Improving Supplier Compliance Through Joint and Shared Audits

Caro, Felipe; Chintapalli, Prashant; Rajaram, Kumar; Tang, Christopher S.

doi:10.2139/ssrn.2683515

Cited by 7 publications

(3 citation statements)

References 15 publications

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“…For completeness, we also analyzed the sequential game model and found that the key results are consistent with those in the simultaneous game model. We refer the interested reader to Caro et al (2015).…”

Section: The Modelmentioning

confidence: 99%

“…To ensure that there is an implementable joint audit, we assume that the consortium will agree to adopt the "minimum-audit-level rule" that we describe shortly. This rule embodies the notion of the weakest link or minimum effort that below can be obtained by formulating the joint mechanism as a unanimous game, see Caro et al (2015).…”

Section: Proposition 5 the Total Supply Chain Profit Under The Sharementioning

confidence: 99%

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Improving Supplier Compliance Through Joint and Shared Audits with Collective Penalty

Caro

Chintapalli

Rajaram

et al. 2018

M&SOM

Self Cite

129

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When suppliers (i.e., contract manufacturers) fail to comply with health and safety regulations, buyers (retailers) are compelled to improve supplier compliance by conducting audits and imposing penalties. As a benchmark, we first consider the independent audit-penalty mechanism in which the buyers conduct their respective audits and impose penalties independently. We then examine the implications of two new audit-penalty mechanisms that entail a collective penalty. The first is the joint mechanism under which buyers conduct audits jointly, share the total audit cost incurred, and impose a collective penalty if the supplier fails their joint audit. The second is the shared mechanism in which each buyer conducts audits independently, shares its audit reports with the other buyers, and imposes a collective penalty if the supplier fails any one of the audits. Using a simultaneous move game-theoretic model with 2 buyers and 1 supplier, our analysis reveals that both the joint and the shared mechanisms are beneficial in several ways. First, when the wholesale price is exogenously given, we establish the following analytical results for the joint mechanism in comparison to the independent mechanism: (a) the supplier's compliance level is higher; (b) the supplier's profit is lower while the buyers' profits are higher; and (c) when the buyers' damage cost is high, the joint audit mechanism creates supply chain value so the buyers can offer an appropriate transfer-payment to make the supplier better off. Second, for the shared audit mechanism we establish similar results but under more restrictive conditions. Finally, when the wholesale price is endogenously determined by the buyers, our numerical analysis shows that the above key results continue to hold.

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Section: The Modelmentioning

confidence: 99%

Section: Proposition 5 the Total Supply Chain Profit Under The Sharementioning

confidence: 99%

Improving Supplier Compliance Through Joint and Shared Audits with Collective Penalty

Caro

Chintapalli

Rajaram

et al. 2018

M&SOM

Self Cite

129

View full text Add to dashboard Cite

show abstract

“…Related literature and contributions: Our work is closely related to two streams of research: socially responsible operations and supplier development. Within the socially responsible operations literature, research based on analytical models typically examines one of two topics: (I) addressing SR risks in a supply chain through tools such as audits and inspections (e.g., Plambeck and Taylor 2016, Wang et al 2016, Caro et al 2018, Cho et al 2018a; and (II) motivating better supplier SR practices.…”

Section: Introductionmentioning

confidence: 99%

Motivating Supplier Social Responsibility Under Incomplete Visibility

Kraft

Valdés

Zheng

2020

M&SOM

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Problem definition: We examine how a profit-driven firm (she) can motivate better social responsibility (SR) practices by a supplier (he) when these practices cannot be perfectly observed by the firm. We focus on the firm’s investment in the supplier’s SR capabilities. To capture the influence of consumer demands, we incorporate the potential for SR information to be disclosed by the firm or revealed by a third party. Academic/practical relevance: Most firms have limited visibility into the SR practices of their suppliers. However, there is little research on how a firm under incomplete visibility should (i) invest to improve a supplier’s SR practices and (ii) disclose SR information to consumers. We address this gap. Methodology: We develop a game-theoretic model with asymmetric information to study a supply chain with one supplier and one firm. The firm makes her investment decision given incomplete information about the supplier’s current SR practices. We analyze and compare two settings: the firm does not disclose versus she discloses SR information to the consumers. Results: The firm should invest a high (low) amount in the supplier’s capabilities if the information she observes suggests the supplier’s current SR practices are poor (good). She should always be more aggressive with her investment when disclosing (versus not disclosing). This more aggressive strategy ensures better supplier SR practices under disclosure. When choosing between disclosing and not disclosing, the firm most likely prefers not to disclose when the supplier’s current SR practices seem to be average. Managerial implications: (i) Greater visibility helps the firm to better tailor her investment to the level of support needed. (ii) Better visibility also makes the firm more “truthful” in her disclosure, whereas increased third-party scrutiny makes her more “cautious.” (iii) Mandating disclosure is most beneficial for SR when the suppliers’ current practices seem to be average.

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