A Theoretical Framework of Risk Compensation in Supply Chain Management Decision Making

Abstract

The goal of this study is to develop a theoretical framework for the study of decision makers within supply chains. Decision makers may compensate inappropriately by overstocking or overestimating lead times resulting in greater inventory costs. By leveraging the knowledge associated with risk compensation, better accountability of logistics and inventory holding costs can be achieved. Although there are conflicting views on risk compensation, the theory does provide insights into the complexities facing the decision maker in supply chain environments. More specifically, there has been relatively little research examining how human factors issues impact the supply chains' effectiveness. The risk compensation framework is tailored to represent and model the inventory management portion of the supply chain and can be validated through experimentation by evaluating the operator's perceived risks. In developing this model, the foundations for extending our knowledge of the human decision making in supply chain management can be established.