Behavioral pitfalls of product proliferation in supply chains: An experimental study

Abstract

ABSTRACTWe study how increased complexity in terms of increased stock‐keeping units and/or markets can affect operational performance, with an emphasis on managerial decision‐making. Specifically, when given the option to increase profits by increasing the number of markets served, we ask whether managers can increase profits by exercising this option or does increased complexity become a burden? We conduct a human‐subjects experiment in which subjects manage a simulated supply chain across different levels of complexity, either as individuals or as part of a team. Subjects receive initial training in supply chain management and participate twice in the simulation—once as an individual and once as a team, while also varying complexity across trials. We show that as complexity increases, revenues also increase. However, average performance often deteriorates and many subjects destroy value, despite the increased opportunities for profit. We argue that managers are tempted to chase new revenue sources without understanding the costs or risks to future profits. In a follow‐up experiment, we show that when subjects are reminded about the importance of opportunity costs, revenue declines but earnings are the same or higher. Lastly, our experiments show that both teamwork and experience increase performance and reduce the variance of earnings. Experienced teams make better investment decisions. Less experienced individuals focus on revenue rather than earnings.