On the riskiness of lower‐tier suppliers: Managing sustainability in supply networks

• Date: 01 November 2018
• Author: Verónica H. Villena,Dennis A. Gioia
• DOI: http://doi.org/10.1016/j.jom.2018.09.004
• Published date: 01 November 2018

Contents lists available at ScienceDirect

Journal of Operations Management

journal homepage: www.elsevier.com/locate/jom

On the riskiness of lower-tier suppliers: Managing sustainability in supply

networks

Verónica H. Villena

a,∗

, Dennis A. Gioia

b

a

The Pennsylvania State University, Smeal College of Business, Department of Supply Chain & Information Systems, 412 Business Building, University Park, PA, 16802,

USA

b

The Pennsylvania State University, Smeal College of Business, Department of Management & Organization, 428 Business Building, University Park, PA, 16802, USA

ARTICLE INFO

Accepted by: S. de Treville

Keywords:

Sustainability

Supply networks

Lower-tier suppliers

Inductive research

ABSTRACT

Although multinational companies (MNCs) have increasingly embraced a sustainability strategy for their own

operations, fewer have tried to engage their (tier-one) suppliers in their sustainability initiatives. It is even rarer

that MNCs engage their suppliers' suppliers (lower-tier suppliers), despite the latter having a higher incidence of

violations with more acute environmental and social impacts that can jeopardize the MNCs’ operations and

reputation. We conducted inductive research on three supply networks in the automotive, electronics, and

consumer product/pharmaceutical industries. We collected data on three leading sustainable MNCs and a subset

of 9 tier-one suppliers and 22 lower-tier suppliers and complemented that information with data on several

NGOs and industry organizations. This study (1) reveals that many lower-tier suppliers address their environ-

mental and labor issues passively and constitute the riskiest suppliers in a supply network; (2) provides a

grounded theoretical framework for managing a sustainable supply network that accounts for multiple network

members as well as three sustainability dimensions (the 3Ps: profit, people, and planet); and (3) shows how

processes MNCs use to manage their suppliers differ from processes these suppliers use with their own (lower-

tier) suppliers. The study reveals the practices that leading sustainable MNCs use to manage their supply net-

works and provides important future research directions.

“My lower-tier suppliers are the ones who keep my director up all night.

My team's goal is to avoid my company being the next one to appear in

the news.”

—Supply chain manager for environmental compliance and social

responsibility

1. Introduction

The sustainable supply chain management literature has reported

how firms consider profit, people, and the planet (the 3Ps) in their

decisions and how they engage their suppliers in developing “green,”

“responsible,” and “ethical” products and processes (e.g., Carter, 2004;

Huq et al., 2016;Klassen and Vereecke, 2012;Linton et al., 2007). This

literature also proposes how stakeholders can create accountability for

firms regarding their suppliers' behavior (Parmigiani et al., 2011) and

how they can help firms develop evaluation and verification cap-

abilities (Gualandris et al., 2015). More recently, scholars have taken a

multi-tier approach to investigate: strategies that firms can use to

manage lower-tier suppliers (Meinlschmidt et al., 2018;Mena et al.,

2013;Tachizawa and Wong, 2014); critical factors for managing lower-

tier suppliers (Grimm et al., 2014); and the important role tier-one

suppliers play—fulfilling their MNC's requirements and imposing these

requirements on their own suppliers (Wilhelm et al., 2016a,2016b).

Despite notable progress, scholars know relatively little about how

firms actually manage their lower-tier suppliers and how risky these

suppliers are.

1

Without adequate attention to both tier-one and lower-

tier suppliers, large firms can, perhaps unwittingly, externalize their

sustainability costs to their suppliers, thus creating a weak link in

supply chain sustainability.

In an era when stakeholders are demanding sustainability, mis-

managing tier-one and/or lower-tier suppliers can damage a firm's

operations and reputation. For instance, Apple has recently faced in-

tense scrutiny because of the poor labor standards and unsafe working

conditions of one of its largest suppliers, Foxconn. Nike and Adidas

https://doi.org/10.1016/j.jom.2018.09.004

Received 9 December 2017; Received in revised form 13 September 2018; Accepted 23 September 2018

∗

Corresponding author.

E-mail addresses: vhvillena@psu.edu (V.H. Villena), dag4@psu.edu (D.A. Gioia).

1

Lower-tier suppliers are a firm's tier-two and tier-three suppliers. A tier-two supplier is a supplier's supplier (e.g., a tier-two supplier could be a leather wholesaler

that supplies leather to a firm that builds leather seats for an automaker). A tier-three supplier is a tier-two supplier's supplier (e.g., a leather tannery).

Journal of Operations Management 64 (2018) 65–87

Available online 08 October 2018

0272-6963/ Published by Elsevier B.V.

T

have also been criticized for doing business with a large Chinese textile

supplier found to be discharging toxins into a river. And these are only

the tier-one suppliers; another set of lower-tier suppliers has a higher

incidence of violations with even more severe environmental and social

impacts. We observed, for instance, lower-tier suppliers in China,

Taiwan, and Mexico that have chronic overtime issues, precarious

working conditions, turnover rates up to 100 percent, open cases with

local NGOs on job/sexual harassment, and/or highly polluted manu-

facturing processes, among others. These examples illustrate supplier

sustainability risks—the adverse impact on a buyer from a supplier's

social and environmental misconduct (Hajmohammad and Vachon,

2016).

Accounting for lower-tier suppliers brings a range of challenges,

however. Such suppliers are arguably less controllable, riskier to deal

with, and often even invisible. First, lower-tier suppliers are less gov-

ernable. There is often no direct contractual relationship, and the

business that a multinational company (MNC) represents might be a

small fraction of a lower-tier supplier's total business (Tachizawa and

Wong, 2014). Second, lower-tier suppliers often are more prone to

violating labor standards and contaminating the environment because

they lack awareness of sustainability-related practices; receive little

pressure from media, NGOs and other external stakeholders; and are

located in countries where environmental and social regulations are

relatively undemanding (Grimm et al., 2016;Tachizawa and Wong,

2014). Third, firms lack information about their lower-tier suppliers:

e.g., who they are, what capabilities they do (and do not) have, and

where they are located. In a study of 525 companies in 71 countries,

73.5% of the respondents reported they do not know who their tier-two

and tier-three suppliers are (Supply Chain Resilience Survey, 2015).

Limited data are available on these suppliers, particularly about their

environmental and labor practices. In fact, empirical studies that in-

clude data on MNCs; tier-one suppliers; and, particularly, second-tier

suppliers are rare.

Although MNCs monitor their tier-one suppliers' compliance with

the MNCs' sustainability standards, these suppliers do not often demand

similar compliance from their own suppliers. The difficulties worsen for

MNCs because lower-tier suppliers are further removed from their di-

rect supervision. Nonetheless, customers and society often blame the

MNC when a tier-one, tier-two, or tier-three supplier causes environ-

mental or social damage (Hartmann and Moeller, 2014). Customers feel

duped when a company they trust deviates from their expectations

(McDonnell and King, 2014), and they might even boycott. For these

reasons, tier-one and lower-tier suppliers’ violations can have acute

consequences for MNCs, with considerable financial, environmental,

and human costs. Some of the practical challenges that MNCs and tier-

one suppliers face when implementing sustainable practices have been

investigated. However, the challenges and risks that lower-tier sup-

pliers face/bring are inadequately understood. Such lack of information

raises our research questions: (1) Do lower-tier suppliers constitute the

riskiest members of the supply network? If so, why? (2) How do MNCs

manage sustainability concerning both their tier-one and lower-tier

suppliers? (3) Are there differences between practices MNCs adopt with

their tier-one suppliers and those that tier-one suppliers use with their

lower-tier suppliers?

Given the nascent knowledge about managing sustainability in

lower-tier suppliers, we adopted an inductive, grounded research ap-

proach (Glaser and Strauss, 1967) to address these research questions.

We investigated how sustainability practices have been managed (or

disseminated) in three supply networks in the automotive, electronics,

and consumer-product/pharmaceutical industries. We define a supply

network as the dynamic inter-organizational relationships among a focal

organization and its tier-one and lower-tier suppliers (see Choi et al.,

2001). In this study, a supply network consisted of an MNC recognized

for its industry-leading sustainability efforts and a subset of its tier-one

and lower-tier suppliers. Three MNCs, 9 tier-one suppliers, and 22

lower-tier suppliers participated. We conducted 165 interviews with

key informants from all participating firms. Thus, our research design

allowed us to compare the perspectives of each member within a given

supply network (e.g., the MNC's perspective vs. a tier-two supplier's)

and to discern patterns of sustainability practices across these three

industries. We followed the tenets of systematic inductive research from

Gioia et al. (2013) to ensure rigor in our research design and execution.

This approach enhanced our understanding of a complex pro-

blem—how to manage a sustainable supply network.

Our research contributes to the sustainable supply chain manage-

ment literature in three ways. First, we present empirical evidence that

not only demonstrates that lower-tier suppliers are likely to be the

supply network's riskiest members, but also identifies reasons why they

do not adopt sustainability practices. We discovered that these suppliers

address their environmental and labor issues passively, at best, because

they perceive minimal consequences for non-compliance. These sup-

pliers are often small firms with limited resources and lack sustain-

ability expertise, operate in countries with less stringent labor and en-

vironmental laws, and receive little attention from external

stakeholders (e.g., media), all contributing to their passivity. Second,

we develop an empirically grounded framework for managing a sus-

tainable supply network that includes the perspective of multiple

supply network members and addresses all 3Ps. This more compre-

hensive perspective is particularly important when MNCs have a ma-

ture sustainability program, but their suppliers, especially lower-tier

ones, do not. In fact, directors recognize that a barrier to advancing

sustainability is lower-tier-suppliers’ inadequate sustainability perfor-

mance (Global Corporate Sustainability Report, 2013). Thus, we extend

supply network studies (e.g., Choi et al., 2001;Choi and Hong, 2002;

Kim et al., 2011) that have focused mainly on the economic (profit)

pillar of sustainability to include the social (people) and environmental

(planet) pillars, as well. Third, we identify both proactive and reactive

processes that MNCs have developed for managing sustainability

among their tier-one suppliers, which, in a few instances, cascade to

their lower-tier suppliers. We also reveal how the processes that MNCs

use to manage their tier-one suppliers differ from those they use with

their lower-tier suppliers.

Several scholars have called on researchers to address larger societal

issues (e.g., George et al., 2016;Montabon et al., 2016). To answer their

call, we adopted a practice-driven approach to constructing a theore-

tical framework for managing sustainable supply networks. If the field's

focus on sustainability remains only at the firm or the firm/first-tier-

supplier level, we as scholars will remain blind to the firms that argu-

ably pose the highest sustainability risks (i.e., lower-tier suppliers). Our

data show that lower-tier suppliers pose significant environmental and

social risks and, thus, have a greater need to embrace sustainability.

Ironically, however, these are the least monitored, least equipped, and

least regulated companies. In the absence of a framework for under-

standing these suppliers, the unfortunate consequence would be that we

will mainly handle sustainability issues reactively (responding to en-

vironmental crises or scandals), rather than proactively (planning for

and implementing sustainable practices across a supply network).

2. Literature review

Sustainability is a major research domain, but scholars suggest that

this important domain is not only “atheoretical” (Corley and Gioia,

2011, p.24) but also “highly fragmented” (Aguinis and Glavas, 2012, p.

933). They also suggest shifting the main research focus from under-

standing “what” (defining sustainability) and “why” (reasons for en-

gagement) to a greater concern with “how” companies can implement

sustainable practices (Basu and Palazzo, 2008;Gardberg and Fombrun,

2006). Porter and Kramer (2006) echo this call, criticizing existing

studies as having unclear practical relevance. The consensus seems to

be that economic, social, and environmental performance—the

3Ps—are all necessary for corporate sustainability (Bansal, 2005;

Elkington, 1998;WCED, 1987). To manage sustainability in lower-tier

V.H. Villena, D.A. Gioia Journal of Operations Management 64 (2018) 65–87

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