Trust and trustworthiness in supply chain management [electronic resource]
Keywords: Management Science and Engineering

This dissertation studies the role of two important behavioral factors, trust and trustworthiness, in supply chain management. In particular, we investigate an important operations context, forecast information sharing. We consider a two-tier supply chain in which the upstream supplier solicits demand forecast information from the downstream manufacturer for making capacity investment decisions. To ensure abundant supply, the manufacturer has an incentive to inflate her forecast in a costless, nonbinding, and nonverifiable type of communication known as "cheap talk." In Chapter 2, we employ a novel methodology that combines theoretical modeling with experimental methods to show that the non-pecuniary factors of trust and trustworthiness can significantly improve the efficacy of forecast sharing. Specifically, we first show that under standard game theory, the only equilibrium in our setting is uninformative: the manufacturer's report is independent of her forecast and the supplier does not use the report to determine capacity. However, we observe in controlled laboratory experiments that parties cooperate even in the absence of reputation-building mechanisms and complex contracts. We argue that the underlying reason for cooperation is trust. The current literature on forecast sharing and supply chain coordination implicitly assumes that supply chain members either absolutely trust each other and cooperate when sharing forecast, or do not trust each other at all. Contrary to this all-or-nothing view, we determine that a continuum exists between these two extremes. In addition, we determine (i) when trust is important in forecast information sharing, (ii) how trust is affected by changes in the supply chain environment, and (iii) how trust affects related operational decisions. To explain and better understand the observed behavioral regularities, we also develop an analytical model of trust to incorporate both pecuniary and non-pecuniary incentives in the game-theoretic analysis of cheap-talk forecast communication. The model identifies and quantifies how trust and trustworthiness induce effective cheap-talk forecast sharing under the wholesale price contract. We also determine the impact of repeated interactions and information feedback on trust and cooperation in forecast sharing. We conclude with a discussion on the implications of our results for developing effective forecast management policies. In Chapter 3, we further extend our research on trust and trustworthiness in supply chains to a multi-country context. We experimentally investigate the country-level variations in trust and trustworthiness between China and the U.S. in forecast sharing. We first note that both trust and trustworthiness and the supplier's capability to solve for the optimal capacity decision affect the efficacy of forecast sharing and the resulting profits. Thus, we disentangle these two aspects with a novel experimental design. Our experimental results first demonstrate the robustness of the pull-to-center bias in both countries when people solve a complex decision problem under uncertainty (i.e., the newsvendor problem). We next determine that Chinese consistently exhibit lower trust and trustworthiness than their U.S. counterparts. In addition, when risk or vulnerability entailed by trusting another increases, the relative decline in trust (measured by the percentage decrease of trust) is more evident in the U.S., whereas the absolute decline is more pronounced in China. This chapter takes the first attempt to manifest the impacts of cultural and institutional heterogeneity between China and the U.S. on strategic supply chain interactions. Our conclusions underscore the importance for firms to devote more time and effort to maintaining a trusting relationship with their Chinese partners than they do with U.S. ones. Chinese companies and government should in turn proactively cultivate a cooperative mindset among the young generation and establish an environment conducive for efficient inter-organization transactions. We also highlight the critical environment (e.g., one with a high overage risk) in which sustaining this trusting and cooperating relationship is most imperative. To conclude, this dissertation demonstrates that non-pecuniary factors such as trust and trustworthiness can have significant impacts on operational decisions. Behavioral operations research is a promising and important research area that not only improves our scientific understanding of human decision making, but also helps prescribe better managerial strategies for environments where non-pecuniary incentives are salient.