Rationality biases in demand planning

Do you consider yourself a rational being? Probably yes. We learned that the human being is the only rational animal, that is, able to analyze problematic situations and make decisions based exclusively on reason, regardless of emotions, feelings and instincts. But can we be fully rational? In any situations? Individual experience and a quick reflection and self-criticism show us that this is not the case.

A Harvard University, an important center for studies on judgment and decision-making processes, conducted a series of experiments and concluded that in business environments, where rational decisions are assumed, time and cost restrictions, allied to the growing complexity of the market and of its competitive mechanisms, lead to the adoption of a set of simplifying rules, known as decision heuristics, which simplify the process, but lead to systematic errors, predictable, but difficult to eliminate.

In the demand planning process, the use of these heuristics can be easily identified, whether to estimate sales or the specific impact of a commercial action, such as a promotion, media campaign or product launch. The more complex the environment, the more difficult the information interpretation process is and the more prone the planner will be to unconsciously use some simplifying rule.

Let's see the following example:

At a certain point in time, a company decided to carry out a promotion, which generated a demand higher than expectations and there were shortages in stock and delays in delivery. We can see in Figure 1 that the stock level after the promotion had a considerable increase. Why did this happen? Was there a need for this additional stock? The answer is probably no. This is a bias caused by a heuristic called availability.

Figure 1 - Effect of the availability heuristic on a company's inventory

The realization of a sales promotion changes, in general, the pattern of demand in the period in which it is carried out. As it is a specific event, the promotion has an intense effect on demand planning decisions for the following periods and, mainly, on future promotions. A successful promotion, i.e., when sales increase significantly and stocks are eliminated (sometimes causing stockouts), results in increased stock levels in subsequent periods, as a form of prevention by the planner's perception that it is “more likely” a new rupture will occur, as shown in Figure 1.

The biases caused by the use of the availability heuristic are related to problems with vivid and recent information, as a fact that makes an event more “available” in memory does not necessarily make it more likely. It is not always easy to distinguish what really impacts the probability of an event occurring. Understanding the availability heuristic is essential in exceptional situations in demand planning, such as promotions and sporadic events.

Other heuristics, such as Representativeness, Anchor and Fit, Retrospective Forecasting and the Confirmation Trap, also play an important role in the demand planning process. In addition to having a structured process, based on the use of statistical models for forecasting sales and reconciling commercial and operational plans, good planning also depends on planners who know these heuristics and are able to recognize their impact on the actions of the areas involved.

Reference

https://ilos.com.br/web/problemas-de-julgamento-e-tomada-de-decisao-no-atendimento-da-demanda/