Supply Chain Models with Mutual Commitments and Implications for Social Responsibility

In today's increasingly globalized environment, more and more companies recognize the mutual dependence of supply chain partners in value creation. When making business decisions, they take into consideration their partners' bottom line profitability, especially in emerging markets. The question is, is this kind of practice sustainable? This study makes an attempt to formalize this issue by examining a stylized two-party supply chain model in which each player maximizes its own profit while making a certain commitment to its partner. We compare five different games between the two supply-chain partners, which reflect different power positions of the players and different levels of commitment. We identify conditions under which both players are better off with mutual commitments than without, a situation we call win-win. We show that win-win can be achieved if and only if the mutual commitments are comparable. Thus, the recognition of mutual dependence of the supply chain members needs to be translated into reciprocal concerns. In addition, different players' commitments play different roles but together they have a similar effect as a profit sharing contract. Finally, we discuss the implications of our findings in the context of socially responsible operations. In particular, our analyses show that it is possible to care about the supply chain partners' bottom line without sacrificing one's own profitability, and our models can be used as a tool to determine the commitment levels by evaluating the predicted outcome.