Understanding complex dynamics in inventory management with endogenous demand under social interactions: a chaos perspective

Abstract

This paper investigates the system dynamics and performances of a deterministic inventory model with endogenous demand transitions determined by consumers' purchase behaviours and managers' order decisions under social interactions. With known demand transitions, the manager makes order decisions to maximise the single-period profit by the optimal order policy or commits to a fixed quantity by the constant order policy. With unknown demand transitions, the demand-chasing order policy is adopted. The impacts of various endogenous factors on the system dynamics and performances are examined. It is found that the equilibrium demand can exhibit stability, periodic cycles, and chaos in the long-run dynamics. Strong social interactions can lead to instabilities in demand processes and impair the profitability of the inventory system. The value of information on endogenous demand transitions increases if social interaction intensities and/or sizes of loyal customers become larger. The results suggest that endogenous factors stemming from managers' decision-making, consumers' purchase behaviours, and their interplay can cause persistent and unpredictable demand fluctuations leading to instability and profit losses. Managers should understand the underlying causes of demand variations and the impacts of endogenous factors to improve operational effectiveness in inventory management.