Behavioural insights into responsible sourcing in global supply chains

With the emergence of globalisation, today’s supply chains have expanded across the globe. Attracted to cheaper labour and production costs, and with a lack of proper monitoring mechanisms in place, many firms ignore their social responsibilities and go to non-responsible suppliers to procure their materials or make their products. Recent reports by the International Labor Organization show that there are currently more than 150 million children in child labour in global supply chains.

NGOs such as GoodWeave, aim at ending child labour and bonded labour in global supply chains by engaging socially conscious consumers to react to the issues. Their aim is to find out whether consumer reactions influence sourcing decisions, and more importantly, what type of reaction NGOs should promote among consumers?

Generally speaking, one can expect two types of reactions from consumers:

• Encouraging reaction - values responsible sourcing. Consumers pay premium prices for responsibly sourced products
• Discouraging reaction - denounces non-responsible sourcing. Consumers boycott firms if responsibility violations occur in their supply chains

Learning the most effective consumer reaction depends upon understanding a firm’s sourcing behaviour. Firms (for reasons such as positioning themselves as responsible) tend to dual source to serve different consumer segments. They may source from responsible suppliers for socially conscious consumers and from non-responsible suppliers for regular consumers.

Classical economic models that ignore this behaviour predict that an encouraging reaction (in terms of a premium price) needs to be high to show any effect on responsible sourcing. Moreover, classical models do not have an answer for supply chains of products with low salvage value, such as perishables and fast fashion. Whereas a behavioural model of responsible sourcing accounts for dual sourcing behaviours and is more effective in providing practical and thorough insights.

These corrections lead to the following simple recommendation: in supply chains of products with no brand substitutes, an encouraging reaction from consumers is the most effective way to improve responsible sourcing.

In addition to being straightforward and thorough, this is also a pragmatic recommendation for NGOs where they can fit their communication strategy to the nature of the product.

By leading consumer reactions more effectively, NGOs can pressure firms into ensuring social responsibility in their supply chains. Firms may not want to simply abandon sourcing from cheap suppliers, but they can do something about their business relations with them. Certification, process audit and contingency payment are three mechanisms that firms can employ to control their suppliers’ social responsibility. The key question is, which of these mechanisms is more effective to that end?

Classical economic models suggest that certification is most effective in filtering out non-responsible suppliers in supply chains. However, evidence has shown that suppliers often temporarily act responsibly to get certified and change their process afterwards. Classical models also find contingency payments to be more effective than process audits. This insight also comes with limited practical value as suppliers in developing economies often need an upfront payment to start their productions.

A behavioural model that accounts for suppliers’ behavioural patterns has different views. Suppliers’ cheating behaviour is an undeniable assumption in such a model, and so it does not find certification as powerful as classical models do. A behavioural model also finds that suppliers’ aversion to process audits is the same as their aversion to the loss in contingency payments. So, when one cannot be implemented, the other is a viable alternative.

Further behavioural insights can be applied to understand supply chain partners’ behaviour in their social responsibility communication. Information sharing and transparency can significantly facilitate achieving social responsibility in global supply chains. With many obstacles (from privacy to pecuniary) concerning different entities, establishing these is not an easy task. What behavioural insights can do is offer alternative frames of communications to work around these obstacles.

Mahdi Mahmoudzadeh is a lecturer in the Department of Information Systems and Operations Management. His research interests are behavioral OM, social/environmental responsibility, sustainable operations, supply chain analytics and corporate social responsibility.