This brief is part of the Insights @ Center for Emerging Markets, a publication focused on cutting-edge ideas and advice for global leaders about emerging markets.
By Miriam Wilhelm (Vienna University of Economics and Business) and Veronica H. Villena (Arizona State University)
In emerging markets, where legal remedies and enforcement may be lacking, the role of multinational buyers in building sustainable supply chains becomes even more critical. Therefore, by extending sustainability requirements down the supply chain, multinational buyers may improve transparency, accountability, and overall sustainability performance, while mitigating potential reputational risks, ensuring compliance with regulations, and promoting responsible business practices.
Lower-tier suppliers often pose higher environmental and social risks. However, multinational buyers may be less involved with them due to the lack of contractual relations and the sheer complexity of the supply chain. Thus, first-tier suppliers play a crucial role in cascading sustainability standards and practices to lower-tier suppliers. Nevertheless, buying firms cannot blindly rely on first-tier suppliers to do so but need to carefully select first-tier suppliers with the right attributes.
Investigating Sustainable Procurement in Multi-Tier Supply Chains
Miriam Wilhelm and Veronica H. Villena conducted a study with a large European company known for its sustainability practices to uncover the attributes that enable its first-tier suppliers to adopt sustainable procurement practices, thereby making the cascading of sustainability requirements to lower-tier suppliers more likely. They collected data from audits, procurement records, and surveys involving 134 Chinese suppliers who participated in the company's Supplier Development Program.
The study identified three key attributes that enable Chinese suppliers to adopt sustainable procurement. These supplier attributes are: an integrated management system for quality, environment, and health and safety; engagement with relevant stakeholder networks (such as the amfori Business Social Compliance Initiative, the Carbon Disclosure Project, and the Responsible Business Alliance); and their own compliance with the large European company's sustainability requirements. Their findings challenge the assumption that suppliers that violate such requirements are less likely to adopt sustainable procurement. In fact, they show that noncompliant suppliers can adopt sustainable procurement practices when the European firm captures a large portion of their sales. However, suppliers with critical sustainability violations may still resist adopting sustainable procurement practices.
Managerial Implications: Leveraging Buyer Influence for Sustainable Procurement Practices
Multinational buyers should engage with suppliers that have adopted an integrated management system and incentivize those suppliers that are considering this system's adoption. Multinational buyers can also encourage their suppliers to participate in relevant stakeholder networks, as nearly half of the sample in the study did not engage with any network. These networks provide valuable assessment tools and training, helping suppliers improve their sustainability standards.
In some cases, suppliers with critical violations may prioritize cost savings over supply chain accountability, believing that noncompliance with sustainability requirements will be offset by the savings. In these situations, it may prove counterproductive to continue working with resistant suppliers. Instead, multinational buyers should focus on fostering a culture of sustainability and accountability throughout the entire supply chain, ensuring that all suppliers, from the first-tier to the lower tiers, are held to the same high standards. By doing so, they can promote responsible and sustainable business practices, mitigate potential risks, and improve compliance with global standards and regulations.
Wilhelm, M.M., & Villena, V.H. (2021). Cascading Sustainability in Multi‐tier Supply Chains: When Do Chinese Suppliers Adopt Sustainable Procurement? Production and Operations Management, 30(11), 4198-4218.
If you are interested in learning more about this work, contact Professor Miriam Wilhelm at email@example.com