Ordering Behavior Under Supply Risk: An Experimental Investigation

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 a ect 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 di er in their costs and risks to satisfy a xed amount of end-customer demand. We show that under such a scenario, it is theoretically optimal to sole-source exclusively from either 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 diversi cation tendency in procurement decisions and its possible impact on pro ts under various cost and risk settings. We also establish that bounded rationality of subjects can provide a possible rationale for the above phenomenon.