Leverage Your Firm’s Abilities, Supply Chain, and Stakeholders to Do Good and Do Well

Supply chain managers are concerned with timeliness, cost, and quality. Increasingly, they must also respond to stakeholder expectations.

Supply chain managers have always been concerned with issues of timeliness, cost and quality. But in recent years another dimension has been added to the mix: stakeholder expectations. Firms are being held increasingly accountable for the social and environmental implications of their entire supply chain. Nike, Mattel, and Dell have shown that companies can’t divorce themselves from their suppliers — at least in the public’s eye. Companies are being asked to raise the bar on social and environmental performance across the supply chain.

Fundamentally, supply chains can be designed to deliver customer value in one of two ways: efficient or responsive. Efficient, low-cost supply chains work well for established products or commodities with predictable demand. Responsive, innovative supply chains are best when products are customized or evolving and demand is variable.

Firms can develop different types of supply chain abilities: technical (for example, better design of components) and relational (for example, aligning incentives and creating common goals with suppliers). Both occur in efficient and responsive supply chains, but look different in each. How does the design of the supply chain and the abilities of the firm impact the firm’s ability to deliver on social and environmental aspects? And what does this mean for the bottom line?

Researchers Anne Parmigiani (Lundquist College of Business, University of Oregon), Robert Klassen (Richard Ivey School of Business, The University of Western Ontario) and Michael Russo (Lundquist College of Business, University of Oregon) suggest the answer relates to two factors: control (the firm’s ability to influence supply chain decisions) and accountability (how much firms are required to justify their decision).

Combined, these two factors are defined as “stakeholder exposure.” A firm’s supply chain is exposed in varying degrees to the reactions, criticism, and feedback of customers, interested communities, and NGOs on both environmental and social aspects. Stakeholder exposure is highest when both control and accountability are high — in other words, when stakeholders expect a lot and when the firm has substantial control over its supply chain. So how can these firms deal constructively with their position?

Those with efficient supply chains might leverage their technical expertise on process improvements to pursue technically focused initiatives like carbon footprint analysis.

By contrast, those with responsive supply chains might focus on product innovations like “cradle-to-cradle” design or might try to “servicize” a product. On the relational abilities side, firms in efficient supply chains might focus on using social and environmental metrics and reporting mechanisms (think Wal-Mart), while firms in responsive supply chains might leverage trust to build shared assets like recycling practices.

The design of the supply chain underpins a firm’s development of social or environmental abilities, which in turn drives sustainability performance for the firm. Firms with more control and strong technical abilities can find “win-win” outcomes by leveraging their social and environmental capabilities. For example, managers at Sony used the firm’s control and technical expertise to quickly substitute inputs in response to Dutch government regulators concerns about cadmium levels in PlayStations.

Firms held highly accountable by stakeholders will do better if they have strong relational abilities, which enable monitoring and collaboration. For instance, when Trader Joe was the potential target of a Greenpeace-organized boycott for selling products containing genetically engineered ingredients, the retailer worked with its suppliers and Greenpeace to reformulate products and then randomly test them to demonstrate that they had delivered.

The ideal is, of course, to have strong technical and relational abilities. Consider Hewlett-Packard: it has the efficiencies to compete on low-cost, high-volume, but also is known for the “HP Way” which focuses on innovation. Both of which translate into better social and environmental performance.

So what, if anything, do a firm’s stakeholder exposure and social and environmental abilities have to do with economic performance? The “silver lining” of being under scrutiny is that firms with the highest stakeholder exposure have the most to gain from their social or environmental good deeds.

Parmigiani, Anne, Robert D. Klassen and Michael V. Russo. (2011) Efficiency meets accountability: Performance implications of supply chain configuration, control, and capabilities. Journal of Operations Management, 29, 212-223.