Ordering Behavior Under Supply Risk:An Experimental Investigation

Haresh Gurnani (), Karthik Ramachandran (), Saibal Ray () and Yusen Xia ()
Additional contact information
Haresh Gurnani: School of Business Administration, University of Miami, Coral Gables, Florida 33124
Karthik Ramachandran: Scheller College of Business, Georgia Institute of Technology, Atlanta, Georgia 30308
Saibal Ray: Desautels Faculty of Management, McGill University, Montreal, Quebec H3A 1G5, Canada
Yusen Xia: Robinson College of Business, Georgia State University, Atlanta, Georgia 30303

Manufacturing & Service Operations Management, 2014, vol. 16, issue 1, 61-75

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.

Keywords: disruption management; supply risk management; experiments; ordering behavior; diversification bias; bounded rationality (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://dx.doi.org/10.1287/msom.2013.0453 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormsom:v:16:y:2014:i:1:p:61-75

Access Statistics for this article

More articles in Manufacturing & Service Operations Management from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().