Managing Social Responsibility in Multitier Supply Chains

Abstract

We study the management of social responsibility in a three-tier supply chain in which a Tier 2 supplier sells to a Tier 1 supplier, which in turn sells to a Tier 0 buyer. The Tier 2 supplier potentially violates social and environmental standards, resulting in harm to the Tier 0 and 1 firms. Each member of the supply chain can exert effort to improve the responsibility in Tier 2, and the efforts of Tiers 0 and 1 are substitutable with one another and complementary to the efforts of Tier 2. We show that in this scenario the buyer’s optimal strategy is one of extremes, consisting of direct control (only Tier 0 works with Tier 2), delegation (only Tier 1 works with Tier 2), or no effort (neither firm works with Tier 2), and we characterize the features of Tiers 0, 1, and 2 that lead the buyer to favor each strategy. Under the buyer’s optimal strategy, we find that selection of Tier 1 and 2 suppliers for greater responsibility or lower cost, as well as increased pressure from external stakeholders (consumers, NGOs, and governments), may increase the chance of a responsibility violation when the buyer shifts from control to delegation. We further illustrate how responsibility management differ in three- and two-tier supply chains, and show that perverse reactions to better supplier selection and greater external stakeholder pressure never occur in a two-tier system, demonstrating the unique challenges associated with multitier responsibility management. Lastly, we show that appropriately designed non-compliance penalties to either Tier 0 or 1 when a Tier 2 violation occurs can coordinate the three-tier supply chain, i.e., make it perform like a two-tier system, though such penalties face implementation challenges in practice.