Mitigation, Avoidance, or Acceptance? Managing Supplier Sustainability Risk

• Published date: 01 April 2016
• Date: 01 April 2016
• Author: Sara Hajmohammad,Stephan Vachon
• DOI: http://doi.org/10.1111/jscm.12099

MITIGATION, AVOIDANCE, OR ACCEPTANCE?

MANAGING SUPPLIER SUSTAINABILITY RISK

SARA HAJMOHAMMAD

University of Manitoba

STEPHAN VACHON

Western University

This study takes a conceptual theory building approach to develop a

framework for managing supplier sustainability risk—the adverse impact

on a buying organization from a supplier’s social or environmental mis-

conduct. Using anecdotal evidence and the literature, we present four dis-

tinct risk management strategies that supply managers adopt: risk

avoidance, monitoring-based risk mitigation, collaboration-based risk mit-

igation, and risk acceptance. Drawing on agency and resource dependence

theories, we study how the interactions of two key risk management pre-

dictors—that is, the supply managers’perceived risk and the buyer–

supplier dependence structure—affect supply managers’strategy choice.

Specifically, we propose that a collaborative-based mitigation strategy,

involving direct interaction and solution development with the suppliers,

is selected by supply managers in a high perceived risk-buyer dominant

context. In a low perceived risk-buyer dominant context, however, a moni-

toring-based mitigation strategy is preferred. When the buyer and the sup-

plier are not dependent on each other and there is a low perceived risk,

the supply managers accept the risk by taking no actions, whereas in a

high perceived risk-independent context the supply managers would avoid

the risk by terminating the relationship with the supplier. We conclude

the study by describing the theoretical contributions and managerial

implications of the study as well as the avenues for future research.

Keywords: supplier sustainability risk; risk perception; buyer–supplier dependence;

agency theory; resource dependence theory; conceptual theory building

INTRODUCTION

In recent years, an increasing number of organiza-

tions have been tarnished by their suppliers’ question-

able practices in regard to sustainability issues.

1

These

situations can be very detrimental for a buying organi-

zation (hereafter “buyer”) as they have been linked to

an average reduction of 12 percent in market capital-

ization (Lefevre, Pell

e, Abedi, Martinez & Thaler,

2010). This study focuses on the potential negative

impacts on a buyer from its suppliers’ ecological or

social misconducts, which we termed “supplier

sustainability risk” (Foerstl, Reuter, Hartmann &

Blome, 2010; Hofmann, Busse, Bode & Henke, 2014).

Buyers display a wide range of actions when facing

supplier sustainability risk even if they are operating

within the same industry. On one hand, suppliers not

meeting certain standards may be phased out by buyers

such as Staples to avoid the risk (Grant & Ando, 2008).

On the other hand, some buyers, like Ford and GM,

invest substantial resources to monitor their suppliers’

activities (Zhu, Sarkis & Lai, 2007) or, like IKEA, to col-

laborate with them (IKEA, 2012) to mitigate the risk

across the supply chain. Other buyers, however, simply

accept the risk and turn a blind eye, hoping that an

adverse event would not occur—in fact, some buyers

associated with the Rana Plaza (Bangladesh) disaster

belong to this category (Reuter, Foerstl, Hartmann &

1

This study is about suppliers’ practices with regard to the social

and environmental dimensions of sustainability. For example,

social aspects include employee safety, respect for local commu-

nities, child labor, and human rights.

Volume 52, Number 248

Blome, 2010). While the fact that each buyer operates

in different contexts might explain the different behav-

iors, the question becomes what are the key predictors

of a buyer to select one risk management strategy over

another and why is it the case?

To answer these questions, we take a conceptual the-

ory building approach (Carter, Rogers & Choi, 2015)

and draw on resource dependence and agency (Eisen-

hardt, 1989) theories to craft a framework of supplier

sustainability risk management. Over the years, the

sustainable supply chain management (SSCM) litera-

ture has evolved to conceptualize sustainability-related

interactions between buyers and suppliers as monitor-

ing (or control) and collaboration practices in the

supply chain (Parmigiani, Klassen & Russo, 2011);

however, this vision of SSCM falls short of the array

of strategies described above and poorly explains how

they can be linked to supplier sustainability risk.

Bringing together the literatures on SSCM and supply

risk management (SRM), our proposed framework

allows for a better positioning of supplier sustainabil-

ity risk by focusing on two key contextual elements,

namely the perception of risk (Ellis, Henry & Shock-

ley, 2010) and the dependence structure of the buyer–

supplier relationship (Foerstl, Azadegan, Leppelt &

Hartmann, 2015).

Our framework proposes that buyers’ relative power

over suppliers (i.e., high supplier dependence context)

leads them to adopt either of the risk mitigation

strategies (i.e., monitoring-based or collaboration-

based), where a collaboration-based approach would

be more likely in high mutual dependence situations.

It also suggests that buyers facing sustainability risk

associated with powerful suppliers (i.e., low supplier

dependence context) either avoid or accept the risk,

with acceptance being their preferred approach if they

are highly dependent on the suppliers. The framework

further underscores the moderating effect of buyers’

high perceived risk in shifting the buyers’ selected

strategy toward risk avoidance or collaboration-based

risk mitigation strategies.

By examining supplier sustainability risk, this study

contributes theoretically by aligning the contextual

elements with different risk management strategies. So

far, the SSCM literature has considered monitoring

and collaboration as beneficial, independent of the

context. For instance, none of the theoretical develop-

ments regarding these SSCM practices has suggested

monitoring to be either better or worse than collabo-

ration—the general premise is that the greater inten-

sity of these practices is better for an organization

(Golicic & Smith, 2013). In this study, we distinguish

between the four risk management strategies based on

the two major contextual elements. Such a descriptive

model is needed as a first step to a more normative

and contingent model which would link the operating

context, the adopted strategy, and the performance

outcomes (Galbraith, 1973; Lawrence & Lorsch,

1967). Finally, this study makes a managerial contri-

bution as it challenges purchasing strategies prescribed

by Kraljic (1983).

In the following sections, we discuss the concept of

supplier sustainability risk and how it can be man-

aged by buyers’ purchasing and supply management

functions. Then, we develop our propositions and

contingent conceptual model. Subsequently, we dis-

cuss our model in contrast to Kraljic’s (1983) purchas-

ing strategies portfolio. The study concludes with the

managerial and theoretical implications and directions

for future research.

DEFINING SUPPLIER SUSTAINABILITY RISK

The SRM literature is generally concerned with “pure

risks” within supply chains which, in contrast to

“speculative risks,” involve the situations where no

gain relative to the starting position is possible as the

outcome of the risk event (Yates & Stone, 1992). In

other words, supply chain risk refers to the possibility

of unpredictable events resulting in negative conse-

quences for the firm under investigation in a supply

chain (Narasimhan & Talluri, 2009) and should be

considered as a pure risk.

Supplier sustainability risk is an emerging concept

in the literature (Hofmann et al., 2014). The concept

gained more traction when it was discussed with the

potential consequences as a backdrop. For example,

studies have used the concept as possibly leading to

reputational losses for buyers (Cousins, Lamming &

Bowen, 2004; Foerstl et al., 2010), explaining the fact

that supplier sustainability risk is often referred to as

reputational risk (Jiang, Baker & Frazier, 2009; Roeh-

rich, Grosvold & Hoejmose, 2014). While the reputa-

tional outcomes can be substantial, the purpose of

this study is not about the potential consequences.

This study is about taking the concept of supplier sus-

tainability risk as introduced in the literature and for-

malizing it further to be able to better delineate its

management (i.e., the selection of strategies). As a

starting point, a slight adaptation of a basic, yet

broad, conceptualization of supplier sustainability risk

provided by Hofmann et al. (2014) can be useful:

“[a sustainability-related] condition or a potentially

occurring event”, located within a buyer’s supply

base, that “may provoke harmful stakeholder reac-

tions.”(p. 168)

As discussed above, the “harmful stakeholder reac-

tions” often translate into damaging the buyer’s image

and reputation. It can also be a call for a boycott or

having a buyer’s customers canceling their orders.

Such harmful reactions can also lead to a disruption

April 2016

Managing Supplier Sustainability Risk

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