Responsible supply chain operations : analytical modeling of emerging issues
Date of Issue2017
College of Business (Nanyang Business School)
Supply chain responsibility is a growing area in the operations management (OM) literature. This dissertation contributes to this literature by analyzing and explaining practical issues which are not well understood but are crucial for comprehending the implications of responsibility in supply chain operations. In this dissertation, a firm's perspective of profit maximization is taken in order to address two corporate decisions which are intrinsic to supply chain responsibility: contracting with suppliers, and investments in improving supply chain responsibility. Throughout the dissertation, non-governmental organizations (NGOs), governments, shareholders, and consumers are collectively referred to as “external entities”. Following the introduction, the second chapter reviews the literature relevant to this dissertation. The extant OM literature on supply chain responsibility is not exhaustive, with most of the work being in the area of responsible sourcing. This is not surprising, considering that challenges to fostering supply chain responsibility are still emerging in practice. As a result, the analytical models uses in this dissertation are derived from multiple areas within OM such as responsible sourcing, supplier auditing, and disruption management. The literature review provides a comprehensive discussion about the literature related to this dissertation. The third chapter deals with the contract between a firm and her suppliers, when the suppliers differ with respect to their intrinsic degrees of responsibility. Firms generally source from a variety of suppliers, including the potential perpetrators of supply chain responsibility violations. A supply network comprising a profit-maximizing buyer, a supplier who may commit direct responsibility violations (risky supplier), and a supplier who may commit indirect responsibility violations such as unauthorized subcontracting (apparently responsible supplier) is modeled. The firm uses the latter supplier as a backup in case the former becomes unavailable during actual production. The firm's optimal contract terms presented to the suppliers is obtained by solving a mechanism design problem. The analyses of the model suggest that it is indeed optimal for the firm to squeeze her suppliers' margins, in general. However, under certain conditions, the firm might pay a premium to the apparently responsible supplier for reserving backup capacity. Another interesting finding is that through the terms of contract, the firm might cover some of the costs that should have been actually incurred by the apparently responsible supplier. The fourth chapter addresses the following question: Is external pressure on global firms for improving supply chain responsibility always effective? This chapter uses analytical modeling to analyze a firm's incentives for investing in improving the responsibility of suppliers, when exposed to reputation and financial damage from external entities. In contrast to the existing practice of always criticizing and penalizing the buyers and prevalent academic wisdom (Guo et al. 2015), the analyses of our model suggest: criticizing and penalizing the firms do not necessarily improve supply chain responsibility when the improvement of supply chain responsibility hinges on investments by the firms. This finding highlights the potential negative effect of criticizing the firms which is observed in practice: after the Rana Plaza disaster in the Bangladesh apparel industry, even though there has been continuous global pressure on firms to invest in improving their suppliers' responsibility, actual investments in supplier improvement have not been significant. Our analyses also find that in general, external entities should restrict the firms' violation costs to a wider (narrower) interval, if the suppliers are more (less) differentiated with respect to their intrinsic riskiness and costliness. Further, it is demonstrated that external entities should directly penalize a supplier if she engages in unauthorized subcontracting. Additionally, unauthorized subcontracting can be avoided if the penalty is higher than a threshold. Finally, a holistic policy for the external entities is devised, which can achieve maximum supply chain improvement within the scope of our model.