Behavioral Decisions in Inventory Systems with Dual Sourcing Option : An Experiment

Dual sourcing practices have become increasingly popular with firms. To examine the actual behavior in such settings, we conducted a laboratory experiment with a multi-period single-echelon inventory model with a fast, expensive and a slow, inexpensive supplier. Compared to single-sourcing, the difference between the normatively achievable and the empirically realized cost decreases considerably. We find that the overusage of the fast supplier is driven by reference-dependent preferences. In general, subjects use order smoothing strategies and tend to choose a preferred supply mode. Furthermore, the individual variation in cognitive reflection drives cost differences: Subjects with a higher cognitive score have less random errors, order smoothing and supply line underweighting; they also overuse the fast option to a smaller extent. Our findings highlight the importance of having procurement professionals with a high cognitive reflection and the benevolent nature of the additional supply mode primarily due to its lower lead time