Mitigating behavioral supply risk under dual sourcing: Evidence from an order allocation game

Chao Xue, Yan (Diana) Wu, Wanshan Zhu, Xiaobo Zhao and Jinghuo Chen

Production and Operations Management, 2022, vol. 31, issue 4, 1788-1801

Abstract: We consider an order allocation game in which a manufacturer sources from two suppliers due to supply capacity limitations and allocates uneven orders to take advantage of incremental quantity discount. Laboratory experiments are conducted to examine empirical decisions by all three members in this dual sourcing channel. We observe that the supplier who receives large orders mostly agrees to supply; however, the supplier who receives small orders frequently refuses to supply. Consequently, the manufacturer experiences severe supply shortage, which hurts its profit and the supply chain efficiency. We develop behavioral models to explain the empirical decisions, and find that fairness concerns of the small‐order supplier cause supply rejections and shortages. To mitigate this behavioral supply risk, we apply the modeling results to design a subsidy mechanism and conduct a validation experiment. The experiment shows that the proposed subsidy mechanism successfully reduces supply rejections, and that the channel efficiency is significantly enhanced at no additional cost to the manufacturer. The study demonstrates the viability of the behavioral mechanism design approach in addressing issues in empirical decision‐making, and offers insights for manufacturers to manage asymmetric sourcing with two suppliers.

Date: 2022
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