Social Responsibility and Win-Win Supply Chains

CSR and supply chain managementProf. Qiying Hu, School of Management Fudan University, and fellow researchers Jiguang Chen, School of Management, Shandong University, and Jing-Sheng Song, Fuqua School of Business, Duke University, share their research into the CSR benefits of win-win supply chain management.

Some events strike our memories and remain. For the working world, one such event was the tragedy at the Rana Plaza factory in Bangladesh in April 2013, when at least 1,129 factory workers died when their building collapsed on them. This was the worst disaster in the history of the global clothing industry, following several others around the same period and in the same country. Not surprisingly, the tragedies sparked a debate on the issue of responsibility among the big western brands to ensure employee safety in developing countries whose economies rely on low-cost production. Some attributed the poor working conditions, at least in part, to the low profit margins in contracted factories. Inevitably, the tragedy also generated intense scrutiny of companies’ global supply chains and a spate of research into the nature and impact of contractor-supplier relationships.

tragedy at the Rana Plaza factory in Bangladesh Much of this research went into studying the vertical competition and tension between contractor and supplier – in some ways, the study of win-lose scenarios. Prof. Qiying Hu, School of Management Fudan University and his fellow researchers, decided to change the perspective and focus their research on bilateral commitments in the supply chain – in other words, win-win agreements and their positive impact on socially responsible operations.

Fair game

Their method was to apply five different game scenarios on two supply chain partners – each scenario reflecting a different power position of the players and different levels of commitment to the business deal. A feature of the game scenarios was that each player maximized its own profit while making a certain commitment to its partner. The results gleaned from the experiments enabled the behaviour of each supply member to be assessed both individually and across the entire chain, as well as the conditions under which both players were better off with mutual commitments (win-win) than without. In essence, the researchers sought to solve three questions: How supply chain members’ mutual commitments impacted the profit of the supply chain and their own profitability; under what situations would mutual commitments increase both players’ profits; and finally, what the effect of the relative power of the supply chain members was. These are important in the sense that they are closely related to the notion of socially responsible operations. Specifically, they help shed light on corporate social responsibility for supply chain partners such as suppliers’ working conditions, business sustainability (each member’s prosperity), and profitability in terms of shareholders’ economic benefit.

Going for the win-win

Council on Business & Society on socially responsible supply chainsThe results of Prof. Qiying Hu et al were conclusive – a win-win situation via ex ante mutual commitments in the form of the contractor’s minimum profit commitment and the supplier’s minimum quantity commitment expands the total chain profit and makes each partner better off than in the competitive chain. There are several key ingredients for achieving this. Firstly, to achieve win–win, both parties need to be mutually supportive and make reciprocal commitment. Unless both partners are mutually supportive in making comparable bilateral commitments, one party may be worse off compared to making no commitment – and the positive benefit of the chain may not last. As such, when goodwill is demonstrated, agreements have a better chance of being sustained. Secondly, as a result, mutual commitments are usually imbedded in long-term partnerships with repeated interactions. In particular, the research highlights that to achieve win–win, not only the contractor’s commitment is important, but a comparable reciprocal commitment from the supplier is also necessary. For example, promising to use the increased profit to improve workers’ safety.

Freeing up the chains – towards more socially responsible operations

Council on Business & Society on CSR and worker safety in global supply chainsIn today’s increasingly globalized environment with new suppliers and emerging markets, an increasing number of companies recognise the mutual dependence of supply chain partners in value creation. When making business decisions, they take into consideration their partners’ bottom line profitability. As a powerful buyer, McDonald’s China, for instance, commits not only to offering its potato suppliers in Inner Mongolia a procurement price which marks up the supplier’s cost by a decent margin, but also adjusts the price annually to take into account risk factors such as bad weather affecting crops. Reciprocally, the supplier commits to fulfilling the giant’s order, the exact size of which is only decided after McDonald’s demand is realised. In Japan too, large car manufacturers guarantee their suppliers satisfactory profits who, in turn, reserve capacity for them or set a higher priority for fulfilling their orders. Or then again, the example of Caterpillar who, during the financial crisis of 2008 committed to increasing local dealers’ profits by providing various forms of insurance to support the purchase and leasing of Caterpillar equipment and shouldering a share of the inventory by delaying its collection of receivables. In this way, Caterpillar established a base level for the dealers’ profit margins, and the dealers ensured that the in-stock rate met certain targets.

It takes a tragedy

All in all, the recognition of mutual dependence along the supply chain requires the identification and setting up of reciprocal concerns. After the Rana Plaza tragedy mentioned at the beginning of this article, several European retailers signed a legally binding agreement to improve safety in Bangladeshi factories. In 2014, H&M partnered with 18 brands to assist suppliers in improving their workers’ safety. Prof. Hu’s research points to commitment from the contractor benefitting the chain by allocating a bigger portion of the chain profit to the supplier. And although larger supplier profits do not automatically mean improved worker safety, they do represent a dimension of social responsibility in the sense that an adequate profit is likely a necessary condition for safety. Above all, the research shows that it is indeed possible to care about the supply chain partners’ bottom line without sacrificing one’s own profitability. This makes everyone happy. In short, it’s a win-win.

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