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

41 Pages Posted: 18 Aug 2014 Last revised: 24 Mar 2020

See all articles by Kyle Goldschmidt

Kyle Goldschmidt

University of St. Thomas

Mirko Kremer

Frankfurt School of Finance & Management

Douglas J. Thomas

University of Virginia - Darden School of Business

Christopher Craighead

University of Tennessee, Knoxville - College of Business Administration

Date Written: March 20, 2020

Abstract

We study sourcing behavior in “severe” conditions where supply disruptions are rare, but carry the potential of wiping out several periods’ worth of a firm’s profit. The trade-off 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. We study supplier diversification through a behavioral lens, and test theoretically derived predictions under controlled laboratory conditions. Our data provides strong evidence for “under-diversification.” We posit that this pattern is partly due to the fact that investing in supplier diversification involves an upfront cost to achieve a delayed, and rarely encountered, benefit. Under-diversification bias is costly and its causes 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: Behavioral Operations, Experiments, Supply Chain Management, Risk Management

Suggested Citation

Goldschmidt, Kyle and Kremer, Mirko and Thomas, Douglas J. and Craighead, Christopher, Strategic Sourcing Under Severe Disruption Risk: Learning Failures and Under-Diversification Bias (March 20, 2020). Available at SSRN: https://ssrn.com/abstract=2481099 or http://dx.doi.org/10.2139/ssrn.2481099

Kyle Goldschmidt (Contact Author)

University of St. Thomas ( email )

2115 Summit Avenue
Saint Paul, MN 55105
United States
6519624416 (Phone)

Mirko Kremer

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Douglas J. Thomas

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Christopher Craighead

University of Tennessee, Knoxville - College of Business Administration ( email )

453 Haslam Business Building
Knoxville, TN 37996
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
229
Abstract Views
1,002
rank
143,094
PlumX Metrics