Sourcing from a Self-Reporting Supplier: Strategic Communication of Social Responsibility in a Supply Chain

Problem definition: To manage supplier social responsibility (SR), somefirmshave adopted a self-assessment strategy whereby they ask suppliers to self-report SR capa-bilities. Self-reported information is difficult to verify, and this leads to an important credi-bility question: can a buyer expect truthful reporting? We examine whether a supplier'sSRcapability can be credibly communicated through free and unverifiable self-reporting.Aca-demic/practical relevance:SRisastrategicfocusforfirms because consumers care about ethi-cal production. Somefirms rely on supplier self-assessment as part of their SR strategy. It isimportant to understand the value and challenges of this approach.Methodology: We devel-op a cheap talk model of a supplier and a buyer. The supplier is endowed with a given SRlevel (privately known to the supplier) that represents the probability of no violation. Thebuyer sells in a market that is sensitive to publicized SR violations. The supplierfirst com-municates its SR level to the buyer, and then the buyer chooses between two audit strin-gency levels to conduct on the supplier and also chooses how much to order.Results:Influ-ential truthful communication may emerge in equilibrium if (i) the buyer orders a largerquantity from the high-type supplier but imposes a more stringent audit than the buyerwould for the low type and (ii) the high-type supplier opts for this larger order, whereasthe low-type, fearing audit failure, does not. The buyer can benefitastheauditbecomesmore expensive.Managerial implications: Supplier SR self-assessments can be a valuablestrategy for buyers but only if the buyer has access to auditing capabilities of different levelsand does not precommit to a particular level. It is valuable forfirms to engage in anup-front auditing step to ensure a minimum SR capability of approved suppliers becausevery low-performing suppliers never truthfully report. Implementing supplier self-assessments may or may not help reduce the social damage resulting from potential SR vio-lations; we identify situations when it helps and when it does not

Automated summary

Supplier self-assessments can be a valuable strategy for managing supplier social responsibility, but the credibility of self-reported information can be challenging. Buyers can benefit from increasing audit costs, and upfront auditing steps can ensure minimum SR capability of approved suppliers.