Research Shows Supply-Chain Transparency Does More than Manage Risk

Editor’s Note: Basak Kalkanci is an Associate Professor of Operations Management at the Georgia Institute of Technology Scheller College of Business and an affiliate faculty member of the Ray C. Anderson Center for Sustainable Business. Erica Plambeck is the Charles A. Holloway Professor of Operations, Information & Technology in the Stanford Graduate School of Business and Senior Fellow in the Woods Institute for the Environment.

The Covid-19 pandemic has increased the urgency for supply-chain transparency. In the early days of the response, McKinsey, Gartner and others advised companies to gain greater visibility into their supply chains as the first step in mitigating disruptions.

Now, as we move from response into recovery, reporting suggests that supply chain restructuring is likely in the years ahead. To achieve greater resilience, firms are expected to reshore manufacturing and add geographic diversity to their supply-chain maps. However, as firms reshape their supply chains, there’s another aspect of transparency they should consider that was gaining momentum before the pandemic.

NGOs have been calling on businesses to publish lists of their suppliers in an effort to drive accountability on environmental and social issues. Some firms (particularly those in the apparel and electronics industries) have begun doing this, but on the whole, most still argue that their lists of suppliers are sensitive, competitive information. Giving up that information would negatively impact their bottom line, they say. But our research shows that isn’t necessarily true.

A game-theoretical model demonstrates there are numerous situations in which committing to publish a list of approved suppliers—as well as blacklisted suppliers—actually improves profitability. At the same time, transparency also motivates suppliers to improve environmental and social performance. The key to reaping the rewards of supply-chain transparency is to understand which situations can be beneficial and to manage them appropriately.

Setting Up the Board

We created several mathematical models to study the strategic interactions and potential outcomes that can occur between buyers and suppliers. We found there are four conditions under which it is favorable for a buyer to commit to publishing a list of its approved suppliers.

1. Low selling price or slim margin – The first condition is when the final product the buyer sells into the market has a small margin or low selling price. In this situation, publishing an approved supplier list incentivizes suppliers with the likelihood of attracting additional buyers. But the original buyer’s competitive advantage is not undercut by a reduction in supply capacity due to the price or margin. This was the case for H&M, which published its supplier list in 2017. This condition helps to explain why few luxury brands have taken this step towards transparency.
2. High cost of finding a supplier – The second condition is when the buyer’s cost of identifying and qualifying a candidate supplier is high. In this instance, the buying firm’s cost is wasted unless the supplier chooses to incur enough cost of its own to pass an audit. The potential to sell to additional buyers helps to justify the supplier’s decision. This helps to explain why FedEx committed to promoting to other buyers the hybrid-electric delivery trucks it developed with suppliers in 2003. In doing so, FedEx helps to boost the profits and motivation of its supply partners.
3. High risk of violation – The third condition is when there is a high likelihood that a candidate supplier will have an initial responsibility violation that needs to be addressed before contracting with the buyer. This high risk is often present when sourcing from developing countries that have lax regulatory institutions and law enforcement.
4. Potential brand damage – The fourth condition is when the buyer has a high risk of damaging its brand if it sources from a supplier with a responsibility violation. This risk to brand damage was arguably a consideration for Nike and Apple, both of which lead their industries in revealing suppliers. Similarly, Unilever faces tremendous scrutiny and potential brand damage associated with illegal deforestation in Indonesia by palm oil suppliers. The company faces less scrutiny over its other inputs, which could explain why Unilever committed to publishing only the identities of its palm-oil suppliers.

The Question of Blacklisting

If promising to publish a list of approved suppliers is the carrot, buyers also have a stick at their disposal. The commitment to publish a list of suppliers that have been blacklisted as the result of failing audits is a powerful disincentive. But it carries risks of its own.

If a supplier knows it has an environmental or safety violation, a potential buyer’s commitment to publish a blacklist will spur the supplier either to fix the violation or to avoid the business relationship. However, suppliers sometimes don’t know whether or not they have violations, and they may be unwilling to risk blacklisting by pursuing the business. In that case, our model shows that it could benefit a buyer to pair the practice of blacklisting with a commitment to publishing approved suppliers.

Also, a standalone commitment to blacklisting prompts a supplier to try to hide known violations. This is because the supplier would only have to evade detection for a single audit to avoid the penalty. In contrast, to gain the full benefit of attracting additional buyers generated by the publication of approved suppliers, the supplier would have to pass additional audits that would increase the risk of attempting to hide violations.

Everybody Wins

Public supply-chain transparency can be a powerful tool for enhancing social and environmental responsibility in global supply chains by encouraging suppliers to invest in eliminating responsibility violations in their facilities. Suppliers in developing countries often complain that buying firms demand social and environmental responsibility, but are unwilling to make long-term sourcing commitments or pay higher prices to compensate for the costs of responsible practices. Publishing the identities of suppliers can address that complaint and create a triple-win for the buying firm committing to be transparent, its supplier, and other potential buying firms looking to identify responsible suppliers.

The commitment is also a clear sign to investors that a company is serious about protecting its labor force and supply chain. In a May 13 article, The Wall Street Journal reported that as the global economy began a downturn at the beginning of 2020 due to the coronavirus, ESG funds attracted twice as much capital as they did in the same period a year before. Plus, the funds provided better-than-average returns, despite volatile market conditions.

The Ray C. Anderson Center for Sustainable Business at Georgia Tech’s Scheller College of Business recently published a research brief explaining the game-theory results of the supply chain study. The paper was published online in January 2020 by Manufacturing & Service Operations Management.

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