Book Reviews

Cross-Functional Inventory Research

Gavirneni, Srinagesh, ed. 2016. Cross-Functional Inventory Research. World Scientific. 229 pp. $120.00.

This edited volume on cross-functional inventory research, which was written in honor of an accomplished academic, Professor L. Joseph Thomas, is a successful effort to capture interesting perspectives on a critical problem in both nonprofit and commercial sectors. U.S. firms hold $1.8 trillion in inventory across the distribution channel, as Chapter 1 highlights. This book contains seven chapters that concentrate essentially on commercial inventory research. However, it provides a wide set of perspectives that, in my opinion, can help both academics and practitioners.

Chapter 1 provides a concise picture of inventory management and modern fulfillment policies. It depicts the trend of improvements in inventory management, which it supports with a rich set of literature and interesting facts. It highlights three critical areas of challenges and opportunities: (1) rapid changes in products and delivery models offered to the customer, (2) information sharing among channel partners, and (3) incentive alignment between the partners. It also discusses how these areas have influenced downstream inventories. Based on my recent interactions with the retail industry, I think this chapter contains thoughtful perspectives and highlights relevant comments (e.g., about ship-to-store fulfillment policies). In Chapter 6, the author responds to some concerns raised in Chapter 1, and suggests an approach to plan inventory and storage space for an online retailer’s multiple-location fulfillment system.

Motivated by Joe Thomas’ works, which highlight the behavioral aspect of human operators in process analysis, Chapter 2 echoes that the results of analytical models, which assume that people are predictable, unimportant, independent, and stationary, are likely to be impotent. Based on an empirical study, this chapter shows how a system’s response times, in which inventory is people, are concave with resource utilization, and what the roots of this concavity are. The remainder of the book (Chapters 3–6), are modeling-based articles.

Because the global supply chain and firms are affected by national and international economic and political changes, Chapter 3 focuses on a very critical question: What should inventory managers do in the presence of financial turbulence? I liked this terminology because it serves the purpose of this chapter well. Turbulence often retains external forces that impose uncertainties to the system. This chapter analyzes the impact of discount factors and exchange rates on inventory decisions—it is not a new topic. The literature shows that an assumption of fixed-opportunity cost of capital leads to incorrect inventory policies. Therefore, this chapter advances our knowledge by modeling a multiple-period case for a single product in a periodic-review inventory system. Chapter 3 concludes with interesting insights from numerical studies that are based on data provided by four Mexican companies, each with a unique supply chain structure. In contrast, Chapter 4 focuses on another type of uncertainty that a firm itself might create. Manufacturers use internal and external leverages to minimize demand-supply mismatch. One of these leverages is promotion; manufacturers often offer discounts to retailers, expecting that the savings will be passed to consumers and will increase their market share. Is this policy beneficial in a long-term horizon? Does its success not depend on factors such as product reference price, and (or) the retailer’s pass-through rate? Does the manufacturer achieve its goals? Chapter 4 answers these questions by considering a retail channel that consists of a single set of a manufacturer and a retailer, and heterogeneous consumers.

The objective of an optimal ordering policy is to minimize the expected inventory holding and stockout costs. Nevertheless, stockout cost is an ambiguous cost component that managers usually guestimate. Chapter 5 explains that stockout costs contain several components, including the cost of lost goodwill, which is the consequence of unsatisfactory service levels. Chapter 5 suggests an interesting alternative to model stockout cost, pictures its consequences on future demand, and explains how the inventory level can be modified.

In summary, I believe each chapter tackles a relevant topic of inventory research, and provides a set of simple, yet useful, insights to both academics and practitioners. Moreover, in my opinion, academics can benefit from parts of this book and integrate them into their MBA and higher-level courses. Chapter 7 particularly criticizes the current methods of teaching MBA students, and suggests insights on how to improve our teaching style.

Mahyar Eftekhar

Arizona State University, Tempe, Arizona, [email protected]

The Undoing Project: A Friendship That Changed Our Minds

Lewis, Michael. 2017. The Undoing Project: A Friendship That Changed Our Minds. W.W. Norton and Company. 362 pp. $28.95.

Economists standardly assume that people are rational when it comes to making decisions in general and in their market interactions in particular. This routine assumption notwithstanding, one can certainly ask whether this rationality assumption holds for all people and not just for people in economic models. Of particular interest here is the rationality of people in the context of decision making under uncertainty. To study and explain decision making under uncertainty, economists utilize the so-called expected-utility hypothesis. So, the study of rational decision making under uncertainty has a lot to do with ascertaining the validity of the expected-utility hypothesis.

In contemporary times, the validity of the expected-utility hypothesis has been analyzed most tellingly by two Israeli psychologists, Daniel Kahneman and Amos Tversky. The book under review here chronicles the unusual but intense friendship between Kahneman and Tversky, and examines the profound impact that the academic research emanating from this friendship has had on both economists and psychologists and on the construction and implementation of public policy in many settings.

The early lives of Kahneman and Tversky were dissimilar. Kahneman spent many years in France during World War II, frequently moving from one place to another to avoid detection by German soldiers. Then, after the untimely death of his father, a saturnine Kahneman moved to Israel with his mother and sister. In contrast, the ebullient Tversky was born and grew up in Israel, the son of a veterinarian father and a parliamentarian mother. From an early age, Tversky was interested in people and questions “of why people behaved as they behaved, and thought as they thought … ” (p. 100) were of great interest to him.

Kahneman and Tversky met and worked at the Hebrew University of Jerusalem during the early part of their professional lives. Even though they were very different people, they were drawn to each other and, as such, they displayed traits in each other’s presence that they did not display in the company of others. The author repeatedly emphasizes the personal differences between Kahneman and Tversky and points to the unlikely nature of their friendship. As he puts it, the students at the Hebrew University “wondered how two so radically different personalities could find common ground, much less become soul mates” (p. 154). Even so, it is salient to understand that these two people shared some things, and that this is perhaps what kept their relationship going. We learn that both “men were blessed with shockingly fertile minds. And both were Jews, in Israel, who did not believe in God” (p. 156).

In the early 1970s, Kahneman and Tversky started their work on the inner workings of the human mind and were particularly interested in how people made intuitive judgments. They worked well together because even though Kahneman was a complicated person, in his presence, Tversky did something that he rarely did with other people; he almost suspended disbelief. Their early work together led to an important contribution about how people formed judgments. Specifically, this work showed that in many uncertain situations, “the mind did not naturally calculate the correct odds” (p. 183). Instead, the mind replaced the laws of chance with rules of thumb that Kahneman and Tversky called “heuristics.” The first such heuristic was what they called “representativeness.”

To give the reader a flavor for the ways in which the research of Kahneman and Tversky could be and was used in other fields, the author focuses on decision making in medicine with an emphasis on clinical misjudgment. We learn that in treating individual patients, doctors behaved differently than they did when they designed ideal treatments for groups of patients with the same symptoms. The clear implication of this line of work is that a doctor “could not treat his patient one way, and groups of patients suffering from precisely the same problem another way, and be doing his best in both cases” (p. 229).

Two key results stemming from some of Kahneman and Tversky’s later research are worth highlighting. The first result concerns the phenomenon known as “loss aversion.” As the author rightly points out, the basic idea here is straightforward but powerful. “When choosing between sure things and gambles, people’s desire to avoid loss exceeded their desire to secure gains” (p. 269). The second result pertains to the notion of “framing.” With regard to this notion, Kahneman and Tversky demonstrated that by simply altering the description of a situation, and by making a gain seem like a loss, “you could cause people to completely flip their attitude toward risk, and turn them from risk avoiding to risk seeking” (pp. 276–277).

Once Kahneman and Tversky left Israel to work permanently in the United States, motivated in part by Kahneman’s personal problems, their professional and personal relationship gradually lost a lot of its former zest. The fact that they were initially geographically separated—Kahneman at the University of British Columbia and Tversky at Stanford University—did not help. Even when, after a few years, Kahneman moved to the University of California, Berkeley, the newfound physical proximity did not improve their strained relationship. A key reason for this insalubrious state of affairs was that Kahneman needed something from Tversky that he never received. Specifically, Kahneman needed Tversky “to correct the perception that they were not equal partners. And he needed it because he suspected that Amos shared that perception” (p. 332).

The chance that the two lifelong friends would ever work together ended when Tversky died in 1996. Even so, there is no denying the fact that the joint work of these two scholars has significantly influenced how all of us think about decision making under uncertainty; in addition, it has given rise to the burgeoning new field of behavioral economics.

The author of this book intermittently rambles on with insignificant details. He sometimes draws unjustifiable conclusions about the entire economics profession from the thinking of a few economists. For the generalist reader, he provides insufficient details about what it really means to violate the rules of rationality. These caveats notwithstanding, this is a well-researched book and the author does a commendable job of explaining the workings of the human mind by exploring the personalities of two seemingly inscrutable individuals. Finally, readers who have perused Thinking, Fast and Slow (Kahneman 2011) will get less out of this book than those who have not.

Amitrajeet A. Batabyal

Department of Economics, Rochester Institute of Technology, Rochester, New York 14623-5604, [email protected]