Reveal the Supplier List? A Trade-Off in Capacity vs. Responsibility

Abstract

This paper contributes to a recent thrust in the OM literature on how various sorts of transparency influence social and environmental responsibility in a supply chain. In practice, companies are under pressure to publish their supplier lists and suppliers’ violations, and some are beginning to do so. This paper shows how a buying firm can use transparency to reward a supplier for responsibility effort to eliminate social or environmental violations. By publishing its supplier list, the buying firm can signal that a supplier is responsible and generate profitable new business for the supplier. However, the resulting competition for the supplier’s scarce capacity could cause the buying firm to obtain fewer units or pay a higher price. We identify the conditions under which a buying firm should commit to publish its supplier list, and the conditions under which the buying firm should make complementary investments to help the supplier become more productive. In addition, the paper shows how a buying firm can use transparency to punish a supplier for a responsibility violation- by warning other buying firms not to source from the violating supplier. Commitment to do so increases the supplier’s responsibility effort and can screen out a supplier with a known responsibility violation, thereby increasing a buying firm’s expected profit. If the supplier is uncertain whether or not it has a violation (e.g., faulty electrical wiring likely to cause a fire) then the two forms of transparency can be complementary. Buying firms should consider transparency as a potentially profitable approach to mitigating social and environmental violations in their supply chains.