Responsible sourcing and supply chain traceability

Abstract

This paper explores a buyer's tracing and its supplier's own sourcing decisions in a multi-tier supply chain. We explore what different stakeholders can do to achieve a more transparent and/or responsible supply chain. We establish that under rather general conditions, the two firms will adopt mixed strategies in equilibrium, a focal case of our analysis. The mixed-strategy results first explain at the micro level why many companies are not certain about whether their supply chains are ethical or not. At the more macro level, they also help explain why a significant proportion of the buyers did not trace or comply with transparency regulations. We then show that more responsible sourcing can be induced by lowering the buyer's tracing cost but not by reducing the supplier's own responsible sourcing cost. We also find that more transparency does not always imply more responsible sourcing. For the external stakeholders, more responsible sourcing may be obtained through lowering tracing costs, improving tracing or public discovery of violations, and imposing more significant reputational damage or penalties only on the buyer. For the internal stakeholders, a contract incorporating both responsible sourcing cost sharing and non-compliance penalty if found may be constructed for the first-best supply chain efficiency and likely social optimality under some simple sufficient conditions.