NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Five years ago, the Rana Plaza factory in Bangladesh collapsed killing more than 1,100 workers and revealing the horrific working conditions that garment workers endure across the developing world. Still, to this day apparel makers are trying to get a grasp on the social responsibility practices being used in their supply chains.

To create a transparent supply chain requires a company to both learn what is occurring in their supply chains and disclose relevant information to consumers. Gaining supply chain visibility is the often-overlooked aspect of supply chain transparency. It is a complicated and time-consuming endeavor—and the benefits to a company’s bottom line are not always entirely clear. Do customers really care? And even if they do care, are they willing to reward a company for its efforts?

Bringing Supply Chains TO LIGHT

According to our research, the answers are yes and yes. A majority of customers value insight into a company’s supply chain—and some are even prepared to pay a premium for greater visibility.

A number of forward-thinking companies such as Nike, Levi’s and Patagonia, for instance, have long published their lists of suppliers, and have also put mechanisms in place to ensure their products are manufactured in a responsible manner. For them, supply chain visibility is an absolute must: a social good that safeguards human rights, but also provides information that customers deserve to know.

While events such as the Rana Plaza collapse, one of the deadliest industrial accidents in history, have helped to force the issue, many companies still have limited insight into the practices being used in their supply chains. Why? Gaining supply chain visibility is hard. Modern supply chains are complex, globe-spanning systems, and monitoring them is an exceedingly difficult challenge. Large brands or retailers can easily have hundreds, and even thousands, of first-tier suppliers alone, with those suppliers then having their own extensive supplier network.

Regulations have not done much to move the needle. Take, for instance, the California Transparency in Supply Chains Act that was enacted in 2012. The law stipulates that retail sellers and manufacturers that conduct business in California must disclose their efforts to “eradicate slavery and human trafficking from their direct supply chains.” However, the law does not state anything about requiring companies to exert effort; rather, they’re just required to say what they’ve done—even if they have done nothing.

HighER Visibility, Greater Reward

So here we are: Supply chain visibility is hard, expensive and not legally mandated. As a result, not enough companies are making progress on improving the visibility of their supply chains because they are unwilling to put in the time and money.

We hope our research shifts their thinking. Along with our coauthor, León Valdés, Assistant Professor of Operations Management at the University of Pittsburgh’s Katz Graduate School of Business, we conducted a series of laboratory experiments that examined when companies can benefit from greater supply chain visibility. In our experiments, we mimic the dynamics of a supply chain with a three-player game where participants play the roles of a consumer, a seller or a worker. We examine whether and how visibility into the outcome of the seller’s effort to improve the treatment of the worker impacts the price premium that consumers are willing to pay to the seller. All players’ decisions are incentivized; i.e., their actions directly impact their payments from the experiment.

We find that consumers value greater visibility into a company’s social responsibility practices in the upstream supply chain when workers are disadvantaged (i.e., poorly treated). This is especially true if consumers exhibit a self-serving bias and use low visibility as an excuse not to pay for social responsibility. Our results also highlight when information regarding a company’s social responsibility efforts resonates with its target consumers. Specifically, we observe that if consumers naturally care about others’ well-being, then they are less interested in learning about the amount of effort that a company exerts and more interested in observing greater visibility into the outcomes of such effort. If instead, consumers are more driven by self-interests, then under high levels of visibility, they may be willing to reward a company for its social responsibility efforts. However, under lower levels of visibility, these same consumers may punish a company for low effort or even justify a lower willingness to pay by further shifting responsibility for the workers’ well-being onto the company.

Companies that have been content to not ask too many questions about the pathways and origins of the goods they source ought to take note. Customers care about having visibility into your social responsibility practices – and some may be even willing to pay additional for it.

Tim Kraft is a Visiting Assistant Professor of Operations Management and Yanchong Zheng is the Sloan School Career Development Professor and Associate Professor of Operations Management at the MIT Sloan School of Management.

Image courtesy of rijans.