Quick Links

"Ordering Behavior Under Supply Risk: An Experimental Investigation," Manufacturing and Service Operations Management

Published: 27 Feb 2014

Authors: Gurnani, Haresh; Ramachandran, Karthik; Ray, Saibal; Xia, Yusen

Publication: Manufacturing and Service Operations Management

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 affect 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 differ in their costs and risks to satisfy a fixed amount of end-customer demand. We show that under such a scenario, it is theoretically optimal to sole source either from 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 diversification tendency in procurement decisions and its possible impact on profits under various cost and risk settings as well as comment on various ordering behavior observed during the experiments. We also establish that bounded rationality of subjects can provide a possible rationale for the above phenomenon. © 2014 INFORMS.

Category:
Source Site: /desautels

Connect with the Desautels Faculty of Management

Desautels Faculty of Management at McGill on FacebookDesautels Faculty of Management at McGill on TwitterFollow the Desautels Faculty of Management University page on LinkedInDesautels Faculty of Management at McGill, BCom Program on LinkedInDesautels Faculty of Management at McGill, MBA Program on LinkedInDesautels Faculty of Management at McGill on YouTubeDesautels Faculty of Management at McGill on Facebook

Research at the Desautels Faculty of Management

Accounting at Desautels Faculty of ManagementFinance at Desautels Faculty of ManagementInformation Systems at Desautels Faculty of ManagementMarketing at Desautels Faculty of ManagementOperations Management at Desautels Faculty of ManagementOrganizational Behaviour at Desautels Faculty of ManagementStrategy and Organization at Desautels Faculty of ManagementHealth Care at Desautels Faculty of Management