Mitigating risky sourcing with a responsible supplier in a competitive environment: the implication of product line design and sourcing diversification

Abstract

We consider the sourcing decisions of two competing firms with a potential responsibility violation risk from a supplier. There are two consumer segments in the market: socially and nonsocially conscious consumers. When a responsibility violation occurs, the socially conscious consumers will not purchase from any firm who sources from the risky supplier. To avoid this potential demand loss, the two firms can consider sourcing from a responsible but more expensive supplier. We develop game theoretical models to investigate the firms’ optimal sourcing strategies and examine the effects of product line design and sourcing diversification on firms’ incentives to source responsibly. Our study shows that when each firm adopts a single sourcing strategy, as the suppliers’ cost difference increases, both of their sourcing choices deviate from the responsible supplier to the risky supplier. Moreover, we find that when the firm sourcing responsibly can determine whether to extend the product line to offer responsible and conventional products, product line design improves both firms’ profits and induces them to source responsibly. Finally, we find that when each firm can choose between a single and a dual sourcing strategy, sourcing diversification can be potentially detrimental for both firms and prevent them from sourcing responsibly.

KEYWORDS:

• Supply risk
• responsible sourcing
• responsible supplier
• product line design
• sourcing diversification
• competition

Acknowledgements

The authors sincerely thank the Editor-in-Chief, Alexandre Dolgui, the associate editor, and the anonymous reviewers for their valuable suggestions and constructive comments that have significantly improved the paper.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

The data that support the findings of this study are available from the corresponding author upon reasonable request.

Notes

1 https://www.fairtrade.net/about/certification.

2 https://www.bcorporation.net/en-us/certification/.

3 https://www.campaignlive.co.uk/article/amt-coffee-switches-fairtrade-only-products/464020.

4 https://www.thehonestconsumer.com/blog/socially-responsible-brands.

5 In practice, two methods are commonly used to assess the value of $\varphi$: qualitative and quantitative methods (Kouvelis et al. 2011). Qualitative methods mainly rely on expert opinion and subjective risk map is a typical representative. Conversely, quantitative methods mainly rely on statistical analysis, history data, and experience, and value-at-risk is a typical representative.

6 Our results still hold if we assume that a fraction of socially conscious consumers are willing to pay a premium α_H, and the other socially conscious consumers are willing to pay a premium α_L<α_H.

Additional information

Funding

This work is supported by the National Natural Science Foundation of China (NSFC) [grant number 72171218 and 72091215/72091210], the USTC Research Funds of the Double First-Class Initiative, and the Fundamental Research Funds for the Central Universities, Zhongnan University of Economics and Law.

Notes on contributors

Fei Lv

Fei Lv is an associate professor in the School of Business Administration, Zhongnan University of Economics and Law, Wuhan, China. He received the Ph.D. degree in the School of Management at Huazhong University of Science and Technology, China. His research interests include responsible sourcing and CSR management in supply chains.

Zhe Yin

Zhe Yin is a researcher in the International Institute of Finance, School of Management, University of Science and Technology of China. He received the Ph.D. degree in the School of Management, Huazhong University of Science and Technology, China. His research interests include supply risk in supply chains and operations and marketing interface.