Production, Manufacturing, Transportation and Logistics
Impacts of leadership on corporate social responsibility management in multi-tier supply chains

https://doi.org/10.1016/j.ejor.2021.06.042Get rights and content

Highlights

  • Impacts of leadership on CSR management in a multi-tier supply chain are studied.

  • Tier 1 leads Tier 2 and Tier 2 leads Tier 1 are discussed separately.

  • The delegation and control strategies of Tier 0 buyer are compared.

  • Surprisingly, the control strategy may be more efficient when Tier 1 leads Tier 2.

  • Impacts of information asymmetry and funding factor are addressed.

Abstract

As supply chains become more complex and multi-tiered, managing corporate social responsibility (CSR) of lower-tier suppliers is more challenging and draws increasing attention. In this paper, we develop a game theory model with a multi-tier supply chain, which consists of a Tier 0 buyer, a direct Tier 1 supplier and an indirect Tier 2 supplier. To reduce the CSR violations of Tier 2 supplier, the Tier 0 buyer can either provide funding to the Tier 1 supplier (delegation strategy) or fund the Tier 2 supplier directly (control strategy). We theoretically analyze the optimal strategy under two different supply chain leaderships: Tier 1 leads Tier 2, and Tier 2 leads Tier 1, and further discuss the impact of supply chain leadership. Unlike empirical studies arguing that delegation is more effective when the Tier 1 leads Tier 2, we find that when the funding factor is uniform among suppliers (exogenous), the control strategy is more likely to ensure a lower violation probability than the delegation strategy. Besides, when the loss of Tier 0 buyer due to violations in Tier 2 is relatively small, the buyer may adopt the strategy with a higher violation probability to maximize his profit. In addition, we also consider information asymmetry between the Tier 0 buyer and Tier 2 supplier, and find that the buyer is more inclined to choose the delegation strategy if he is more uncertain about the Tier 2 supplier. Finally, we explore four model extensions and show that the main results are robust.

Introduction

The growing popularity of outsourcing and globalization makes supply chains more complex and multi-tiered, posing a huge challenge for companies to manage corporate social responsibility (CSR) across their supply chains (Soundararajan & Brammer, 2018). In a typical multi-tier supply chain, there are three main members: a Tier 0 buyer, a Tier 1 supplier that sells to the Tier 0 buyer, and a Tier 2 supplier that sells to the Tier 1 supplier (i.e., a sub-supplier of the Tier 0 buyer). Considering the huge amount and disperse location of Tier 2 supplier, as well as the indirect business relationship, information asymmetry between the Tier 0 buyer and Tier 2 supplier is obvious (Soundararajan, Brammer, 2018, Wilhelm, Blome, Wieck, Xiao, 2016a). This information asymmetry makes it difficult for the Tier 0 buyer to monitor CSR of the Tier 2 supplier and increases the probability of CSR violations (hereinafter referred to as “violation probability”) in Tier 2. Recently, the violations of Tier 2 suppliers draw wide attentions (Huang, Song, & Swinney, Wilhelm, Blome, Bhakoo, Paulraj, 2016b). According to a survey by Sedex (2013), the number of CSR violations by Tier 2 suppliers is 18% higher than that of Tier 1 suppliers, and the “major” and “critical” incidents happen more frequently in Tier 2 than in Tier 1.

CSR violations of Tier 2 suppliers result in losses for all members in the supply chain (Jabbour, de Sousa Jabbour, Sarkis, 2019, Wilhelm, Blome, Wieck, Xiao, 2016a). For example, Apple, with Foxconn as its Tier 1 supplier, in 2011, 137 workers at the facility owned by Apple’s Tier 2 supplier Wintek suffered adverse health effects after exposure to a chemical called n-hexane (Apple, 2011). After this scandal, 36 Chinese NGOs jointly called for a boycott of Apple products over workers’ health safety (Dav, 2011). CSR violations of Tier 2 suppliers are common, as even large Tier 2 suppliers pose violation risks. For example, Samsung, a major Tier 2 supplier of screens for Apple, has been exposed for providing low-quality OLED screens to Apple, which caused serious color display problems in Apple’s iPhone X series. However, Samsung Galaxy S8 series using the same screen were working normally (Sean, 2018). After that, Apple recalled its iPhone X series on a large scale due to defective screens provided by Samsung, causing huge losses(Sina news, 2017). Similar cases also occurred with Timberland (Swartz, 2010), Zara (Wilhelm et al., 2016b), Nike (Nisen, 2013), Nestle (Grimm, Hofstetter, & Sarkis, 2016), and Walmart (Greenhouse, 2013). Given the number of cases and huge losses due to violations of Tier 2 suppliers, Tier 0 buyers, especially well-known multinational companies, have started to strengthen CSR management towards Tier 2 suppliers.

One of the most common and effective methods to reduce violation probability of Tier 2 suppliers is providing funding. Conventional wisdom shows that one of the main reasons for CSR violations by Tier 2 suppliers is that CSR requires additional cost, which they do not want to bear for their own benefits (Awasthy & Hazra, 2019). Providing funding for suppliers and sharing the CSR cost may solve this problem. Moreover, given the difficulties of directly conducting audits, training, or monitoring among Tier 2 suppliers (Huang, Song, & Swinney, Wilhelm, Blome, Wieck, Xiao, 2016a), funding may be a more direct and achievable means, which is commonly used as an incentive in CSR management. For example, after the collapse of Bangladesh factory in 2013, American Alliance provided significant funds to these unsafe suppliers to improve their working conditions (Bangladesh Alliance, 2013). In most cases, companies will share part of CSR costs of suppliers to motivate them (Awasthy & Hazra, 2019). In this study, we use “funding factor” to represent the proportion of CSR costs the Tier 0 buyer shares.

In multi-tier supply chains, except for the funding factor, another key question for Tier 0 buyers is whether they should work with Tier 1 suppliers or directly invest in Tier 2 suppliers to reduce CSR violations of Tier 2 suppliers. This question can be seen as a choice between the delegation strategy and control strategy (Huang et al., 2020). In most cases, due to the indirect business relationship and information asymmetry between Tier 0 buyers and Tier 2 suppliers (Soundararajan, Brammer, 2018, Wilhelm, Blome, Wieck, Xiao, 2016a), Tier 0 buyers always fully delegate CSR management of Tier 2 suppliers to Tier 1 suppliers, without establishing a direct relationship with Tier 2 suppliers, which is called the delegation strategy. For example, for most Tier 2 suppliers, Apple applies its “supplier code of conduct,” which clearly states that its direct suppliers are responsible for transmitting its CSR requirements to the next tier suppliers (Apple, 2019b). However, sometimes buyers manage CSR of their Tier 2 suppliers directly, which is called the control strategy. For instance, after the Wintek scandal, Apple directly intervened in Wintek’s social responsibility and re-audited Wintek’s facility (Apple, 2011). In addition, Apple conducted the “A + focal program” in 2017 and invested directly in some Tier 2 suppliers (e.g., Jabil Inc.) to improve their CSR (Apple, 2019c). However, how to choose between the delegation strategy and the control strategy remains unclear. Specifically, the factors affecting this choice need to be further explored.

Based on practical observations and the literature, we find the choice between the delegation strategy and the control strategy is greatly affected by supply chain leadership (Grimm, Hofstetter, Sarkis, 2016, Jia, Gong, Brown, 2019, Tachizawa, Wong, 2014). Supply chain leadership refers to the idea that leaders are more powerful than other supply chain members and can assert their influence in several ways (Fang, Gurnani, Natarajan, 2018, Mokhtar, Genovese, Brint, Kumar, 2019). In supply chain management, supply chain leaders usually have priorities in deciding many important strategies, such as pricing, promotion, and effort-level decisions (Fang, Gurnani, Natarajan, 2018, Mokhtar, Genovese, Brint, Kumar, 2019). In CSR management, the decision-making priorities of leaders are also very important (Fan, Ni, Fang, 2020, Wang, Wang, Fang, Chen, 2019). The implementation of CSR often involves enormous costs. Facing higher social and public pressures, leaders will be more inclined to act first to encourage other members to cooperate and fulfill their CSR. Supply chain leadership is generated by the company’s resources, size, and economic power (Bowersox, Closs, 1996, Munson, Rosenblatt, Rosenblatt, 1999). In a three-tier supply chain, the leading position of buyers motivates them to promote CSR across the supply chain, while the leadership relationships between Tier 1 and Tier 2 suppliers will have an important effect on the optimal strategy of buyers. According to Wilhelm et al. (2016b), when a Tier 2 supplier leads a Tier 1 supplier, the delegation strategy tends to be less effective due to the limited resources of Tier 1 supplier and its weak power to put pressure on the Tier 2 supplier. Similarly, Grimm et al. (2016) examine two cases in detail and argue that a powerful buyer tends to choose the control strategy. However, when a Tier 1 supplier receives more public attention, indirect delegation is preferred.

Interestingly, Apple’s CSR management practices for Tier 2 suppliers are different from the results of previous studies. As mentioned above, Apple adopts a control strategy for managing its Tier 2 suppliers, such as Wintek and Jabil Inc., whose supply chain power is lower than that of Foxconn (Apple, 2019c). For powerful Tier 2 suppliers like Samsung, Apple chooses the delegation strategy. This counterintuitive phenomenon motivates us to study the influence of supply chain leadership relationship between the Tier 1 and Tier 2 suppliers on the optimal strategy. We summarize our practical motivations in Table 1.

Theoretically, CSR management in multi-tier supply chains is still under-explored. The most relevant study is Huang et al. (2020), which explores the optimal strategy among delegation, control, and no effort strategies. Our study differs from it in three ways. First, in terms of research focus, they focus on comparing strategies and examining how external pressures affect the optimal CSR level, while we focus on the impact of supply chain leadership on CSR management. Second, in terms of model assumptions, they assume that the Tier 0 buyer does nothing to reduce the violation probability of Tier 2 supplier under delegation strategy while the Tier 1 supplier does nothing under control strategy. However, in practice, companies always pay much attention to managing their direct suppliers (Awasthy, Hazra, 2019, Caro, Chintapalli, Rajaram, Tang, 2018, Chen, Lee, 2016), so the Tier 1 suppliers never completely ignore CSR management in Tier 2 suppliers.1 Therefore, we define delegation and control strategies based on whether the Tier 0 buyer works with the Tier 1 supplier or directly engages with the Tier 2 supplier (but the Tier 1 supplier makes efforts in the both delegation and control strategies). Third, in terms of results, they find that higher external pressure may lead to a lower CSR level. Differently, we theoretically verify that control strategy may be better when the Tier 1 supplier is in the leading position. More importantly, although some prior studies illustrate the importance of leadership for CSR management in Tier 2 suppliers based on empirical observations (Grimm, Hofstetter, Sarkis, 2016, Jia, Gong, Brown, 2019, Tachizawa, Wong, 2014, Wilhelm, Blome, Wieck, Xiao, 2016a), to the best of our knowledge, no prior study has explored this question theoretically, not to mention the counterintuitive case of Apple. Based on these research gaps, we examine the following research questions:

  • (1)

    Which strategy is more effective in reducing CSR violations in Tier 2: delegation or control? Will the Tier 0 buyer always choose the strategy with a lower CSR violation probability?

  • (2)

    How does supply chain leadership affect the CSR efforts and violation probability? Is it always effective to delegate the CSR management to a leading Tier 1 supplier?

  • (3)

    What is the effect of the CSR funding factor? What are the differences if the Tier 0 buyer sets uniform (exogenous) or different (endogenous) funding factors to the Tier 1 and Tier 2 suppliers?

To answer these three research questions, we build a three-tier supply chain consisting of a Tier 0 buyer, a Tier 1 supplier, and a Tier 2 supplier. The CSR violations of Tier 2 supplier will result in losses for all members of the supply chain. The violation probability of Tier 2 supplier is directly determined by the CSR effort levels of both Tier 1 and Tier 2 suppliers. The buyer decides whether to provide funding to the Tier 1 supplier (delegation strategy) or the Tier 2 supplier (control strategy) to entice them to exert more efforts. In the context of asymmetric information between the Tier 0 buyer and Tier 2 supplier, we build models under two supply chain leadership relationships: 1) the Tier 1 supplier leads the Tier 2 supplier(hereinafter referred to as “Tier 1 leads Tier 2”), and 2) the Tier 2 supplier leads the Tier 1 supplier(hereinafter referred to as “Tier 2 leads Tier 1”). The supply chain leader decides the level of CSR effort first. We first discuss the optimal strategies when the Tier 0 buyer sets a uniform (exogenous) funding factor for all suppliers and extend the model to the case with an endogenous funding factor in Section 6.1.

We summarize our main findings regarding the following three aspects:

1. Optimal strategy: For the purpose of lowering the violation probability, we find that when the Tier 1 supplier has an obvious cost advantage regarding CSR effort, delegation strategy always ensures a lower violation probability. However, the buyer votes for the control strategy at this time if his losses due to the violations in Tier 2 are relatively small. Similarly, when the control strategy ensures a lower violation probability, the buyer chooses the delegation strategy if his losses due to the violations in Tier 2 are relatively small. We call these phenomena “institution failures” where the buyer seeks higher profits and chooses the strategy with a higher violation probability due to his small losses for the Tier2’s violations. More importantly, in this case, the buyer chooses to invest in the supplier with a higher effort cost coefficient and a lower CSR effort, preventing both Tier 1 and Tier 2 suppliers from making efforts and leading to a higher violation probability. This conclusion explains the frequent CSR scandals in the developing areas with loose regulations toward CSR.

2. The impact of supply chain leadership: Contrary to our intuition, we find that when the buyer’s CSR funding factor is exogenous, the delegation strategy is more effective in lowering the violation probability when the Tier 2 supplier leads Tier 1 supplier. Indeed, supply chain leadership affects the CSR effort levels of Tier 1 and Tier 2 suppliers. When the Tier 1 supplier is in the leading position, she benefits from the first-mover advantage and will reduce her CSR effort level to cut down the CSR costs. At that time, when the buyer sets a uniform funding factor and provides funding with conditional on the suppliers’ efforts, the total investment decreases when he funds the powerful Tier 1 supplier, which further increases the violation probability. In the model extension, we also consider the case where the Tier 1 and Tier 2 suppliers occupy the same leadership position. Compared with the two previous leadership scenarios, we find that the higher the leadership position of the Tier 1 supplier, the more the Tier 0 buyer tends to choose the control strategy to reduce the violation probability. This result is robust.

3. The impact of the funding factor: The funding factor plays an important role. First, when the funding factor is exogenous, we show that the delegation strategy is more effective when the Tier 2 leads Tier 1. However, in the model extension, we find that when the funding factor is endogenous, the delegation strategy is preferable when the Tier 1 leads Tier 2 in lowering the violation probability. This conclusion shows that when a buyer can adjust its funding more flexibly, he always delegates a strong Tier 1 supplier to manage Tier 2 suppliers. In addition, we consider the investment constraints in the model extension. The results show that when the CSR investment constraint is tight, supply chain leadership will not affect the optimal strategy of Tier 0 buyer, and he will always choose to invest in the supplier with cost advantages. As mentioned above, this interesting result not only explains the counterintuitive strategies adopted by Apple but also supplements the literature which claims that the delegation strategy is always better when the Tier 1 supplier is more powerful (Grimm, Hofstetter, Sarkis, 2016, Wilhelm, Blome, Bhakoo, Paulraj, 2016b).

The rest of this paper is organized as follows. Section 2 reviews the relevant literature. Section 3 develops the models. Section 4 presents the equilibrium solutions for the delegation and control strategies under the two leadership relationships and compares the two strategies. Section 5 analyzes the effect of supply chain leadership. Section 6 presents the model extensions. Section 7 discusses the managerial implications and provides concluding remarks. All proofs are relegated to the Appendix.

Section snippets

Literature review

This study is related to two streams of literature, namely supplier CSR management and supply chain leadership. Supplier CSR management attracts attention in industry and academia (Engida, Rao, Oude Lansink, 2020, Lee, Tang, 2017, Tang, 2018). Many studies focus on motivating suppliers to fulfill their CSR (Awasthy, Hazra, 2019, Caro, Chintapalli, Rajaram, Tang, 2018, Chen, Lee, 2016), that is, ethical sourcing. For example, Chen & Lee (2016) investigate the interactions between three

Model building

To investigate the impact of supply chain leadership on CSR management in multi-tier supply chains, we consider a three-tier supply chain consisting of a Tier 0 buyer (“he,” e.g., Apple), a Tier 1 supplier (“she,” e.g., Foxconn), and a Tier 2 supplier (“it,” e.g., Samsung and Wintek). In the three-tier supply chain, the Tier 2 supplier sells materials to the Tier 1 supplier at a unit wholesale price w2, then the Tier 1 supplier sells the unfinished products to the Tier 0 buyer at a unit

Tier 1 leads tier 2

This section compares the delegation and control strategies when the Tier 1 supplier leads the Tier 2 supplier. In Section 4.1.1, we compare the violation probability of the delegation and control strategies and analyze the buyer’s expected profits in Section 4.1.2.

Effects of supply chain leadership

In this section, we explore the effects of supply chain leadership on CSR management in multi-tier supply chains. We analyze the effects of leadership on the CSR effort level and violation probability in Sections 5.1 and 5.2, respectively.

Effect of the funding factor

In this section, we explore the optimal strategy when the Tier 0 buyer sets an endogenous funding factor. As we analyzed above (P.S. Proposition 6), the leading supplier may use its first-move advantage to exert a lower CSR effort level. Therefore, if the funding factor is exogenous and the buyer provides the total funding conditional on the suppliers’ effort level, the delegation strategy will be less effective under the leadership of Tier 1 leads Tier 2 than it under the leadership of Tier 2

Conclusion

In this study, we analytically examine the CSR management strategies in a three-tier supply chain consisting of a Tier 0 buyer, a Tier 1 supplier, and a Tier 2 supplier. With the Tier 0 buyer leading the supply chain, we consider two kinds of supply chain leaderships between two suppliers: (i) Tier 1 leads Tier 2, and (ii) Tier 2 leads Tier 1. In particular, we identify which strategy (delegation or control) is optimal in different supply chain leadership relationships and analyze the impact of

Declaration of Competing Interest

Authors declare that they have no conflict of interest.

Acknowledgments

This research is supported by Major Program of the National Social Science Foundation of China (Grant no. 18ZDA060). The reviewers’ comments are also highly appreciated.

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