S. YAMINI, Rahul R. MARATHE
Planning fallacy is defined as the tendency to hold a confident belief that one's own project will proceed as planned, even while knowing that a vast majority of similar projects have run late (Kahneman and Tversky, 1979). This underestimation of time is due to the optimistic bias, which happens (1) when people concentrate on plan based scenarios rather than on pertinent experiences in the past while making their predictions, (2) underestimating the actual cost incurred to complete a task, and (3) overestimating the incentives given for rapid completion. The concept of planning fallacy has not been not studied from the supply chain perspective. However, time based competition which focusses on time compression is a well-researched topic in the manufacturing and business environment, and it indirectly leads to planning fallacy in the estimation of completion time. We develop a mathematical model from the principal’s perspective (an original equipment manufacturer, OEM) to avoid the optimistic bias of agents (a contract manufacturer (CM) and a supplier). It is the observer’s (OEM) responsibility to estimate the deadline to be offered to actors (supplier and CM) in order to avoid the mis-estimation of completion time, when the deadline is exogenously determined by the actor. We explicitly factor the actor’s planning fallacy in the model through the cost under-estimation factor. We contribute to the current planning fallacy literature by (1) designing a mechanism where the deadline for the CM and the supplier can be estimated by the OEM by anticipating their actual completion times; (2) analytically showing that under threshold-based mechanism, the completion time of the player in the supply chain will be less than the imposed deadline, even without any external penalty mechanism; (3) proving that the threshold incentives motivate the supplier and CM to mitigate planning fallacy and the procrastination of task, and (4) mathematically proving that under lump sum, bonus-based incentive, the completion time of the supplier and the CM will be equal or higher than the imposed deadlines.
