The Effect of Sourcing Policies on a Supplier's Sustainable Practices

Abstract

Consumers today increasingly care about the process characteristics of the supply chain that created their product, such as the environmental impact of the processes. To meet this growing demand for sustainably produced products, firm must be able to source sustainably produced parts from their suppliers. In this paper, we analyze when and how buyers (manufacturers or retailers) can use sourcing policies to influence their suppliers to adopt sustainable processes that meet certain sustainability criteria. We study two sustainable sourcing policies commonly observed in practice, which influence supplier process decisions by committing to offer sustainable products. Under a Sustainable Preferred sourcing policy, a buyer commits to offering a sustainable product if she can source sustainably produced parts from the supplier, but otherwise will offer a conventional product. In contrast, under a Sustainable Required sourcing policy, the buyer will only offer a sustainable product, and therefore will only source from the supplier if he has adopted a sustainable process. We find that both the Preferred and Required policies can deter the supplier from switching to a sustainable process when the premium for the sustainable product is high. Moreover, the buyer can actually benefit from using the Preferred policy to deter the supplier. The Required policy can induce the supplier to switch but only when the premium for the sustainable product is low. However, the buyer may still benefit from using the Required policy to induce switching. We also consider the effect of supplier competition and show that both the Preferred and Required policies can deter or induce the supplier from switching to a sustainable process. However, the buyer never finds it beneficial to deter a supplier in the presence of supplier competition, and will only use a sustainable sourcing policy to induce switching.