Crippling decision-making

Many companies are currently wondering whether they should not relocate some or all of their suppliers or their own production from China or Taiwan to other Southeast Asian countries. For instance, I recently spoke to several electronics manufacturers from the Eindhoven Brainport region who are struggling with this. The balancing act is tricky because it is difficult to gather all the underlying information to do this in a thoroughly ‘fact-based’ manner.

In this case, it is important to properly assess and map all risks. These include risks under ‘no action’ – how likely is a military or economic conflict involving China and Taiwan, how likely is it that the US government will further amend dual-use and rules-of-origin legislation, and what are the financial consequences if this happens? On the other hand, there are the risks in ‘action’ – what is the economies-of-scale financial loss, what are the risks in product quality and supply, and what investments are needed?

Figuring out and identifying everything is a virtually impossible task. A lot of information is either not available or not easily available, there are huge uncertainties that can also change from day to day, and the objective calculation of all these details is not easy. After all, it requires calculating and comparing a whole series of scenarios.

Paralysis by analysis

It is known from decision theory that such a plethora of information and complexity in decision-making can lead to ‘paralysis by analysis’. I also observe this in many companies now facing these difficult supply chain choices. After an initial run-through – which usually concludes that it is costly and the risks are very uncertain – the conclusion is often to just wait and see, and collect more data. However, with inherent uncertainties, such as here, that is rarely a wise strategy. And certainly not a strategy to get out from under the paralysis in analysis.

German decision scientist Gerd Gigerenzer claims that in almost all such cases, it is better to construct a simple decision model with limited information and make a decision faster on that basis. His research shows that in many cases, such ‘heuristics’ lead to better decision-making than complex analysis that still ends up being incomplete.

Newsvendor model

For the supply chain decisions mentioned here, it is ultimately well worth considering a simple newsvendor model: what costs will I certainly have to incur, and which uncertain returns are associated with a particular choice? Deciding based on a simple model is always better than waiting for a complete picture that will never come.

Jan Fransoo is Professor Operations and Logistics Management at the Tilburg School of Economics and Management