A new study, led by two MIT Sloan School of Management professors, found that customers do value information related to a company’s supply chain and many are prepared to pay a premium for greater transparency and visibility.
Authors of the study, published in Manufacturing & Service Operations Management, said the news has implications for companies trying to balance how transparent to make their supply chains and the best way to communicate their social responsibility efforts to consumers.
“Historically, many companies kept their supply chains as a closely guarded secret,” said Tim Kraft, visiting assistant professor of operations management at MIT Sloan School and one of the study’s authors. “But recent events, such as the Foxconn suicides in Shenzhen in 2010 and the Rana Plaza [apparel] factory collapse in 2013, have shifted the paradigm.”
Kraft said many companies now realize an expectation exists about supply chain responsibility and transparency and that they need to make this information available and visible for consumers to see.
“But even as they’ve increased their transparency, most weren’t sure that it made a difference to customers,” he said. “Our study demonstrates that it does make a difference: Customers want to know more about where and how the products they purchase are made.”
Kraft and co-authors Yanchong Zheng, associate professor of operations management at MIT Sloan, and León Valdés, assistant professor at the University of Pittsburgh’s Katz Graduate School of Business, conducted a series of lab experiments that mimicked the dynamics of a supply chain. A three-player game had participants play the roles of consumer, seller and worker. The experiment examined whether and how visibility into the outcome of the seller’s effort to improve the treatment of the worker affects the price premium that consumers are willing to pay to the seller. All players’ decisions were incentivized, meaning their actions directly impacted their payments from the experiment.
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The researchers varied the extent to which the company’s social responsibility efforts were known to participants. Sometimes both the company and the consumer could see the outcome of the company’s effort to increase the worker’s pay, while at other times, even the company was uncertain of the outcome of its effort.
“Our results show that social responsibility matters to customers,” Zheng said. “Yes, gaining supply chain visibility requires massive time and financial commitments. Many companies have hundreds of suppliers and those suppliers, in turn, have tens of hundreds of suppliers of their own. It is a massive undertaking to verify that everything is being done properly. And yet, our findings show that it can be worthwhile, not only for the social good, but also for a company’s market position.”
The study also highlights how a company’s messaging about its social responsibility initiatives resonates with target customers. Citing Patagonia, Nike and Levi’s, the report noted that the three retailers are leading the charge on social responsibility and transparency.
In the study, the researchers found that if consumers naturally care about others’ wellbeing, then they tend to be less interested in learning about the amount of effort a company exerts and more interested in observing greater visibility. If instead, consumers are more driven by self-interests, then under high levels of supply chain visibility, they may be willing to reward a company for its social responsibility efforts. However, under lower levels of visibility, these same consumers could punish a company for lack of effort or even justify a lower willingness to pay by further shifting responsibility for the workers’ wellbeing onto the company.
“For companies that are trying to figure out how best to communicate their social responsibility efforts, the lesson is clear: know your customers,” Kraft said. “Understanding their needs, values, attitudes and personality traits will help companies send the right messages to the right people.”