Sourcing and Capacity Investment Decisions in Supply Chain Risk Management

Abstract

Risks are prevalent in supply chains. While managers are familiar with common risks such as supply disruption and demand uncertainty, new risks are constantly emerging. These emerging risks may differ from the existing ones in important ways that alter the decision setting, requiring managers to adopt new risk management strategies. Using old strategies to respond to these emerging risks may be ineffective or even counterproductive. Through three studies, this dissertation examines how sourcing and capacity investment decisions are influenced by two categories of emerging risks—supplier-induced risks and regulatory risks. Studies 1 and 2 use analytical models and behavioral experiments to compare how buyers’ optimal and actual sourcing strategies differ under supplier-induced responsibility violation risks and traditional supply disruption risks. We document significant and robust differences in buyers’ ordering behaviors across the two risk types and further disentangle the effects of risk structure and context characteristics that drive the differences. Our additional analysis on the performance implications of different sourcing strategies shows the promise of sole-sourcing from the risk-free supplier and identifies cognitive and affective behavioral factors associated with adopting this strategy. Study 3 uses analytical models and a numerical study to examine a vaccine manufacturer’s optimal capacity investment strategy across domestic and overseas markets when faced with a potential risk emanating from regulations that restrict vaccine exports from the domestic market. We characterize how a regulatory mandate may shift the manufacturer’s overall capacity commitment strategy (produce in one location vs. both) as well as the associated capacity levels in each location. We further assess the impact of these changes on service level and public health outcomes at both locations as well as globally. A general theme of this dissertation is to investigate when diversification, a common strategy used to handle risks, is warranted in these problem domains from normative and behavioral perspectives.