Over-Reaction To Demand Changes Due To Subjective And Quantitative Forecasting

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Executive Summary

In this paper, the authors study managers' errors in decision making for inventory replenishment and how these errors affect their inventory system. In particular, primarily for its expected relationship with the bullwhip effect, they focus on the error of the over-reaction to demand changes and a common contributor of decision making biases: forecasting of demand. They show that the representative manifestations of forecasting - managers' subjective response to demand signals and the use of simple quantitative forecasting techniques - share similar consequences: both can result in an increase in internal costs and in the uncertainty and volatility of the system's replenishment orders.

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