A growing number of apparel companies are publishing their supplier lists, and there’s increasing activist pressure on others to do the same.
From a business perspective, the argument for such transparency is that publishing the names of approved suppliers incentivises greater compliance with responsible environmental, social and governance (ESG) policies. However, there’s also a prevalent argument against supplier transparency, which is that other buyers may then contract with the “good” suppliers, limiting capacity or driving up costs to the detriment of the original buyer.
Another less common approach to transparency is for a buyer to publish a list of suppliers that failed ESG audits. The logic here is that the threat of blacklisting will incentivise compliance and dissuade irresponsible suppliers from even engaging with the buyer. But this approach also has a tradeoff, which is that responsible suppliers may stay away as well if they’re uncertain whether they would pass an audit.
The transparency decision is further complicated in that some suppliers may be incentivised to try to hide violations, and numerous variables – such as the likelihood of a supplier having a violation or the cost of finding new suppliers – all shift the strategic thinking.
When buying firms try to weigh everything that’s involved, it can quickly become a tangled mess. That’s where game theory comes in. Game theory uses mathematical models to predict the strategic outcomes of rational decision-makers based on the totality of incentives and/or disincentives.
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Favourable conditions for publishing supplier lists
We recently used a game theory model to analyse the conditions under which a firm’s commitment to publishing a list of approved suppliers increases the buying firm’s expected profit and motivates suppliers to work towards eliminating safety, environmental, or other responsibility violations. In other words, we looked for the scenarios that produce only positive outcomes.
With a dozen or more factors accounted for in the model, the study produced a complex set of results. In order to give specific recommendations for any single buying firm, a model would have to be evaluated with that firm’s unique set of conditions. However, we found four conditions – prevalent throughout the apparel industry – that favour publishing an approved supplier list. They are as follows:
- The buying firm has a low selling price or slim margin.
- The buying firm has a high cost of identifying and qualifying a candidate supplier.
- The buying firm faces a high likelihood that a supplier has responsibility violations that will be exposed.
- The buying firm faces the potential for significant brand damage due to sourcing from a supplier with a responsibility violation.
Under one or more of the conditions above, the model consistently showed that a buying firm could expect better profits and ESG results from the increased transparency of a supplier list.
What about blacklisting?
When it comes to publishing a blacklist, the takeaways are less clear. Under some conditions, publishing a list of suppliers that failed ESG audits increases supplier responsibility, but under others it actually decreases it.
Without modelling a buyer’s specific situation, the only general takeaways available are:
- Blacklisting should primarily be practiced in conjunction with publishing an approved supplier list; and
- The combination will be particularly effective with new, prospective suppliers that don’t know if an audit will find them to be in violation or not.
Another conclusion of our study is that helping to improve suppliers’ productivity can be complementary to publishing their identities. NIKE, for example, saw a reduction in the frequency of failed audits after publishing its supplier list and helping suppliers adopt lean manufacturing practices. For suppliers that need more buyers, the combination of what is essentially free advertising and help in cutting costs is a strong incentive to pass a responsibility audit.
In short, there are numerous ways in which greater transparency can be a profitable approach to mitigating social and environmental violations in apparel supply chains. To identify the models and conditions that best match their business realities, firms can dig into our study published last year in the journal, Manufacturing & Service Operations Management. Or they can read the research brief published by the Ray C. Anderson Center for Sustainable Business at the Georgia Tech Scheller College of Business.
About the authors:
Basak Kalkanci is an associate professor of operations management at Georgia Tech’s Scheller College of Business and a faculty affiliate of the Ray C. Anderson Center for Sustainable Business. Her research focuses on socially and environmentally responsible supply chain management, behavioural operations management, supply risk management, contracting and information sharing in supply chains.
Erica L. Plambeck is the Charles A. Holloway Professor of Operations, Information & Technology in the Stanford Graduate School of Business and Senior Fellow in the Woods Institute for the Environment. She is an expert in manufacturing operations and supply chain management, and her current research focuses on environmental sustainability.