Managing supplier sustainability risks in a dynamically changing environment—Sustainable supplier management in the chemical industry

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Abstract

Varying definitions and interpretations of sustainability standards have become a major concern for purchasing and supply management (PSM). As the foremost interface to an increasingly global supply base, PSM plays an important role in the mitigation of sustainability-related risks. By conducting responsible purchasing and supplier management, the risk of corporate reputational damage to the buying firm, caused by supplier misconduct, can be avoided. However, resources for effective risk-mitigation are limited and the applicability of supply risk assessment and supplier assessment methods have not been evaluated for sustainability. In this paper, we explore how leading PSM functions identify, assess, and treat supplier sustainability risks and elaborate on the integration of sustainability risk management in supplier management processes. Based on the findings from a multiple case study in the chemical industry and by drawing on the dynamic capabilities view (DCV), we propose that mature and sustainable supplier management capabilities are a source of competitive advantage in terms of lower exposure to reputational risks and enhanced operational performance.

Introduction

Diverse definitions and interpretations of sustainability standards in global supply chains, along with differing levels of supplier compliance to these standards, have become major concerns for purchasing and supply management (PSM). The ongoing corporate social responsibility (CSR) movement exerts pressure on firms to address ecological and social sustainability around the world. Therefore, CSR has become one of the many competitive pressures which firms face in today’s business environment. Frequent changes to the standards issued by non-governmental organizations (NGOs) and by governmental regulatory bodies lead to continuous alterations in the amount of pressure exerted on firms (Hall, 2000). In order to respond to uncertainty and reputational risks, firms must perfect their capabilities to detect changes in CSR requirements and respond to these changes timely and rigorously to secure their competitive position in the marketplace (Campbell, 2007, Porter and Van der Linde, 1995).

Throughout this paper, we use the term ‘sustainability’ to refer to the pursuit of the tripartite of economic, environmental, and social performance, also known as the triple-bottom line of the organization (Carter and Rogers, 2008, Kleindorfer et al., 2005). According to Campbell (2007), firms pursuing genuine sustainability practices distinguish themselves from other firms by not knowingly doing anything that could harm their stakeholders. As soon as any harm is discovered and brought to their attention, they rectify their behaviour and analyze the roots of the issue at hand. Scholars in the field have stated that firms, which are able to accommodate the changing attributes of CSR and to correct CSR violations on short notice, will experience competitive advantage (Hart, 1995, Russo and Fouts, 1997, Campbell, 2007).

In fact, in a study performed by Harwood and Humby (2008), 20% of the firms viewed sustainability issues as their largest supply chain risk and 25% of the firms required suppliers to adhere to social and ecological standards in order to mitigate supply chain risks.

Due to the cost-oriented outsourcing trend over the past decades (Krause et al., 2001), external stakeholders, such as NGOs and customers, expect the focal buying firms to assure socially and ecologically sound production at their suppliers’ sites. Thus, irresponsible supplier behaviour of any kind may be projected to the buying firm, causing adverse publicity, reputational damage, and costly legal obligations (Carter and Jennings, 2004). Thus, firms which outsource production to suppliers cannot transfer the risk related to unacceptable environmental and social standards at supplier premises, but must seek active management of the supply base for sustainability. As the foremost interface to an increasingly global supply base, PSM plays an important role in the mitigation of sustainability risks.

Hence, scholars reprimand that sustainable supplier management (SSM) must go beyond supplier self-declaration of compliance to standards and encompass effective identification, assessment and monitoring measures as well as compliance incentive systems (Baden et al., ., Green et al., 1996, Jiang, 2009). Specifically, the increasing reliance on a global supply base enhances the need for supply risk management (Wagner and Bode, 2006) and, in particular, for active management of supplier sustainability risks (Baden et al., in press). However, risk-absorbing practices to protect the buying firm from adverse effects from supplier misconduct are not cost-free. In particular, supplier assessment, supplier qualification and monitoring of supplier sustainability, for instance by conducting supplier audits, require time and financial resources. Consequently, the PSM function must prioritize and concentrate its sustainability engagement on those suppliers which are perceived as most likely to cause an adverse event in terms of sustainability and those which are perceived to cause the most significant damage if the risk is realized (Harland et al., 2003). To this point, the applicability of supply risk assessment methods brought forward by supply chain scholars (Zsidisin et al., 2004) and practitioners (Kraljic, 1983) have not been evaluated in the research field of sustainability (Baden et al., in press). Moreover, knowledge as to how buying firms assure ecologically and socially sound supplier operations in an economically sustainable manner is limited (Carter and Rogers, 2008). Thus, the following research questions shall be addressed in our research:

  • 1.

    How do firms configure sustainable supplier risk management processes in congruence with dynamically changing sustainability requirements?

  • 2.

    How can supplier sustainability risk mitigation strategies and processes be a source of competitive advantage to the buying firm?

In order to approach these questions, we ground our research in the supply chain risk management framework by Ritchie and Brindley (2007). This framework enables us to integrate the established approaches to supply chain risk management with our research interest in sustainability-related risks in supply management. The overall notion of the framework is that a firm that adopts and invests in strategies for managing supply risks will do better than firms that neglect the type of risks faced in their selected risk management strategy (see Fig. 1). We adopt this notion to our research interest of supplier sustainability risk management (see Fig. 2).

The dynamic capabilities view (DCV) of the firm suggests that the ability of a function to contribute to competitive advantage depends on the fit of its strategy and processes to the external environment of the firm (Eisenhardt and Martin, 2000, Teece et al., 1997). Hence, the degree to which the PSM function accommodates stakeholder interests in the identification of sustainability risks has a considerable influence on the subsequent sustainability risk management processes. As presented in Fig. 1, the model commences with the identification of sustainability risks and continues with the assessment of these risks. The assessment leads to the decision of supplier sustainability risk, which in turn determines the risk management response at the individual supplier level. The framework terminates with the performance outcomes of the chosen sustainability risk management processes.

Our research approach is described best as theory elaboration (Lee et al., 1999) since the research model of supply chain risk management and the dynamic capabilities view affect our research design when studying firms’ supplier sustainability risk management processes.

The paper is structured as follows: First, we review extant literature on supplier classification and risk assessment, and the subsequent supplier management processes to mitigate risks focusing on sustainability. In the following section, the assumptions of the DCV are outlined. We elaborate on the multiple case study method applied in this paper and then present our research findings in light of our extended research framework and the DCV. In the conclusion, we summarize our results and suggest paths for further research.

Section snippets

Supply risk management processes and sustainability

The risks inherent in enhanced reliance on upstream suppliers, common in global production, have caused enterprise risk management to address the supplier perspective more extensively (Hallikas et al., 2004, Wagner and Bode, 2006). The focus on supply risks and their assessment in a matrix of “profit impact” and “likelihood of occurrence” for developing a distinctive approach to supplier and commodity management has a long tradition in PSM research (e.g. Kraljic, 1983, Gelderman and Van Weele,

Research design

An inductive multiple case study approach was selected in order to explore how companies manage sustainability-related supplier risks. This approach appeared to be adequate for the following four reasons: (1) research on how firms account for sustainability-related supplier risks in their purchasing organization is still in an exploratory stage (Basu and Palazzo, 2008); (2) case study research is well-suited for investigating complex phenomena, which cannot be illuminated by, for example,

Data analysis

The data analysis started with open coding of the collected information from the various sources in order to structure the data. Subsequently, key categories were identified and further refined in an incremental and iterative process. First, we conducted within-case analyses to develop individual profiles in order to become acquainted with each case. After each author individually coded each case, we met to compare the classification of the case. In areas of discrepancy, we analyzed whether the

Summary and conclusion

In this paper, we have studied how firms address the challenge of meeting their stakeholders’ sustainability demands across their supply base in a resource-effective manner, while effectively managing the risk of corporate reputational damage, which could potentially be caused by supplier non-adherence to sustainability standards. The contribution of this paper is threefold. First, we analyze how PSM functions configure their supplier sustainability risk assessment processes in order to

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