Social responsibility and cost-learning in dyadic supply chain coordination

https://doi.org/10.1016/j.tre.2021.102549Get rights and content

Highlights

  • Game-theoretic Stackelberg model of two-periodic socially responsible supply chain.

  • Supplier with cost learning capability undergoes CSR through consumer surplus.

  • Analysis for four combinations of wholesale price and revenue sharing contracts.

Abstract

Over time, many leading organizations have started to include Corporate Social Responsibility as an instrument to enhance their brand image, and gain competitive advantage. In this paper, we develop a game-theoretic Stackelberg model for a two-periodic socially responsible supply chain with cost-learning capabilities. We study both the revenue sharing and wholesale price contracts under various permutations to achieve supply chain coordination. In the process, we use analytical, numerical, and graphical methods to understand how the contract parameters affect the channel partner’s performance under two-periodic setting. The results show that although the wholesale price contract fails to solve double marginalization, interestingly, the combination of the wholesale price and revenue sharing contracts can coordinate a two-period socially responsible supply chain, but fails to resolve the channel conflict. However, the revenue sharing contract does resolve the channel conflicts under two-periodic setting.

Introduction

Several organizations across various sectors have been under pressure to incorporate Corporate Social Responsibility (CSR) in order to enhance their brand image, and gain a competitive advantage thereof (Amoako and Dartey-Baah, 2020). Organizations today have begun to realize the importance of ensuring all stakeholders’ social welfare for sustainable business operations, besides the economic objective of profit maximization; e.g. innovative goods and services, operation efficiency, resource, and capacity utilization. CSR initiatives achieve the critical goal of ‘social welfare’. Thus, leading organizations carry out different CSR initiatives (Table 1), taking into account the fundamental components of CSR. These are classified as: i) philanthropic, ii) ethical, iii) legal, and iv) economic (Carroll, 1991). These initiatives have significant potential to improve supply chain performance (Carter et al., 2000, Carter and Jennings, 2002, Crifo et al., 2016, Drobetz et al., 2014). Therefore, many researchers have looked to integrate CSR initiatives into supply chain management (Feng et al., 2017, Modak et al., 2020).

The transactional relationship between supply chain agents, driven by profit maximization and cost efficiency has now been replaced by a more cohesive long-term strategic partnership that encourages inter-agent cooperation. Organizations recognize that establishing a long-term contractual agreement between supply chain partners is critical for achieving sustainable growth. In fact, several organizations like the H&M group for instance, have built a robust relationship with Asian suppliers over time. Adidas on the other hand, has established a stable business relationship with 800 manufacturers from 55 countries. Nike’s supplier base includes 525 factories in 41 countries. It helps the organization to take strategic decisions based on the relationship with other supply chain partners, whether to continue with a similar contractual relationship or change it to other relationship based on the trust developed over time (Chen and Baddam, 2015, Merckx and Chaturvedi, 2020, Zhang and Zhang, 2018).

Strengthening the long-term contractual agreement does help supply chain agents to improve their capabilities, and thereby achieve competitive advantage. Besides, cost-efficiency is also recognized as one of the critical factors that ensure supply chain sustainability within the multi-period relationship. Cost efficiency in effect, may be achieved through cost-learning, also known as the learning curve, experience curve, or learning-by-doing (Li et al., 2015, Bag et al., 2020). It enables the supplier to reduce its manufacturing cost in subsequent periods (Mesak et al., 2020, Zhang et al., 2016), and has been observed in various industries like automobile, logistics, fashion, semiconductors, and musical instruments (Zhang and Zhang, 2018). Further, learning-by-doing over time may be a source of efficiency improvement in manufacturing firms. Due to repetition and accumulation of the production process, workers become more familiar about a job, which further helps them in improving the production process. Learning by doing thereby leads an intertemporal component to a firm's output strategy.

There are many business cases, which show that learning by doing actually increases efficiency, and hence reduces both cost and product’s price. For instance, in the case of the rayon industry, the price of rayon decreased from the year 1911–1938. While in the case of the airplane industry, it was observed that the price of aeroplanes decreased as the cumulative production increased. With a decrease in manufacturing cost, the wholesale price charged from the buyer also decreases. The decision to purchase the products becomes strategic for the buyer, where the wholesale price changes from period to period (Anand et al., 2008, Moon et al., 2018). In fact, there are many real-life cases in which, it has been reported that firms learn in two-period operations. Most recently, textile supply chains have been facing the problems of disruptions due to COVID’19 pandemic. Similarly, pandemic induced supply chain disruptions was encontered by Toyota due to shortage of the semiconductor. Both these cases, refelects the two periodic problem in supply chain that is influence by pre- and post- pandemic.

As per the above observations, this study contributes to socially responsible supply chain coordination literature under cost learning capabilities. We propose a stylized analytical model to examine the following research questions:

  • What should channel partners’ coherent strategy be, while coordinating a socially responsible supply chain under cost learning capabilities?

  • What are channel partners’ equilibrium decisions within a two-periodic, socially responsible supply chain under different permutations of different contracts?

  • How do the contract parameters impact the performance of channel partners in a two-periodic socially responsible supply chain?

To address the research questions, we study the stylized model of a two-period socially responsible supply chain system with cost learning capabilities. Herein, we assume the supplier to be the market leader, while the buyer, a follower in terms of making rational decisions. As a leader, the supplier is ethically bound for CSR activities (Amaeshi et al., 2008), measured through consumer surplus gained by customers. As a leader, the benefits received by the supplier through cost learning capabilities are passed on to the buyer and further passed to the customers through various CSR initiatives. Notably, with the cost-learning capabilities, the supplier’s manufacturing cost decreases, in turn, reducing the wholesale price charged from the buyer, which further reduces the retail prices in the subsequent period. Thus, in order to examine the supplier’s strategic gain, we study different permutations of some of the most studied contracts in literature, i.e., wholesale price contract (WPC) and revenue sharing contract (RSC) over two different periods. The underlying sequential contracts are: WPC in both periods, WPC in the first period (T1) and RSC in the second period (T2), RSC in T1, and WPC in T2, and RSC in both periods.

Through this endeavor, we highlight the need to establish a two-periodic, socially responsible supply chain that ensures coordination between channel partners, which in turn, goes on to integrate the organizations’ social and economic concerns. Moreover, herein the supplier’s cost learning capabilities are also imperative to observe in order to understand the supply chain agents’ contract preference within these two periods. That is, whether they continue with the previous contract or are willing to change it in the next period. Our primary contributionsinclude (a) develop a game-theoretic Stackelberg model of the two-periodic socially responsible supply chain with cost-learning capabilities, (b) we found remarkable results, whereby a combination of WPC and RSC perfectly coordinate the two-periodic supply chain, but fails to resolve channel conflicts, (c) However, RSC under both periods does coordinate the supply chain, while resolving channel conflicts simultaneously.

The remaining study comprises of five sections. The second section provides a comprehensive literature review. The third, puts forward our proposed analytical model and propositions; while the fourth demonstrates both numerical and graphical analyses, followed by theoretical and managerial implications. Further, in order to check the robustness of the analytical model, we also studied different combination of a wholesale price contract and linear two part tariff contract. The last section envelops conclusions with future research directions. For simplicity of exposure, the numerical proofs of all propositions are given in the appendix.

Section snippets

Literature review

Our model lies at the convergence of three streams of literature: literature on socially responsible supply chain; literature on cost learning capabilities within the supply chain; and literature on the supply chain coordination. We discuss each of these below.

Modelling

Consider a two-echelon socially responsible supply chain that consists of one supplier and one dedicated buyer. The former is a socially responsible decision-maker, and supplies products to the latter to sell to the end customer. We assume that the supplier controls the wholesale price wi, whereas the buyer is accountable for both order quantity qi to the supplier and retail price pi to the end consumer in the period i{1,2}. We also assume that the market demand in each period i is a linear

Results and discussion

In this section, we performed both numerical and graphical analysis to check the effect of the consumer surplus coefficient, along with a cost learning parameter on the wholesale price, retail price, buyer’s profit, supplier’s profit, supplier’s utility, and social welfare. To check the robustness of our model, we extend the two-period contract to the combination of a linear two-part tarrif contract and wholesale price contract. We also discuss both the theoretical and managerial implications

Theoretical contributions

The theoretical contributions of the current study are summarized as follows:

  • The equilibrium results for a wholesale price, retail price, demand, buyer’s margin, buyer’s profit, supplier’s profit, supplier’s utility, and social welfare are derived for all RSC and WPC combinations in a two-period socially responsible channel coordination. We also have derived equilibrium results for a two-periodic, socially responsible centralized supply chain, a benchmark solution.

  • Notably, complete coordination

Managerial contributions

The managerial implications are as follows:

  • The derived equilibrium results would help practitioners for decision-making under two-periodic socially responsible channel coordination, which would further help in integrating both the economic and social aspects of social welfare for a firm’s sustainable performance.

  • This study would help managers make contractual agreements in a two-period setting, where cost parameters could possibly be changed in subsequent periods.

  • Moreover, in a single-periodic

Conclusions

We considered a two-period socially responsible supply chain system, where the supplier has cost learning capabilities to reduce its manufacturing cost in T2 through knowledge, experience, and expertise gained in the previous period. The Stackelberg game between the supplier and the buyer is thereby formulated, where the supplier is the market leader, while the buyer is the follower. The supplier undertakes CSR activities, which in turn are determined through consumer surplus received by

Declaration of Competing Interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

Acknowledgments

This research was supported in part by National Natural Science Foundation of China (Grant No. 72172148, 71672125), Fundamental Research Funds for the Central Universities (Grant No. 3122020021), and SAFEA High-End Foreign Experts Project (Grant No. G20200002020).

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