Analysis of a dyadic sustainable supply chain under asymmetric information

Highlights

• Designed and analyzed the four different models through simultaneous consideration of greening and corporate social responsibility among the suppliers and buyers.

• Investigates how supply chain agents choose their sustainability efforts.

• Provide mathematical evidence that sustainability efforts may improve firm performance.

• Contract has designed to improve the sustainable supply chain.

Abstract

We model a sustainable supply chain with simultaneous consideration of greening and Corporate Social Responsibility by supplier and buyer and analyze it for four different decision alternatives. In the first two cases, a single supply chain agent looks after both greening and social responsibility, in the other two cases, one agent takes one of the responsibilities. We compared these four cases by considering both full information and asymmetric information about the buyer's marginal production cost. Using the supplier Stackelberg game, we obtained the optimal values of decision variables under both information scenarios. The supplier negotiates with the buyer using the wholesale price contract or the linear two-part tariff contract. The second one is the dominating choice. For this contract the value of information is also higher for all decision alternatives. We have revealed the conditions under which the supplier would be benefited by choosing the greening effort and where the buyer would be benefited by taking up social responsibility. Further, we have designed a cut-off policy and found that the supplier and buyer can trade without conflicts only at a high level of consumer sensitivity towards greening and social responsiveness. This result suggests that if sustainability is left completely on consumer pressure, then the supplier and the buyer may not incorporate sustainability in the supply chain practices. We could specify those consumer sensitivity levels under which there must be government regulations to derive sustainability.

Introduction

Sustainable supply chain management (SSCM) has recently emerged as one of the most important research topics in the operations management area (Barbosa-Póvoa, da Silva & Carvalho, 2018; Lee & Tang, 2017). Firms across the globe have realized that the adoption of sustainability can also contribute to competitive advantage, thus leading to an increase in market share (Mani et al., 2018). SSCM integrates the three different dimensions of business: economical, environmental, and social (Elkington, 1998). Firms face mounting pressure from various stakeholders to adopt sustainability in the supply chain. Therefore, companies across diverse sectors such as Apple, General Electric Caterpillar, PepsiCo, Tata Motors, Ford Motors, Nike, Walmart, Dell, and IKEA are including sustainability into the supply chain (The Guardian 2014). General Motors have enforced their suppliers to adopt green technology to reduce emissions. IKEA, Wal-Mart, and PepsiCo have made their suppliers follow green technology with a focus on corporate social responsibilities (Jayaram & Avittathur, 2015; PepsiCo, 2016). Apple Inc. is motivating their supplier—Foxconn Technology Group—to improve the health and safety conditions of workers working in the Chinese factories, while the company itself focuses on green technology (Garside, 2012). The Whole Foods Market, the world's largest retail chain of natural and organic foods, has committed to CSR and requested the suppliers to put efforts in greening (Ma, Shang & Wang, 2017). Similarly, many companies (Mahindra & Mahindra, Johnson Controls Inc, Levi Strauss & Co, De Beers, Volkswagen, and Timberland) have established a supplier code for partners to follow sustainability. Hindustan Unilever Limited has trained more than 350,000 tea growers with smallholdings in Kenya to incorporate sustainability practices (HUL, 2017).

Though, in reality, noticeable visibility of better sustainability performance is still missing from the supply chain (Barbosa-Póvoa et al. 2018; The UN Report 2013). Certain recent incidents such as the death of an employee of Foxconn and a contract manufacturer of the Apple i-pad, factory collapse and fires in Bangladesh, recall of nearly 1 million toys by Mattel in 2007 because of the use of harmful material by its supplier manufacturing toys, etc., bear evidence of the lack of visibility for enhancing sustainability in the supply chain (The New York Times 2007). To adopt sustainability across the supply chain, firms and their suppliers have to invest upfront in green technology. Recently, IKEA has allocated around €3bn “sustainability investments” for enhancing sustainability, facing strong criticism from its stakeholders for this huge investment (Gould, 2017). HUL also faced similar criticism in the recent past. Neoclassical economics argue that investment in sustainability puts a firm in an unnecessarily disadvantageous position. However, some researchers have argued that investment in sustainability increases stakeholders’ value, and in the long run, it increases the profitability of a firm (Soytas, Denizel & Durak Usar, 2019). Therefore, the fundamental question arises whether an investment in sustainability is justifiable. Some of the firms are implementing greening and CSR efforts on their own, while other firms are putting pressure on their partners to enhance greening and CSR efforts. Nevertheless, this situation creates a misalignment of objectives between the suppliers and buyers.

The contract is an important coordination mechanism, which can align sustainability objectives. However, designing a quantitative model for incorporating all the three aspects of sustainability and formulating a contract with the supply chain partners is challenging. Hence, it remains unexplored in the existing literature (Barbosa-Póvoa et al., 2018; Lee & Tang, 2017; Reefke & Sundaram, 2017). The problem is further exaggerated in the case of asymmetric information, wherein one party has better information than others. On top of this, the fundamental question is related to the reasons behind supply chain agents putting sustainability efforts as well as to understand whether consumer pressure is sufficient to motivate supply chain agents for putting sustainability efforts. The above-discussed business scenarios prompt several research questions that need to be explored. Does sustainability lead to profitability? How to develop an integrated quantitative model considering all the pillars of sustainability that comprise economic, environmental, and social aspects? Can the contract design provide an incentive for supply chain agents to put effort into sustainability? Does a simple, linear two-part contract suffice? What is the value of information for a supplier in the case of asymmetric information? What is the cut-off value for the supply chain agents? Can consumer pressure drive sustainability?

We used analytical models to obtain answers for the aforementioned questions and analyzed the dyadic sustainable supply chains under the context of full information and asymmetric information with four different decision alternatives. These four cases are: (i) supplier is putting greening and CSR efforts, the buyer is only profit maximizer; (ii) supplier puts effort in greening, while buyer puts effort in CSR; (iii) supplier puts effort in CSR, while buyer puts effort in greening; and (iv) the buyer is putting greening and CSR efforts, while the supplier is only profit maximizer. After analyzing all the four models under the context of full as well as asymmetric information, we derived the optimal values. First, we derived the results for the centralized case and then for the decentralized case, under the context of wholesale price contract and linear two-part tariff contracts. Second, we designed the cut-off policy and the value of information in case of asymmetric information and posited that the sustainability efforts of the supply chain agents enhance their profitability. We showed that the linear two-part tariff coordinates the sustainable supply chain for all the scenarios. Last, several managerial implications and interesting results were presented using numerical analysis. The paper makes four important contributions. First, we analyzed a sustainable supply chain model by combining it with the economic, environmental, and social aspects under the context of asymmetric information, which is unreported in the extant literature (Barbosa-Póvoa et al., 2018). Second, we analyzed a linear two-part tariff contract for coordination. Third, we found the range under which trade between supplier and buyer would be beneficial under the context of sustainability. Last, our results show under which circumstances is the consumer pressure alone not enough to motivate the sustainability agenda.

The remainder of this paper is organized as follows. Section 2 presents the literature review, which is followed by a model discussion in Section 3. In Section 4, the supplier and buyer optimal decisions are analyzed and the results are compared. Sections 5 and 6 analyze the cut-off policy and the value of information, respectively. Section 7 presents the numerical analysis of the optimal results and Section 8 presents some interesting managerial results. Finally, in Section 9, the study is concluded.