Inventory allocation behavior of the distributor during demand spikes and supplier disruptions

Abstract

Inventory allocation stands as a fundamental operation within any supply chain. Typically, the responsibility of allocating inventory to retailers falls upon the distributor at a distribution center. The literature outlines three primary allocation methods; proportional allocation, linear allocation, and uniform allocation that distributors can employ when distributing inventory to retailers. However, distributors often grapple with determining the optimal allocation method, particularly when there is a mismatch between available supply and requested orders. While existing studies often explore order allocation for suppliers by retailers, there is a scarcity of research on distributor driven order allocation for retailers. This behavioral aspect of inventory allocation decisions remains largely unexplored under different practical scenarios. Specifically, the allocation decisions of a distributor during demand spikes and supplier disruptions have not attracted attention in the extant literature. In our study, we investigate the behavior of distributors across three distinct scenarios: (i) instances of demand spikes, (ii) occurrences of supply disruptions, and (iii) situations where both scenarios coincide. To comprehensively analyze this, we executed a computerized laboratory experiment, recruiting undergraduate students. These participants assumed the role of distributors and were tasked with allocating inventory using one of the three inventory allocation mechanisms. Our findings reveal intriguing insights. We observed that the proportional allocation mechanism emerged as the most effective strategy in scenarios involving demand spikes. Conversely, when faced with supply disruptions, the linear allocation mechanism demonstrated superior performance. Moreover, in scenarios where both demand spikes and supply disruptions intersect, our study suggests that employing the linear allocation mechanism might be the optimal course of action for distributors. Further, our research sheds light on practical recommendations for distributors to navigate and optimize their allocation strategies amidst demand fluctuations and supply disruptions. Keywords: Behavioral Supply Chain Management; Behavioral Operations; Inventory Allocation Decisions; Laboratory Experiments