Ordering Behavior Under Supply Risk:An Experimental Investigation

Abstract

As supply chains become increasingly complex and global in their scale, supplier selection and management in the face of disruption risk has become one of the most challenging tasks for modern managers. Several novel model-based approaches to managing such risks have been developed in the academic literature, but how behavioral tendencies may aect procurement decisions under such conditions has received relatively less attention. In this paper, we present results from a study where paid subjects were asked to place orders from two suppliers who dier in their costs and risks to satisfy a xed amount of end-customer demand. We show that under such a scenario, it is theoretically optimal to sole-source exclusively from either the more reliable (and more costly) supplier or from the more risky but cheaper supplier, depending on cost and risk parameters. Subjects in our experiment, however, show a systematic tendency to diversify their orders between the two sources. We document this diversication tendency in procurement decisions and its possible impact on prots under various cost and risk settings. We also establish that bounded rationality of subjects can provide a possible rationale for the above phenomenon.

Incentivizing supplier participation in buyer innovation: Experimental evidence of non‐optimal contractual behaviors

“…At the same time, risk aversion also could counteract the effect of bounded rationality when the buyer decides the optimal fixed fee according to project uncertainty (as we observed in the interaction analysis for H1a). Therefore, it is hard to say whether risk aversion triggers or prevents non‐optimal contractual decisions, a finding that is very similar to a previous study on ordering behaviors under supply risk (Gurnani et al, 2013). However, these findings do support the importance of considering risk aversion when explaining non‐optimal decisions.…”

Consistency and Recovery in Retail Supply Chains

“…Researchers have also used laboratory studies and field experiments to study the relationship between supplier inventory service level and orders from retailers. Gurnani et al (2013) use laboratory experiments in a multisupplier context to determine how subjects spread orders across two suppliers, one that is perfectly reliable and more expensive, and one that is imperfect and less expensive. In these experiments, subjects increase their orders for the unreliable supplier as that supplier's service level increases.…”

Supply Risk Mitigation Via Supplier Diversification and Improvement: An Experimental Evaluation

“…We contribute to the nascent field of supply chain risk management, for which Sodhi et al (2012) identified a methodology gap and called for more empirical studies to bridge the gap between theory and practice. Within this field, there is an extensive body of theoretical literature (Tang (2006) provides an excellent review; we also refer readers to Gurnani et al (2014) and Wang et al (2010) and the references therein). The theoretical setting of our paper builds on Wang et al…”

“…Experimental literature on dual sourcing: The closest papers to our work in this domain are Gurnani et al (2014), Goldschmidt et al (2014), and Csermely and Minner (2015). We review the similarities and differences between their work and ours below.…”

“…In Gurnani et al (2014), the authors consider a buyer procuring products from two heterogeneous suppliers who are different in their costs and reliabilities. In their setting, it is theoretically optimal to sole source either from the more costly and reliable supplier or from the more risky and cheaper supplier.…”