The effects of integrating management judgement into OUT levels: In or out of context?

Abstract

Physical inventories constitute a significant proportion of companies' investments in today's competitive environment. The trade-off between customer service levels and inventory reserves is addressed in practice by statistical inventory software solutions; given the tremendous number of Stock Keeping Units (SKUs) that contemporary organizations deal with, such solutions are fully automated. However, empirical evidence suggests that managers habitually judgementally adjust the output of such solutions, such as replenishment orders or reorder levels. This research is concerned with the value being added, or not, when statistically derived inventory related decisions (Order-Up-To, OUT, levels in particular) are judgementally adjusted. We aim at developing our current understanding on the effects of incorporating human judgement into inventory decisions; to our knowledge such effects do not appear to have been studied empirically before and this is the first endeavour to do so. A number of research questions are examined and a simulation experiment is performed, using an extended database of approximately 1,800 SKUs from the electronics industry, in order to evaluate human judgement effects. The linkage between adjustments and their justification is also evaluated; given the apparent lack of comprehensive empirical evidence in this area, including the field of demand forecasting, this is a contribution in its own right. Insights are offered to academics, to facilitate further research in this area, practitioners, to enable more constructive intervention into statistical inventory solutions, and software developers, to consider the interface with human decision makers.

Definition of efficiency indicator and study of its main function as an optimization criterion

“…Despite a large number of publications, for example [1][2][3][4][5][6][7][8][9][10][11][12][13][14][15][16]20] which are devoted to efficiency or optimization criteria development, indicators that are based on all objects of the full global operation model are practically absent.…”

“…Increase of business development's rates is closely connected with a possibility of the perceived and objective choice of the best way of a scenario among many possible alternatives [1][2][3]. A necessary condition of such development is value increase of operational process output products in relation to the input products value.…”

Behavioural operational research: Returning to the roots of the OR profession

“…In addition, the authors demonstrate that by adopting simple strategies (guidance, restrictiveness, Blattberg-Hoch), the negative impacts of this behaviour can be reduced. In their article on the potential value of judgmental adjustments to statistically derived inventory related decisions, Syntetos, Kholidasari and Naim (2015) found that judgmentally adjusting order-up-to (OUT) levels offers a small advantage, and that this advantage is associated with negative adjustments, whilst larger adjustments do not perform well. In addition, the authors demonstrate that when adjustments of OUT levels are accompanied by a justification for the adjustment, then this leads to an improved inventory performance.…”

Behavioral Operational Research

“…For example, there is a stream of research that examines the work of expert modellers (Tako, 2014;Tako & Robinson, 2010;Waisel, Wallace, & Willemain, 2008;Willemain, 1994Willemain, , 1995 , novice modellers (S. G. Tavella & Papadopoulos, 2015b;, or both (Tavella & Papadopoulos, 2015a). Research focusing on other types of actors is also beginning to appear, such as studies of forecasting experts (Petropoulos, Fildes, & Goodwin, 2016;Syntetos, Kholidasari, & Naim, 2016), decision analysts (Papamichail, Alves, French, Yang, & Snowdon, 2007), and OR consultants proving strategy support (O'Brien, 2015).…”