Monday, January 6, 2014

Supply Networks for Relational Sourcing

Read the working paper
INSEAD Working Paper 2014/03/TOM

Socially responsible sourcing has become a necessity for many global firms and a competitive advantage for others. Sourcing strategies based on social responsibility now increasingly employ long-term commitments (relational sourcing). This study examines the role that supply network configuration plays in the efficacy of relational sourcing in ensuring socially responsible behavior across the supply network (compliance). Our analysis reveals that, irrespective of the supply network’s topology (star or linear), the effectiveness of relational sourcing can be assessed via two aggregate network metrics: the relational potential (gain in total network profits from relational sourcing) and the exploitation potential (sum of the gains that individual players could earn by unilaterally reneging on the relational agreement’s terms while others abide by them). We characterize the preferred supply network for different product types and find that so-called high-degree networks are more suited for products with stable sourcing, higher margins, higher probabilities of detecting noncompliance, significant damage from any noncompliance, and modest compliance costs. Firms that market products with such characteristics are better served by relational sourcing arrangements featuring suppliers that are comparatively more specialized. Our results apply also to linear networks and are robust to several extensions, including various equilibrium concepts and supplier asymmetry.