Journal of Business Ethics Corporate Social Responsibility, Bullwhip Effect, and Supply Chain in the Emerging Markets --Manuscript Draft-Manuscript Number: Article Type:
Original Article
Full Title:
Corporate Social Responsibility, Bullwhip Effect, and Supply Chain in the Emerging Markets
Section/Category:
Corporate Responsibility: Theoretical/Qualitative Issues - Adam Lindgreen
Keywords:
Corporate Social Responsibility, Bullwhip Effect, Supply Chain, Emerging Markets, Ethics, Business, Multinational Corporations.
Corresponding Author:
Gang Li, Ph.D. Bentley University Waltham, MA UNITED STATES
Corresponding Author E-Mail:
[email protected]
Order of Authors:
Nader Asgary, Ph.D. Gang Li, Ph.D.
Abstract:
This paper examines ethical challenges and opportunities that multinational corporations (MNC) face in global supply chains. Doing business in emerging markets, MNCs often face a bullwhip effect in their global supply chains which transfers a small disruption resulting from an unethical operation into a big disaster. The bullwhip effect, plus other challenges in emerging markets such as lax regulations and a corrupt atmosphere, motivates MNCs to adopt new and more sustainable approaches to incorporate Corporate Social Responsibility (CSR) into their supply chain operations. Consequently, MNCs that build CSR supply chains will have competitive advantages over their competitors in the long-run. In this paper, we propose two interrelated approaches by MNCs, the bottom-up and proactive, to be adopted to achieve sustainable CSR in supply chains. The bottom-up approach emphasizes the importance of incorporating CSR with operational decisions towards improving conditions of workers and suppliers in emerging markets. The proactive approach recommends initializing CSR-complied operations to mitigate the negative impact of the bullwhip effect. We elucidate why a proactive CSR policy is more attractive than a reactive CSR policy for MNCs to endure and prosper in emerging markets. Conversely, we illustrate that MNCs that approach CSR reactively in their operations will be impacted negatively due to the bullwhip effect. Therefore, firms that are proactive rather than reactive to CSR will in the long-run have lower average costs. Strategic operations and recommended actions are also presented.
Suggested Reviewers:
Tan Justin York University
[email protected] Prof. Tan was the editor of JBE 2009 special issue on MNCs and CSR in Emerging Markets. This study represents a continuation of work conducted by Tan (2009). Yves Fassin Vlerick Leuven gent Management School
[email protected] This study represents a continuation of work conducted by Fassin (2005), which was published in JBE and addresses the Reasons behind Non-ethical Behaviour in Business and Entrepreneurship. Kenneth M. Amaeshi The University of Warwick
[email protected] This study represents a continuation of work conducted by Amaeshi et al.(2008), which was published in JBE and addresses CSR in Supply Chains.
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CSR, Bullwhip Effect, and Supply Chain
Corporate Social Responsibility, Bullwhip Effect, and Supply Chain in the Emerging Markets Nader Asgary, P h. D., Bentley University 175 Forest Street Waltham, MA 02452
[email protected] and
Gang Li, P h. D., Bentley University 175 Forest Street Waltham, MA 02452
[email protected]
*Blinded Manuscript (excluding authors' names and affiliations) Click here to download Blinded Manuscript (excluding authors' names and affiliations): CSR, Bullwhip Effect, and Supply Chain_Paper.doc Click here to view linked References 1 CSR, Bullwhip Effect, and Supply Chain 2 3 4 5 Corporate Social Responsibility, Bullwhip Effect, and Supply Chain in the 6 7 8 Emerging Markets 9 10 11 12 Abstract 13 This paper examines ethical challenges and opportunities that multinational corporations 14 15 (MNC) face in global supply chains. Doing business in emerging markets, MNCs often face a 16 17 18 bullwhip effect in their global supply chains which transfers a small disruption resulting 19 20 from an unethical operation into a big disaster. The bullwhip effect, plus other challenges in 21 22 emerging markets such as lax regulations and a corrupt atmosphere, motivates MNCs to 23 24 adopt new and more sustainable approaches to incorporate Corporate Social Responsibility 25 26 27 (CSR) into their supply chain operations. Consequently, MNCs that build CSR supply chains 28 29 will have competitive advantages over their competitors in the long-run. 30 31 32 In this paper, we propose two interrelated approaches by MNCs, the bottom-up and 33 34 proactive, to be adopted to achieve sustainable CSR in supply chains. The bottom-up 35 36 37 approach emphasizes the importance of incorporating CSR with operational decisions 38 39 towards improving conditions of workers and suppliers in emerging markets. The proactive 40 41 approach recommends initializing CSR-complied operations to mitigate the negative impact 42 43 44 of the bullwhip effect. We elucidate why a proactive CSR policy is more attractive than a 45 46 reactive CSR policy for MNCs to endure and prosper in emerging markets. Conversely, we 47 48 illustrate that MNCs that approach CSR reactively in their operations will be impacted 49 50 negatively due to the bullwhip effect. Therefore, firms that are proactive rather than 51 52 53 reactive to CSR will in the long-run have lower average costs. Strategic operations and 54 55 recommended actions are also presented. 56 57 58 KEY WORDS: Corporate Social Responsibility, Bullwhip Effect, Supply Chain, Emerging 59 Markets, Ethics, Business, Multinational Corporations 60 61 62 63 64 65
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I.
Introduction
Internationalization of business activities, led by advancement of communication and transportation and reduction in barriers to trade, has brought about the convergence and integration of economies. The shifting geography of global value chains has motivated MNCs to increasingly source from suppliers in emerging markets (World Economic Forum, 2012a; World Trade, 2012). As supply chains have continued to be dispersed, it has become pertinent to understand the practices and ethical guidelines MNCs adhere to across borders with regards to sustainability. MNCs are using long lines of supply chains in their production and logistics process (e.g., Braithwaite, 2003; Sheffi 2005; Hollon, 2006; Belso-Martínez, 2008; Wee et al., 2010). For example, Boeing Corporation used significantly more sub-contractors to build their 787 plane than their previous models (Hiltzik, 2011). The aim of this outsourcing strategy is to spread risks and lower the cost of building a plane. However, for a MNC, effectively managing its operations in a global supply chain becomes a very challenging task. An intricate phenomenon, called the bullwhip effect, makes the task of effective management even more challenging. Similar to the well-known butterfly effect in natural science, the bullwhip effect describes that a small change from one end of a supply chain could result in a huge change to the other end of the supply chain. The bullwhip effect leads to tremendous inefficiencies in a supply chain, but it is often the outcome of “optimal decisions” of individual partners in the supply chain (Lee et al., 1997a). Regarding ethical decision making, the existence of the bullwhip effect brings two sides of implications to MNCs. On one side, a “minor” unethical operational decision made in an emerging market might have a significant negative impact on consumers’ purchasing decisions in the western market. On the other hand, a MNC can
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mitigate the negative impact of the bullwhip effect by initiating ethical decisions with a “relatively” small initial cost, and therefore gain competitive advantages over those competitors, who have to spend more resources to replicate the same actions. The study of Cheung et al. (2009) shows that up to 25% of companies’ operating costs are due to inefficiencies in the supply chain, but a mere 5% improvement in supply chain efficiency can lead to a doubling of a company’s profit margin. The principle of sustainability, supported by CSR initiatives, can be an effective driver of cost-reduction and therefore should be directly incorporated with MNCs’ strategies. The success of a company’s CSR initiatives does not just depend upon internal factors. The company’s ethical dealings with entities such as the local community and business partners are essential to CSR practices. Therefore it is wise and economically beneficial for MNCs to engage in long-term relationships with all partners of the supply chain, forged on a solid ethical foundation. In addition to direct cost-reduction motivations, the proliferation of campaigns against MNCs has correlated with an increase in awareness of CSR in emerging markets. Consumers in emerging markets have become increasingly aware of the idea of stakeholder theory of the firm and in turn are placing more stringent demands on MNCs to be more socially responsible. The role of social media has also been essential for the adoption of sustainable CSR in emerging markets. Growth of new social media platforms and access to the mobile internet has allowed people to communicate instantly with one another. Access and availability of information has never been easier, empowering the consumer and allowing for coverage of social issues to truly become instantaneous and global in reach (World Economic Forum, 2013). As a result, a small disruption resulting from unethical operations in a remote plant of an emerging market will have an immediate ripple effect across the global supply chain through new social media. Global sourcing strategies used by most
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MNCs such as just-in-time inventory, competitive wages, and cheap raw materials further magnify the ripple effect among partners of the supply chain, as described by the bullwhip effect theory. Thus, when the ripple finally reaches to the western market, it will result in a direct financial hit and cause lasting reputation damage to MNCs (Tsikoudakis, 2013; Amaeshi et al., 2008).). Such an ethics-related supply chain disruption risk presents MNCs with serious challenges and potential competitive advantages. It has become imperative for firms to be capable of maintaining and developing a supply chain with ethical operations in emerging markets in order to minimize the disruption risk. This paper will examine below two propositions that articulate the concepts presented here. Proposition I: Unethical conduct at any stage of the supply chain process will have a significant negative impact on MNCs’ reputations and bottom-lines due to bullwhip effects. Proposition II: Ethical conduct in MNCs’ supply chain process is the expected norm among stakeholders and is not prone to stimulate the bullwhip effect. Consumers expect MNCs to operate ethically and society does not allocate a premium for ethical conduct. However, the opportunity cost for unethical supply chain operations is very high. Holding everything else constant, a MNC that proactively implements CSR in its supply chain operations will have a competitive advantage in terms of reputation and overall cost. Due to CSR initiatives, unexpected disruptions are less likely to occur in operations. Thus, the MNC will enjoy a smooth production process and a positive public image in the long run. On the contrary, a MNC that reactively addresses CSR in its supply chain will incur smaller costs in the short run, but will likely encounter the bullwhip effect in the long run. Once the bullwhip effect appears, the MNC will be hit heavily from the loss of both public trust and the bottom-line. Furthermore, to rebuild the public trust the company ends up paying much
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higher costs to reconfigure its supply chain, therefore suffering from both an irregular production process and a negative public image in the long run. Our aim is to examine the above two propositions by addressing where, when, how and what specific CSR initiatives should be implemented within the supply chain operations. We will develop conceptual foundations, which explain why proactive CSR initiatives and implemented from the bottom-up will pay off for MNCs economically. Conversely, MNCs that approach CSR reactively in their operations will be impacted negatively due to bullwhip effects. We will also examine critical operational decisions in supply chain management and their link with both proactive and reactive CSR actions. We conclude that the proactive and bottom-up CSR decisions will help MNCs better manage the supply chain and boost their competitive advantage, holding everything else constant. We will also provide recommendations for MCNs to implement CSR-operations in their supply chains. Despite that the concept of CSR has been well acknowledged in the global business, some MNCs treat it primarily as a show of bright public image and lack of motivation to pursuing strong CSR commitments at their local business partners. As was discussed by Fassin (2005), it seems that that the CSR policies and codes of conduct were introduced in corporations during prosperous times, but when business becomes harder and more competitive, such policies tend to be forgotten and seen as a luxury. Fassin argued that, to achieve sustainable CSR, management should not be confined to the large strategic issues but also address the small, practical matters of everyday business life. In emerging markets, violation incidents to CSR are noted due to fierce competition and loose regulations. As a result, few companies “seem to have found a proper balance between their aspirations in CSR and their performance in emerging markets.” (Tan 2009, 151). To achieve such a proper balance, Amaeshi et al. (2008) examined the relationship between CSR, supply
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chains, and global brands. Their work “highlights the use of code of conducts, corporate culture, anti-pressure group campaigns, personnel training and value reorientation as possible sources of wielding positive moral influence along supply chains” (p. 223). This study represents a continuation of work conducted by Fassin (2005), Tan (2009), and Amaeshi et al. (2008). By applying the concept of the bullwhip effect and its impact on CSR in the supply chain process, we are complementing Amaeshi et al. (2008) study. Additionally, we highlight a new focus on operational management, which Fassin (2005) argued is critical to achieve sustainable CSR. According to our literature survey, our study is the first paper that links CSR and the operational supply chain by applying the bullwhip concept and focusing on MNCs in emerging markets. This study is filling the gap in the literature on CSR and the supply chain for MNCs in emerging markets. The paper is organized as follows. Section II reviews literature in five related areas and points out the gap in the existing literature between CSR and the supply chain. Section III addresses the challenges and opportunities of CSR operations in emerging markets and proposes an approach to explain how MNCs can develop and maintain ethical supply chains in emerging markets. Section IV examines critical operational decisions and their consequences on MNCs’ long-term profitability using two different CSR strategies. Section V provides recommendations to implement CSR-operations in MNCs’ supply chains. Section VI concludes the paper. II.
Literature Review
Corporate social responsibility (CSR) describes ‘‘a commitment to improve community wellbeing through discretionary business practices and contributions of corporate resources’’ (Kotler and Lee, 2004). Others (e.g., Adams et al., 2001; Asgary and Mirschow, 2002; Sethi, Page 6 of 40
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2005) discussed voluntary codes of ethics and proposed codes for multinational cooperation. The notion of CSR is one of the most important issues in the current business environment, due to the fact that relationships between businesses and their stakeholders have become more pronounced and integrated. Corporations realize that in order to operate successfully, they cannot isolate themselves from their stakeholders, rather they must focus equally on both market and non-market stakeholders in pursuit of long-term shareholder value creation. Therefore, integration of CSR in business strategy has become a key feature of some of the leading companies worldwide.
a. CSR Theories Stakeholder theory has become one of the new approaches of management decision making. According to Freeman (1984) stakeholders are ‘‘any group or individual who can affect or is affected by the achievement of the firm’s objectives.’’ This theory maintains that companies should incorporate the interests of broader stakeholder groups — not only internal stakeholders (owners, customers, employees, and suppliers), but also external stakeholders (governments, competitors, consumer advocates, environmentalists, special interest groups, local community organizations, and the media)—into their business decisions. The basic idea behind the theory is that the success of an organization depends upon the degree of satisfaction of all stakeholders, not just shareholders. Proponents of the stakeholder theory make three core arguments for their views: descriptive, instrumental, and normative (Donaldson and Preston, 1995). The descriptive argument states that it is a more realistic presentation of what firms are actually doing. The instrumental argument is that it is essential for their business strategy. And finally, they argue it is normative because it is the “right” thing to do. Therefore, when companies consider the interests of external stakeholders, they will have better chance to develop and Page 7 of 40
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grow sustainably, and subsequently increase shareholder value in the long run. In terms of firm value, sustainable development has the ability to forecast cash flows for the future and use a lower discount rate when assessing the value due to the stability of cash flows a firm can expect. In the case where investors believe in sustainable development, they can value a company with a high degree of certainty. The effect of sustainable growth is an increase in the financial performance while also meeting the requirements of the stakeholders. The stakeholder theory has been well accepted and incorporated in contemporary business practices because more and more executives believe that CSR activities will elicit companyfavoring responses from stakeholders (McKinsey & Company, 2006). A comprehensive survey on the stakeholder theory has been conducted by Laplume et al. (2008). Lopez-DePedro and Rimbau-Gilabert (2012) further proposed new criteria to expand the stakeholder model. b. Drivers for CSR In most cases the drivers for implementing sustainable CSR come from the independent mediators, the social awareness and education of the general public, and the consumers, as well as from the companies’ inner desire for long-term growth. The role of independent mediators, particularly the government, to ensure the prevention of damage to the universal good, including people and the environment (e.g., Ditlev-Simonsen, 2010; Doh and Guay, 2006) has been debated. Critics of CSR argue that the government should identify the social responsibility through legislation and regulation, which will allow businesses to be responsible for their activities. Meanwhile, government legislation and regulation raise several concerns. Regulation in itself is unable to comprehensively cover every aspect of the corporation conduct. This leads to cumbersome legal processes relating to the Page 8 of 40
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interpretation and controversial gray areas. Social awareness and education of the general public are another set of factors that lead to the implementation of CSR (Mohret al., 2001). International organizations especially the United Nations has been initiating pacts and agreements such as Global Compact, Principles for Responsible Management Education, and Global Reporting Initiatives to address CSR issues. The public is putting pressure on corporations to act responsibly, and uses the power of the media to acquire support. Development of ethical consumerism is also playing an important role in forcing companies to address CSR. Many educated consumers are using their economic power to reward companies that incorporate CSR in their strategic plan (e.g., Ethical Consumer, 2013; Ethical Consumer Group, 2013). In addition to these external pressures, more and more companies realize that CSR is not just a charitable deed, cost, or constraints. Instead, CSR generates innovation, provides competitive advantages, and offers new opportunities for companies. CSR also helps address urgent social problems (Anderson, 2010). A company that is able to clearly identify its shared values with the society and to incorporate CSR with its strategic business decisions will gain competitive advantages over its competitors (Porter and Kramer, 2006; Kiran and Sharma, 2011). c. CSR in Emerging Markets Despite many companies having officially incorporated CSR into their business policies, instances of non-ethical behavior in relation to the whole gamut of stakeholders have been disclosed at all company levels in everyday operations (Fassin, 2005). Fassin noted factors such as “pressure from stakeholders, short-term tactics, hegemony of financial considerations, ‘juridisation’ of business, the tyranny of communications and the media and
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the difficulties in translating strategy into practical implementation”, as major reasons for these non-ethical operations. It seems as if the CSR policies and codes of conduct are introduced in corporations during prosperous times but that, when the business climate becomes more challenging, these policies tend to be forgotten and seen as a luxury, especially in emerging markets. CSR policies in emerging markets are mostly either non-existent or very weak. In many of these markets there are few incentives or penalties for firms to pursue business in an ethical and environmentally sustainable fashion compared to developed markets. Eweje (2006) provided evidence that emerging markets have benefited from an influx of FDI for many industries due to low costs of production and loose regulations. Peters et al. (2011) reinforced the view that emerging markets tend to exhibition weaker measures of CSR and corporate governance. Businesses are allowed to pursue short term growth strategies irrespective of the long term potential damage they may cause on stakeholders. The recent terrible tragedy in a garment factory in Bangladesh that caused more than 1,100 deaths provides an example of low-level regulation (Burke, 2013). When MNCs try to implement CSR in emerging markets due to external pressures and inner desires, they face unique challenges. Some recent studies (e.g., Chen et al., 2011) concluded that simply following best CSR practices often does not translate into successful policies in emerging markets. Chen et al. stated that there are different barriers to successful CSR implementation in emerging markets and, subsequently, successful strategies in developed economies cannot always be mirrored in emerging markets. They recognized that emerging markets have a culture of family-run business and therefore there has been a lack of awareness of CSR policies. Because of these barriers, Tan (2009) stated that “although many MNCs have attempted to integrate CSR in their strategic decisions and implementations, few seem to have found a proper balance between their aspirations in CSR and their performance in emerging Page 10 of 40
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markets.” (p151). Journal of Business Ethics (Vol. 86) presented a collection of articles that address the opportunities and challenges on MNCs and CSR in the emerging markets. These articles summarize past efforts, introduce new perspectives, provide new empirical insights, and define future research needs on CSR research in a unique context. Research presented in this paper is a follow-up study of those scholarly works. d. Bullwhip Effect in Supply Chain Management The term bullwhip effect was officially introduced in the classic articles by Lee et al. (1997a, b), which describe that the variance of orders may be larger than that of sales and the distortion tends to increase as one moves upstream in a supply chain. An illustrative picture of the bullwhip effect, originated from Lee et al. (1997 a), is attached in the Appendix of this paper for interested readers. On causes of the bullwhip effect, Lee at al. argued that the bullwhip effect is a consequence of the partners’ rational behavior within the supply chain’s infrastructure. Particularly, they identify four major causes of the bullwhip effect: (a) demand forecast updating, (b) order batching, (c) price fluctuation, and (d) rationing and shortage gaming. The bullwhip effect brings tremendous inefficiencies and detrimental consequences to the supply chain, such as product shortages at times, excess inventory at other times; low utilization of capacity at times and overtime at other times; poor product quality and poor customer service; less reliable replenishments; lost revenue and extreme high supply chain costs. Li et al. (2005) simulated the impact of the bullwhip effect on a multi-stage supply chain. According to their simulation, the magnitude of the bullwhip effect could increase exponentially from a mild origin. Although the bullwhip effect is often used to describe information distortion from the demand to the supply, such a distortion can also happen from the supply to the demand, as discovered by Li et al. (2006). We apply the
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bullwhip effect concept in this paper to describe the effect that a small change from one end of a supply chain leads to a big change to the other end. Although the concept of the bullwhip effect is relatively new, the nonlinear relationship of partners in a supply chain has long been acknowledged, and its first formal description can be traced back to Forrester (1961). Sterman (1995) demonstrated this phenomenon in the popular “MIT beer game.” According to Sterman, the bullwhip effect originates from the non-optimal solutions adopted by supply chain participants without considering the system as a whole. Economists also notice the bullwhip effect and ascribe the reason as a result of rational actions that managers take to mitigate demand uncertainties and to avoid out-ofstock and/or to smooth production (Blanchard, 1983; Kahn, 1987). The existing literature (e.g., Lee et al. 1997a, b) suggests that the bullwhip effect could result in unexpected and adverse impacts on efficiency of the whole supply chain, and should be avoided. e. CSR and Supply Chain Management The evolution of globalization has created supply chains that are fragmented and complex (Braithwaite, 2003). And for many companies the supply chain has grown so complex that it is hard to manage it and therefore results in inadequate attention to CSR (e.g. Cheung et al., 2009). On the other hand, companies are increasingly under pressure from stakeholders to incorporate CSR into operations and supply chain management strategies. Tate et al. (2010) examined how top global companies integrated and improved the triple-bottom line in internal operations and external supply chains. They found that while institutional pressure is the major driving force behind strategy development, companies emphasize different facets of social, environmental and economic responsibility upstream and downstream in supply chains based on industry, size and geographic location. They concluded that supplier management is one of the key sustainability issues across the supply chain. Amaeshi et al. Page 12 of 40
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(2008) also found that global brands are under greater pressure to regulate their supply chain in order to prevent “negative public sentiments and invariably resentments towards” their brand image thereby affecting their sales. Some MNCs that produce consumer goods (e.g., apparel) are forced by the threat of pressure groups such as NGOs and other organizations to conduct their business ethically in emerging markets. In this process, suppliers that are directly responsible for unethical practices are not directly targeted, therefore allowing them to continue operating with lax CSR. Amaeshi et al. suggested that since MNCs wield a lot of power, they should encourage their immediate suppliers to adhere to CSR practices. And “through ripple effects, the influence of the powerful firm will filter down the entire spectrum of the supply chain” (p229). Meanwhile, the relevance of supply chain management in contributing to social and environmental sustainability is acknowledged in literature. Caniato et al. (2012) conducted an exploratory case-based research on environmental sustainability in fashion supply chains. They compared two different business models: a.) for MNCs to include environmental aspects into a new concept of quality for their established brands, and b.) for smaller and local firms to leverage on environmental sustainability to compete in new market niches and establish their brand. Their study suggested that environmental sustainability in fashion can generate new business opportunities through supply chain management. Sen (2009) linked greens supply chain management and shareholder value creation. The study suggested that resources committed and utilized for green supply chain management need to be looked upon as long-term strategic investments and not merely as cost centers. Green supply chain management contributes positively to CSR and generates exceptional value for its shareholders. Therefore, companies should shed their myopic view and become early adopters of green supply chain management. Cheung et al. (2009) also confirmed the importance of incorporating CSR and supply chain management and argued Page 13 of 40
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that efforts to become proactive in CSR need collaboration between suppliers and MNCs because both parties will gain during the process. The study conducted in this paper further explores the ripple effects (i.e., the bullwhip effect) stated in Amaeshi et al. (2008) and highlights the long-term impact of CSR initiatives on supply chain management, especially the supplier management. III.
CSR Approaches in the Emerging Markets a. Challenges and Opportunities
Doing business in emerging markets poses severe challenges for MNCs. When some of the strategic suppliers are far away in time zones and distance from the final users, the supply chain becomes extremely long and fragile. A small disruption at one end might result in an unexpected storm at the other end. The crisis faced by Apple in 2011 provides a good example on how a bullwhip effect could form and evolve unexpectedly: On a Friday evening, May, 2011, an explosion in a manufacturing factory in a southwest city of China killed four workers and injured 18. Given that tragedies happen everywhere and all the time, such local news usually hardly stirs any interests for the general public in the western hemisphere. However, this explosion was different because it happened in a factory of a primary supplier of Apple, Foxconn, which builds Apple’s latest and potentially greatest product, the iPad. Further investigation on the blast uncovered depressing working conditions in Foxconn's factories and suggested that the tragedy could be avoided, if proper safety measures were implemented in advance. On January 25, 2012, The New York Times reported the explosion and gave an inside look at working conditions in Foxconn (Duhigg and Barboza, 2012). Responding to the report, angry readers posted thousands of comments within three days to condemn Apple’s wrongdoing in China. A few weeks later, fair-labor organizers delivered 250,000 signatures to Apple stores in six cities around the Page 14 of 40
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world in protest of the company’s working conditions in China (Freeman, 2012). Apple, the computer giant whose success largely rests on its positive corporate reputation, was heavily hit by boycott call from social media, ethic and labor organizations, and worst of all, its loyal customers (Harris, 2012). Apple is not alone; the challenges faced by MNCs that have global supply chains and source from the emerging markets are somewhat common. And the bullwhip effect, exhibited clearly in the Apple case, could also happen to other MNCs. Due to the bullwhip effect, ethical issues, such as poor working and living conditions could adversely impact a MNC’s reputation and dramatically damage its customer loyalty. On the other hand, MNCs must realize that emerging markets pose unique opportunities for them to survive and prosper in the global competition. Emerging markets are not only the material and low labor cost sourcing markets, but also the fast growing end-consumer markets. Between 1990 and 2010, the number of people who live in extreme poverty has fallen from 43% to 21% in emerging markets, a reduction of almost 1 billion people, and China is responsible for three-quarters of the achievement (Chandy et al., 2013). The improving living conditions in emerging markets nurture an expanding middle-class in these countries with soaring demands for Western products. MNCs that have the vision to build a long-term relationship with customers in these emerging markets will therefore enjoy continual and rapid growth. The following table summarizes key challenges and opportunities faced by MNCs in emerging markets. Table 1- Challenges and Opportunities
Challenges A long supply chain o High probability of disruptions o Significant impact of the bullwhip effect on reputation and bottomline Rich in natural resources but poor in working and living conditions
Opportunities Long-term relationship with stakeholders in emerging markets, which will eventually provide o Rich and loyal customers o Skillful employees o Stable suppliers / partners o Friend local governments Page 15 of 40
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Unreliable and inefficient infrastructure Low skilled workforce and less educated public Lax regulation, and corrupted and incapable local government
Sustainable supply of natural resources Fast growth of market shares and long run profits Contribution to the human kind
Most MNCs, such as Apple, use emerging markets as natural and human resources for sourcing and as end-product consumer markets for selling. Therefore, the local communities of emerging markets should be treated by MNCs as equally important stakeholders as those in the developed markets. Ethical behaviors are the key to maintain the good relationship between MNCs with the stakeholders. However, how to deal with the unique challenges and opportunities in the emerging markets and how to build the good relationship with stakeholders in the emerging markets?
b. Bottom-up and Proactive Approach When facing the boycott requests related to worker abuses in China in 2012, Apple treated it as a public relationship disaster. The company’s chief executive Tim Cook announced that, “Any suggestion that we don’t care is patently false and offensive to us…accusations like these are contrary to our values” (Harris, 2012). One year later, the company shifted its supply chain away from Foxconn to Pegatron, ironically, because Foxconn’s cost advantages resulting from scale had waned as it worked to improve factory conditions after the series of accidents in recent years but Pegatron was willing to accept lower profits (Dou, 2013). On the contrary, other MNCs conduct differently. Huawei Technologies Co., China’s largest maker of telecommunications equipment, realized that “supplier management is a very key part of our brand management. We will never let supplier issues tarnish our brand” (Bloomberg, 2013). The company carried out on-site audits of 101 suppliers in 2012 and did not allow suppliers who failed the audit to enter into contracts until those issues were
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addressed. Other technology companies, like H.P. and Intel, are also operating differently from Apple. Instead of changing suppliers, these companies demand their suppliers to reward their employees reasonable and improve their working conditions (Duhigg and Barboza, 2012). Apple’s response under pressure was a typical reactive action. Apple treated the negative news exposure by switching to a new supplier who was willing to accept the low sourcing cost and was not exposed negatively as Foxconn had been. This reaction seemed effective and incurred little cost over a short period of time. However, if the new low-cost supplier, Pegatron, encounters another worker-condition related disaster, which is highly possible judged by the company’s history records1, Apple will face much harsher public critiques and find it in a vulnerable position to defend its reputation. Apple’s supplier selection decision is a Top-down and Reactive approach. This approach is driven by the desires of minimizing the short-term supply chain costs and reflects the incapability of the company in integrating the interests of stakeholders into their business process. With the top-down approach, MNCs view CSR primarily as a show of bright public image and lack of motivation to pursuing strong CSR commitments at their local business partners. Thus, when the local partners or the MNCs themselves are under pressure of cutting costs, CSR is often treated as a luxury and might be the first cost center to be abandoned, as pointed by Fassin (2005). With the reactive approach, MNCs respond only when violations of CSR become publically aware, and these responses mainly focus on rebuilding the good public image. Unfortunately, due to the bullwhip effect of the supply chain, the violations might already lead to a big disaster in terms of public trust and the cost of recovering from the disaster
1
Founded in January 2008, Pegatron is an electronic and computing DMS company headquartered in Taipei. Although Pegatron briefly caught the public eye in 2011 due to a factory explosion that injured dozens of workers, the company has largely escaped the laser like spotlight that has forced Foxconn to increase wages and make changes to its labor practices (Dou 2013).
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could be extremely high. On the contrary, the choices of Huawei, H.P., and Intel represent another set of approaches, which we call Bottom-up and Proactive approaches. The bottom-up approach is the contrary to the top-down approach. The top-down approach focuses only on the “top” stakeholders, i.e., the well-off customers in the Western society and the top executives of a company, and the “top” decisions, i.e., the public relationship decisions adopted to pacify the anger of customers. Different from that, the bottom-up approach focuses on the “bottom” stakeholders (Prahalad, 2004), i.e., the workers and suppliers who suffered from poor working conditions, and the “bottom” decisions, i.e., the operational decisions that every company must make in daily business. The bottom-up approach requires MNCs to switch focus on targeted stakeholders and decision levels. In terms of stakeholders, most companies educate and train their executives and employees on the importance of CSR. However, many suppliers and most of their employees of emerging markets are not familiar with the concept of CSR. They have limited access to the internet and cannot self-educate themselves on ethical issues. MNCs sourcing from emerging markets have to focus on these people at the bottom of the pyramid (Prahalad and Hart, 2002). They have to train, educate, and elucidate their suppliers and their employees on the importance of CSR. In terms of decision levels, most companies realize the importance of CSR on the public relationship, but few seem to have found a proper balance between their aspirations in CSR and their performance in emerging markets (Tan, 2009). We propose that the incorporation of CSR and the daily operational decisions provides such proper balance needed for these companies. CSR-operations will provide companies with competitive advantages over their competitors on low operational cost and good quality products. Some companies, such as Starbucks in China with its Farmer’s Support Centre and IKEA in India with their Better
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Cotton Initiative (BCI), are applying the bottom-up method. They not only ensure ecofriendly harvesting but also produce better quality products. The proactive approach is also necessary for MNCs, especially when they face long and unstable supply chains. In such supply chains, unexpected disruptions are often inevitable. However, by proactively incorporating CSR within the operations of supply chains, MNCs can reduce the risk of disruptions to a minimum. Even if an unexpected disruption does happen, due to the good relationship established by CSR-operations, the disruption can be effectively managed and will not develop into a disaster. Thus, by proactively implementing CSR, MNCs can effectively mitigate or even avoid the bullwhip effect in supply chains and enjoy smooth productions meanwhile undisrupted public images in the long run. On the contrary, by negating CSR in the first place, the reactive approach stimulates the bullwhip effect even in the case of minor disruptions. Once the bullwhip effect appears, it is very difficult to control because no partner in the supply chain is willing to take the responsibility. Instead, they just blame the wrongdoing of other partners and further exacerbate the bullwhip effect. In the end, the bullwhip effect will make a huge loss to every stakeholder. The bottom-up and proactive approach is essential for MNCs to achieve a sustainable and profitable future in emerging markets. The bottom-up approach specifies where to implement CSR initiatives and the proactive approach specifies when. In the next section, we further address what specific CSR initiatives should be implemented through the supply chain operations and discuss the different consequences of operational decisions with and without CSR initiatives.
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IV.
CSR-Operations Decision and Expected Outcome
Porter and Kramer (2006) stated that “the more closely tied a social issue is to a company’s business, the greater the opportunity to leverage the firm’s resources – and benefit society.” Therefore, to achieve sustainable CSR impacts, a company needs a proactive and tailored operational process. Davis and Heineke (2012) classified the strategic operations decisions into two major categories, structural and infrastructural decisions. The structural decision includes location, physical capacity, vertical integration, and process technology. The infrastructural decision is workforce configuration, quality management, policies and procedures, and organizational structure. Among these operations that consist of a company’s business procedure, we focus on four specific decisions, supplier selection and management, facility location selection, product design, and workforce selection. These four decisions are directly related to supply chain management and emerging markets, which are the focus of this study. Also, the relationship between CSR and the supply chain is more clearly observable for these four areas of decision making. For each of them, we analyze the challenges and the corresponding opportunities that a MNC has to confront when making the decision. Distinguished by CSR awareness, the company’s decision can be either proactive or reactive, each leading to a different outcome. We discuss potential impacts on the company’s cost and the stakeholder values whether a company incorporates the CSR concerns or not in their strategic operations decisions. We will show that the outcome of these decisions supports Propositions I and II. The following table describes major factors and outcomes:
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Table 2- Operations Decisions and CSR Strategic Operations Decisions
Challenges in Emerging Markets
Opportunit ies in Emerging Markets
Decision Type
CSR Initiatives
Expected Outcome: Costs, Stakeholder Values, and Bullwhip Effect
Supplier Selection and Managemen t
Less reliable and costdriven suppliers
Long-term relationship with suppliers using sustainable resources
Proactive
Select CSR compliant suppliers and encourage continual CSR improvement Use cheapest suppliers; change to another if a current supplier is reported violating CSR standard
High initial sourcing costs; low disruption costs; good supplier relationship. Suppliers help manage disruptions; low risk of bullwhip effect.
Abundant and unpolluted resources; sufficient and sustainable supply
Proactive
Select a place that has a minimum damage to the surrounding environment and community
Reactive
Find a most convenient place; shutdown the facility if the damage is proven too big to fix
High selection and construction costs; low maintenance costs; low disruption costs; good community relationship. Community helps defend reputation if incidents; low risk of bullwhip effect. Low selection and construction costs; increasing maintenance costs; high shutdown costs; high compensation costs; continual pressure from local government and NGOs. Community helps publicize and condemn incidents; high risk of bullwhip effect.
Products using sustainable and healthy materials are hard to reproduce
Proactive
Use environmentally sustainable and healthy materials Use low cost materials; change to other materials if the current materials are banned.
High material costs; high sales prices; more favorable product image. Low risk of bullwhip effect. Low material costs; risk of lawsuits because of harms to customers; high switching costs to other materials. High risk of bullwhip effect once harm materials are found used in the supply chain.
Easy to adopt CSR principles and practices by training;
Proactive
CSR Education in schools and community; continual CSR employee training
High initial investment in education; low work training costs; low disruption costs; great reputation. Skillful and ethical workers ensure no unethical incidents could
Facility Location
Product Design
Workforce Selection
Inefficient and unstable Infrastructur e
Less protection of Intellectual Property
Low skill workforce; less awareness of CSR
Reactive
Reactive
Low initial sourcing costs; high switching costs; high disruption costs; resentful supplier relationship. Suppliers shift responsibility off in disruptions; high risk of bullwhip effect.
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potential customers Reactive
Train employees only if regulation requires or if harmful consequences are found among employees
happen; low risk of bullwhip effect Cheap labor costs; high costs of training employees to change behaviors; high compensation costs if operations harm employee health. High risk of bullwhip effect due to unawareness of ethical operations.
Supplier selection and management is an important operations decision. Suppliers play a significant role in a company’s strategic partnership because they provide the company natural and human resources that cannot be easily substituted in the developed countries. On the other hand, in emerging markets companies often find suppliers who are willing to accept a very low sourcing price. These suppliers can drive the cost extremely low because they sacrifice human rights and engage in unethical practices. Thus, one of the main differences between a proactive MNC and a reactive MNC is the choice of suppliers. A proactive CSR leadership in a MNC, (CSR-leader for short), will choose CSR compliant suppliers even though this strategy often means excluding suppliers who can provide the lowest bidding price. The CSR-leader will also continuously monitor the suppliers’ behaviors and decisions, encourage improvement in the working conditions, and actively address other concerns of the stakeholders. By doing these, the CSR-leader needs to share some of its revenues with its suppliers and pay additional costs to help the suppliers implement and maintain proper CSR procedures. On the contrary, a reactive CSR follower, (CSR-follower for short), tends to use the purchasing price as the primary factor of choosing the suppliers. To gain maximum profits, the CSR-follower also tries hard to squeeze the profit margin of its suppliers, constantly demanding lower purchasing prices. Thus, in a short run, a CSR-follower will have a lower operational cost than CSR-leader, therefore gaining a competitive advantage shortly. Page 22 of 40
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However, in a global supply chain that consists of dozens and even hundreds of partners, unexpected disruptions may happen at any time. Worse, to survive in the fierce price competition, the suppliers working with a CSR-follower will frequently generate disruptions. These suppliers transfer the price pressure by sacrificing human rights or product quality or both to keep the orders delivered on time. Such unethical operations will inevitably lead to more disruptions. Once disruptions occur, social media will quickly deliver the message to customer markets. Because CSR conduct is expected norm by stakeholders, the unethical conduct in the supply chain of the CSR-follower will easily drive huge negative customers’ responses. Under pressure, the CSR-follower switches to another supplier. Although changing suppliers seems a low cost method to pacify customer anger, it is very inefficient and costly to the supply chain operations. The new supplier needs a long learning period in order to make its production coordinated with the CSR-follower’s supply chain. In the learning period, the CSR-follower will suffer from delayed or defected delivery from the new supplier. Besides, the CSR-follower will have to adjust its operations to comply with the changed situation, such as reprinting the operational manual, retraining its employees, redesigning its logistic network, etc. All of these changes lead to additional costs. These costs, plus advertising and other public relation costs to rebuild the public trust, represent a huge switching cost. Moreover, if the CSR-follower keeps the same reactive approach, another disruption and the consequent bullwhip effect will likely start again from the new supplier. When the final users of product obverse repeated unethical incidents of the CSR-follower, they will not trust the company any more. Thus, the reactive approach for the supplier selection will inevitably lead to higher operational costs and may force the CSRfollower to go out of business. The above scenario illustrates why Proposition I holds. The CSR-leader will face a totally different scenario in the long run. The good supplier relationship generated by the proactive CSR initiatives will bring good reputation and Page 23 of 40
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sustainable profits to both suppliers and MNCs, holding everything else constant. Thus, these suppliers have strong motivations to maintain the relationship by maintaining ethical operations and implementing new CSR initiatives if needed. These strong CSR-equipped suppliers will not be prone to incur disruptions. Even if a disruption does happen, these suppliers will actively seek ways to confine the disruption within their control boundary. By the collective efforts of both suppliers and the CSR-leader, the disruption is not prone to stimulate the bullwhip effect. Therefore, through a proactive approach, ethical operations become the norm; the MNC will have a continually decreased operational cost because the relationship between the suppliers and the CSR-leader becomes tighter over time. The above scenario verifies why Proposition II holds. Clearly, the supplier selection and management decision of the CSR leader generates a positive stakeholder value cycle: the selection of CSR compliant suppliers leads to a strong relationship among the supply chain partners, and leads to a stable supply chain production flow, which will reduce operational costs. The low operational costs then enable the supply chain partners to further strengthen their relationships and gain the competitive advantage in the market. On the contrary, the decision of the CSR follower generates a negative stakeholder value cycle. The selection of cheapest suppliers has a high potential of leading to a resentful relationship among the supply chain partners, and the relationship could lead to frequent disruptions to the supply chain production flow and, therefore, high operational costs. The high costs further weaken the relationship of supply chain partners and will lead to the loss of the competitive advantage of the MNC. The following figure demonstrates the two cycles generated by two different CSR strategies in the supplier selection and management.
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Figure 1- Stakeholder Value Cycles in Supplier Selection and Management Decision
Select and switch to cheapest suppliers
Select and monitor CSR compliant suppliers
Strong relationship of supply chain partners
Low operational costs in the long run
Stable supply chain production flow (a) Positive stakeholder value cycle generated by proactive CSR leader
High operational costs in the long run
Resentful relationship of supply chain partners
Frequent disruptions to supply chain production flow (b) Negative stakeholder value cycle generated by reactive CSR follower
As it is shown in Table 2, proactive or reactive CSR strategies lead to positive or significant negative stakeholder value cycles due to the bullwhip effect. In the facility location decision, the proactive CSR strategy selects a place that has a minimum damage to the environment and community, therefore enjoying low maintenance costs and a good relationship with the local community. In the product design decision, the proactive CSR strategy uses environmentally sustainable materials and designs healthy environment for workers, therefore enjoying high sales prices and more favorable product image in the long term. In the workforce selection decision, the proactive CSR strategy provides CSR education in schools of the local community and continual CSR employee training, therefore enjoying low workers training costs and a great reputation among all stakeholders. A common feature of these proactive CSR strategies is that they require a high initial cost at the beginning to create a proper mechanism to incorporate CSR into the operations. Once the mechanism is
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built and the incorporation is properly implemented, all stakeholders of the supply chain will enjoy a positive value-creation cycle, which leads to low costs and strong competitive advantages in the long run. The following figure illustrates potential cost curves of both the CSR-leader and the CSR-follower.
Figure 2 - Potential Cost Curves of CSR-Follower and CSR-Leader
Cost
Reactive-CSR
D
CSR NonCSR Firm
E
B
C A Proactive-CSR
Time
Figure 2 illustrates that in the long run a reactive CSR-follower will have a higher overall cost than a proactive CSR-leader. The solid and dotted lines represent the cost curves of the CSR-follower and the CSR-leader, respectively. The CSR-follower starts with a smaller overall cost because it does not need to invest in CSR. However, due to unsustainable sourcing practices the company will reach to point A, where a disruption happens in its supply chain. The disruption quickly results in the bullwhip effect and the outside pressure and negative publicity is so strong that the firm has to change its sourcing decision, such as switching to a new supplier or moving to a new facility. The change decision leads to sudden
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increase in overall cost, indicated by Point B. After switching to a new supplier, the CSRfollower will maintain a constant cost for a while until a new disruption happens. This stage is represented by the flat line from B to C. When a new disruption happens, a stronger bullwhip effect will appear. The company will have to change its decision again and suffer from another sudden increase in overall cost, which is presented as the vertical line from C to D. Thus, in the long run the bullwhip effects will inevitably bring increased costs to the CSR-follower, as concluded in Proposition I of this paper. On the contrary, a proactive CSR-leader will begin with a higher overall cost because of the additional fixed and variable costs for CSR initiatives. However, through shared values among stakeholders and ethical operations in the supply chain, the CSR-leader is able to gradually decrease the cost and is not disrupted by adverse impacts of the bullwhip effect. As the dotted curve in Figure 2 shows, when CSR-conduct becomes norm, the CSR-leader will eventually reach to point E, where the CSR-leader has the same overall cost as the CSRfollower. Thereafter, CSR-leader will gain competitive advantages over its competitors in the long run, as concluded in Proposition II of the paper. For illustrative purposes and based on our previous arguments, the locus points A, B, C, and D are assumed. The timing of these locus points is assumed to be when a disruption happens and leads to a bullwhip effect. The shapes of these curves represent the bullwhip effect. The overall opportunity cost associated with this process consists of costs of operations, such as supplier switching, facility maintenance, production and logistic, etc. The timing and locus are company specific. Unless we have specific data for opportunity cost and time, we will not be able to specify exact locus points that are drawn on the graph.
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V.
Implementation of CSR-Operations
Implementing CSR-operations proactively in emerging markets and ensuring operations sustainability take more than good intentions and strong leadership (Porter and Kramer, 2006). Effective implementation requires coordinated efforts of MNCs, local suppliers, governments, and NGOs. The journeys of Nestle’s milk business in India and the Starbucks and Conservation International Partnership provide important insights on implementation of CSR-operations. When Nestle entered the Indian market in 1962 and built a dairy processing factory in the northern district of Moga, poverty in the region was severe; people were without electricity, transportation, telephones, or medical care. The company decided to proactively implement a series of CSR initiatives for the “bottom” of the society, the local farmers. It invested in local infrastructure, sent experts to provide medicines and nutritional supplements for sick animals and to hold monthly training sessions for local farmers, and provided financing and technical assistance to these farmers. Nestle successfully incorporated its operations with the CSR initiatives. By doing this, the company has gained direct and reliable access to suppliers and customers for its global supply chain while generating enormous social benefits for the local community. Porter and Kramer (2006) examined the Nestle case and concluded that when value chain practices and investments in a competitive context are fully integrated, CSR becomes hard to distinguish from the day-to-day business of the company, exactly as predicated in Proposition II of this paper. In addition, Porter and Kramer (2006) pointed out that integrating business and CSR requires adjustments in organization, reporting relationships, and incentives. Companies have to shift the performance measures from short-term revenue generating to long-term competitiveness.
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The partnership between Conservation International (CI) and the Starbucks Coffee Company exemplifies another important implementation issue. The partnership shows how MNCs should work with NGOs to proactively promote CSR-operations for the “bottom” such as small-scale producers in the emerging markets. CI is an international NGO founded in 1987 aiming at societal change by advancing and promoting environmental standards. The CI-Starbucks partnership started in 1998 when CI attempted to secure a market for coffee supply grown using the best conservation practices. Meanwhile, Starbucks, faced by NGO pressure and a major coffee production crisis, attempted to secure a long-term stable supply chain in South America. Through the partnership, CI developed a set of best practices for coffee productions suitable for emerging markets. They convinced local producers to adopt these practices, and collaborated with local governments and organizations to promote CSR. Starbucks applied these practices in its entire supply chain, developed its own coffee purchasing code using the same principles, and provided financial and technical assistance for local farmers. The decision of Starbucks represents a characteristic “reactiveturned-proactive” strategy, where pressures from NGOs and economic interests for stable coffee production led the company to go from resistance and mere compliance to strategic movements towards a strong CSR supply chain. Perez-Aleman and Sandilands (2008) used the CI-Starbucks partnership as a good empirical case to address how the implementation of social and environmental standards in supply chains can foster the inclusion of the bottom of the pyramid. Their study provided insightful lessons on CSR implementation in emerging markets, including focusing on processes, addressing specific conditions and challenges faced by local suppliers, and providing incentives and active assistance to the suppliers. While proactively incorporating CSR into operations proves beneficial for both MNCs and society as shown in the Nestle and Starbucks cases, not all companies realize this benefit Page 29 of 40
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and are willing to give up their top-down and reactive CSR strategy voluntarily. Government regulation, incentives from outsider organizations, and pressure from consumers are often needed to push companies to implement the “reactive-turned-proactive” strategy. The failure of CSR implementation in Spanish companies teaches us that international and national initiatives to promote CSR are critical and should be combined with the initiatives that companies implement voluntarily (Gonzalez and Martinez, 2004). In the international scope, the United Nations (UN) has developed the Principles for Responsible Investment (PRI) with the goal to understand the implications of sustainability for investors and support signatories to incorporate these issues into their investment decision making and ownership practices (UNPRI, 2013). Although these principles are voluntary, they provide companies pressures and guidelines to make CSR investment decisions. Similar to PRI, we believe that UN can also develop a set of Principles for Responsible Operations (PRO), based on best CSR operations practices. Like other UN initiatives, PRO will encourage CSR-operations in supply chains, especially regarding sourcing operations. In the national scope, national or local government can use regulations and incentives to foster and monitor CSR-operations. Among the two, providing incentives is often a better way to achieve desired CSR behaviors (Mirrlees, 1997). There are mainly three different forms of incentives, namely: tax rebates, subsidies, and awards, that can be chosen. MNCs to a large extent can be presumed to transfer its profits out of countries with medium to high taxes and into countries with lower taxes. Therefore offering tax rebates on CSR-operations not only incentivizes MNCs to adopt CSR policies, but also makes countries that implement this tax policy attractive to operate in. Subsidizing local companies that develop and maintain CSR-operations is another effective way to encourage MNCs and its local suppliers
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to adopt CSR. Subsidizing offered by a local government helps reduce initial cost required by the proactive CSR approach and exhibits government commitment in support of ethical conduct. All of these incentivize MNCs to invest in the region. Also, government can offer awards to encourage healthy competitions on CSR investment, such as rewards for companies with the best labor practices, most environmentally friendly, and best CSR partnership. Innovation-based CSR awards can also bring a new form of bullwhip effect, in which a small CSR innovation made by a company impacts the operations of other companies and lead to better and larger scale of CSR innovations. The conclusion is that in order to effectively implement the bottom-up and proactive CSRoperations in emerging markets, MNCs need to initiate a series of changes in their operations and work closely with all stakeholders, especially local suppliers, local governments, and international NGOs. The following table presents a list of recommended actions for MNC stakeholders; these recommendations are based on best practices in various industries (e.g., Gonzalez and Martinez, 2004; Porter and Kramer, 2006; PerezAleman and Sandilands, 2008) and our analysis in this paper. The primary focus here is on MNCs and their three stakeholders -- suppliers, government, and NGOs -- which have direct impacts on MNCs’ operations in emerging markets. Table 3- Recommended Actions for Implementing CSR-Operations Implementing Stakeholders MNCs
Targeted Objects Operations process of the supply chain
Actions
Expected Results
Shift performance measures from short-term revenue generating to long-term competitiveness;
Ethical conduct in supply chain process by MNCs becomes norm;
Create new standards, codes of conduct, and certification programs suitable for emerging markets;
Long-term profits and competitive advantages
Proactively incorporate CSR with strategic operations. MNCs
Local suppliers
Select CSR-compliant, not only lowest-cost, suppliers
Ethical conduct by the suppliers becomes norm;
Allow sufficient profit margin for
Minimum disruption and not
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suppliers to improve working conditions Provide financing and technical assistance for suppliers’ CSR initiatives
prone to the bullwhip effect Positive stakeholder value cycle
Proactively address any ethical concerns and have zero tolerance to CSR violation Government
NGOs including UN
MNCs and their local suppliers
MNCs and their local suppliers
Use regulation to monitor the conduct of MNCs and punish wrongdoings;
Make the local region attractive to MNCs with CSROperations;
Use incentives (tax rebates, subsidies, and awards) to encourage CSR-operations
Encourage healthy competition in CSR innovations;
Develop UN-backed Principles for Responsible Operations (PRO);
Win-win condition for both local community and MNCs;
Keep pressures on MNCs having unethical-operations
Best CSR practices are adopted and become norms globally.
Preserve natural resources and protect welfare of local residents.
Build partnership with MNCs to foster CSR-operations Coordinate with local government and community to promote best CSR practices.
VI.
Conclusion
This paper examined ethical challenges that MNCs confront when having a global supply chain deeply reliant on emerging markets. We discussed the importance for MNCs to develop and maintain bottom-up and proactive CSR approaches. We presented the application of the concept of the bullwhip effect in supply chains and analyzed its significantly negative impact on both bottom-line and reputation for MNCs. Our analysis concluded that MNCs that engage in proactive CSR will be able to achieve competitive advantages in the long-run. The application of the bullwhip effect concept to CSR and the supply chain provided strong economic arguments for MNCs to incorporate the CSR proactively in their business model. Our study also presented strategic operations decisions that should be incorporated with CSR initiatives and recommended actions to implement
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these CSR-operations. We proposed that UN develop a set of Principles for Responsible Operations (PRO). Future extension of this study would be the development of a questionnaire that can quantify the opportunity costs and benefits for a proactive CSR firm compared to a reactive one. In the opportunity costs and benefits evaluation the bullwhip effect impact should be incorporated. A reasonable number of MNCs and suppliers should be surveyed and plot the cost and benefit curves and quantify the conceptual arguments presented in this paper. We acknowledge that Implementing the proposed future study faces two challenges: a.) Defining and quantifying the opportunity costs and benefits, and b.) having firms that are willing to provide detailed information. Additionally, in this paper we used a conceptual model and logical reasoning to verify two propositions. A potential extension would be to develop a mathematical model that incorporates all factors presented in this paper and derives quantitative insights that further confirm our propositions.
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Appendix: Illustrative Picture of the Bullwhip Effect
“In a supply chain for a typical consumer product, even when consumer sales do not seem to vary much, there is pronounced variability in the retailers’ orders to the wholesalers. Orders to the manufacturer and to the manufacturers’ suppliers spike even more” (p94, Lee et al. 1997a)
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