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

• Published in: Manufacturing & service operations management 2021-07, Vol.23 (4), p.761-780
• Main Authors: Goldschmidt, Kyle, Kremer, Mirko, Thomas, Douglas J., Craighead, Christopher W.
• Format: Article
• Language: English
• Subjects: behavioral experiment; Diversification; Investments; procurement; Strategic planning; supply chain disruptions; Supply chain management; supply chain risk management
• ISSN: 1523-4614; 1526-5498
• DOI: 10.1287/msom.2020.0907

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.