Competitive Advantage In The Supply Chain Is A Social Endeavor

Technology has changed the way society and individuals communicate.  What used to be hidden years ago behind long distances and language differences easily becomes news via 24-hour cable channels and videos captured using cell phones and broadcast over the internet.  As a result, a broader range of customers and non-governmental organizations (NGOs) gain access to more information about what happens within supply chains, those networks of companies that products go through – from raw material extraction to manufacturing to consumer retailing –  before distribution.  Thus, companies are held accountable and need to ensure that issues like poor worker conditions in suppliers’ facilities are addressed.  Concerns include the use of sweatshop labor, the provision of safe working conditions, and the payment of a living wage to their employees. 

In response, a growing number of firms are exploring how to identify, assess, and monitor supplier-related social issues and practices.  My research looks at the various management systems that can be put in place to improve social performance in the supply chain.  These supplier socially responsible practices can be divided into four categories. 

First, a firm can establish supplier human rights practices, which reduce the possibility that suppliers employ vulnerable groups of people, such as children.  A firm can also put in place supplier labor practices to assess the conditions in which employees perform their duties, and how an employer contributes to the overall welfare of employees.  Supplier codes of conduct ensure that specific procedures are explicitly spelled out by the focal to guarantee that suppliers adhere to ethical expectations.  Finally, the firm can conduct supplier social audits to monitor suppliers and ensure their adherence to social expectations or, in a similar vein, use a certification provided by an independent third-party, such as Fairtrade or the Rain Forest Alliance.  

I’m currently working on a research project with Professor Robert D Klassen of the University of Western Ontario in which we examine what drives firms to adopt socially responsible practices.  This study is based on responses from a survey of 1,209 Canadian manufacturing plants in the food, chemicals and transportation industries.  The survey results indicate that the level of involvement in supplier codes of conduct was the highest, followed by supplier human rights, then supplier labor practices, and finally supplier social audits.  This points towards a progressive development from practices that are internal to the firm and where the firm has a lot of control (i.e., supplier codes of conduct involve both the buyer and supplier), to supplier-oriented practices (i.e., supplier human rights and supplier labor practices), to verification of practice (i.e., supplier social audits).  In essence, operations managers are beginning to address social issues by trying to get their own operational practices in order, as supplier codes of conduct ensure that buyer’s employees have procedures and practices to deal with suppliers ethically.  Additional practices then engage and push suppliers to improve their human rights and labor practices. Finally, operations managers put supplier social audits in place to ensure that suppliers are adhering to these new social practices.  

Various factors in the supply chain can drive a firm to adopt the different supplier socially responsible practices, and my research examines in depth the three specific dimensions of the supply chain, namely transparency, dependency, and distance. When considered within the context of supply chains, transparency captures the extent to which information is readily available to end-users and other firms in the supply chain.  Dependency represents the degree to which a firm relies on other members of the supply chain for critical resources, components, or capabilities.  Distance can refer to differences because of the cultural differences, geographic distance, or simply the number of firms in the supply chain.  A supply chain made up of many firms – from raw material extraction through consumer retailing – is often more complex and difficult to manage.

Only one dimension of Distance has substantial impact on the adoption of supplier socially responsible practices.  In the study there was a strong relationship between the adoption of supplier socially responsible practices and the numbers of firms in the supply chain.  The longer and more complex the supply chain, the more likely a firm was to adopt these practices.  However, there wasn’t a strong relationship between the other distance dimensions or dependency and the adoption of supplier socially responsible practices.  There are a number of explanations for this.  First, some firms might not have sufficient influence to drive change back through the supply chain to all suppliers.  Second, the cultural norms and expectations for improving human potential vary by industry, customer segment, and marketplace.  Third, as more manufacturing and supplier sourcing has shifted overseas, the geographic distance, and length of supply chains (i.e., tiers) between supply chain partners has also increased.  Furthermore, the costs associated with adoption practices to deal with social issues might be prohibitive.  

One of the very strong relationships was identified between visible brands and the adoption of supplier socially responsible practices.  This points towards the notion that managers with valuable, highly visible brands do not want their brand images tarnished by improper practices in the supply chain.  Therefore, these managers are more likely to invest in practices that help protect that brand.  By putting these supplier socially responsible practices in place, it is less likely that improper practices in the supply chain would occur.  Furthermore, managers that currently have supplier socially responsible practices in place can promote these practices to their customers to further differentiate the firm and give it more of a competitive advantage.  

There could be two drivers for investments in supplier socially responsible practices.  First, the firm could be seeking new opportunities to position its products and brands, and minimize the risks of criticisms and concerns from NGOs, the public, and customers.  Also, by investing in supplier socially responsible practices, the firm can mitigate the negative outcomes of unexpected events and/or revelations in the supply chain.  Our analysis also suggests that supply chain transparency drove the adoption of supplier socially responsible practices.  By extension, firms with well-developed supplier social practices can launch educational programs for consumers to illustrate the tangential social benefits embedded in their products and supply chains.  Of course not all competitors have the management capabilities or economies of scale essential to replicate socially responsible practices in a cost effective manner.   Thus, socially responsible practices simultaneously achieve social gains, blunt potential criticism, and provide the firm with a competitive advantage that is difficult to imitate.

[This research paper has been reproduced with permission of the authors, professors of IE Business School, Spain http://www.ie.edu/]