When Do Minor Shortages Inflate To Great Bubbles?

When demand exceeds supply, retailers hedge against shortages by placing multiple orders with multiple suppliers. This artificial growth in orders can severely affect suppliers, creating excess capacity, excess inventory, low capacity utilization, financial and reputation losses. This paper contributes to the understanding of order amplification caused by shortages, by providing a comprehensive causal map of the supplier-retailer relationships and a formal mathematical model of a subset of relationships. It provides closed form solutions to the dynamics of supplier backlogs when supplier capacity is fixed and simulation analysis when it is flexible. Parameter sensitivity provides a deeper understanding of long-term impacts and suggests emphasis for solution policies. For instance, the ability to quickly build capacity can effectively reduce the bubble size. Finally, the time it takes retailers to perceive supplier’s delivery delay is an important leverage in controlling retailers’ inflationary ordering. In particular, longer retailers’ perception delays contribute to system stability.