The Effect of Social Preferences on Sales and Operations Planning

Sales and operations planning processes are used to align production quantities and customer demand. Two key activities of these processes are demand planning and production planning, which are often assigned to individuals in different departments. Production planning requires accurate demand forecasts from demand planning to be able to choose proper production quantities, but demand planners have to invest effort to create accurate demand forecasts. We study the role of social preferences (altruism, inequality aversion, and competitive pressure) in incentivizing demand planners to invest effort, and we analyze how social preferences interact with monetary incentives. We use a game-theoretic model and laboratory experiments. Our results indicate that social preferences can be used to incentivize demand planners to invest effort and that this effect is anticipated by production planners. The resulting more accurate demand forecasts and adapted production quantities result in higher company profit. We also provide an optimization model for optimally allocating investments to financial incentives and social preference building.