Impact of Supply Chain Transparency on Sustainability under NGO Scrutiny

Abstract

We analyze a brand's disclosure of its supplier list to improve the suppliers’ compliance with social and environmental sustainability standards. We develop a model of a buyer, a supplier, and an NGO; when a violation of the supplier occurs, the buyer and the supplier both incur penalties. Given that the disclosure influences the NGO's perception of the supplier and results in a different level of NGO scrutiny, the buyer decides whether to reveal her supplier. Our model characterizes the buyer's optimal revelation strategy and provides the equilibrium efforts of the supplier and the NGO. The results show that an increase in the penalty for the supplier or an increase in the NGO's auditing efficiency always gives the buyer an incentive to reveal the supplier and has a beneficial effect on supply chain sustainability. However, an increase in the penalty for the buyer acts as a deterrent to the revelation, and thus it often has a detrimental effect on sustainability, except when the increase is modest and the buyer makes an individual effort to monitor her supplier. Moreover, although an increase in the NGO's gain in utility from targeting a revealed supplier acts as a deterrent to the revelation, it can have either a beneficial or detrimental effect on sustainability, depending on the extent of the increase and the efficiency of the NGO's auditing. Last, if the buyer can invest in improving the supplier's capability, the above‐mentioned factors that have beneficial (detrimental) impacts on sustainability also make the investment more (less) worthwhile.