) placement of new order with the upstream all treatments for a fair comparison of the performance differences. We
echelon for inventory replenishment. The first three activities are recruited 200 undergraduate business students from a major public
carried out automatically; each participant only decides the order university in the US as the participants (subjects) in our experiments.
amount in each period. Consumers' demand in each period is These subjects were randomly assigned into the five treatments, which
uniformly distributed between 0 and 8 units, and it is indepen- enabled us to have one student to manage every echelon for all ten
dently drawn between periods. The demand distribution is known replications in each treatment (i.e., four subjects formed a team and
to all participants. At the start of the experiments, every echelon completed one replication). Every replication was conducted for 55
has an initial inventory of 12 units and incoming shipments of periods; however, the subjects had no prior knowledge on the total
4 units in each of the next two periods. The outstanding order at number of periods in each experiment, which could have induced an
each echelon for the previous two periods is also 4 units. end-of-period behavior otherwise. Before beginning the experiments,
Supply chain disruptions are unpredictable events. Therefore, the subjects were briefed on the rules and objectives of the game. The
the participants have no prior knowledge that disruption may meaning of “uniform demand distribution” had been clearly explained
happen during the experiments. We consider five treatments as during the briefing. The subjects were told the amount of holding and
shown in Fig. 2. Treatment 1 is the base case, where no disruption backorder costs (which were $0.50 and $1.00 per unit per period)—
takes place. In the absence of disruptions, this setup is the same as these cost values are consistent with prior studies. The objective of each
that for a traditional beer game. In each of the remaining game was to minimize the total supply chain cost. After the briefing, the
treatments, a disruption is introduced at either the retailer's or subjects practiced the games for five periods before the experiments
the manufacturer's location starting in period 10. Each disruption began. Any kind of communication between subjects was prohibited for
is five periods long—during this time, the disrupted echelon (i.e., the duration of the game. We did not mention anything on disruption
retailer or manufacturer) cannot perform normal operations. during our briefing; although considering the business background of
Though the disrupted echelon can observe the incoming demand all students, we can assume that they were familiar with the con-
in every period, fulfillment of downstream demand, order place- sequence of a supply chain disruption. At period 10, some subjects (i.e.,
ment with upstream suppliers, and delivery of replenishment disrupted echelons in treatments 2 and 4, and all echelons in treatments
items are prevented throughout the disruption. As soon as the 3 and 5) saw the disruption information screen in their web browsers.
normal operations resume (i.e., at the start of period 15), (i) all Before beginning the games, participants were informed of the
incoming shipments are received, (ii) accumulated incoming incentives: $100 for the winning team and $50 for the second winner in
demand during disruption are shipped (subject to inventory each treatment. Each student also received a bonus credit in the course-
availability), and (iii) disrupted echelon can place replenishment work for participation in the game. While various monetary incentive
order of any quantity. Similar to the pre-disruption periods, structures exist in the literature, ours is similar to the fixed prize schemes
information flow and material flow lead times are also applicable used in Sterman (1989) and Ancarani et al. (2013). We believe that our
for post-disruption ordering and delivery in the disrupted echelon. simple structure is readily interpretable, which allowed the participants to
The retailer disruptions are introduced in treatments 2 and 3. focus on the ordering decisions rather than the incentive mechanism.
When the disruption begins in a game (i.e., in period 10), the
retailer learns about the duration of disruption (i.e., five periods)
and its impact (i.e., no order placement, delivery and demand 4. Results
fulfillment during the disruption; accumulated demands need to
be filled after the disruption, etc.). In treatment 3, the disruption Our primary units of analysis are the order quantities placed by
information is shared with the other echelons as soon as the each subject and the corresponding inventory levels, which are
disruption starts. In a similar manner, the manufacturer disruptions
are introduced in treatments 4 and 5. Similar to the case of retailers
in treatments 2 and 3, the manufacturers in treatments 4 and
5 receive the disruption information at period 10—but the disrup-
tion information is immediately shared with other echelons only in
treatment 5. Treatments 2 and 4 (no information sharing) replicate
a practical scenario that managers of the disrupted facilities may
consider hiding the disruption information beneficial. The rationale
behind such an intention of the managers is discussed earlier with
real-life examples. Fig. 2. Classification of the treatments used in the experiments.

Fig. 1. Schematic of the beer distribution game model.


174 S. Sarkar, S. Kumar / Int. J. Production Economics 169 (2015) 169–178

compiled for periods 10–50. Data before period 10 is not considered, manufacturer disruptions) suggests a potential role of information
as all treatments are expected to be similar before the start of sharing in improving the overall cost.
disruptions. The impact of a disruption is often longer than the
disruption duration (Schmitt and Singh, 2012), therefore we consider
4.1. Hypothesis test
up to 50th period in our analysis. Following Croson et al. (2014) and
Zhao and Zhao (2015), we use Grubbs (1969) procedure to identify
To further explore the benefit of information sharing and particu-
the outliers in all treatments. One team from each of the treatments 1,
larly to verify our hypotheses, we perform the Mann–Whitney U test
3 and 5 are found to be outliers and eliminated from our analysis.
(also called Wilcoxon–Mann–Whitney test, see Siegel and Castellan
Fig. 3(a)–(e) shows the order quantities and Fig. 4(a)–(e) show the
(1988), p. 128), which is a nonparametric test to determine whether
order variances for each echelon in all five treatments. By definition,
two independent groups were drawn from the same population. This
the bullwhip effect is a phenomenon of increased order variance at a
test, widely used in similar behavioral studies, has the advantage of
given echelon relative to the order variance at the downstream
not relying on the normal distribution assumption. First we compare
echelon. Figs. 3 and 4 confirm the presence of the bullwhip effect
the difference in order variances between the base case (treatment 1)
in all treatments. A nonparametric sign test (Siegel and Castellan,
and each of the treatments 2–5.We report the p-values from the
1988, p. 80) considering “success” as an increase in the variance of
Mann–Whitney U test as: 0.07 (treatment 2), 0.05 (treatment 3), 0.02
orders placed in two successive echelons confirms the amplification
(treatment 4) and 0.64 (treatment 5). This test shows a significant
of order variance to the upstream of these supply chains (p-value
increase in the order variability due to disruptions; treatment 5 (i.e.,
o0.01 or better). The median supply chain costs incurred during
periods 10–50 are $1671.50, $2566.00, $2565.00, $3312.50, and
$1731.50 for treatments 1–5, respectively. The corresponding per-
period costs incurred by the individual roles are shown in Fig. 5.
These values depict similar supply chain costs in treatments 2 and 3
(i.e., no information sharing vs. information sharing in the retailer
disruptions), but a large difference between the costs in treatments
4 and 5 (i.e., no information sharing vs. information sharing in the

Fig. 4. Variance of orders by role and team for each treatment.

Fig. 5. Role-specific cost break-up for median supply chain cost in each treatment.
R¼ retailer, W ¼ wholesaler, D¼ distributor, M ¼ manufacturer. Treatment 1 is base
case; treatment 2 is retailer disruption with no information sharing; treatment 3 is
retailer disruption with information sharing; treatment 4 is manufacturer disrup-
tion with no information sharing, treatment 5 is manufacturer disruption with
Fig. 3. Average ordering quantity for each echelon across all treatments. information sharing.
S. Sarkar, S. Kumar / Int. J. Production Economics 169 (2015) 169–178 175

the manufacturer disruption with information sharing) is the only the difference is found to be significant (n4 ¼ 20, n5 ¼ 18,
exception. When we compare the variances of the orders across mean variance 4 ¼ 197:6, mean variance 5 ¼ 60:9, p ¼ 0:003). A
treatments 2 and 3 (i.e., disruption at retailer), none of the differences similar grouping of the downstream echelons (i.e., retailer and whole-
are found to be significant at the individual echelon levels. We also saler) also shows a significant difference across the treatments
compare the order variances in the supply chain level combining all (n4 ¼ 20, n5 ¼ 18, mean variance4 ¼ 19:1, mean variance5 ¼ 13:7,
echelons: test statistics is still not significant (n2 ¼ 40, n3 ¼ 36, p ¼ 0:048). Both the upstream and downstream groups have lower
mean variance2 ¼ 37:5, mean variance3 ¼ 39:6, p ¼ 0:67; subscript order oscillations because of the information sharing; however, the
2 and 3 represent treatments 2 and 3, respectively), therefore we do upstream group achieves a reduction of ð197:6  60:9Þ
197:6  100 ¼ 69:2% on
not find support for H1A. However, a similar comparison test for the average, while the downstream group achieves a reduction of only
order variances in manufacturer disruptions demonstrates a signifi- ð19:1  13:7Þ
19:1 100 ¼ 28:1%, which supports H3A2.
cant difference between treatments 4 and 5 (results shown in Table 1),
We use a similar analysis for comparing the operating costs of the
therefore H2A is supported. We conclude that real-time sharing of the
upstream and downstream echelons across treatments 4 and 5.
disruption information by manufacturers reduces order oscillations.
Operating cost reduction achieved by information sharing is signifi-
To verify the impact of information sharing on order amplifica-
cant for the upstream members (n4 ¼ 20, n5 ¼ 18, mean cost4
tion, we again use the Mann–Whitney U test for a comparison of
¼ 1302:2, mean cost5 ¼ 692:9, p o 0:002, reduction¼ 46.8% on
amplification ratios (i.e., the ratio of order variances at adjacent
average), but not significant for the downstream counterparts
echelons) across treatments: p-values for neither the echelon level
(n4 ¼ 20, n5 ¼ 18, mean cost4 ¼ 383:3, mean cost5 ¼ 366:5, U ¼
comparisons nor the overall comparisons indicate a significant
326, p ¼ 0:47). Therefore, H3B2 is also supported.
difference between sharing and not sharing the disruption informa-
We compare the order oscillations in supply chains (i.e., by
tion. For the retailer disruptions, test result for the overall compar-
grouping order variances in all four echelons together) across
ison is the following: n2 ¼ 40, n3 ¼ 36, mean amplification2 ¼ 1:430,
treatments 2 and 4. Recall that these two treatments incorporate
mean amplification3 ¼ 1:480, p ¼ 0:54. For the manufacturer disrup-
the retailer disruption and the manufacturer disruption, respec-
tions: n4 ¼ 40, n5 ¼ 36, mean amplification2 ¼ 1:711, mean
tively—in none of them the disruption information is shared with
amplification3 ¼ 1:432, p ¼ 0:32. Therefore H1B and H2B are not
the other echelons. The difference in order oscillations is not
supported. We found evidence that the disruption information
significant (n2 ¼ 40, n4 ¼ 40, mean variance2 ¼ 61:3, mean
sharing by the manufacturers does help to reduce the order
variance4 ¼ 108:3, p ¼ 0:49), therefore H4A is not supported. Next,
oscillations; however, no such improvement is observed for order
we compare treatments 3 and 5. These treatments incorporate
amplifications. It should be noted here that the unchanged order
information sharing for the retailer disruption and the manufac-
amplification ratios do not subdue the benefits of information
turer disruption, respectively. The difference in order oscillations
sharing, since oscillation reduction (as opposed to amplification
across these two treatments is significant (n3 ¼ 36, n5 ¼ 36,
reduction) is a direct measure of supply chain performance improve-
mean variance3 ¼ 67:1, mean variance5 ¼ 37:3, p ¼ 0:005), which
ment. Croson and Donohue (2003) showed an example: if the order
supports H4B.
oscillations are reduced by a constant factor for each echelon, then
the amplification ratios will remain unchanged, but the overall
4.2. Weight on inventory and supply line
supply chain will have a reduced oscillation.
We further investigate the effect on supply chain cost at each
Following Sterman (1989), and Croson and Donohue (2006), we
echelon across treatments. The p-values for the Mann–Whitney U
next test the underweighting of supply line issue by the following
test are not significant for the comparison between treatments in
regression for each subject in our experiments:
case of retailer disruptions, but they are significant in case of n o
i  1;g
manufacturer disruptions (results shown in Table 2). The data Oig ig ig ig
t ¼ max 0; α0 þ αI I t  1 þ αR Ot  2 þ αS St þ αN N t þ αt t þϵ ð1Þ
provides no support to H1C, but it does support H2C.
Since H1A–H1C are not supported, our analysis indicates no where i, g and t indicate the echelon (i.e., i ¼ 1, 2, 3 and 4 for
significant benefit in sharing downstream disruption information. retailer, wholesaler, distributor and manufacturer), team (i.e.,
As there is no benefit, H3A1 and H3B1 are not applicable. g ¼ 1, 2, …, 10) and time period (t ¼ 10, 11, …, 50), respectively.
As shown in Tables 1 and 2, the benefit of disruption information Order placed by echelon i in current period t is Oig t . The explana-
sharing appears to be larger for the upstream echelons (i.e., distributor tory
 variables are the inventory level in the previous period

and manufacturer) than the downstream counterparts (i.e., retailer I ig
t  1 , the orders arrived from the downstream echelon in
i  1;g
and wholesaler). We verify the significance of this difference by current period
  (Ot  2 ), the shipments received from upstream
ig
grouping the order variances of distributor and manufacturer together echelon
  S t , the outstanding order quantity in the supply line
and compare those values across the treatments 4 and 5 Nig t , and the time period t. The regression provides the best-fit
(i.e., disruption at manufacturer) using the Mann–Whitney U test: model that predicts the ordering decisions of each subject. How-
ever, as noted in Croson and Donohue (2003), there is no

Table 1 Table 2
Difference in order variances across treatments 4 and 5 (manufacturer disruption). Difference in operating cost across treatments 4 and 5 (manufacturer disruption).

Echelon Retailer Wholesaler Distributor Manufacturer Overall Echelon Retailer Wholesaler Distributor Manufacturer Overall

n4 10 10 10 10 40 n4 10 10 10 10 10
n5 9 9 9 9 36 n5 9 9 9 9 9
mean variance4 11.9 26.2 143.8 251.5 108.4 mean cost4 296 471 1263 1341 3371
mean variance5 9.3 18.1 34.4 87.5 37.3 mean cost5 291 442 724 662 2119
Ustatistics 74 73 63 61 1124 U statistics 91 78 66 59 62
p-Value 0.21 0.18 0.03 0.02 0.006 p-Value 0.97 0.36 0.05 0.02 0.04

Subscripts 4 and 5 indicate treatments 4 and 5, respectively. Disruption information Subscripts 4 and 5 indicate treatments 4 and 5, respectively. Disruption information
is not shared in treatment 4, but is shared with other echelons in treatment 5. is not shared in treatment 4, but is shared with other echelons in treatment 5.
p-Values shown are for two-tailed comparison using Mann–Whitney U test. p-Values shown are for two-tailed comparison using Mann–Whitney U test.
176 S. Sarkar, S. Kumar / Int. J. Production Economics 169 (2015) 169–178

guarantee that the subjects actually ordered according to the motivations to comply with the information transparency require-
estimated parameter values. The average adjusted R2 value ranges ments. This concern is legitimate, as external mandates, such as
between 0.63–0.69 across the treatments. The optimal values of αI the Sarbanes–Oxley Act, have been devised to encourage man-
(i.e., the coefficient of inventory level) and αN (i.e., the coefficient agers to disclose disruption information in real-time. However, our
of outstanding order quantity) are –1. If the subjects neither findings show that the managers of upstream echelons may be
underweight nor overweight the supply line, the values of αI and better off sharing the disruption information for their own benefit
αN will be the same. However, we find the average value of in regard to reduced bullwhip effects and associated supply chain
αI ¼ –0:216 and αN ¼ –0:072 in treatment 1 (base case). The costs. The main hindrance for building resilient supply chains is
difference between αI and αN is statistically significant often the associated operating cost increases (Chopra and Sodhi,
ðαI o αN ; p  value o 0:01Þ, which indicates underweighting of sup- 2014). However, maintaining information transparency may not
ply line by the subjects. In the absence of disruption, Sterman increase the operating costs, but still reduces the impact of a
(1989) obtained: αI ¼ –0:261, αN ¼ –0:088, and Croson and disruption at the manufacturer's location.
Donohue (2006) obtained: αI ¼ –0:237, αN ¼ –0:030. These values It is interesting to compare our findings with Croson and
are similar to ours, which provides a validation of our Donohue (2005), who using a beer game framework in their
experimental setup. behavioral experiments, showed that sharing inventory informa-
We further calculate the values of (αI þ αN ) for the upstream tion of the downstream echelons is effective in reducing the
members (i.e., the average of manufacturer and distributor) and bullwhip effect, and sharing upstream inventory information
the downstream members (i.e., the average of wholesaler and provides little benefit. Their experiment considered the same
retailer) of each game in the treatments 4 and 5. The value of retail demand distribution as our experiments, but did not con-
(αI þαN ) implies the weight of inventory position (i.e., inventory sider any disruptions in supply chains. We find that sharing
levelþ on-order inventory) in the ordering decisions. The p-value information on upstream disruptions reduce the bullwhip effects
for Mann–Whitney U test is weakly significant for the difference and associated costs, while sharing information on downstream
(mean αI þ αN for the upstream treatment 4 ¼  0.116, mean αI þ αN disruptions did not create much of a difference. Here a comparison
for the upstream treatment 5 ¼  0.192, p-value ¼0.07), indicating can also be drawn with the findings of two other studies. In the
the effect of information sharing on the weightage of inventory first study, Schmitt and Singh (2012) suggested that addressing
position for the manufacturer disruptions. The analysis suggests downstream disruption should be prioritized over addressing
that when disruption information is not shared, the decision- upstream disruptions under resource constraints, as the down-
makers give even less weight on the inventory position. The stream disruptions can have a faster effect on consumers. When
corresponding p-value for the difference in downstream members' risk mitigation initiatives are directed toward increasing informa-
weightages is not significant. The coefficient values obtained tion transparency throughout the supply chain, our study shows
through regression analysis may help to explain the findings in that increasing transparency for an upstream disruption is more
the previous subsection: when the manufacturer's disruption important than that for a downstream disruption. In the second
information is not shared, an upstream decision-maker gives less study, Croson and Donohue (2003) found that sharing POS data
weight on the inventory position that results in more severe was more beneficial to the echelon furthest from the source of the
underweighting issue compared to the information sharing case. POS data. We find that sharing upstream disruption information is
Sharing disruption information helps to ameliorate the under- more beneficial to the upstream echelon itself.
weighting, hence the order variability reduces significantly. In our analysis, we did not find support for H4A as the order
oscillation levels are similar for the upstream and downstream
disruptions in the absence of information sharing. In the case of an
5. Discussion upstream disruption, postponing the fulfillment of large orders due to
the disruption can cause high order oscillation levels. However, for
The collective results of the treatments indicate that in the case downstream disruptions, a spike in the retailer's order quantity
of a disruption at the upstream echelon (i.e., manufacturer), it is immediately after the disruption may cause high order oscillation as
beneficial to share the disruption information (such as the well. In information sharing cases, downstream disruptions have
expected duration and significance) with the other echelons in more impact, which supports the finding of Schmitt and Singh (2012).
the supply chain. Sharing of the upstream disruption information We offer an explanation for our findings on the impact of
helps to mitigate the order variance at both the upstream and downstream vs. upstream disruptions. In a demand-driven supply
downstream echelons, which results in lower operating cost for chain, the retailer has more control than the manufacturer over
the supply chain. Information sharing reduces ambiguity over the aggregate order quantities flowing through all echelons: even
supply chain operations, which may help improve trust and a small change in a retailer's order can result in a larger order
long-term reliability in the buyer–supplier relationship. The entire volume for the manufacturer; however, increased production
supply chain may also get the assurance of timely warning for any volume at the manufacturer's end does not necessarily increase
future disruptions. Disrupted upstream echelons gain the larger outbound order shipment from the manufacturer. In both cases of
share of the overall benefit: both order variability and operating downstream disruptions (i.e., information sharing and no informa-
costs drop significantly. In the case of a disruption at the down- tion sharing), retailers place larger orders after the disruption to
stream echelon, we do not find any significant improvement in clear backorders that occurred during the disruptions and also in
supply chain performance by sharing disruption information with anticipation of future disruptions. However, in both cases, the
supply chain members. From the perspective of the bullwhip retailer has the same information on the disruptions regardless of
effect, a disruption at the manufacturer's location is found to be whether she is sharing the information. Therefore, the order
less damaging than a disruption at the retailer's location if the quantity from the retailer should not be significantly different
disruption information is shared. In the absence of information across the two treatments. Other echelons only react to the
sharing, no such conclusion can be made. retailer's demand, and knowing about the disruptions may not
A vast amount of literature on supply chain risk management create a large difference in their ordering decisions. On the other
has investigated supply chain incentives and contract design, hand, due to upstream disruptions, the shipments may take an
where an underlying assumption is that the manufacturers are unusually long time to be delivered. When disruption information
unwilling to reveal disruption information and need external is not shared, other echelons do not get a clear explanation for this
S. Sarkar, S. Kumar / Int. J. Production Economics 169 (2015) 169–178 177

delay, and they assume it is because of the manufacturer's the durations are often predicted with reasonable accuracy. How-
incompetency. They (especially the distributor, who is immedi- ever, when the disruption duration is significantly misestimated,
ately downstream) react by attempting to pile up stocks to buffer a the supply chain members receive distorted information, which
higher coordination risk in coping with an incompetent manufac- may have an impact on order decisions. Another potential direc-
turer. The attribution theory (Kelley and Michela, 1980; Coombs tion for future research is investigating the causal schemata in the
and Holladay, 1996) can help explaining this behavior as subjects' behavior. A possible explanation for the difference in
outlined below. ordering behavior of the subjects is due to the attributional
Supply chain disruption is an organizational crisis for the difference. However, attributional complexity scale varies with
disrupted echelon. Once the supply chain members detect the the perceptions of individual subjects (Fletcher et al., 1986),
inactivity of the disrupted echelon due to a crisis, they evaluate the therefore an in-depth study on the causal inference process may
cause and make attributions. Communication with the stake- be conducted.
holders (i.e., information sharing with the supply chain members) In reality, a supply chain manager may be reluctant to share the
can influence the evaluation and judgment made, which in turn disruption information due to a fear that the firm's goodwill or
influences the supply chain members' feelings and behavior reputations will be damaged. A limitation of this study could be
toward the actor (i.e., the disrupted echelon). The attribution is the absence of this goodwill factor consideration. However, we
influenced by the received information and perceiver's beliefs (e.g., have investigated the immediate impact of sharing disruption
suppositions about the causes, and expectations of the effects). information on the operational efficiency rather than the long-
The locus of causality (i.e., internal or external) and controllability term effect on goodwill.
of cause are two important aspects of attribution (Ford, 1985).
When ambiguity exists, the causal analysis is biased toward
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