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Can Buyer Consortiums Improve Supplier Compliance?

  • Felipe CaroEmail author
  • Prashant Chintapalli
  • Kumar Rajaram
  • Christopher S. Tang
Chapter
Part of the Springer Series in Supply Chain Management book series (SSSCM, volume 7)

Abstract

When suppliers (i.e., contract manufacturers) fail to comply with environmental or safety regulations, several non-governmental agencies and consumer activists put pressure on the buyers (customers) to take necessary actions to improve supplier compliance. Due to concerns over negative image and public boycotts, many buyers conduct costly audits to improve supplier compliance. By considering a common practice that calls for independent audits (i.e., each buyer performs its own audit) as a benchmark, we examine the implications of joint audit mechanism arising from a buyer consortium. Under this mechanism, buyers conduct joint audits by sharing the joint audit cost and impose a collective penalty on the supplier if the supplier fails their joint audit. We evaluate the efficacy of joint audits against the commonly practiced independent audits. Our analysis reveals that the joint audit mechanism is beneficial in two important ways. First, it can make the supplier increase its compliance level in equilibrium. Second, the joint audit mechanism can increase the supply chain profit when the audit cost is below a certain threshold.

Keywords

Supply chain risk Supplier compliance Audits Collective penalty 

Notes

Acknowledgements

The authors would like to thank Professors Gregory Leblanc and Terry Taylor of University of California, Berkeley, for discussing the joint audit mechanism and the notion of collective penalty with one of the authors.

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Copyright information

© Springer Nature Switzerland AG 2019

Authors and Affiliations

  • Felipe Caro
    • 1
    Email author
  • Prashant Chintapalli
    • 1
    • 2
  • Kumar Rajaram
    • 1
  • Christopher S. Tang
    • 1
  1. 1.UCLA Anderson School of ManagementUniversity of CaliforniaLos AngelesUSA
  2. 2.Indian Institute of Management BangaloreBengaluruIndia

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