Implementing Environmental and Social Responsibility Programs in Supply Networks through Multi-Unit Bilateral Negotiation

Involving suppliers deep in the supply chain is critical for the success of environmental and social responsibility (ESR) initiatives. Administering ESR programs throughout a complex supply network, however, is challenging. In this paper, we apply a bilateral bargaining framework to analyze to what extent an ESR initiator should directly engage higher-tier suppliers, as opposed to delegating the assurance of ESR compliance to its first-tier suppliers. Our bargaining framework not only generalizes the conventional Shapley value approach by allowing the flexibility of modeling imbalanced power distribution among the firms, but also provides an explicit way of implementing the resulting gain sharing among the firms through negotiated contract terms. We show that the eventual structure of negotiation relationships can be derived by finding a shortest path tree in the supply network with the arc cost defined as a monotone function of the negotiating parties’ relative bargaining power. These developments allow us to analyze ESR implementation in generally extended supply networks. We find that the ESR initiator tends to delegate ESR compliance negotiation to a supplier that is strong in negotiations with higher-tier suppliers. When the supply network is complex (i.e., wide and deep), directly engaging all suppliers for ESR compliance can lead to a larger gain by the initiator than fully delegating the negotiations with higher-tier suppliers to the first-tier ones.