Expedited Shipping to Meet a Target Service Level: Analytical Recommendations and Behavioral Biases

Abstract

Maintaining a high service level with customers involves a fundamental tradeoff between investing in inventory and investing in expediting the shipping of the additional units needed to achieve that service level. We use a multi-method approach to show how and when ordering decisions are influenced by different levels of expediting costs and target service levels. First, we derive a mathematical model that provides a closed-form solution to this tradeoff. Second, we run a behavioral study to show how increments in the expediting cost and the target service level impact buyers’ ordering behavior. Results show that ordering decisions are influenced mainly by the expediting cost. Our econometric estimations provide a generalization of the pull-to-center effect to a setting with expedited shipping. Moreover, we find that buyers adjust their orders only when facing a high target service level. To reduce the observed behavioral biases, we propose that managers can increase the salience of key performance metrics in the buyers’ decision-making process. We test for the role of salience with a second behavioral study and a behavioral model. Results show that the extent to which salient information helps improve buyers’ ordering decisions depends on the level of the expediting cost. Interestingly, our behavioral model highlights how ordering decisions improve not by eliminating people’s biases but by amplifying some of those biases. We contribute to the literature on expedited shipping and behavioral operations, and provide practical recommendations for how managers can improve ordering decisions.