Managing Social Responsibility in Multitier Supply Chains

Problem Definition: 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 may violate social and environmental standards, resulting in harm to all firms in the supply chain; we analyze the equilibrium allocation of costly effort by each firm to improve responsibility in Tier 2. We also examine how pressure from external stakeholders (consumers, NGOs, and governments) influences the optimal level of responsibility.Academic / Practical Relevance: Recently, there have been a number of serious responsibility violations in Tiers 2+ of large, multinational supply chains, leading to significant negative consequences for firms and society; understanding how best to manage such violations is of practical importance to multiple stakeholders.Methodology: We employ a game theoretic model in which each firm in the supply chain optimizes its responsibility efforts to maximize its own profit, and study the implications of this decentralized optimization for the overall supply chain.Results: Under the conditions of our model, 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); we determine when each strategy is optimal. We further find that increasing some types of external pressure can backfire, leading to a lower level of responsibility.Managerial Implications: For firms operating multitier supply chains, we show how to optimally manage risk by choosing between different responsibility management strategies. For external stakehold- ers seeking to encourage responsibility, we provide insights on how best to achieve this while avoiding “backfiring.” For researchers, we provide a modeling framework to study responsibility and risk manage- ment problems in multitier supply chains