Strategic Sourcing Under Severe Disruption Risk: Learning Failures and Under-Diversification Bias

Kyle Goldschmidt (), Mirko Kremer (), Douglas J. Thomas () and Christopher W. Craighead ()
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Kyle Goldschmidt: Opus College of Business, University of St. Thomas, Minneapolis, Minnesota 55403
Mirko Kremer: Frankfurt School of Finance and Management, 60322 Frankfurt am Main, Germany
Douglas J. Thomas: Darden School of Business, University of Virginia, Charlottesville, Virginia 22903
Christopher W. Craighead: Haslam College of Business, University of Tennessee, Knoxville, Tennessee 37996

Manufacturing & Service Operations Management, 2021, vol. 23, issue 4, 761-780

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 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormsom:v:23:y:2021:i:4:p:761-780

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