Supply Chain Decisions - Overcoming Behavioral Biases
Cognitive Shortcuts
Humans are programmed with innate behavioral biases to help our instinctive survival. When faced with vast amounts of information and stimuli which must be comprehended in a limited time frame, our minds resort to mental models shaped by our environment and upbringing. Mental models are shortcuts that allow us to navigate the plethora of data we are challenged with processing at any given moment. However, certain behavioral biases have downsides which can lead to irrational decision making, thus impacting supply chain planning and operational costs.
Behavioral Biases
Here are a few examples of cognitive tendencies, as well as methods to counteract the biases:
A common fallacy is the confirmation bias, where an individual or group will seek out information to confirm existing beliefs and disregard information that contradicts their beliefs. In supply chain operations, this can lead to poor decision making, the inability to adapt to change, and imbalanced resource allocation, which can result in costly mistakes and missed opportunities. It is helpful to counter this common fallacy by seeking out a variety of perspectives and reviewing decision making strategies regularly.
Another common bias is sunk cost fallacy, when individuals or an organization continue to invest in an idea or project because significant time, money, or resources have already been invested. This bias can impact supply chain operations negatively as wasted resources, or the inability to pivot and cut losses if a project or idea is not providing desirable results. It is important to evaluate the effectiveness of supply chain strategies and be willing to make adjustments if they are not working.
The endowment effect bias can greatly affect supply chain operations, and occurs when an individual or group places higher value on ideas or objects they own or have invested in. This can lead to poor judgment, such as overvaluing a current supplier even though alternative options could be more cost-effective. Encouraging divestment and regular objective evaluations with clear criteria are a few strategies to mitigate this bias.
Beginner's Mind
Moreover, whenever I’m feeling stuck or unproductive, I refer back to key lessons learned in Dr. Lee Newman’s Behavioral Studies course at Instituto de Empresa Madrid. ‘Beginner’s Mind’ is a helpful mindset to engage in; it is an approach to situations or problem-solving with an openness and curiosity, rather than making snap judgments based on preconceived notions. There are a myriad of benefits, including promoting an environment of innovation and creativity, offering a fresh perspective when problem solving, allowing increased learning, and encouraging an overall deeper understanding and acceptance of others.
Exercising Restraint
It is important for organizations to be aware of potential cognitive tendencies that may affect decision making when it comes to supply chain planning or overall business operations. Inserting a pause to reflect before jumping into the next big decision or task can help organizations avoid mistakes and remain nimble. A continuous evaluation of strategies from diversified perspectives can be immensely helpful to sidestep the pitfalls of behavioral biases.
