The Impact of Supply Chain Structure on Responsible Sourcing

We analyze the sourcing decisions of firms that may choose between two types of suppliers: responsible suppliers that are costly but adhere to the strictest social and environmental responsibility standards, and normal suppliers that are less expensive but may randomly experience responsibility violations. There are two potential consequences of any such violation to the buying firm: costs may increase (e.g., due to increased monitoring of the supplier, wage increases, or product recall expenses) and some segment of the consumer population, which we refer to as socially conscious, will choose not to buy from the firm, leading to a reduction in demand. We consider how three structural elements of the supply chain influence the firm's optimal sourcing decision: downstream competition, the concentration of the supplier base, and supply chain flexibility. We find that greater downstream competition, a more concentrated supplier base, a less flexible supply chain all make a firm more likely to source responsibly. We conclude that supply chain characteristics play a key role in determining the optimality of responsible sourcing.