Strategic Sourcing Under Severe Disruption Risk: Learning Failures and Under-Diversification Bias
Kyle Goldschmidt, Mirko Kremer, Douglas J. Thomas, Christopher W. Craighead
Manufacturing & Service Operations Management · 2021 · Volume 23 · Issue 4
Abstract
Problem definition : We study sourcing behavior in severe conditions where supply disruptions are rare but carry the potential of wiping out several rounds worth of a firm’s profit. Academic/practical relevance : The tradeoff between scale economies from supplier consolidation and risk mitigation from supplier diversification is at the core of firms’ sourcing strategy and one that is empirically understudied. Methodology : We study supplier diversification through a behavioral lens and test theoretically derived predictions under controlled laboratory conditions. Results : Our data provide strong evidence for under-diversification . We posit that this pattern is partly because of the fact that investing in supplier diversification involves an upfront cost to achieve a delayed, and rarely encountered, benefit. Managerial implications : Under-diversification bias is costly, and its causes are difficult to overcome, presenting firms with the daunting task of devising debiasing mechanisms that reinforce a supplier diversification strategy when the rarity of disruptions almost always render supplier consolidation the ex post preferred strategy.
Keywords
supply chain disruptions, procurement, supply chain risk management, behavioral experiment
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