Does supply chain visibility affect operating performance? Evidence from conflict minerals disclosures

• Author: Caroline Swift,V. Daniel R. Guide,Suresh Muthulingam
• Date: 01 July 2019
• DOI: http://doi.org/10.1002/joom.1021
• Published date: 01 July 2019

RESEARCH ARTICLE

Does supply chain visibility affect operating performance?

Evidence from conflict minerals disclosures

Caroline Swift | V. Daniel R. Guide Jr. | Suresh Muthulingam

Smeal College of Business, The

Pennsylvania State University, Pennsylvania

Correspondence

V. Daniel R. Guide, Jr., Smeal College of

Business, The Pennsylvania State

University, University Park, PA 16802.

Email: dguide@psu.edu

Handling Editor: Brian Jacobs

Abstract

Firms are increasingly held accountable for their suppliers' transgressions. Conse-

quently, firms need to develop upstream visibility to exercise control over their

supply chains. An emerging body of work has recognized the importance of supply

chain visibility and has examined it using analytical models, behavioral methods,

and case studies. Still, large-sample empirical evidence on the benefits of supply

chain visibility remains elusive. We seek to bridge this gap by examining conflict

minerals disclosures (mandated by the 2010 Dodd-Frank Wall Street Reform and

Consumer Protection Act) and financial reports to evaluate whether firms with

greater visibility into their conflict minerals supply chains achieve improved oper-

ating and market performance. We use the data from conflict minerals disclosures

(Form SD) to distinguish between firms that have high or low visibility into their

conflict minerals sources. Then, we use event study methods to analyze differences

in operating and market performance between firms with high visibility and firms

with low visibility. We find that firms with high visibility into their conflict min-

erals supply chains achieve higher profitability than comparable firms with less vis-

ibility. In addition, we find that firms with high visibility into their conflict

minerals supply chains realize improved sales performance and stock market valua-

tions. Our results are relevant to managers because they show that firms can attain

operational and market benefits by improving visibility in their supply chains.

KEYWORDS

conflict minerals, event study, operating performance, supply chain visibility

1|INTRODUCTION

Government agencies, non-governmental organizations

(NGOs) , investors, and consumer groups increasingly hold

firms responsible for the actions of their suppliers (Lee &

Rammohan, 2017). As a result, firms may be exposed to

potential violations on account of their suppliers(Hartmann &

Moeller, 2014). In many instances, supplier violations could

lead to serious consequences that not only result in financial

costs but can also affect firm reputation (Marshall, McCarthy,

McGrath, & Harrigan, 2016). For example, in 2007 Mattel

recalled millions of toys due to lead paint that entered its sup-

ply chain from unauthorized paint subcontractors. The recall

ultimately cost the firm over $110 million for fees, fines, and

the administration of product returns, besides damaging its

market reputation (Hoyt, Lee, & Tseng, 2008; Sodhi & Tang,

2012). To combat such problems firms must exercise suffi-

cient control over their supply chains. But, in some situations,

firms may find it challenging to monitor even their first-tier

suppliers and sourcing partners. Consider Chipotle, a restau-

rant chain that differentiates itself by sourcing food from local

producers. In 2015 and 2016, an outbreak of Escherichia coli

Received: 2 April 2018 Revised: 21 February 2019 Accepted: 1 March 2019

DOI: 10.1002/joom.1021

406 © 2019 Association for Supply Chain Management, Inc. wileyonlinelibrary.com/journal/joom J Oper Manag. 2019;65:406–429.

and the norovirus was traced to Chipotle, but the restaurant

was unable to identify the origins of the contamination due to

its decentralized supply chain. Chipotle's revenue dropped

nearly 30%, and the company faced the difficult and costly

task of winning back customer trust (Walker & Merkley,

2017). However, the challenges of monitoring suppliers do

not stop at the first tier. This is because suppliers often out-

source to other suppliers, which compounds the monitoring

challenge. In multi-tier supply chains, outsourcing and sub-

contracting make the scope of the supply chain exponentially

large and, as a result, firms can lose visibility of their supply

chain partners. In extreme cases, firms may not even know

who their suppliers are or what they are doing. For example,

Tesco lost nearly €300 million in market value in 2013 when

horse meat was discovered in beef products sold at its stores.

The complex food supply chain with multiple levels of sup-

pliers made it difficult for Tesco to isolate the origin of the

horse meat, which prolonged the financial and reputational

damage for the firm (Fletcher, 2013).

Given these challenges, it is essential for firms to develop a

better understanding of their suppliers and supply chain part-

ners. Consequently, supply chain visibility—“the ability to

trace the points of origin of materials used in a product”

(Lee & Rammohan, 2017)—is emerging as an important con-

cept to manage supply chains effectively. The importance of

supply chain visibility stems from the idea that when firms can

trace the origin of their materials, they develop knowledge

about their supply chain partners. This knowledge can help

firms avoid problems at their supplier locations and within their

supply chains. The extant literature has recognized the signifi-

cance of supply chain visibility and many papers have used

case studies to explore the consequences for firms when they

lack supply chain visibility (e.g., Doorey, 2011; Hoyt et al.,

2008; Walker & Merkley, 2017). The common rationale across

these studies is to infer the significance of visibility from its

absence. Although this approach is suitable to illustrate the

consequences of insufficient visibility, it does not provide a

complete picture of potential benefits from supply chain visibil-

ity. Presumably, firms that have more visibility throughout

their supply chains can exercise higher control over their sup-

ply function. In turn, this higher control could lead to opera-

tional improvements and cost savings. But, to the best of our

knowledge, little research has explored potential benefits from

improved supply chain visibility. Therefore, we examine

whether firms with greater supply chain visibility achieve

improved operating and market performance. Specifically, we

investigate how supply chain visibility affects firm profitability,

sales, and market value.

Although the literature recognizes the importance of supply

chain visibility, researchers have found it challenging to mea-

sure and assess its benefits. This is because firms are often

reluctant to share details about their supply chains and,

moreover, subcontracting at suppliers makes it challenging to

obtain information on upstream supply chain partners. In this

study, we overcome these challenges by using data from a

unique empirical context that allows us to observe the extent to

which firms are able to trace the origin of a select group of

minerals used in their products. Our data pertains to all firms

that come under the purview of Section 1502 of the 2010

Dodd-Frank Wall Street Reform and Consumer Protection Act

(“Dodd-Frank Act”from now onwards). This act mandates

that, starting in 2013, publicly traded firms must “disclose

annually whether any conflict minerals that are necessary to

the functionality or production of a product…originated in the

Democratic Republic of the Congo or an adjoining country”

(SEC Final Rule: Conflict Minerals, 2012). These “conflict

minerals”—tin, tantalum, tungsten, and gold—are commonly

used in the production of consumer goods and electronics

(Bales, 2016; Epstein & Yuthas, 2011). Although Section 1502

was enacted to protect human rights in war-torn regions of

Africa, it is also the first public reporting requirement for sup-

ply chain sourcing in a wide cross section of firms.

Supply chain visibility into conflict minerals sources

(“SCV”from now onwards) is essential to meet the require-

ments of the Dodd-Frank Act. This is because firms can only

determine mineral origins if they are able to track the source

of materials across multiple tiers of suppliers in their supply

chains. As many firms are far removed from the origins of

minerals used in their products, meeting the requirements of

the Dodd-Frank Act can be demanding. To better understand

their concerns about complying with disclosure requirements,

we spoke with managers across a variety of firms ranging

from manufacturers of industrial equipment (e.g., 3M) to

computer hardware (e.g., IBM). Managers pointed out that

significant effort is required to develop visibility, which is

essential to trace the origins of the conflict minerals. For

example, the Director of Environmental Compliance at IBM

mentions that “… sometimes we choose suppliers for our

direct suppliers”—which indicates the effort IBM exerts to

gain visibility in its supply chain (Ferretti, 2015). Overall, our

interactions highlight that SCV is critical to manage the

responsibilities and risks associated with conflict minerals dis-

closures. This makes conflict minerals reporting an ideal set-

ting to study the impactof supply chain visibility.

Our data comes from the population of conflict minerals

disclosures made by firms in the first two years of reporting

mandated by the Dodd-Frank Act (i.e., 2013 and 2014). We

combine this data with information from Compustat to create

a database of 1,180 firms for the disclosure period

2013–2014. We use information from the conflict minerals

disclosures to identify firms that demonstrate superior levels

of visibility into their conflict minerals supply chains. Then,

we use firm size, performance, and industry to match firms

with high levels of SCV to comparable firms with low levels

SWIFT ET AL.407