Supply chain models with corporate social responsibility

Abstract

Currently, corporate social responsibility (CSR) has become a critical issue because more than 88% of consumers think companies should try to achieve their business goals while improving society and the environment. This paper focuses on a CSR supply chain where an Original Equipment Manufacturer’s (OEM’s) sales can be significantly reduced because of its oversea supplier’s social misconduct. Specifically, as in a conventional wholesale price contract the supplier determines its wholesale price and the OEM decides its order quantity, but in a CSR supply chain, the supplier can autonomously change its CSR cost once a minimum requirement is satisfied. A higher CSR cost means that the supplier invests more in its corporate social responsibility and the OEM’s sales will be less likely to be influenced by negative CSR events. The equilibrium solutions show an important dilemma – although the supplier’s profit increases in the basic CSR requirement, the supplier will always use the minimum CSR cost under the conventional wholesale price contract, which eventually leads to a low supply chain profit. Thus, we introduce two different contracts to handle this problem: the flexible quantity contract and the wholesale price incentive contract, which are, respectively, a ‘tough’ way and a ‘beneficent’ way for the OEM to solve the problem. Although the two ways cannot (always) coordinate the supply chain, we show that they both will significantly improve the supply chain performance. Our results also show that in some conditions, one strategy will dominate, whereas in different conditions the other strategy dominates.