MIT System Dynamics Seminar: Sourcing under supply disruption and responsibility violation risks

Please visit the MIT System Dynamics Seminars page for more information.

You are invited to attend the System Dynamics Seminar Series being held on Monday, March 29^th from 9:00-10:30 am EST via Zoom: https://mit.zoom.us/j/99769339852 (password: SysDyn). Our guest speaker will be Karen Donohue (Carlson School of Management, University of Minnesota) presenting Sourcing under supply disruption and responsibility violation risks: A behavioral investigation* (see attached announcement; abstract and brief bio below). A reminder will be sent out closer to the date.

Abstract:           

We investigate sourcing decisions when faced with two suppliers with different cost and risk profiles. Sourcing from one supplier costs more but involves no risk, while sourcing from the other may introduce either supply disruption risk, which influences product supply, or responsibility violation risk, which influences customer demand. To contrast these two types of supplier-induced risks, we present a parsimonious comparative framework based on risk matrices used in practice that organize risk levels by two dimensions: likelihood and impact. We first analytically characterize the profit-maximizing sourcing strategies in different likelihood/impact environments and then employ an incentivized experiment with human participants to explore actual sourcing behavior. While sole-sourcing is always theoretically optimal, we find that individuals tend to diversify. However, they are less likely to diversify and more likely to select the optimal supplier when faced with responsibility violation risk relative to supply disruption risk. Concerning the underlying environment, we find that buyers respond similarly to changes in risk likelihood and impact levels in terms of the adjustment in order allocation between the two suppliers. This behavior deviates from the normative predictions, and our analysis suggests that managers will benefit from recognizing the unique characteristics of the two risk dimensions and developing tailored strategies to manage each type of risk. The negative influence of these behavioral factors on profit can be quite significant, especially under responsibility violation risk. We offer possible remedies to improve performance.

* Joint work with Ph.D. Student Vincent Yu and Professor Karthik Natarajan

Brief Bio: Karen Donohue is an expert in supply chain coordination and behavioral operations.  Her research examines methods for coordinating inventory and distribution decisions across supply chains, as well as ways to align supply chain activities to improve environmental outcomes. She draws on a number of different methodologies in her research including stochastic modeling, game theory, and behavioral economics.  Her research is often conducted in concert with partners from industry and governmental organizations, with recent examples including 3M, Best Buy, MTap, and Medtronic.  Professor Donohue is also Academic Director of the Masters of Science in Supply Chain Management Program at the Carlson School.  Outside of the Carlson School, she holds a joint appointment in the Industrial and Systems Engineering Department (College of Science and Engineering, University of Minnesota) and is a Faculty Research Scholar in the Center for Transportation Studies (University of Minnesota).  She holds B.A. degrees in Mathematics and Economics from St. Olaf College and an M.S. and PhD. in Industrial Engineering and Management Science from Northwestern University.