Responsible Sourcing in Supply Chains

We analyze the sourcing decision of a buyer choosing between two supplier types: responsible suppliers are costly but adhere to strict social and environmental responsibility standards, whereas risky suppliers are less expensive but may experience responsibility violations. A segment of the consumer population, called socially conscious, is willing to pay a higher price for a product sourced from a responsible supplier and may not purchase in the event of a responsibility violation from a risky supplier. We identify four possible sourcing strategies that a buyer might employ: low cost sourcing (sourcing from the risky supplier), dual sourcing, responsible niche sourcing (sourcing from a responsible supplier and selling only to socially conscious consumers), and responsible mass market sourcing (sourcing responsibly and selling to all consumers). We determine when each strategy is optimal and show that efforts to improve supply chain responsibility that focus on consumers (by increasing their willingness to pay for responsibility or increasing the number of consumers that are socially conscious) or increasing supply chain transparency may lead to unintended consequences, such as an increase in risky sourcing. Efforts that focus on enforcement and penalizing the buyer, however, never backfire and always lead to more responsible sourcing and less risky sourcing. This paper was accepted by Yossi Aviv, operations management.