Wednesday March 05, 2014
9:30AM - 10:45AM
Supply Management Under Disruption Risk: Theory and Experiments
In recent times many organizations have seen a significant increase in their supply-side risks in the form of disruptions. In this presentation, we will cover two papers both of which deal with supply disruption risks. The first paper is a normative one set in a decentralized framework, which consists of one downstream firm and n upstream suppliers. Each supplier faces an exogenous default risk and is endowed with certain amount of resources that can mitigate the risk. They can share the resources within an alliance, but need to allocate profits of a surviving alliance among the partners. In this context, we analytically characterize the exact coalition-proof Nash-stable alliance structures that would arise in equilibrium for diverse types of supplier bases. Further analysis shows that risk-reduction is the main motivator for alliance formation, and reveals the business conditions that would result in larger or smaller alliances. The second paper is an experimental one set in a centralized framework. Specifically, we present results from a study where human subjects act as buyers and place orders from two suppliers, who differ in their costs and supply risks, to satisfy a fixed amount of end customer demand. We show that although, in our setting, it is optimal to sole-source exclusively from either of the two suppliers, subjects show a systematic tendency to diversify their orders between the sources even if such an action increases their risk and reduces their expected profits. We also find evidence for subjects anchoring their decisions so as to match expected supply to demand and observe an improvement in their ordering decisions due to learning effects.