The Explosion of Choice and the Cost of
Search
In an increasingly globalized economy, we have all observed supply
chains becoming more and more complex. What boosts this complexity is the
availability of a staggering number of choices for almost any player in the
supply chain. A supply chain manager has usually the option to choose from a
large pool of competing suppliers, to select from wide range of products with
different appealing features, to use one of many different distribution
channels, and so on. Moreover, these available options seem to continue to grow
and transform with each new entrant into the global marketplace.
We might
then conclude that the freedom to choose from a larger number of options naturally
means that each firm in the supply chain can perform better and with lower cost.
However, we should be cautious about this conclusion and the extent we can rely
on it.
At an
individual level, Barry Schwartz argues more choices not only do not make us
happier, but also, contrary to common belief, it can make us more miserable. The
ability to choose from 100 different types of salad dressing does not make our
salad taste better, rather when we are eating our salad, instead of enjoying
it, we might think whether we have made the best decision and weather there has
been a better dressing that we missed. In his book “The Paradox of Choice”, Dr.
Schwartz shows that too many choices can rob us of satisfaction. No one denies
that a few choices are better than no choice. However, having too many choices
can have its downsides. He enumerates these downsides as follows:
Paralysis:
Too many options can make the decision making process so difficult that it can
prevent us from making timely decisions.
Regret: The
more options there are, the easier it is to regret. With too many choices, it
is practically impossible to make sure what the best choice is. The thought
that we might have missed the best choice can constantly haunt us.
Opportunity
costs: When there are many choices, each with different features, by choosing
one option, we always forego some appealing features of other options.
Therefore, with more choices, the unpleasant feeling of lost opportunities gets
stronger.
Escalations
of expectations: When we have the option to choose from a larger number of
choices, we can naturally expect a better outcome. However, when our
expectation of the outcome grows faster than the quality of the outcome itself
(which is usually the case) we might feel worse when we have more choices.
Self-Blame: When
we have very limited number of choices and none of them are quite satisfactory,
then the blame of our dissatisfaction is upon the world who presented us with
this limited number of choices. When we have a lot of choices and the outcome
of our decision is still not satisfactory, then we cannot blame the world since
it has given us many choices, out of them, there should be at least one satisfactory
option. In this case, the finger of blame can only be pointed to our failure of
finding that best choice.
Although it
is easier to understand these downsides of having too many choices at an
individual level, they can equally play an influential role in forming the
decisions at an organizational level. In other words, this multitude of choices
in the supply chain options does not guarantee that we will find the perfect
solution. Indeed, if anything, it guarantees the opposite, that the perfect
solution is out there and we will almost certainly not find it, much to our own
(and our shareholders’) dismay.
Another
downside of having too many choices, which can be problematic at an individual
level and particularly at an organizational level, is the escalation of cost of
finding the best choice, or the search cost.
When you
have only one supplier for the product that need, the only effort that you make
is to negotiate the terms a contract and get your product. When you have more
than one supplier, to make sure that you have chosen the best supplier and the
best deal, you need to use time and resources to evaluate the capabilities and
qualities of all of them and then negotiate with some of the best to strike the
best possible deal.
When the
number of suppliers increases, the best quality that you can get increases with
a diminishing rate. That is, when the number of available suppliers increases
from 10 to 20, the quality that you can get from these suppliers will not
double. The quality usually increases marginally, say 10 to 15% (if you are
lucky). The problem is that the cost of finding the best supplier can increase
even faster than the number of available suppliers. The cost of finding the
best supplier from a pool of 20 candidates might be more than twice the cost of
finding the best suppliers from a pool of 10 candidates.
That is why
performing an exhaustive search might not be cost effective when we have too many choices. In these cases, we can identify a measure for a best possible
value that we can expect from our decision. This serves as an “upper limit” for
the value that we can get from a mythical perfect choice. To keep the search cost under control, we then need to settle for a percentage of the value of
the mythical perfect choice. We then keep searching until we find a good enough
result. To identify when we should stop the search, we need to consider (a) the ratio of the search cost over the potential increase in value, (b) the
diversity of the choices that we face. This approach can be quantified, but it
is beyond the scope of this post.
In short,
although more choices provide a supply chain with better opportunities, they also bring along a series of inevitable hidden costs like the cost of regret, the cost of escalation of expectations, and the search cost. We need to be able to manage and control these costs before we can enjoy the benefits of having many choices.
