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Coordinating a supply chain under demand and cost
disruptions.
Cao, Erbao (AUTHOR)
Zhou, Xiushuai (AUTHOR)
Lϋ, Kevin (AUTHOR) kevin.lu@brunel.ac.uk
International Journal of Production Research. Jun2015, Vol.
53 Issue 12, p3735-3752. 18p.
decision support
disruption management
game theory
optimisation
revenue-sharing contract
supply chain coordination
In this paper, we investigate the coordination of a supply
chain consisting of one manufacturer andnBertrand
competing retailers under disruptions of market demand and
production cost. We present a coordination model of a
supply chain under normal scenarios. Our findings
demonstrate that the coordination scheme designed for the
initial production plan should be revised when disruptions of
market demand and production cost occur. To resolve this
issue, we consider the possible deviation costs caused by
disruptions and propose optimal decision models for different
disruptions under centralised decision-making. We present
an improved revenue-sharing contract model to coordinate
the decentralised supply chain under disruptions. The
proposed models are then further analysed through
numerical examples. [ABSTRACT FROM AUTHOR]
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abstract. (Copyright applies to all Abstracts.)
College of Economics and Trade, Hunan University,
Changsha, China
Department of Industrial and Enterprise Systems
Engineering, University of Illinois at Urbana-Champaign,
Urbana, IL, USA
Brunel Business School, Brunel University, Uxbridge, UK
7802
0020-7543
10.1080/00207543.2014.988885
102272462
Business Source Complete
Coordinating a supply chain under demand and cost disruptions.
In this paper, we investigate the coordination of a supply chain consisting of one manufacturer and
n Bertrand competing retailers under disruptions of market demand and production cost. We
present a coordination model of a supply chain under normal scenarios. Our findings demonstrate
that the coordination scheme designed for the initial production plan should be revised when
disruptions of market demand and production cost occur. To resolve this issue, we consider the
possible deviation costs caused by disruptions and propose optimal decision models for different
disruptions under centralised decision-making. We present an improved revenue-sharing contract
model to coordinate the decentralised supply chain under disruptions. The proposed models are
then further analysed through numerical examples.
1. Introduction
In recent years, supply chain coordination has emerged as an attractive area for firms to improve
performance (Cachon [ 2]). Existing studies on supply chain coordination have mainly focused on
1
2
3
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decision-making under a normal marketing environment, which assumes that the demand is
deterministic and known, and the manufacturer has perfect information about the market demands
and so on. However, as economic integration and globalisation deepen, the unexpected changes
of market demands and production costs are more common than ever before (Lei, Li, and Liu
[16]). After the production or sales plans have been agreed, the marketing environment can often
be disrupted by unexpected haphazard events, which may result in changes in demand or the cost
of the products that affect the original production or sales plans. Therefore, such demand and cost
disruptions may have significant impacts on business performance since supply chains can hardly
recover from these disruptions in a short period time if these disruptions are not managed properly.
It would benefit to the members of a supply chain if effective strategies to deal with such
disruptions have been adopted in order to attain supply chain performance.
Both academics and practitioners recognise the importance of an effective contract to deal with
supply chain disruptions (Yu and Qi [29]; Wu et al. [23]). A number of models have been proposed
in order to study how to handle supply chain disruptions (Qi, Bard, and Yu [20]; Xu, Qi, and Yu
[27]; Xiao and Qi [24]). Adjusting and handling unexpected disruptions in an efficient and effective
way are becoming more and more important to the success of supply chain management.
However, previous studies on supply chain coordination management mainly focus on static
coordination mechanisms, with quantity discount under a deterministic environment, such as
known market demands and production costs (Cachon [ 2]). The situation of cost or demand
disruptions in one supplier and one retailer supply chain have been considered (Qi, Bard, and Yu
[20]; Yu and Qi [29]; Xu, Qi, and Yu [27]; Lei, Li, and Liu [16]). However, many manufacturers face
multiple geographically dispersed and heterogeneous retailers (Yu and Qi [29]).
With considerations to more close to real world situations, this study investigates how disruptions
would affect the coordination scheme with revenue-sharing contracts and how to coordinate the
supply chain after disruptions. In particular, the study examines the scenario where production
costs and demands disruptions occur at the same time. To the best of our knowledge, it is the first
time that a revenue-sharing contract to coordinate a supply chain with multiple retailers under
demand and cost simultaneous disruptions has been considered.
Production cost disruptions often refer to situations in which production costs change from their
estimated values, which are used to design the coordination scheme. Cost disruptions may occur
when raw material prices and transportation costs change, or due to equipment failures or interest
rate fluctuations (Xu, Qi, and Yu [27]). Cost disruptions can occur in various forms at any stage of
the production process with varying consequences. Thus, different solutions are needed for each
of those situations. Unexpected changes in market demands are very common in practice (Qi,
Bard, and Yu [20]), for example, an earthquake might cause a large sudden demand for tents; the
epidemic of mad cow disease affected the demand for beef consumption to a large degree. Such
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costs or/and demand disruptions will impact on consumers, retailers, wholesalers and
manufacturers in an entire supply chain; thus, effective models and coordination mechanisms for
the supply chain are needed in order to handle such disruptions. To adopt optimised decisions to
deal with disruptions from a systems point of view will provide the decision-makers distinctive
advantages.
In this paper, we focus on the scenario that simultaneous production cost and demand disruptions
occur in a supply chain, which includes a single manufacturer and n retailers who compete in a
Bertrand market. Our particular interest is supply chain coordination. It is assumed that the
manufacturer first acts as a Stackelberg leader, who offers the retailers a take-it-or-leave-it
contract menu, including different revenue-sharing contracts, and the retailers then act as the
followers who will choose both how many units of the product to order and its retail price. In a
centralised supply chain, the central decision-maker determines the retail price and the production
quantity, aiming at supply chain profit maximisation under a disruption scenario. In the
decentralised supply chain, the manufacturer and the retailers are independent decision-makers
who seek to maximise their individual profit.
We analyse the managerial insights on how production cost and demand disruptions affect a
revenue-sharing contract where there are competing retailers. We have some interesting
observations: first, it is possible that the manufacturer’s original production plan could tolerant a
certain degree of disruptions and retain a certain degree of robustness; when the cost and
demand are changed within certain thresholds, it is acceptable for the supply chain to keep the
original production plan, and for adjustments in prices alone to compensate the deviation costs.
Only when the change in the demand and cost exceed certain thresholds, should both the original
production quantities and the prices be adjusted. Second, the disruptions may have a significant
effect on the revenue-sharing contract, including the order quantities, wholesale prices and
revenue share, so the improved revenue-sharing contract could coordinate the decentralised
supply chain and produce greater profit than the scenario where the original plan is retained.
The remainder of the paper is organised as follows: the related literature is reviewed in Section 2.
Section 3 introduces the basic coordination model. Section 4 presents the coordination of a
centralised supply chain with revenue-sharing contracts. In Section 5, the coordination of the
decentralised supply chain with improved revenue-sharing contracts is introduced. Numerical
examples with analytical results are presented in Section 6. Section 7 summarises this paper.
2. Related work
This study is related to the intersection of supply chain coordination and disruption management,
and two elements in the arena of supply chain coordination management, namely the revenue-
sharing contract, supply chain disruption management. Hence, in the following, recent studies on
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these topics are reviewed and analysed.
Designing coordination schemes have been an important issue in the study of supply chain
management (Wu et al. [23]). A revenue-sharing contract is beneficial to manufacturers, retailers
and other participants within a supply chain (Cachon and Lariviere [ 3]). In deterministic demand
aspects, Giannoccaro and Pontrandolfo ([11]) coordinated a three stage supply chain with a
revenue-sharing contract. Kebing, Chengxiu, and Yan ([15]) studied coordination mechanisms in a
supply chain consisting of one supplier and multiple retailers under deterministic price-sensitive
customer demand and developed a revenue-sharing contract to coordinate such a supply chain. In
undeterministic demand aspects, Pasternack ([19]) indicated that the right revenue-sharing
contract can coordinate two dyadic supply chains under stochastic demand; Dana and Spier ([ 8])
adopted revenue-sharing contracts to coordinate a supply chain in a basic supplier–retailer
channel setting. Cachon and Lariviere ([ 3]) generalised Dana and Spier ([ 8]) by studying the
revenue-sharing contract in a two-echelon distribution channel with competing retailers and found
that in an extended setting, where market demand is both retail price sensitive and stochastic, only
a revenue-sharing contract can coordinate the channel. Gerchak and Wang ([10]) considered a
revenue-sharing contract in assembly systems with random demand. Wang, Jiang, and Shen
([21]) studied the channel performance of supply chains under consignment contract with revenue
sharing and found that both the overall channel performance and the performance of individual
firms depend critically on demand price elasticity and on the retailer’s share of channel cost and
indicate that a decentralised supply chain cannot be perfectly coordinated. Li and Hua ([18])
extended the work of Wang et al. and provided a cooperative game model that implements profit
sharing between the manufacturer and the retailer to achieve their cooperation. Weng ([22]) also
considered the revenue-sharing contract in a one-period, supplier–buyer channel facing uncertain
and price-dependent market demand and found that the loss in channel profit increases with
demand price elasticity and decreases with the buyer’s share of cost. Zou, Pokharel, and Piplani
([32]) developed an analytical model to synchronise different processing times through the
strategic placement of safety stocks at each player’s premise and found that a revenue-sharing
contract can be used for channel coordination in a two-echelon decentralised assembly system
facing uncertain market demand. In multi-retailer aspects, Yao, Leung, and Lai ([28]) investigated
a revenue-sharing contract for coordinating a supply chain comprising one manufacturer and two
competing retailers, they assumed the demand from two competing retailers is independent and all
parties know their demand distributions at the beginning of the season, but they did not consider
the situations of demand or cost disruptions. It was found that the provision of revenue sharing in
the contract can provide better performance than a price-only contract.
Chen, Zhang, and Sun ([ 4]) studied a manufacturer’s pricing strategies in a dual-channel supply
chain and found that a manufacturer’s contract with a wholesale price and a price for the direct
channel can coordinate the dual-channel supply chain. Cachon ([ 2]) summarised supply chain
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coordination mechanisms and offered a detailed review on the strengths and limitations of different
supply chain contracts.
Disruption management in the supply chain is another aspect closely related to our work. Supply
chain disruption management has attracted increasing attention (Yu and Qi [29]; Wu et al. [23]).
One main difference between coordination under disruptions and coordination under a normal
environment is that the sudden changes in demands and costs will cause certain deviation costs
that did not previously exist (Yu and Qi [29]). These deviation costs can be caused by the over-
time production and the expedited delivery for an increased demand, or the extra inventory holding
and possible disposal for a decreased demand. The costs may be incurred by either the
manufacturer or the retailers. To achieve effective supply chain management, such deviation costs
must be appropriately taken into account. The concept of disruption management was first
introduced by Clausen, Hansen, and Larsen ([ 7]) and applied successfully in airline operations.
Xiao and Yu ([25]) studied the effects of supply chain disruptions on the evolution of retailers’
behaviour, where retailers are bounded rationality and quantity competition with homogeneous
goods. All the above work assumed a centralised system without considering coordination
schemes.
In demand disruption aspects, Qi, Bard, and Yu ([20]) examined a scenario with one manufacturer
and one retailer under demand disruptions and proposed a quantity discount contract to
coordinate a two-stage supply chain. Huang, Yu, and Song ([13]) studied an exponential demand
disruption and adopted an all-quantity discount policy to coordinate a supply chain. Chen and Xiao
([ 6]) developed two coordination models of a supply chain consisting of one manufacturer, one
dominant retailer and multiple fringe retailers to investigate how to coordinate a supply chain after
demand disruption. Zegordi and Davarzani ([31]) used a Petrinets-based model as a tool to
understand the dissemination of disruptions and to trace the operational performance of a supply
chain. Chen and Zhuang ([ 5]) considered a coordination model of a one manufacturer and multi-
retailer supply chain with a dominant retailer’s sales promotion opportunity and possible demand
disruption. Huang, Yang, and Zhang ([14]) studied the pricing and production problem in a two-
period dual-channel supply chain consisting of one manufacturer and one retailer with demand
disruptions.
In the cost disruption aspect, Xu, Qi, and Yu ([27]) studied the case of production cost being
disrupted and proposed a quantity discount contract to coordinate a supplier–retailer supply chain.
Hou, Zeng, and Zhao ([12]) proposed a buy-back contract between a buyer and a backup supplier
when the buyer’s main supplier experiences supply and demand disruptions. Li, Wang, and Cheng
([17]) investigated the sourcing strategy of a retailer and the pricing strategies of two suppliers in a
supply chain under an environment of supply disruption. Yu, Zeng, and Zhao ([30]) evaluated the
impacts of supply disruption risks on the choice between the famous single and dual sourcing
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methods in a two-stage supply chain with a non-stationary and price-sensitive demand. Friesz,
Lee, and Lin ([ 9]) presented a dynamic supply chain network framework formulated as a
differential variational inequality model, which allows consideration of supply chain disruptions
threat to producers, freight carriers and retail enterprises and resolved the differential variational
inequality by adopting a fixed point algorithm.
Issues of demand and cost disruption happening simultaneously were addressed in Lei, Li, and Liu
([16]), where risk management strategies in a supply chain were examined when the disruptions of
demand and cost occurred. Xiao and Qi ([24]) presented a quantity discount contract to coordinate
the supply chain with two Bertrand completing retailers when production cost and market demand
disruptions existed.
Wu et al. ([23]) found that the linear quantity discount scheme can coordinate the supply chain with
two competing retailers, and the all-unit quantity discount scheme can coordinate the supply chain
if the retailers are identical after the market demand is disrupted. This study is mainly focused on
the effects of demand disruption on the coordination mechanism with quantity discount.
Although the revenue-sharing contract has been proven to be effective to coordinate the supply
chain, in the existing literature, the revenue-sharing contract has not been used in the study of
supply chain coordination under demand and cost disruptions. In this paper, we analyse the effects
of simultaneous demand and cost disruptions on a supply chain consisting of one manufacturer
and Bertrand competing retailers and investigate how to coordinate such a supply chain with
demand and cost simultaneous disruptions by a revenue-sharing contract.
3. The basic model
We first consider the coordination mechanism of a supply chain in the baseline case (without
disruption or under normal circumstances). We begin with a manufacturer and retailer model in
which the price–demand relationship is deterministic and known. The manufacturer produces a
product that is purchased by the retailers, who then sell it on the open market. The situation can
be viewed as a Stackelberg game, with the manufacturer assuming the role of the leader and the
retailers as the roles of the followers. In this context, the manufacturer plays first by offering the
retailers a menu of contracts , in which the contract is only a component contract, and each retailer
is free to choose a component contract that is most preferred from the menu. The revenue-sharing
contract includes the wholesale price and a share of revenue generated from each unit. The
retailers act as followers then react to the menu of contracts by choosing their most preferred
contracts and choose the ordering quantities and retail price. At the same time, it is assumed that
the system information is perfect, that is, the individuals of a supply chain have the demand and
cost information. Let be the manufacturer’s unit production cost and is the retailer unit production
cost; thus, is the total production cost of channel and suppose that the ordering quantity of retailer
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is described by the following relationship
Graph
the linear demand function is commonly used in the literatures of supply chain management
(Bernstein and Federgruen [ 1]; Cachon and Lariviere [ 3]; Xiao and Qi [24]). Where is the market
scale (i.e. the maximum possible demand), is the retail price (a decision variable). Similar to Xiao
and Qi ([24]), is the substitutability coefficient of products with different price. The substitutability
coefficient is a measure of the sensitivity of the th retailer’s sales to the change of the other
retailers’ price. When the suffixes and simultaneously emerge in an equation, it always means that
. Let ; then, the revenue of retailer can be represented as . For simplicity, let and . Similar to
Cachon and Lariviere ([ 3]), we assume that the retailer ‘s revenue is decreasing in , that is .
Therefore, the retailer ‘s revenue is increasing if retailer has increased the price , that is, . We
further assume that the retailer i’s revenue is also decreasing if retailer has increased the sales ,
that is, , and the sales are substitute among the different retailers, that is, . This means that the
retailer i’s customers will transfer to other retailers if retailer has a shortage. Therefore, we have . It
is shown that the revenue of retailer is increasing (decreasing) with retailer i’s retail price (sales)
increase.
Let be the supply chain’s profit made at channel , , and let be the supply chain system total profit:
Graph
Clearly , therefore, the supply chain system total profit is a concave function about the retail price.
Denoting a system optimal vector of quantities and retail prices as , , respectively, then satisfies
the following first-order conditions , , accordingly, we have . The equilibrium retail prices of the
retailers can be found by solving simultaneously the equations, the summation of retail prices is
Graph
, the retailers determine their retail prices simultaneously, and their retail prices are the following
unique Nash-Equilibrium point:
Graph
Graph
In a decentralised supply chain system, the manufacturer offers the retailers a revenue-sharing
contract menu , and retailer determines optimal retail price aiming to maximise its own profit given
the contractual terms, it is assumed that each retailer makes its decision independently.
Consequently, retailer i’s profit would be , and the manufacturer’s profit from channel is .
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The following theorem indicates that the manufacturer can use the revenue-sharing contract to
induce the retail prices to and order quantity to . As a consequence, the manufacturer’s own goal
and maximum supply chain profit can be achieved.
Proposition 1. The following revenue-sharing contracts coordinate a supply chain with Bertrand
competing retailers, if the contractual terms satisfy the equation and , , . The optimal profits of the
retailer and the manufacturer in channel is
Graph
( 2)
Graph
Proof：The supply chain system total profit is
Graph
and the optimal retail price of a supply chain system must meet the following first-order condition:
Graph
then we can get
Graph
Graph
the profit of retailer is
Graph
the optimal retail prices that the retailers decided must meet the following first-order condition ; if
the revenue-sharing contract can coordinate the supply chain, then the optimal retail prices that
retailers decided must equal to that of a supply chain, , therefore the following equation must hold:
Graph
Because and it is illegal to sell below cost in practice (i.e. ), the retailer’s revenue share should
satisfy .
Then the profits of the retailer and manufacture are as below
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Graph
Graph
At the same time, if the supply chain does not adopt the revenue-sharing contract in decentralised
decisions, the profits of the partners can be listed as follows
Graph
Graph
From the first-order condition of retailer’s profit , we have . So the optimal price of retailer is .
We substitute into and obtain the optimal wholesale price .
Basically, we have
Graph
Graph
Graph
Graph
Further, we know that the revenue-sharing contracts are acceptable to the chain partners only if
and . Then we have
Graph
Clearly, the partners of the supply chain can obtain non-negative profit, and the revenue-sharing
contract can effectively coordinate the supply chain with Bertrand competing retailers.
4. Centralised decisions with disruptions
In a centralised supply chain system, the manufacturer and the retailers are vertically integrated in
a supply chain, they seek to maximise the total system profit of a supply chain after the demand
and costs disruptions have occurred. We consider the situation with simultaneous demand and
cost disruptions. Suppose that the demand market scale changes from to , and the manufacturer’s
production cost changes from to . The ordering quantity of retailer is .
Further, we assume , . Let be the real demand of retailer under the disruptions and be the
corresponding deviation of the manufacturer. When , the production must be increased in order to
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meet the new market demand. Usually, the unit production cost for the additional products will be
higher than the normal unit production cost because it has to get some extra production resources
at a higher price. When , there will be excess inventory that has to be sold in a secondary market
at a low price (Xu, Qi, and Yu [27]; Wu et al. [23]). In both cases, the demand and cost disruptions
will cause adjustments to the original production plan and ultimately affect the whole supply chain.
We assume that the manufacturer bears fully the production deviation cost caused by the
disruptions (Yu and Qi [29]; Qi, Bard, and Yu [20]; Xu, Qi, and Yu [27]; Xiao and Qi [24]; Lei, Li,
and Liu [16]). To reflect the influence of production variance at each channel on the system total
production deviation cost. It is further assumed that the manufacturer’s production deviation cost
will be determined by the weighted sum of each channel’s production deviation cost. The weight of
each channel is calculated as . Note that the above assumptions are similar to those in the
literatures (Qi, Bard, and Yu [20]; Xu, Qi, and Yu [27]; Wu et al. [23]). Therefore, the revenue and
profit of location after disruptions can be calculated as, respectively:
Graph
Graph
and the total supply chain system profit is
Graph
Graph
Graph
where , , are the marginal extra costs of increased or decreased production from the original plan,
respectively. is the unit extra production cost compared with what has been planned when , and is
the unit cost of handling the leftover inventory when the actual demand is inferior to the original
plan, (see (Xiao, Yu, and Sheng [26]; Xu, Qi, and Yu [27])). If there is a centralised decision-maker
who tries to maximise the total supply chain system profit , the decision-maker will find the optimal
retail price that maximises Equation ( 3) and the corresponding optimal order quantity . Intuitively,
when the production cost increases or demand decreases, the optimal order quantity should
decrease and vice versa. We discuss the retailer’s price decision by comparing the production
quantity before and after disruptions.
When , the problem of maximising reduces to maximising the following strictly concave function:
( 4)
Graph
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and when , the problem of maximising reduces to maximising the following strictly concave
function:
( 5)
Graph
The Kuhn–Tucker condition of Equation ( 4) is that at the optimal retail prices and ordering quantity
, there exists a Lagrangian multiplier such that
( 6)
Graph
To resolve the Kuhn–Tucker condition, we have two different cases with respect to the Lagrangian
multiplier or .
Case 1: when , then Equation ( 6) equivalent to and hold simultaneously. Consequently, , () and
hold simultaneously. We obtain the total retail prices of retailers by accumulated adding
theequations, , thus we obtain the equilibrium retail prices of the retailers by solving the
simultaneous equations, the optimal retail price of retailer is
Graph
Graph
and the constraint condition in Equation ( 6) is equivalent to the following inequality . Obviously,
the optimal ordering quantity of retailer satisfies .
Case 2: If , then the Kuhn–Tucker condition of Equation ( 6) equivalent to and hold simultaneously.
Thus, and hold simultaneously. The total retail prices of retailers can be obtained through
accumulated adding of the equations, the summation of retail prices is . Thus, the optimal retail
price for retailer is
, and the optimal ordering quantity of retailer is . The constraint condition is equivalent to . Adding
all the n equations about together then substituting into it, the constraint condition becomes the
following inequality: , which equals .
The Kuhn–Tucker condition of Equation ( 5) is that at the optimal retail prices , there exists a
Lagrangian multiplier such that the following equations hold
( 7)
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Graph
Through resolving the Kuhn–Tucker condition, we have two different cases with respect to the
Lagrangian multiplier .
Case 3: when , Equation ( 7) equivalent to and hold simultaneously. The summation of retail prices
is , and then, the retail price of the th retailer can be found by
Graph
Graph
The constraint condition is equivalent to the following inequality
. Obviously, the optimal ordering quantity of retailer satisfies .
Case 4: when , the Kuhn–Tucker condition of Equation ( 7) equivalent to and hold simultaneously,
the total retail prices of retailers , and the retail prices of retailer is , and the optimal ordering
quantity of retailer is .
The constraint condition becomes , equivalent to .
Summarising the above results, we have the following proposition:
Proposition 2. When the Bertrand competing retailers’ demand–price relationships satisfy , the
production cost disruption and market demand scale disruption , the total supply chain profit is
maximised at the optimal retail prices .
( 8)
Graph
where and ;
Proposition 2 indicates how to correctly respond to demand and cost disruptions. The expression (
8) in Proposition 2 implies that the optimal retail price can be obtained by adding an adjustment to
the original retail price . It can also be found that the optimal retail price given in ( 8) always
increase linearly with . In particular, when the market scale is increased (), the retailers will
increase the price (in Case 1 and Case 2); when the market scale is decreased (), the retail price
will be reduced (in Case 3 and Case 4). However, when the market scale has only changed
insignificantly (in Case 2 and Case 4) , keeping the original product quantity is recommended, this
shows that the original quantity strategy was resilient enough under limited market turbulence;
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however, when the market scale changes are large enough (in Case 1 and Case 3), adjusting the
product quantities and retail prices becomes necessary.
5. Coordination of supply chain after disruptions
In a decentralised supply chain, all members will adjust their respective strategies and make
decisions independently to maximise their individual profits after the demand and cost disruptions
take place. The manufacturer will adjust the menu of revenue-sharing contracts including
wholesale price and the retailers’ shares of revenue generated from each unit, and the retailers will
again select their favourite contract. Therefore, the previously derived coordination scheme (menu
of contract) must be modified to achieve the maximum supply chain profit. Recall that the optimal
retail prices is given in Proposition 2 for this case. In the baseline case, the manufacturer can use
a revenue-sharing contract to induce the retailer to adopt retail prices . When the market demand
and production cost are disrupted, and decision-making is decentralised, a similar revenue-sharing
contract can also be used to coordinate a supply chain.
When a decentralised supply chain adopts a revenue-sharing contract under demand and
production cost disruption, the retailer’s profit is:
so the equilibrium retail prices must meet the following first-order condition: . We find the
equilibrium retail prices are .
Now the manufacturer needs to see whether it is possible to choose appropriate parameters in the
revenue-sharing contract so that the whole supply chain can be coordinated. Similar to Proposition
2, we differentiate the coordination problem into three cases based on the degree of disruptions.
We know that the decentralised supply chain is coordinated when prices are equivalent to the
optimal prices of the centralised channel. By solving , we derive the following – Proposition 3.
Proposition 3. For the decentralised case with both production cost and demand disruptions, the
retailers select a most preferred contract from the menu of contracts offered by the manufacturer,
the revenue-sharing contract can coordinate the supply chain and the profit allocation of the
optimal supply chain profit can be realised if satisfies the following condition:
Graph
Graph
Graph
Proof: We know that if the decentralised supply chain system is coordinated by the revenue-
sharing contract, the equilibrium retail prices in the decentralised supply chain are equivalent to
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the optimal retail price in the centralised supply chain, that is to say, . Solving the equations with
respect to and , we have
Graph
Because and , we have .
Then we have the profits of the partners with a new revenue-sharing contact under disruptions:
Graph
Graph
Where
Graph
Similarly, the profits of the partners with the original revenue-sharing contract under disruptions
can be listed as follows:
Graph
Graph
where
Graph
And the new revenue-sharing contracts are acceptable to the chain partners only if and , so the
following conditions should be satisfied:
Graph
Graph
Furthermore, the following results hold: if and , then , and the whole supply chain system profit is
simplified = , so the optimal retailer’s price and wholesale price equal, respectively, , and .
Consequently, the revenue-sharing contract can also realise supply chain coordination. In short,
the improved revenue-sharing contract has anti-disruptions ability; the above results are consistent
with that of the work by Cachon and Lariviere ([ 3]).
From Propositions 2 and 3, we find that when the cost and demand disruptions happen
simultaneously and the degree of disruptions are within certain ranges , the production quantity
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need not be changed, while the retail prices and the revenue-sharing fraction for the retailers
should be changed; if the degree of disruption exceeds certain ranges, both the production
quantity, retail prices and the revenue-sharing fractions should be changed for the coordination
necessary for the supply chain.
6. Numerical examples
In this section, we present some examples to analyse the effects of the demand and cost
disruptions on the coordination mechanism. In particular, we are interested in the effect of the
disruption management after various demand and cost changes. Knowing the demand and cost
changes, the manufacturer will adopt an appropriate new revenue-sharing contract to recoordinate
the supply chain (we called it the new policy). Conversely, if the manufacturer is unaware of the
demand and cost changes and cannot react to the demand and cost disruptions in a timely
manner, the retailers will keep the pre-assumed retail prices without changes and have the
freedom to make new orders according to the real market (we called it the original policy). For
these two cases, we compare the relative parameters of revenue-sharing contracts and analyse
the profit difference from the perspective of partners and the whole supply chain. Without loss of
generality, we consider a supply chain system consists of a manufacturer and three retailers, the
demand–price function is , ().
We first consider the revenue-sharing contract without disruptions and analyse the following
examples with parameters: , , , , , . In the baseline case, given the above values, from Proposition
1, we can obtain the retail prices of retailer 1, retailer 2, and retailer 3, respectively, , , and . The
corresponding ordering quantities are , , and . The optimal production quantity of manufacturer is ,
the profits for channel 1, channel 2, and channel 3 are , , and , respectively, the total profit of
supply chain is 1270.3. Based on Proposition 1, we can obtain the revenue-sharing contract for
assuring the coordination of the supply chain, and the revenue-sharing contract parameters satisfy
the following conditions.
, ; , ; , . We can illustrate the revenue-sharing contracts, which are depicted in Figures 1–3. From
Figures 1–3, we find that only the value of and along the continuous line can make the supply
coordinated.
Graph: Figure 1. The revenue-sharing contract: the wholesale price vs. revenue share .
Graph: Figure 2. The revenue-sharing contract: the wholesale price vs. revenue share .
Graph: Figure 3. The revenue-sharing contract: the wholesale price vs. revenue share .
If, further assuming that the manufacturer and retailers agree to share the total supply chain profit
at a ratio of 6:4 under the assumption of symmetric information, where , then from Proposition 1,
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we can obtain the wholesale , , . From Equation ( 1) in Proposition 1, we can obtain the retailers’
optimal profits , and , respectively. The optimal profits of the manufacturer and the supply chain
are and , respectively. As a result, it is clear that the revenue-sharing contract can effectively
coordinate the supply chain.
Furthermore, we consider and analyse the following example with parameters: , , , , , , , , . In
general, the directions of the market demand or cost disruptions faced by retailers are very much
in the same direction. So, we consider the cases that retailers are facing similar disruptions in
market demands or production costs, the similar cases were discussed in (Xiao and Qi [24]). We
obtained the retail prices and wholesale prices under the original policy and the new policy, which
are reported, respectively, in Tables 1 and 2. In order to illustrate the efficiency of the revenue-
sharing contracts, the associated parameters, including location profits are depicted in Table 3.
The different disruptions have effects on partners and total profits, which are given in Table 4.
Table 1. The optimal retail price and quantity under different disruptions.
Channel 1’s profitOriginal policy426.2 399.5 522.2489.5
New policy 425.7 397.1625524.9625495
Channel 2’s profitOriginal policy388.5 363.9 483.5452.9
New policy 391 364.1125483.7125455.4
Channel 3’s profitOriginal policy351.5 329 445.5417
New policy 357 331.7625443.1625416.5
Table 4. The effects of different disruptions on partners and total profits.
Cases Supplier
profit
Retailer
1’s
profit
Retailer
2’s
profit
Retailer
3’s
profit
Total
profit
of
supply
chain
system
Original
policy
New
policy
Original
policy
New
policy
Original
policy
New
policy
Original
policy
New
policy
Original
policy
New
policy
1 –1 –1 –1 –1.5 1085.1 1071.7 31.684 39.204026.896 33.85622.528.9 1166.21173.7
2 –1 –1 –1 1.5 1011.3 994.4 31.684 38.025 26.896 32.76122.527.8891092.41093
3 1 1 1 –1.5 1326 1346.5 47.524 40.401041.616 34.96936.129.9291451.21451.8
4 1 1 1 1.5 1234.2 1264.9 47.524 39.2 41.616 33.85636.128.9 1359.41366.9
In general, when there is only production cost disruption, the optimal production quantities and
production cost disruptions are negatively correlated, that is the higher the production cost is, the
smaller the optimal production quantity will be, as the optimal retail price increases, and vice versa
(Xu, Qi, and Yu [27]). When there is only demand disruption, the optimal production quantities and
demand disruptions are positively correlated, that is the larger the demand is, the higher the
optimal production quantity will be, as the optimal retail price increases, vice versa (Qi, Bard, and
Yu [20]). However, from Proposition 2 in Equation ( 8), we know that the optimal retail price is an
increasing function of the incremental amount of demand when the production cost and demand
simultaneously disrupted.
From Table 1, we found that the retail prices are unchanged when one adopts the original policy.
3
3/4/21, 19:55
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The optimal production quantities (or the ordering quantities) and demand disruptions are
positively correlated, and the optimal production quantities are independent of the cost disruptions.
However, in a new policy, the changes of the retail price and ordering quantity are more
complicated. When the market size is changed slightly (the first case and the fourth case in Table
1), keeping the original production plan but adjusting the retail prices should be sufficient to deal
with the disruptions of demand and cost of productions, which demonstrates that the original plan
has certain degree of robustness. When the market size is changed significantly (the second case
and the third case in Table 1), it requires the production plan (in terms of the quantity of products)
as well as the retail price to be adjusted in order to settle disruptions of demand and cost of
productions. The main reasons are as follows: when the demand and production costs change in
the same direction and within a robust region (the first case and the fourth case in Table 1), the
demand and the cost disruption will interact with each other; thus, there is a mutual constraint
relationship between demand interruption and cost production. The manufacturer does not need to
adjust the production plan (), and all the retailers’ optimal ordering quantities are equal to their
optimal ordering quantities under normal circumstances, that is , , , and the optimal production
quantity of manufacturer is 27.6, which shows that the supply chain achieves optimal profits.
However, all the retailers need to adjust their retail prices to deal with the demand and cost
disruptions. Additionally, the demand and production cost disruptions mutually affect and restrict
each other, that is the adverse effect of one disrupted event is eliminated by another disrupted
event, and therefore, the total supply chain profit remains stable, demonstrating that the revenue-
sharing contract’s robustness. The supply chain obtains a higher profit by changing the retail
prices in these cases.
From Tables 1 and 2, it can be seen that when the market demand and production cost are
disrupted in different directions, from the second case, the market demand decreases and
production cost increases simultaneously, the supplier responds to the disruption in both the
original strategy and the new strategy by decreasing the production quantity from the original
optimal production quantity: 27.6 to 24.6 and 27.15, respectively. From the third case, the market
demand increases and production cost decreases simultaneously, the supplier responds to the
disruption by increasing the production quantity compared with the original optimal production
quantity: 27.6. The optimal production quantity, retail prices, and coordination strategy should be
adjusted in response to the disruptions in these two above cases. From Table 4, we can see that
the retail prices bring in higher total profit in the new strategy than that in the old strategy, which
adopts fixed retail prices.
From Table 2, we found the wholesale price is independent of the cost disruptions when one
adopts the original policy. The reasons are the retail prices are unchanged (from Table 1, we
known that , and ) and the production quantities (ordering quantities) are independent of the cost
disruptions. Moreover, from Table 4, we found the retailer’s profit is independent of the cost
3/4/21, 19:55
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disruptions when one adopts the original policy because the retail prices and wholesale prices do
not change and the manufacturer bears fully the production deviation cost caused by the
disruptions.
From Table 4, we find that the effect of disruption management on the partners’ profitability can be
significant, even when the effect on the channel profit is fairly small. According to Tables 3 and 4,
the total supply chain system’s profits of the new production plan are more than those of keeping
the original retail prices. Tables 3 and 4 also indicate that the improved revenue-sharing contract
can cope with demand and cost disruptions.
7. Conclusion
In this study, a mathematic model-based Stacklberg game theory has been proposed for analysing
the process of coordinating of a supply chain under disruptions of market demands and production
costs as well as for providing optimised decisions-making. We introduced optimised strategies for
the coordination of revenue-sharing contracts between a manufacturer and the retailers of a
supply chain under demand and cost simultaneous disruptions.
In a centralised system, we proposed an optimised strategy model; optimised solutions for price
and quantity are obtained through resolving Karush–Kuhn–Tucker (KKT) condition. When the
market size is changed slightly, keeping the original production plan but adjusting the retail prices
should be sufficient to deal with the disruptions of demand and cost of productions, which
demonstrates that the original plan has certain degree of robustness. When the market size is
changed significantly, it requires the production plan (in terms of the quantity of products) as well
as the retail price to be adjusted in order to settle disruptions of demand and cost of productions.
In a decentralised system, a modified revenue-sharing contract is needed when demand and cost
interruptions occur, when no disruption exists the basic model will be applied (Proposition 1). To
resolve the problem of coordinating a supply chain after disruptions on demands and costs from
marketing is a complex and dynamic challenge, one way to support decision-making is to develop
a mechanism that works in an interactive manner, thus more realistic solutions based on the
scenarios can be provided, this is the direction we are currently working on.
Acknowledgements
We thank the associated editor and the anonymous referees for their excellent and constructive
comments, which led to significant improvements in this paper. This research is supported in part
by: (i) the National Natural Science Foundation of China under Grants 71,001,035 and 70,925,006;
(ii) the Program for New Century Excellent Talents in University under Grant NCET-13-0181.
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~~~~~~~~
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sustainability
Article
Supplier Qualification Sub-Process from a Sustained
Perspective: Generation of Dynamic Capabilities
Carmen De-Pablos-Heredero *, Gonzalo Fernández-Valero and Miguel Blanco-Callejo
Departamento de Economía de la Empresa (Administración, Dirección y Organización), Economía Aplicada II y
Fundamentos de Análisis Económico, Facultad de Ciencias Jurídicas y Sociales, Universidad Rey Juan Carlos,
28032 Madrid, Spain; gonzalo.fdez@hotmail.com (G.F.-V.); miguel.blanco@urjc.es (M.B.-C.)
* Correspondence: carmen.depablos@urjc.es; Tel.: +34-669-791-657
Academic Editor: Barbara Aquilani
Received: 22 February 2017; Accepted: 21 April 2017; Published: 3 May 2017
Abstract: This research describes the generation of dynamic capabilities in the Repsol supplier
qualification sub-process based on a sustained value chain, using a proposed model consisting of
seven stages of supplier approval. A qualitative and descriptive approach, focusing on social and
sustained commitment methodology has been applied. An analysis of a case of a successful firm
in the supplier qualification sub-process has been performed based on the achievement of positive
results from the dynamic capabilities theory. The results show how REPSOL contributes to the
sustained development of its suppliers with specific actions arising from the implementation of its
dynamic capabilities in organizational governance, the environment, human rights, labor practices,
consumer issues, fair operating practices, and developing the communities with which it operates,
in a model that seeks to respond to the expectations of society. The research performed shows that
REPSOL’s capabilities are generated by influencing their competitive efficiency and better defining
a sustained value chain integrated with its suppliers. The description and analysis of REPSOL’s
supplier qualification sub-process becomes a business guideline for reaching dynamic capabilities
in the process of qualification of suppliers. The proposed model means an inspiration for firms
operating in the same, or different, industries.
Keywords: REPSOL; supplier qualification; sustained value chain; sustained value system;
dynamic capabilities
1. Introduction
Companies are, more and more, applying the value chain concept to obtain and maintain a
competitive edge due to their particular efficiency and effectiveness throughout several parts of the
value chain [1,2]. According to Porter and Millar [3] a business is profitable if the value it creates exceeds
the cost of performing the value activities. To gain a competitive advantage over its rivals, a company
must either perform these activities at a lower cost or perform them in a way that leads to differentiation
and a premium price (more value). A sustainable value chain can provide a differentiation in terms of
value creation through sustainability.
Sustainability at firms cannot become a reality unless the value chain is considered. From the very
first moment raw materials go out from the provider, reach the firm, and end at the final customer, a
verification of the compromise of all agents that take part in the value chain is required. It would not
be ethical to promote a sustainable value chain unless all of the agents that take part in the chain are
sustainable. As it is indicated in [4]. ISO 26000 provides guidance on how businesses and organizations
can operate in a socially responsible way. This means acting in an ethical and transparent way that
contributes to the health and welfare of society.
The purpose of this article is to verify the generation of dynamic capabilities in the REPSOL
supplier certification sub-process (called qualification at REPSOL), from a sustained perspective, based
on the model developed.
In the concrete case of this firm, the need to reach sustainability through a sustainable value
chain is described in the code of ethics and conduct guidelines of the company, group 4, safety, and
environmental protection [5].
The structuring and facilitating of relations with suppliers by establishing both company
and supplier responsibilities define the expectations of both organizations, which is the everyday
development lever of global performance [6]. A previous article highlighted that supplier management
constitutes one of an organization’s strategic processes, according to the Spanish Professional
Association of Procurement, Contracting, and Supply [7], and forms part of the decisions that affect
the future success of any organization [8]. Suppliers are, therefore, an essential part of the business
value system [9] and it is vital to have the necessary tools to ensure that the supply chain flows as
efficiently as possible [10,11]. The information on all suppliers forms part of a company’s selection
process and verification of the non-static information provided should be considered on a risk-driven
basis [12]. The qualification of suppliers must be developed and deployed in all areas of the company
and not only in procurement-quality, going beyond simple metrics towards objectives and strategies in
the overall value chain [1,13].
REPSOL [14] integrates company relations with its suppliers and contractors, which are governed
by corporate regulations that ensure compliance with its standards, under a “procurement model”
based on actions that adhere strictly to the guidelines and policies of safety and the environment,
ethics, and quality observed by the company at all times. The “Supplier Code of Ethics and Conduct”
defines the guidelines on how the companies that enter into contracts with REPSOL are expected to
act. REPSOL also has a strict supply chain management system, subject to auditing and performance
appraisals that are designed to identify social, ethical, and environmental risks and enable the company
to act on time to prevent them, with permanent concerns about the economic development of the
locations in which it operates and, therefore, makes a high percentage of purchases from local
suppliers. In order to do so, REPSOL uses different supplier management tools throughout its
procurement process:
• By registering suppliers, REPSOL identifies potential suppliers of goods and services and informs
them of the requirements they must meet to qualify, while providing them with the guidelines set
forth in its supplier code of ethics and conduct.
• In the qualification stage, REPSOL checks the suitability of the supplier to provide a particular
good or service, by analyzing corporate, financial, technical, quality system, safety, and
environmental aspects, as well as issues relating to ethics and human rights.
• During negotiations with suppliers, REPSOL incorporates its general purchasing and contracting
conditions, which include a specific corporate responsibility clause that the supplier must fulfil.
• Following the work, or during the performance of such work, REPSOL carries out a performance
evaluation of the supplier to analyze whether or not the work performed meets the required
standards of management, quality, safety, and the environment.
• Based on the evaluation results obtained and, based on its business needs, REPSOL decides
whether or not to develop a supplier, according to the different alternatives possible under
the regulations.
REPSOL has regulations and a supply chain management system that ensures the integrity of the
relations between the company and its suppliers and contractors in order to guarantee that contractors
and suppliers act in accordance with their commitments undertaken with REPSOL. The purpose of the
criteria governing the conduct and the general purchasing and contracting conditions is to achieve the
integrity of the relations that take place in the Value System with regard to the environment, safety,
ethical conduct, and human rights. The company demands compliance with internationally-recognized
Sustainability 2017, 9, 730 3 of 15
standards, in addition to national regulations governing safety, the environment, and respect for human
rights. When a supplier or contractor is unable to comply with these principles, it cannot take part in
bids, nor be awarded an order or contract.
In turn, subcontractors are also required to successfully complete the REPSOL qualification
process, depending on the need for the services they provide. The process includes the possibility of
defining procedures that specify the requirements (of the project or area of business) that must be met.
These requirements must be in line with those necessary to develop the business, bearing in mind the
type of REPSOL facilities, where they are located, and adapting the requirements accordingly.
Performance evaluations guide conduct and define the criteria for acceptable performance,
monitoring results over time and guiding both parties, the company and the supplier, to act in
accordance with the information obtained from the measurements [10] of effective procurement.
According to [15], effective procurement involves compliance with five criteria: (1) obtaining products,
goods and services at the right price, (2) suitable quality, (3) exact quantity, (4) time commitment, and
(5) efficient source of supply. Of these criteria, the choice of the correct source of supply affects the other
four and it is, therefore, the purchaser that has the capacity to add value to the procurement process.
Neither this source of supply, nor company employees, can accurately calculate the value
added; however, to reduce the power of suppliers, modern day companies free themselves from
conventional strategies in different ways: (1) by replacing the view of ‘heroic’ companies that compete
in slowly-changing markets with a dynamic approach that analyses the inter-dependencies that exist;
(2) eliminating the concept of a perfectly-ordered industry, with buyers that are different to suppliers
and acknowledging that they can be competitors, buyers, and suppliers all at the same time; and (3)
focusing less on the dynamics of appropriating value and more on how the company can be integrated
into a collaborating network that creates value [16].
The value chain helps to determine the distinctive activities or skills that enable a competitive
edge in the market that produces a relatively higher yield than market rivals in the same industrial
sector in which the company competes, which must be sustainable over time [6,12,17] explain the new
scenario that affects the company management paradigm, its application, and understanding, which
is expressed as a change in business and corporate mentality, which requires time and interest from
management to achieve best results. The pursuit of this strategy according to the Porter [18] value
chain model would be incomplete and require an extension of the concept towards a sustained value
chain, as shown in Figure 1.
Sustainability 2017, 9, 730 3 of 15
environment, and respect for human rights. When a supplier or contractor is unable to comply with
these principles, it cannot take part in bids, nor be awarded an order
or contract.
In turn, subcontractors are also required to successfully complete the REPSOL qualification
process, depending on the need for the services they provide. The process includes the possibility of
defining procedures that specify the requirements (of the project or area of business) that must be
met. These requirements must be in line with those necessary to develop the business, bearing in
mind the type of REPSOL facilities, where they are located, and adapting the requirements
accordingly.
Performance evaluations guide conduct and define the criteria for acceptable performance,
monitoring results over time and guiding both parties, the company and the supplier, to act in
accordance with the information obtained from the measurements [10] of effective procurement.
According to [15], effective procurement involves compliance with five criteria: (1) obtaining
products, goods and services at the right price, (2) suitable quality, (3) exact quantity, (4) time
commitment, and (5) efficient source of supply. Of these criteria, the choice of the correct source of
supply affects the other four and it is, therefore, the purchaser that has the capacity to add value to
the procurement process.
Neither this source of supply, nor company employees, can accurately calculate the value
added; however, to reduce the power of suppliers, modern day companies free themselves from
conventional strategies in different ways: (1) by replacing the view of ‘heroic’ companies that
compete in slowly-changing markets with a dynamic approach that analyses the inter-dependencies
that exist; (2) eliminating the concept of a perfectly-ordered industry, with buyers that are different
to suppliers and acknowledging that they can be competitors, buyers, and suppliers all at the same
time; and (3) focusing less on the dynamics of appropriating value and more on how the company
can be integrated into a collaborating network that creates value [16].
The value chain helps to determine the distinctive activities or skills that enable a competitive
edge in the market that produces a relatively higher yield than market rivals in the same industrial
sector in which the company competes, which must be sustainable over time [6,12,17] explain the
new scenario that affects the company management paradigm, its application, and understanding,
which is expressed as a change in business and corporate mentality, which requires time and interest
from management to achieve best results. The pursuit of this strategy according to the Porter [18]
value chain model would be incomplete and require an extension of the concept towards a sustained
value chain, as shown in Figure 1.
Figure 1. Sustained value chain. Source: own data (2016) based on the Porter [18,19] value chain
model.
A company’s value chain is related to activities [20] carried out by other companies in its
environment. This broader system of activity, the value system, includes the value chains of
suppliers, of the company, the channel (wholesalers, retailers) and the end client. Nevertheless, the
system has to be extended to a context of sustained efforts, to the sustained value system model
(Figure 2), that incorporates the desire to improve the expectations of each agent in the system:
suppliers, companies, channels, and end clients.
• FIRM INFRASTRUCTURE
• HUMAN RESOURCE MANAGEMENT
• TECHNOLOGY DEVELOPMENT
• PROCUREMENT
• SUSTAINABILITY AND SOCIAL RESPONSABILITY
SUSTAINED
APPROVAL OF
SUPPLIERS
SUSTAINED
INBOUND
LOGISTICS
SUSTAINED
OPERATIONS
SUSTAINED
OUTBOUND
LOGISTICS
SUSTAINED
M ARKETING
AND SALES
SUSTAINED
SERVICES
SUSTAINED
ASSESSM ENT AND
DEVELOPM ENT
OF SUPPLIERS
SUSTAINED PRIMARY ACTIVITIES
S U S T A I N E D V A L U E C H A I N
Figure 1. Sustained value chain. Source: own data (2016) based on the Porter [18,19] value chain model.
A company’s value chain is related to activities [20] carried out by other companies in its
environment. This broader system of activity, the value system, includes the value chains of suppliers,
of the company, the channel (wholesalers, retailers) and the end client. Nevertheless, the system has
to be extended to a context of sustained efforts, to the sustained value system model (Figure 2), that
incorporates the desire to improve the expectations of each agent in the system: suppliers, companies,
channels, and end clients.
Sustainability 2017, 9, 730 4 of 15
Sustainability 2017, 9, 730 4 of 15
Figure 2. Sustained value system. Source: own data (2016) based on the Porter and Millar [18] value
system model.
REPSOL’s suppliers, although being independent organisations, actively intervene in the
Repsol value chain. This is why the supplier code of ethics and conduct establishes the guidelines on
what REPSOL expects from its suppliers in their commercial and professional relations. REPSOL
expects all of its suppliers to share and observe the guidelines included in the code (Figure 3).
Figure 3. REPSOL code of ethics and conduct guidelines (2016). Source: Repsol [14].
These REPSOL guidelines on supplier ethics and conduct are divided into five groups: (1)
compliance with current legislation, (2) respect for human rights, (3) ethical conduct and measures
against bribery and corruption, (4) safety and environmental protection, and (5) confidentiality.
They enable a company to develop the market-sensing dynamic capability [19], as it comes closer to
the values with which suppliers and clients identify. A necessary capability for an organisation to
maintain its competitive edge is, therefore, to sense the changing business environment in order to
be able to take measures to benefit from the expected changes [21].
Value chains differ greatly from one company and industry to another; however, all companies
should use value chain analyses to develop and promote basic skills and convert them into a
competitive edge (a central skill is an value chain activity that a company performs particularly well;
when a central skill becomes an important competitive advantage, it is then called a competitive
edge).
2.
Materials and Methods
A qualitative method describing the REPSOL’s supplier qualification process has been applied
with the main objective of showing the reality that results in the firm’s efficiencies, and it may
become an inspiration for other organizations. The description of the case is based in the
documentation provided by Repsol in 2015 and 2016 and interviews performed from June to
October 2015 with Mr. José Vicente Castillo Sevilla and Mr. Francisco Javier Á vila González, from
the Buying and Contracts Managerial Areas in REPSOL. The interviews took place at REPSOL
Campus, Madrid.
The REPSOL regulations governing procurement and contracts requires (1) an audit of
suppliers, in order to verify the information provided during the qualification process, and (2)
performance appraisals to analyse the work performed and complete the information on the
supplier or contractor, in case they have to re-qualify.
SUSTAINED
SUPPLIER
VALUE CHAINS
SUSTAINED
FIRM
VALUE CHAINS
SUSTAINED
CHANNEL
VALUE CHAINS
SUSTAINED
BUYER
VALUE CHAINS
UPSTREAM VALUE FIRM VALUE DOWNSTREAM VALUE
S U S T A I N E D V A L U E S Y S T E M
Figure 2. Sustained value system. Source: own data (2016) based on the Porter and Millar [18] value
system model.
REPSOL’s suppliers, although being independent organisations, actively intervene in the Repsol
value chain. This is why the supplier code of ethics and conduct establishes the guidelines on what
REPSOL expects from its suppliers in their commercial and professional relations. REPSOL expects all
of its suppliers to share and observe the guidelines included in the code (Figure 3).
Sustainability 2017, 9, 730 4 of 15
Figure 2. Sustained value system. Source: own data (2016) based on the Porter and Millar [18] value
system model.
REPSOL’s suppliers, although being independent organisations, actively intervene in the
Repsol value chain. This is why the supplier code of ethics and conduct establishes the guidelines on
what REPSOL expects from its suppliers in their commercial and professional relations. REPSOL
expects all of its suppliers to share and observe the guidelines included in the code (Figure 3).
Figure 3. REPSOL code of ethics and conduct guidelines (2016). Source: Repsol [14].
These REPSOL guidelines on supplier ethics and conduct are divided into five groups: (1)
compliance with current legislation, (2) respect for human rights, (3) ethical conduct and measures
against bribery and corruption, (4) safety and environmental protection, and (5) confidentiality.
They enable a company to develop the market-sensing dynamic capability [19], as it comes closer to
the values with which suppliers and clients identify. A necessary capability for an organisation to
maintain its competitive edge is, therefore, to sense the changing business environment in order to
be able to take measures to benefit from the expected changes [21].
Value chains differ greatly from one company and industry to another; however, all companies
should use value chain analyses to develop and promote basic skills and convert them into a
competitive edge (a central skill is an value chain activity that a company performs particularly well;
when a central skill becomes an important competitive advantage, it is then called a competitive
edge).
2. Materials and Methods
A qualitative method describing the REPSOL’s supplier qualification process has been applied
with the main objective of showing the reality that results in the firm’s efficiencies, and it may
become an inspiration for other organizations. The description of the case is based in the
documentation provided by Repsol in 2015 and 2016 and interviews performed from June to
October 2015 with Mr. José Vicente Castillo Sevilla and Mr. Francisco Javier Á vila González, from
the Buying and Contracts Managerial Areas in REPSOL. The interviews took place at REPSOL
Campus, Madrid.
The REPSOL regulations governing procurement and contracts requires (1) an audit of
suppliers, in order to verify the information provided during the qualification process, and (2)
performance appraisals to analyse the work performed and complete the information on the
supplier or contractor, in case they have to re-qualify.
SUSTAINED
SUPPLIER
VALUE CHAINS
SUSTAINED
FIRM
VALUE CHAINS
SUSTAINED
CHANNEL
VALUE CHAINS
SUSTAINED
BUYER
VALUE CHAINS
UPSTREAM VALUE FIRM VALUE DOWNSTREAM VALUE
S U S T A I N E D V A L U E S Y S T E M
Figure 3. REPSOL code of ethics and conduct guidelines (2016). Source: Repsol [14].
These REPSOL guidelines on supplier ethics and conduct are divided into five groups:
(1) compliance with current legislation, (2) respect for human rights, (3) ethical conduct and measures
against bribery and corruption, (4) safety and environmental protection, and (5) confidentiality.
They enable a company to develop the market-sensing dynamic capability [19], as it comes closer to
the values with which suppliers and clients identify. A necessary capability for an organisation to
maintain its competitive edge is, therefore, to sense the changing business environment in order to be
able to take measures to benefit from the expected changes [21].
Value chains differ greatly from one company and industry to another; however, all companies
should use value chain analyses to develop and promote basic skills and convert them into a
competitive edge (a central skill is an value chain activity that a company performs particularly well;
when a central skill becomes an important competitive advantage, it is then called a competitive edge).
2. Materials and Methods
A qualitative method describing the REPSOL’s supplier qualification process has been applied
with the main objective of showing the reality that results in the firm’s efficiencies, and it may become
an inspiration for other organizations. The description of the case is based in the documentation
provided by Repsol in 2015 and 2016 and interviews performed from June to October 2015 with Mr.
José Vicente Castillo Sevilla and Mr. Francisco Javier Ávila González, from the Buying and Contracts
Managerial Areas in REPSOL. The interviews took place at REPSOL Campus, Madrid.
The REPSOL regulations governing procurement and contracts requires (1) an audit of suppliers,
in order to verify the information provided during the qualification process, and (2) performance
appraisals to analyse the work performed and complete the information on the supplier or contractor,
in case they have to re-qualify.
Sustainability 2017, 9, 730 5 of 15
The supplier audits are mandatory for suppliers and contractors before commencing business
relations, depending on the need for the product or service to be supplied. In the event of a highly
critical need, the audit is carried out mainly through externally-contracted companies, although
company staff perform some such audits.
Repsol performance appraisals establish a process of systematic and documented evaluation
of the most significant aspects of relations with a current supplier. Performance appraisals identify
situations of potential risk. When a failure to comply is detected, REPSOL works together with the
supplier on proposed corrective measures. The appraisal is aimed at: (1) quantitatively measuring
performance, in order for decisions to be as objective as possible, (2) developing a tool to maintain
or change the supplier’s qualification, and (3) taking into consideration additional criteria for the
selection of suppliers to take part in bids. At least one performance appraisal per year is mandatory for
all highly critical suppliers that have supplied at least one good or service during the year. The variety
of goods and services acquired by the company makes it difficult to establish sole indicators of
performance and the different areas have, therefore, been developing what they consider to be their
own most suitable indicators and are slowly incorporating them into their quality, information, and/or
supplier agreement monitoring systems, although such indicators must be consolidated with regard to
management, quality, safety, and the environment.
The Repsol supplier qualification system is shown in Figure 4:
Sustainability 2017, 9, 730 5 of 15
The supplier audits are mandatory for suppliers and contractors before commencing business
relations, depending on the need for the product or service to be supplied. In the event of a highly
critical need, the audit is carried out mainly through externally-contracted companies, although
company staff perform some such audits.
Repsol performance appraisals establish a process of systematic and documented evaluation of
the most significant aspects of relations with a current supplier. Performance appraisals identify
situations of potential risk. When a failure to comply is detected, REPSOL works together with the
supplier on proposed corrective measures. The appraisal is aimed at: (1) quantitatively measuring
performance, in order for decisions to be as objective as possible, (2) developing a tool to maintain or
change the supplier’s qualification, and (3) taking into consideration additional criteria for the
selection of suppliers to take part in bids. At least one performance appraisal per year is mandatory
for all highly critical suppliers that have supplied at least one good or service during the year. The
variety of goods and services acquired by the company makes it difficult to establish sole indicators
of performance and the different areas have, therefore, been developing what they consider to be
their own most suitable indicators and are slowly incorporating them into their quality, information,
and/or supplier agreement monitoring systems, although such indicators must be consolidated with
regard to management, quality, safety, and the environment.
The Repsol supplier qualification system is shown in Figure 4:
Figure 4. REPSOL supplier qualification process (2016). Source: Repsol [14].
The REPSOL supplier qualification process attempts to limit the risks involved in the supply
chain, by identifying critical suppliers and checking their suitability as suppliers of different goods
and services in a sustained way. In doing so, it analyses business, financial, technical, and quality
management systems, safety and environmental aspects, as well as ethical and human rights issues.
This analysis increases in depth according to the monetary value and critical nature of the purchase
or contract.
In defining its critical levels, REPSOL takes into account the impact of failure to supply the
goods and services on operating processes, safety, accidents, employment issues, the environment,
image, ethics, and human rights, etc. REPSOL, therefore, establishes four critical levels: very low,
low, average, and high. The level of criticality assigned to an activity determines the minimum
requirements for a supplier to qualify, however, under certain circumstances, it may be advisable to
increase the qualification requirements to a higher level in the case of long-term contracts for
substantial amounts, or activities that can have a major impact on local communities. To qualify as a
supplier with a very low level of criticality, REPSOL only requires the supplier’s identification
details.
In the case of suppliers with low critical levels, REPSOL requires the completion of a
qualification questionnaire, which includes business, economic-financial, technical, quality
Figure 4. REPSOL supplier qualification process (2016). Source: Repsol [14].
The REPSOL supplier qualification process attempts to limit the risks involved in the supply
chain, by identifying critical suppliers and checking their suitability as suppliers of different goods
and services in a sustained way. In doing so, it analyses business, financial, technical, and quality
management systems, safety and environmental aspects, as well as ethical and human rights issues.
This analysis increases in depth according to the monetary value and critical nature of the purchase
or contract.
In defining its critical levels, REPSOL takes into account the impact of failure to supply the
goods and services on operating processes, safety, accidents, employment issues, the environment,
image, ethics, and human rights, etc. REPSOL, therefore, establishes four critical levels: very low, low,
average, and high. The level of criticality assigned to an activity determines the minimum requirements
for a supplier to qualify, however, under certain circumstances, it may be advisable to increase the
qualification requirements to a higher level in the case of long-term contracts for substantial amounts,
or activities that can have a major impact on local communities. To qualify as a supplier with a very
low level of criticality, REPSOL only requires the supplier’s identification details.
Sustainability 2017, 9, 730 6 of 15
In the case of suppliers with low critical levels, REPSOL requires the completion of
a qualification questionnaire, which includes business, economic-financial, technical, quality
management information, and the safety and environmental systems implemented, as well as on ethics
and human rights, which are checked by different specialists. In the case of suppliers with medium
or high levels of criticality, REPSOL requires completion of an advanced qualification questionnaire,
which requires more detailed business, economic-financial, technical, quality system management,
safety and environmental system information, as well as ethics and human rights, which also require
approval by different specialists. In addition, in order for a supplier with a high level of criticality to
qualify, a qualification audit must be performed to personally check the supplier’s installations and
interview a number of employees to verify the truthfulness of the data provided.
These checks are completed by technical audits, if required, by technical specialists and special
audits (ethics and human rights) if the business-country connection poses a high risk to the company’s
reputation. In the latter case, the checks can also be carried out on suppliers with country connections
that do not pose a high risk to reputation.
Accordingly, when a supplier is qualified, it can supply goods or services for a maximum term
of four years. Upon expiry of this term, its capacities must be re-qualified to determine whether
or not qualification can be extended for the same period of time. The first renewal analysis only
requires a check of its economic-financial position and an appraisal of its performance during the time
it was qualified.
In its constant desire to improve, REPSOL is revising its supplier qualification system and studying
the introduction of changes in three areas:
• Not to base qualification on the completion of questionnaires, but rather on the providing and
proof of evidence of qualification, specific to each area of business.
• Not to keep supplier qualification for up to a maximum of four years, but rather make it dependent
on the expiry and renewal of the required evidence of qualification.
• Incorporate regular inspections of suppliers by outsourced services to check areas such as integrity,
corruption, and bribery.
3. Results
The following Figure 5 shows the seven dynamic capabilities that are included in the methodology
and model designed at the Rey Juan Carlos University (2016) to qualify suppliers:
Sustainability 2017, 9, 730 6 of 15
management information, and the safety and environmental systems implemented, as well as on
ethics and human rights, which are checked by different specialists. In the case of suppliers with
medium or high levels of criticality, REPSOL requires completion of an advanced qualification
questionnaire, which requires more detailed business, economic-financial, technical, quality system
management, safety and environmental system information, as well as ethics and human rights,
which also require approval by different specialists. In addition, in order for a supplier with a high
level of criticality to qualify, a qualification audit must be performed to personally check the
supplier’s installations and interview a number of employees to verify the truthfulness of the data
provided.
These checks are completed by technical audits, if required, by technical specialists and special
audits (ethics and human rights) if the business-country connection poses a high risk to the
company’s reputation. In the latter case, the checks can also be carried out on suppliers with country
connections that do not pose a high risk to reputation.
Accordingly, when a supplier is qualified, it can supply goods or services for a maximum term
of four years. Upon expiry of this term, its capacities must be re-qualified to determine whether or
not qualification can be extended for the same period of time. The first renewal analysis only
requires a check of its economic-financial position and an appraisal of its performance during the
time it was qualified.
In its constant desire to improve, REPSOL is revising its supplier qualification system and
studying the introduction of changes in three areas:
• Not to base qualification on the completion of questionnaires, but rather on the providing and
proof of evidence of qualification, specific to each area of business.
• Not to keep supplier qualification for up to a maximum of four years, but rather make it
dependent on the expiry and renewal of the required evidence of qualification.
• Incorporate regular inspections of suppliers by outsourced services to check areas such as
integrity, corruption, and bribery.
3.
Results
The following Figure 5 shows the seven dynamic capabilities that are included in the
methodology and model designed at the Rey Juan Carlos University (2016) to qualify suppliers:
Figure 5. Dynamic capabilities for supplier assessment. Source: own data (2016).
The following is an analysis of these capabilities in the case of REPSOL:
Capability 1: Detection: to anticipate and reduce the risk to the supply chain of a possible
interruption in supply, with the information and tools required to monitor suppliers [22]. This is the
supplier risk referred to in the new ISO 9001 standard 2015, of unforeseen operating, financial,
environmental, and social risks. Suppliers are an integral part of the business and must be chosen to
be with the company for a long time and develop solid relations. Companies are not exempt from
responsibility for their suppliers. Today, the growing wave of scrutiny and transparency has gone
4.- WEIGHTING
OF RATING
PARAMETERS
6.- FINAL SCORE
WEIGHTED OF
APPROVAL
1.- SUPPLIER
RISK
2.- ASSESSMENT
COMMITTEE
3.- RATING
PARAMETERS
5.- PARTIAL
RATING
OF PARAMETERS
7.- ASSESSMENT
RESULTS
ASSESSMENT
METHODS
CALIFICATION
METHODS
DETECTION
CAPACITY
COORDINATION
CAPACITY
INNOVATION
CAPACITY
COM UNICATION
CAPACITY
LEARNING
CAPACITY
BUSINESS INTELLIGENCE
CAPACITY
ABSORPTION
CAPACITY
SUPPLIER’S ASSESSMENT
Figure 5. Dynamic capabilities for supplier assessment. Source: own data (2016).
The following is an analysis of these capabilities in the case of REPSOL:
Capability 1: Detection: to anticipate and reduce the risk to the supply chain of a possible
interruption in supply, with the information and tools required to monitor suppliers [22]. This is
the supplier risk referred to in the new ISO 9001 standard 2015, of unforeseen operating, financial,
Sustainability 2017, 9, 730 7 of 15
environmental, and social risks. Suppliers are an integral part of the business and must be chosen to
be with the company for a long time and develop solid relations. Companies are not exempt from
responsibility for their suppliers. Today, the growing wave of scrutiny and transparency has gone right
to the end of the supply chain; each link affecting the others in such a globalized world, that we should
take notice for a better life (World Commission on the Social Dimension of Globalization, [23]). This
new wave of rules and regulations (ISO 9001:2008; EFQM; UNE-EN-ISO 19011: 2012; UNE-CWA 15896:
2010 EX) poses a major challenge to how companies manage their large and medium-sized suppliers.
Putting organizational mechanisms into place to detect where the error lies in the value chain
strengthens the dynamic capability of detection [9,24–26], which is what companies develop in
this initial stage. Detection, as the capability of diagnosing a situation, capable of understanding
clients’ needs better than their competitors [24], is the skill that discovers the opportunities and
threats to stakeholders and the environment and understands the needs and dynamics of the market.
A fundamental factor is intuition and the cognitive capacity to evaluate implicit knowledge, which
is then researched and extended to develop knowledge [27]. To understand the information, the
capability of detection uses surveillance, where the mental position checks external information and
processes the movement of the environment [28]. The dynamic capabilities of external observation
monitor the environment, provide and promote new ideas, discover new possibilities, and evaluate
them [29] in different ways, depending on the company’s situation at a particular point in time.
REPSOL does business in numerous countries, conditions, and environments, in all stages of
the energy sector value chain. It is, therefore, exposed to a wide range of (strategic, operational, and
financial) risks that can affect its future performance and that must be reduced as efficiently as possible.
The company has the organization, procedures, and systems required to reasonably manage the risks
it faces. Risk management is an integrated part of the decision-making process of governing corporate
bodies, as well as business management. Figure 6 shows the types of risk faced by REPSOL and
highlights those related to suppliers and contractors as operational risks:
Sustainability 2017, 9, 730 7 of 15
right to the end of the supply chain; each link affecting the others in such a globalized world, that we
should take notice for a better life (World Commission on the Social Dimension of Globalization,
[23]). This new wave of rules and regulations (ISO 9001:2008; EFQM; UNE-EN-ISO 19011: 2012;
UNE-CWA 15896: 2010 EX) poses a major challenge to how companies manage their large and
medium-sized suppliers.
Putting organizational mechanisms into place to detect where the error lies in the value chain
strengthens the dynamic capability of detection [9,24–26], which is what companies develop in this
initial stage. Detection, as the capability of diagnosing a situation, capable of understanding clients’
needs better than their competitors [24], is the skill that discovers the opportunities and threats to
stakeholders and the environment and understands the needs and dynamics of the market. A
fundamental factor is intuition and the cognitive capacity to evaluate implicit knowledge, which is
then researched and extended to develop knowledge [27]. To understand the information, the
capability of detection uses surveillance, where the mental position checks external information and
processes the movement of the environment [28]. The dynamic capabilities of external observation
monitor the environment, provide and promote new ideas, discover new possibilities, and evaluate
them [29] in different ways, depending on the company’s situation at a particular point in time.
REPSOL does business in numerous countries, conditions, and environments, in all stages of
the energy sector value chain. It is, therefore, exposed to a wide range of (strategic, operational, and
financial) risks that can affect its future performance and that must be reduced as efficiently as
possible. The company has the organization, procedures, and systems required to reasonably
manage the risks it faces. Risk management is an integrated part of the decision-making process of
governing corporate bodies, as well as business management. Figure 6 shows the types of risk faced
by REPSOL and highlights those related to suppliers and contractors as operational risks:
Figure 6. Types of risks faced by Repsol. Source: Repsol [14]
Repsol is also progressing towards an integrated management model designed to anticipate,
manage, and control risks from a global perspective through the integrated risk management system
(IRMS). REPSOL’s commitment towards including the IRMS in its risk management policy and
principles is expressed in the integrated risk management regulations passed by the REPSOL
management committee. This management model is inspired on the international ISO 31000
standard and the Three Lines of Defense Model. The basic foundations of the REPSOL IRMS are:
• Executive management leadership in the implementation of the system.
• To generate a common model that becomes part of all management processes and activities at
the company, with a global perspective of risk.
Figure 6. Types of risks faced by Repsol. Source: Repsol [14].
Repsol is also progressing towards an integrated management model designed to anticipate,
manage, and control risks from a global perspective through the integrated risk management
system (IRMS). REPSOL’s commitment towards including the IRMS in its risk management policy
and principles is expressed in the integrated risk management regulations passed by the REPSOL
management committee. This management model is inspired on the international ISO 31000 standard
and the Three Lines of Defense Model. The basic foundations of the REPSOL IRMS are:
Sustainability 2017, 9, 730 8 of 15
• Executive management leadership in the implementation of the system.
• To generate a common model that becomes part of all management processes and activities at the
company, with a global perspective of risk.
• To assume the participation of the Business and Corporate Areas, which become different levels
of responsibility and specialization (risk management units, supervising, and auditing units) in
the implementation of the system.
• To ensure that all risks are managed according to a common process of identification, evaluation
and treatment.
• To promote on-going improvement to become more efficient and able to respond.
In its selection and constant evaluation of contractors and suppliers, REPSOL prioritizes the use
of the security criteria available and applicable to the order or contract. The qualification process
determines whether or not a supplier is capable of satisfactorily providing the goods or services.
A criticality level is established according to the goods or services to be supplied and information
gathered in cases of critical goods or services, with an audit of the supplier’s installations. The result
of the process is the assigning of a classification status based on whether or not the supplier completes
the process (classified, provisionally classified, or non-classified). Suppliers that have provided goods
or services classified as critical must undergo a performance audit at least once a year.
Suppliers that do not pass the qualification process are classified as “not accepted”. There is
also a classification called “provisionally disqualified”, for situations in which a previously-qualified
supplier fails to perform or receives a disciplinary penalty for performing poorly and failing to pass a
performance assessment.
REPSOL develops its capability of detection by identifying the risks inherent to its supply chain
through its process of qualification of suppliers, defining and assessing the risks, as well as by
registering suppliers, which enables new opportunities in the market.
Capability 2: Coordination: The qualification process is shared by different areas of the company
that form part of a supplier qualification committee that searches for both horizontal and vertical
responses [30]. This response, therefore, affects the different levels of the organization, combining
interests in pursuit of the same result in the supply chain.
The dynamic capability involved in this stage of supplier qualification is that of coordination. [26]
highlight the integration of the managers that coordinate or integrate the business within the company.
Strategic efficiency requires increasingly greater integration of external activities and technologies.
The growing literature on strategic alliances, the virtual company, and purchaser-supplier relations
and technological cooperation proves the importance of integration and external supply. We should
not overlook the fact that the way a company organizes its production is the source of competitive
edge in different areas.
The features to be coordinated are chosen by the committee members: the persons in charge of
each process in a multi-dimensional context [30]. The members of the REPSOL extended committee
involved in its business processes can be classified as follows in Table 1.
The qualification of Repsol suppliers is coordinated by different purchasing units, using the same
questionnaires, procedures, and regulations as other areas of the company, such as the management of
corporate responsibility, safety and the environment, risks, etc., to define the qualification requirements
and test them.
The coordination of the supplier evaluation processes in the same areas of consolidation: quality,
control, safety, and the environment also enables the sharing of this supplier performance knowledge
by the different areas of REPSOL.
Sustainability 2017, 9, 730 9 of 15
Table 1. Members of the Repsol Extended Committee. Source: Repsol [14].
PROCESS MEMBERS OF EXTENDED COMITTEE
Purchasing Units
In charge of defining and ensuring compliance with the qualification processes. They also
ensure compliance with the management and quality processes
Management of Corporate
Social Responsibility
Involve in improving labor relations, family-work flexibility, the environment,
sustainability of the planet, the carbon footprint, ethics, anticorruption and human rights
Management of Safety and
the Environment
Defines and assures compliance with the safety and environmental requirements that
suppliers must meet. Also reviews the training and qualification of employees according
to the company’s manual plans
Technical areas
Technical areas possess the knowledge of the technical capabilities and specifications that
must be met by the providers of goods and services. They may specialize in Engineering,
Operation and Maintenance of Industrial complexes, drilling engineering, etc.
Commercial Areas
Service station procurement managers that, in their position as buyers-sellers, are required
to revise the supplier’s commercial processes. They must know the suppliers products,
prices, campaigns and discounts, qualities, specifications, forms of payment and invoicing.
Risk Management
Accounting profile capable of analyzing supplier balance sheets, profit and loss and cash
flow statements. Also in charge of requesting credit reports and information on late
payment and similar from insurance companies and banks
Capability 3: Innovation: the parameters of qualification are the value judgments that form part of
supplier qualification, the reasons why a supplier qualifies or not. The capability of innovation,
which constitutes the skill to develop new products and markets through strategically-focused
coordination [18,20,31–34] is the dynamic capability that can be developed at this stage.
In an economy in which the only certainty is uncertainty, the main source of lasting competitive
edge is knowledge [33], where markets change, technologies flourish, competitors multiply, and
products quickly become obsolete. The companies that succeed are those that constantly create new
knowledge. By extensively spreading this knowledge throughout the organization and applying it to
new technologies and products, these activities define the company as a “knowledge creator”, whose
only business is constant innovation [35].
This focus of the proposed methodology allows the company to incorporate what [36] calls the
discipline of innovation. The approach is based on taking action against uncertainty and not waiting,
attempting to predict the unknown future, models that sooner or later fail. The idea is to discover the
added value of taking small steps and finding the way, ruling out ways that fail, turning quickly and
cheaply onto the correct road (in business terms).
This third REPSOL dynamic capability of innovation is defined as one of the five company values:
(1) flexibility, (2) innovation, (3) responsibility, (4) transparency, and (5) integrity. These values affect
the daily business of the different areas, in the constant pursuit of improvement. In the specific
case of REPSOL procurement and contracting, these improvements are focused on its qualification
process based on questionnaires according to criticality, which are shared by all areas of purchasing
or contracting with the same degree of criticality, and will be replaced by on-going qualification
based on specific requirements for each type of purchase or contract to be renewed or checked, and
then subsequently completed by specific and regular reviews of issues, such as supplier integrity,
corruption, and bribery by means of external screening services. In this way, by applying innovation to
the supplier qualification process, REPSOL is able to suit its qualification requirements to the specific
nature of each product and service and adapt it to the constant changes in products, services, and
markets, as well as the expectations of society in general.
The REPSOL purchasing and contracting department has, therefore, developed a set of supplier
relations guidelines that recommend certain tools to help identify suppliers with “potential” and
establish the mechanisms of cooperation capable of capturing the innovation and value they contribute.
These tools enable REPSOL to benefit from its suppliers’ capability of innovation and improve its
supply chain.
Capability 4: Absorption: Once we have identified the parameters defined per area, each area must
be weighted according to the total and the decisions made by the committee [30]. If two parameters
Sustainability 2017, 9, 730 10 of 15
are considered as equally important, they are simply weighted the same and if they are of difference
importance, the higher value is given to the most transcendental parameter.
This weighting stage allows companies to improve their capability of absorption, which is the
ability to recognize the value of new ideas, assimilate the information, and use it for commercial
purposes [36,37]. This company capacity is essential to promote the capability of innovation and, to a
large extent, indicative of a company’s knowledge. The cognitive base of an individual’s capability
of absorption includes his/her knowledge and background before joining a company. Cohen and
Levinthal claim that the factors influencing an organization’s capability of absorption are different
from those of its individual members and from the role of background knowledge diversity within
the organization. Critical knowledge not only includes material and technical knowledge, but also
internal and external awareness, innovating external relations and, thus, strengthening the individual
and organization’s capability of absorption.
The strength acquired from new external knowledge does not, in itself, affect the organization’s
performance, but does so through the learning process, given that such know-how must be effectively
implemented [38]. To implement it, the weighting of each parameter must fulfil the 100% principle,
meaning that the total weighting must add up to 100%. Therefore, the best way to weight parameters
is to use an ERP management system or spreadsheet, which weights each parameter and checks that
the final percentages comply with the 100% rule. Each area is required to assign weightings to its
parameters. The final result of each area is then used to calculate the final total average. It is not
common for one particular area to be weighted to give it more importance, but it can occur. In such a
case, we would weigh the area higher so that it influences a supplier’s final rating.
There are two commonly-used methods of weighting: (1) percentage weighting, which uses
percentages for each parameter that must add up to 100%, as indicated above; and (2) weighting from
1 to 5: using the values of 1, 2, 3, 4, and 5, where 1 expresses the lowest importance and 5 the highest
importance of the parameter.
At REPSOL, the aspects analyzed in the supplier qualification process are weighted differently
according to the importance we give to each one during the process. Based on the assigned weighting,
the supplier must achieve a minimum score to pass the process, in which some of the parameters are
excluding. For example, the financial analysis of a supplier’s accounts and balance sheets must obtain
a minimum score to ensure solvency and the continuation of its operations; social and qualification
audits require a minimum score to ensure compliance with the standards expected by REPSOL; and
the acceptance of its “Supplier Code of Ethics and Conduct” is an essential and excluding requirement
in the REPSOL supplier qualification process.
In the appraisal of supplier performance, flexibility is allowed for each area to be free to weight
four aspects (management, quality, safety, and the environment). The cooperation mechanisms
proposed in the supplier relations guidelines, therefore, enable the innovation and value added by
the supplier to be absorbed and REPSOL to, therefore, benefit from the knowledge and innovation
capability of its suppliers to improve its value chain.
Capability 5: Business Intelligence: At this stage, each area of the committee must rate each
parameter analyzed. These partial parameter scores represent the evaluation by each particular
member of the qualification committee and are based on: (1) the answers given by the supplier in the
questionnaire, (2) the inspection made by the committee member, (3) an analysis of the ratios obtained,
and (4) each committee member’s experience.
In this case, the dynamic capability observed is business intelligence (BI), as one of the
rapidly-growing areas of technology that describes a set of concepts and methods based on the
data used to improve business decision-making processes [39]. The BI capability consists of a
series of elements: (1) infrastructure maturity, (2) the capability to manage data, (3) analytical
capability, (4) corporate governance capability, and (5) the capability of the evaluation model chosen.
Organizations, therefore, need this capability to monitor performance, improve on an on-going basis
and construct analytical knowledge. It is comprised of two sub-capabilities, the capability to use
Sustainability 2017, 9, 730 11 of 15
data to improve business processes and the capability to observe business according to the data and
transform the company’s current processes.
The parameters must be measurable, objective and not influenced by the subjective or personal
aspects of the people that belong to the supplier company, but rather by the results obtained from
qualification. Qualification rating methods are the quickest way to lose the ability to measure project
development, as they ignore the changes and continue with obsolete approaches [40]. Passing the
qualification test depends on the method chosen. In this regard, REPSOL has built a business
intelligence model into its purchasing units to inter-relate the data on suppliers obtained from its
processes of qualification, negotiation, appraisal, past purchasing data, etc. All of this improves
decision-making and minimizes risks. Part of this data is gathered manually from forms completed
during supplier performance assessments and other data is obtained automatically, for example, from
assessment systems implemented in certain businesses that evaluate management, quality, and the
timely receipt of goods and services.
REPSOL also uses external sources of data (Informa, Achilles, Thomson Reuters, etc.), which
provide updated information in a fast and reliable way. Informa provides data on the corporate
structure of suppliers (shareholders, shares in other companies, updated balance sheets, and legal
proceedings; Achilles not only provides balance sheets and financial statements, but also information
on management, safety, and environmental systems implemented by organizations; and Thomson
Reuters provides information on issues relating to integrity, corruption, and bribery in which a supplier
may have been involved).
Capability 6: Learning: Following inspections, the questionnaire, and partial qualification
scores, each supplier has to be given a score. A supplier’s score results in a classification of
qualified/non-qualified or suitable/unsuitable. However, to do so, each of the parameters obtained
by the supplier in each area must be revised, in which, as we recall, certain aspects will be weighted
more heavily than others. The person in charge of the qualification process assigns partial scores
on each parameter analyzed and a final weighted score for the area. The average score of all of
the areas provides the supplier’s final average score. This score has only two possible results:
suitable/not suitable.
At this stage, the company strengthens its capability of learning. It is precisely the changes that
occur in the market that make companies adapt their capabilities and boost their skills [41] to obtain
business efficiency with an “upstream” analysis of product markets [42]; according to the idea of Porter
and Millar [3] of looking at suppliers and manufacturers/distributors beyond our company, to obtain
a broad view of the value system. The economy of individual learning, group learning, or both [23],
by the members of an organization is a source of cost reduction. The qualification of suppliers helps to
integrate a company’s resources and skills, just as Nelson and Winter [43] define an organizational
routine as a set of relations, behavior patterns, or interaction models that imply learning processes,
meaning that it is not sufficient to bring resources together, but also to learn from them by repeating
the coordination model.
The strategic importance of on-going organizational learning determines the special challenges
posed by uncertainty and complexity and whether or not the company is successful in the process [24].
In dynamic environments, companies must specify the result of the organization process [41], but
also allow individuals flexibility when performing their work. This second skill in the sixth stage of
supplier qualification involves the capability of committing resources, in other words, accountability
of the different areas of the company, negotiated using procedures that allow processes to be adapted
and coordinated in response to specific events and needs [39].
Finally, once the qualification process has finished, a qualification report is issued. The report
contains the results of the qualification process and its conclusions. A copy is sent to the supplier and
the members of the company’s qualification committee, informing them of the conclusions, in detail,
and justifying our claims, in order for the capability to learn from collaborators to be integrated into
external information and converted into knowledge stored by the company [44].
Sustainability 2017, 9, 730 12 of 15
The REPSOL learning process begins with personal talent and the importance of identifying,
developing, and retaining it, and then applying the same approach to suppliers, by aligning and
orienting it to cover the company’s needs, but also taking into account the interests and motivation of
both parties’ being prepared to respond the changes required in the market.
Therefore, the identifying of capabilities, performance, knowledge, and the management style
of suppliers requires a plan that provides information and enables an integrated and shared review
of the current and future situation, by evaluating strengths and areas of improvement and defining
plans in response to such areas detected. Suppliers are evaluated from three perspectives: (1) current
situation, (2) future prospects, and (3) action to be taken. The REPSOL learning model is based on a
scheme that promotes collaboration, contribution to innovate, and the transparency of experience and
best practices amongst all concerned.
This development of suppliers and mutual capabilities is described in the supplier relations
guidelines, which help to identify suppliers with “potential” and establish the collaboration
mechanisms required for mutual improvement and development.
Capability 7: Communication: The qualification of a supplier does not necessarily open the door to
signing a contract. It is simply another guarantee of better future performance, based on the conclusions
reached as a result of the study of the supplier’s processes shown in the qualification report. In all, it is
a qualification audit. The benefits are obvious: (1) it guarantees the most competitive suppliers and
highest quality, making suppliers compete amongst themselves and improve the market of products
and services, with likely changes in the prices of the goods and services offered; (2) it increases the
company’s power to negotiate; (3) it sends a clear message to suppliers with respect to our future
expectations of the business relations between both companies; (4) it encourages the export of products,
thanks to the improved company image, as a guarantee that enables confirmation of an efficiency
advantage and helps in the fight to gain, maintain, or increase market share; (5) it guarantees certain
levels of the quality and safety of the goods and services provided to consumers; and (6) it reduces the
risk of purchasing products that do not meet the minimum standards required by the company.
At this stage, it is the dynamic capability of communication that presides analysis and arouses the
capability of absorption, which influences the nature and reaching of the company’s efficiency [24]
through its four dimensions: acquisition, assimilation, transformation, and explosion of knowledge.
This arousing of knowledge in the learning processes [42] is intrinsically social and collective and
does not take place only by imitation and emulation of individuals, such as in teacher-student or
master-apprentice relations, but also through joint contribution to understand a complex issue that
requires common communication codes and coordinated search procedures.
The results of qualification must be summarized in a qualification control record, which is
a daily record of each supplier containing data that should be kept for later years (recalling the
promises made in previous years). At Repsol, this data includes: (1) supplier name (code), (2) final
classification: suitable/unsuitable (including qualification data and the dates on which it was checked),
(3) recommendations and proposals for improvement, (4) date of the best proposal obtained, and (5)
the person in charge of achieving the improvement.
Communication at REPSOL, according to Mr. Brufau (Chairman of REPSOL since 2004), is
characterized by transparency and the permanent awareness of others. By communicating with
suppliers during the qualification process and later being able to actively collaborate throughout
the relationship, REPSOL has established different communications channels through the company
website, as well as external Achilles RePro systems (in Spain and Portugal).
Through electronic and personal communications channels, REPSOL takes care of its
communications with its suppliers, informing them of the results in order to improve areas
with poor scores in the different processes and other information in the interests of both parties.
These communications mechanisms are also recommended in the supplier relations guidelines and
undoubtedly help to establish collaboration mechanisms with suppliers.
Sustainability 2017, 9, 730 13 of 15
REPSOL is developing a supplier portal that will enable bidirectional communication channels
that will facilitate collaboration even further.
4. Discussion
The REPSOL supplier qualification process correctly manages the seven dynamic capabilities that
appear in each of the stages of the proposed methodology designed to improve business efficiency:
(1) the capability of detection in the supplier risk evaluation stage, (2) the capability of coordination
in the qualification committee creation stage, (3) the capability of innovation in the qualification
parameter design stage, (4) the capability of absorption in the weighting of qualification parameters,
(5) the capability of business intelligence in the partial parameter qualification stage, (6) the capability
of learning in the final weighted qualification stage, and (7) the capability of communication in the
final stage of qualification [22].
This identification, qualification, and motivation of suppliers ensures that the company will
receive suitable quality, exact quantities, and timely delivery in the agreed terms at the right price; the
selection of the best suppliers is, therefore, a key element in the procurement process. In all, individual
supplier decisions are the basis of the company’s total supply and their impact on profits affects
global efficiency, competitiveness, marketing timing, the success of new products, and the overall
performance of the company [15].
One of the greatest difficulties faced by evaluation systems lies in their implementation.
The extraction of data, linking of different systems, audits, personnel qualification, and the managing
of questionnaires are accepted tasks at REPSOL. Experience [45], the development of instruments, and
IT knowledge are necessary to avoid the traps in deployment [2]. Measuring supplier performance
enables understanding, communications, and subsequent improvement [2].
REPSOL designs and develops strong supplier performance measurement systems that require
comprehensive knowledge of the business, familiarity with high-performance systems, and the
knowledge of measuring methodology. According to Gordon [1], this is a key factor in suitably
defining the right questions to obtain accurate answers.
The answers must be effective and they refer to the extent to which the operations performed
and action taken by the organization, repair and preserve, instead of damaging or destroying, the
natural environment [1]. REPSOL’s target is to improve the company’s situation in a range of areas,
such as corporate governance, the environment, human rights, employment practices, consumer
affairs, fair operating practices, and the development of the communities with which it is involved,
amongst others. REPSOL accepts the incorporation of social and environmental considerations in the
decision-making processes of other organizations, which include its suppliers.
It is essential to review company strategy, its value statement, and reply to the question: what can
your company do that others cannot? [26].
Author Contributions: C.D-P-H has designed and wrote the article. G.G-V has developed the proposed model
and M-B-C has analyzed data a successful cases.
Conflicts of Interest: The authors declare no conflict of interest.
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Introduction
Materials and Methods
Results
Discussion
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OUTSOURCING: TRANSACTION COST ECONOMICS AND SUPPLY CHAIN MANAGEMENT*
Williamson, Oliver E
Journal of Supply Chain Management; Apr 2008; 44, 2; ProQuest Central
pg. 5
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Does implementing social supplier
development practices pay off?
Cristina Sancha, Cristina Gimenez, Vicenta Sierra and Ali Kazeminia
ESADE Business School, Ramon Llull University, Barcelona, Spain
Abstract
Purpose – The purpose of this paper is twofold. First is to investigate the impact of social supplier development practices on the suppliers’ social
performance. Second is to analyze if the implementation of supplier development practices by Western buying firms pays off in terms of operational
and economic results.
Design/methodology/approach – Hypotheses are tested in a sample of 120 Spanish manufacturing firms using Path Analysis.
Findings – The results suggest that while supplier development practices help to improve the suppliers’ social performance and the buying firm’s
operational performance, they do not pay off in terms of
economic performance.
Research limitations/implications – The paper shows that supplier development practices help to improve the suppliers’ social performance while
improving the operational performance of the buying firm. The study has two main limitations. First, because cross-sectional data are used, possible
recursive relationships could not be accounted for. Second, the study is limited to the Spanish scope and, as such, results need to be interpreted
in that context.
Practical implications – The results of this study provide insights to managers with respect to the implementation of supplier development
practices to make their suppliers more socially responsible. Furthermore, managers are shown the implications of implementing such practices in
terms of operational and economic outcomes.
Originality/value – This paper contributes to the existing literature on the effectiveness of sustainable supplier development practices by including
the suppliers’ performance, which has been generally neglected. Objective measures for economic performance are also included.
Keywords Buying firm’s performance, Social supplier development practices, Suppliers’ performance
Paper type Research paper
Introduction
Nowadays, supply chains are becoming increasingly global.
One example of this trend is that firms buy from suppliers
located all over the world. In this context, it is important to
highlight the key role that the suppliers’ performance plays on
the long-term success of buying firms (Carter, 2005; Krause
et al., 2000). For example, the quality level of the products
served by suppliers as well as the on-time delivery of these
products impact the operational performance of the buying
firm. This key role of suppliers can also be translated to the
sustainability arena. The increasing level of outsourcing to
developing countries has emphasized the focus on
sustainability (Andersen and Skjoett-Larsen, 2009). The
concept of sustainability has been traditionally operationalized
using the concept of the triple bottom line (TBL), which
encompasses the combination of economic, environmental
and social performances and relieves the key role of social and
environmental aspects besides economical ones (Elkington,
1998).
In the context of supply chain management (SCM), when a
firm aims to achieve sustainability, it is necessary that it
extends it to all the members in their supply chain. In this
paper, we will specifically focus on the extension of
sustainability to suppliers and analyze the role played by the
suppliers’ sustainability performance on the success of the
buying firm in terms of operational and economic outcomes.
Suppliers’ poor environmental performance can damage the
buying firm’s performance (Faruk et al., 2001). For example,
in 2007, Mattel had to recall nearly one million toys due to its
contract manufacturer using lead paint in their products (The
New York Times, 2007). This caused Mattel not only an
increase in their operational costs (i.e. products had to be
recalled before they reached the stores) but it also damaged its
reputation, leading to a potential decrease in sales. Recently,
Bangladesh faced one of the worst industrial accidents in
modern human history in which more than 2,500 people were
injured and 1,000 killed. A factory collapsed due to its
dilapidated conditions (The New York Times, 2013). At the
The current issue and full text archive of this journal is available on
Emerald Insight at: www.emeraldinsight.com/1359-8546.htm
The authors want to thank the editor and three anonymous reviewers for
their valuable comments. The authors acknowledge financial support from
research grant ECO2013-47794R from the Spanish Ministry of Science
and Innovation and from research grant ECO/155/2012 (ref. 2013FI_B
00,281) from the Research and Universities Secretary, Economic
Department, Generality of Catalonia as well as Social European Funds.
Received 18 July 2014
Revised 13 January 2015
8 March 2015
Accepted 9 March 2015
389
http://dx.doi.org/10.1108/SCM-07-2014-0239
same time, these poor conditions damaged the reputation of
some apparel companies such as Gap, Primark and Benetton,
who were sourcing from this factory. These real-life examples
illustrate how the suppliers’ sustainability performance (i.e.
environmental and social performance) impacts buying firms’
performance. That is, suppliers’ poor sustainability performance
seems to not only impact buying firms’ reputation and hence
sales but it could also create disruptions in their supply chains,
damaging their operational performance. In that sense, it is
necessary that buying firms make an effort to extend
sustainability to suppliers with the aim of improving suppliers’
sustainability performance, as it appears to have an impact on
their own performance.
To improve the suppliers’ sustainability performance, firms
need to manage their supply chains (Andersen and
Skjoett-Larsen, 2009; Beske and Seuring, 2014; Schaltegger
and Burritt, 2014). To do so, they can rely on the use of
supplier development practices such as supplier assessment
and collaboration with suppliers (Gualandris and
Kalchschmidt, 2014; Gualandris et al., 2014; Klassen and
Vachon, 2003; Vachon and Klassen, 2006). Up until now,
studies focusing on sustainable supplier development have
been lacking (Akamp and Muller, 2013). Furthermore, the
scarce literature that has looked at sustainable supplier
development practices has mainly focused on the
environmental dimension of sustainability (Ehrgott, et al.
2013; Klassen and Vachon, 2003; Yu et al., 2014), while
literature that has investigated the role of these practices
adopting a social focus is scarce (Gimenez and Tachizawa,
2012; Hoejmose and Adrien-Kirby, 2012; Moxham and
Kauppi, 2014; Seuring and Muller, 2008).
In this research, we will focus on the social dimension, as
the study of social sustainability has become a necessity in the
SCM field because companies need to operate “in a
responsible manner and take care of employees’ health and
safety” (Kleindorfer et al., 2005). More specifically, we will
follow Pagell and Gobeli’s (2009) approach and understand
the social dimension of sustainability as the firm’s
responsibility to protect employees’ working conditions. In
our paper, we will focus on the employees’ working conditions
in the suppliers’ premises and their impact on the buying
firm’s performance. There is a variety of problematic issues for
the buying firm that can appear in the suppliers’ premises such
as the use of child labor or the existence of poor health and
safety measures that can result in labor accidents (Awaysheh
and Klassen, 2010; Klassen and Vereecke, 2012). Our
objective in this paper is to analyze the impact that the
suppliers’ social performance has on the buying firm’s
performance, and to investigate how the suppliers’ social
performance can be improved by the implementation of social
supplier development practices.
As we have already mentioned, there is limited literature
that has considered social supplier development practices
(Akamp and Muller, 2013; Gallear et al., 2012; Gimenez et al.,
2012; Hollos et al., 2012). This scarce literature has mainly
analyzed the impact that social supplier development practices
have on the buying firm’s economic and/or operational
performance. However, this impact is not clear and mixed
results have been found. While some papers have found that
social supplier development practices lead to improvements
on buying firm’s performance (Akamp and Muller, 2013;
Gimenez et al., 2012; Klassen and Vereecke, 2012), others
have found no such support (Gallear et al., 2012; Hollos et al.,
2012). We believe these contradictory results could be due to
the following issues:
● They have neglected the role of the supplier’s social
performance improvement achieved with the
implementation of social supplier development practices
and/or;
● they have used different operationalization of the
operational and economic performance constructs (being
the economic construct mostly measured with subjective
data).
To shed light on this existing debate, the aim of this paper is
to include the impact of social supplier development practices
on the suppliers’ social performance. We will also try to shed
some light regarding the impact of these practices on the
buying firm’s operational and economic results. Thus, we
address the following research questions (RQs):
RQ1. Do social supplier development practices lead to an
improvement in suppliers’ social performance?
RQ2. Does it pay off in terms of operational and economic
outcomes for the buying firm to implement social
supplier development practices? (i.e. What are the
effects of social supplier development practices on
buying firms’ operational and economic performance?)
By answering these questions we aim to make the following
contributions:
● to extend the limited studies that have analyzed the impact
of social supplier development practices on performance;
● to have a better understanding of the implementation of
these practices by studying their impact on the suppliers’
performance; and
● to include objective indicators to measure the impact
of these practices on the economic dimension of
performance.
Apart from these contributions to research, we aim to provide
managers with some recommendations that will help them in
their effort to make their supply chains more socially
responsible while achieving operational and economic
improvements.
The paper is organized as follows: in the following sections,
we present the related literature and our research hypotheses.
Next, we describe the research methodology used in our study
as well as data analysis. Then, we discuss the results. The
paper finalizes with a conclusion section in which limitations
and future lines of research are suggested.
Literature review and hypotheses development
Social supplier development and performance
Several problematic issues related to social aspects can arise at
the supplier’s premises: unsafe and harsh working conditions
and employees’ safety, use of child labor, human rights abuses,
low and unfair wages, unfair work/life balance policies,
sanitation and housing and use of dangerous and poisonous
Social supplier development practices
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Supply Chain Management: An International Journal
Volume 20 · Number 4 · 2015 · 389 –403
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materials (Klassen and Vereecke, 2012; Pagell and Gobeli,
2009; Pullman et al., 2009; Vachon and Mao, 2008).
To reduce these problematic issues and improve the
suppliers’ social performance, buying firms implement
supplier development practices. Supplier development is
defined as “any activity undertaken by a buying firm to
improve either the supplier performance, supplier capabilities,
or both” (Krause et al., 2000, p. 34). These practices comprise
the assessment of suppliers, the provision of training and/or
incentives to suppliers, the promotion of competition among
them and the direct work with suppliers (e.g. training
suppliers’ personnel). In the sustainable supply chain
literature, the concept of supplier development has mainly
included supplier assessment and collaboration with
suppliers (Gualandris and Kalchschmidt, 2014; Gualandris
et al., 2014; Klassen and Vachon, 2003; Vachon and
Klassen, 2006). In this paper, we have defined supplier
development as those practices related to evaluations of
suppliers’ social performance in the form of questionnaires
and audits, visits to the suppliers’ premises, training in
terms of social issues and the development of joint efforts
between the buying firm and the supplier.
To the best of our knowledge, the impact of social supplier
development practices on firms’ performance has been
scantily studied in the literature (Akamp and Muller, 2013;
Gallear et al., 2012; Gimenez et al., 2012; Hollos et al., 2012;
Klassen and Vereecke, 2012). Akamp and Muller (2013), in
their study about the implementation of supplier management
practices, found support for the supplier development and
suppliers’ operational performance relationship. Similarly,
Hollos et al. (2012) studied how supplier cooperation impacts
the buying firm’s operational and economic outcomes.
However, contrary to the results of Akamp and Muller (2013),
they found that the buying firm’s effort to induce socially
responsible behavior in the supplier premises does not help the
buying firm to reduce costs or improve its operational
performance. Gallear et al. (2012) studied how a firm’s
internal awareness on sustainability issues, the monitoring of
the firm’s sustainability performance and the sharing of best
practices with suppliers affect the firm’s financial
performance. Similar to Hollos et al. (2012), no support was
found for the relationship between supplier development
practices and economic performance improvements. Gimenez
et al. (2012) analyzed the impact of internal and external social
programs – with an environmental and social focus – on each
dimension of the TBL (environmental, social and economic
performances). For the external programs (i.e. supplier
development practices), they found mixed results. While
collaboration with suppliers improves the buying firm’s
economic performance, assessment does not. Finally, Klassen
and Vereecke (2012) developed a framework based on case
studies in which they explored the role of supplier
development programs in achieving economic improvements.
Their results suggest that joint efforts between buying firms
and suppliers lead to improvements on economic
performance.
From the abovementioned papers, the two following points
need to be highlighted. First, the results found in the literature
are mixed. While some papers have found that supplier
development practices on social issues lead to improvements
on buying firm’s performance (Akamp and Müller, 2013;
Gimenez et al., 2012; Klassen and Vereecke, 2012), others
have found no such support (Gallear et al., 2012; Hollos et al.,
2012). These contradictory results can be due to:
● different operationalization of the operational and
economic performance constructs; and
● the fact that the suppliers’ social performance has been
neglected.
Regarding the operationalization of the constructs, in our
model, we will include both performance dimensions (i.e.
operational and economic). For the operational one, we will
consider traditional operational measures such as quality,
delivery and costs as done by Akamp and Muller (2013) and
Hollos et al. (2012). In the case of economic performance, we
will follow Gallear et al. (2012) and include objective
economic measures.
The existence of mixed results can also be explained by the
fact that none of these papers, with the exception of Akamp
and Muller (2013), has considered the role of suppliers in
their models. That is, how suppliers are affected by the
implementation of supplier development practices. We believe
that supplier’s performance mediates the relationship between
supplier development practices and buying firm’s
performance. In other words, the buying firm’s performance
will only improve once the supplier development practices
have resulted in real improvements for the supplier. As stated
by Bai and Sarkis (2014), suppliers’ sustainability
performance is key in the management of the buying firm’s
competitiveness.
In this sense, in this paper, we aim to consider the following
issues:
● The impact of social supplier development practices on
suppliers’ social performance.
● How this affects the buying firm’s operational and
economic performance.
Hypotheses development
To develop our hypotheses, we will adopt the lenses of the
relational view, which has been used in the supplier
development and sustainable SCM literatures (Cao and
Zhang, 2011; Carter and Rogers, 2008; Simpson and Power,
2005). The relational view considers networks and dyads of
firms (i.e. buyer–supplier relationships) to explain relational
rents (Dyer and Singh, 1998). A relational rent is defined as:
[. . .] a supernormal profit jointly generated in an exchange relationship that
cannot be generated by either firm in isolation and can only be created
through the joint idiosyncratic contributions of the specific alliance partners
(Dyer and Singh, 1998, p. 662).
Relational rents are then a result of collaborative activities (i.e.
supplier development programs) in which partners exchange
valuable knowledge and capabilities through relation-
specific investments, inter-firm knowledge-sharing
routines, complementary resource endowment and effective
governance mechanisms (Cao and Zhang, 2011). A
significant idea in the relational view is the fact that by
collaborating, firms generate common benefits that
collaborative partners cannot generate independently. In
our paper, we will consider that the exchange relationship
takes place when the buying firm implements the supplier
development program with the supplier. In this way, the
Social supplier development practices
Cristina Sancha, Cristina Gimenez, Vicenta Sierra and Ali Kazeminia
Supply Chain Management: An International Journal
Volume 20 · Number 4 · 2015 · 389 –403
391
relational rents will be the result of the valuable knowledge
shared by the buying firm through the offering of training
activities to the suppliers’ personnel, the visits to the
suppliers’ premises and the monitoring of the suppliers’
performance.
In the sustainable SCM literature, different studies (most of
them with an environmental focus) show the positive impact
that supplier development programs have on the suppliers’
performance. Foerstl et al. (2010) show that the
implementation of supplier development practices by a buying
firm helps to diminish the suppliers’ use of un-environmental
practices, improving their environmental performance.
Similarly, Lee and Klassen (2008) claim that activities such as
suppliers’ evaluations and/or providing training to suppliers’
personnel result in better suppliers’ environmental
management capabilities and support their better
environmental performance. As suggested by Lippmann
(1999), to improve the supplier’s environmental performance,
it is advisable that the buying firm organizes workshops and
provides technical assistance on this dimension. In that sense,
according to the relational view, the buying firm is an external
source of resources and valuable knowledge for the supplier
that will result in increased rents in the form of increased
performance.
In the case of social issues, to the best of our knowledge,
there is no paper that has empirically shown the relationship
between social supplier development practices and the
suppliers’ social performance. However, based on the
relational view and the aforementioned empirical evidence, it
is expected that evaluating suppliers, training the supplier’s
personnel and working together with the supplier with respect
to social issues will lead to improvements in their social
performance. For instance, the evaluation of the suppliers’
social performance by the buying firm can be an effective
mechanism to pressure suppliers so that they start considering
social issues in their own supply chain. In addition, the
knowledge generated as a result of the buying firm’s training to
suppliers’ personnel will result in better working conditions at
the suppliers’ premises and a reduction of the number of
accidents. Accordingly, we hypothesize that:
H1. Social supplier development practices have a positive
impact on the suppliers’ social performance.
Krause et al. (2000), in their definition of supplier
development practices, state that buying firms’ motivation to
implement these practices is twofold:
1 to improve the suppliers’ performance; and
2 to guarantee their own supply needs.
In that sense, supplier development practices seem to have an
impact not only on the suppliers’ performance but also on the
buying firm’s performance. In the literature, different authors
have studied the impact of sustainable supplier development
practices on the buying firm’s economic and operational
performance dimensions with mixed results. For instance,
Gimenez et al. (2012) show that the implementation of
environmental supplier development programs lead to better
economic results for the buying firm. Similarly, Klassen and
Vereecke (2012), in what they call “development link”,
explain that collaborative activities on social issues between
buyer and supplier lead to better economic results in the form
of market expansion and cost reduction. On the contrary,
Gallear et al. (2012) and Hollos et al. (2012) found no support
for the relationship between sustainable supplier development
practices and the buying firm’s performance. Despite these
mixed results, on the basis of the relational view, we will
hypothesize a positive relationship between social supplier
development practices and buying firm’s performance. The
relational view suggests that the result of the joint work
between two partners (buyer and supplier) results in common
benefits. This implies that by working together on improving
social sustainability, not only the suppliers’ performance will
improve but also the buying firm’s performance.
Social supplier development practices contribute to improve
quality, cost and delivery because buying firm’s employees are
more motivated, as they believe they are working on a more
socially responsible firm. In addition, supplier development
practices contribute to improve the buying firm’s economic
performance through increasing sales because consumers may
be willing to purchase goods that come from a more socially
responsible firm (Andersen and Skjoett-Larsen, 2009; Carter
and Jennings, 2004; Geffen and Rothenberg, 2000; Guoyou
et al., 2013). This improvement in economic performance
could also come from a reduction in cost. In a more socially
oriented firm, employees are more motivated (Zukin and
Szeltner, 2012) and therefore the cost of absenteeism could be
reduced and productivity increased. Therefore, based on the
relational view and on the empirical evidence provided by
Gimenez et al. (2012) and Klassen and Vereecke (2012), we
hypothesize that:
H2. Social supplier development practices have a positive
impact on the buying firm’s operational performance.
H3. Social supplier development practices have a positive
impact on the buying firm’s economic performance.
Suppliers’ performance has been described in the literature as
playing a relevant role on the long-term success of buying
firms, as it could impact its competitive dimensions (Krause
et al., 2000; Tracey et al., 2005). This is also true in the case
of the social dimension of sustainability. In fact, suppliers’
improved social performance can contribute to both the
buying firm’s economic and operational performances in the
following ways.
The supplier’s improved social performance can contribute
to the competitive advantage of the whole supply chain and
result in higher market share and reduced costs (Klassen and
Vereecke, 2012; Rao and Holt, 2005). The fact that the
buying firm employs suppliers that are socially oriented (i.e.
have a higher social performance) results in a better social
reputation and hence attracts socially conscious consumers
(i.e. increasing sales). Furthermore, the improvement of the
working conditions in the suppliers’ premises results in a
reduction of accidents and suggests fewer disruptions in the
supply process and less delays in product delivery, improving
the operational performance of the buying firm (Freire and
Alarcon, 2002; Yuan and Woodman, 2010). Moreover, if the
working conditions of the suppliers’ employees are improved,
the quality of the supplied product can increase due to an
enhancement of employees’ motivation (Pagell et al., 2010).
Social supplier development practices
Cristina Sancha, Cristina Gimenez, Vicenta Sierra and Ali Kazeminia
Supply Chain Management: An International Journal
Volume 20 · Number 4 · 2015 · 389 –403
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Based on the abovementioned arguments, we believe that
improvements in the suppliers’ social performance will result
in an enhanced economic and operational performance for the
buying firm. Accordingly, we hypothesize that:
H4. Suppliers’ social performance has a positive impact on
the buying firm’s operational performance.
H5. Suppliers’ social performance has a positive impact on
the buying firm’s economic performance.
In summary, we have hypothesized the following effects.
Based on the relational view and on empirical evidence, we
have posited a direct and positive effect between social
supplier development programs and the suppliers’ social
performance (H1). In the same line and based on the same
theoretical framework, we have also hypothesized a direct and
positive effect between these programs and the buying firm’s
operational and economic performances (H2 and H3,
respectively). We also believe that the suppliers’ social
performance has a positive impact on the buying firm’s
performance (i.e. operational and economic) (H4 and H5).
The combination of the aforementioned hypotheses results in
a mediated model. This means that an indirect effect between
supplier development programs and both buying firm’s
performances through suppliers’ social performance (i.e.
mediating variable) may exist. In other words, we expect that
the supplier’s social performance mediates the relationship
between supplier development programs and the buying firm’s
operational and economic performances. This mediating
effect could be explained as follows: once the supplier has
achieved a better social performance due to the
implementation of supplier development practices, the buying
firm’s economic and operational performances will increase. It
is important to mention that H2 and H3 (direct effect between
supplier development practices and buying firm’s
performances) suggest that suppliers’ social performance may
function as a partial mediator rather than a full mediator
(Baron and Kenny, 1986). This reasoning leads to the
following two hypotheses:
H6. Suppliers’ social performance partially mediates the
relationship between social supplier development
practices and the buying firm’s operational
performance.
H7. Suppliers’ social performance partially mediates the
relationship between social supplier development
practices and the buying firm’s economic performance
(Figure 1).
Methodology
Questionnaire development
To test our model, we first developed a questionnaire based on
the literature review. To check the understanding and the
clarity of the questions, we carried out a pre-test with
academics, which resulted in minor changes in the wording of
some items. The following constructs are used in this study:
● Social Supplier Development Practices: refers to the
evaluation of suppliers’ social performance as well as to
practices that entail a more direct involvement of the
buying firm with the supplier;
● Suppliers’ Social Performance: refers to the working
conditions, human rights compliance and use of child
labor in the suppliers’ premises;
● Buying Firm’s Operational Performance: considers
dimensions such as quality, delivery and cost; and
● Buying Firm’s Economic Performance: includes objective
data on profit and sales (see Appendix 1 for the specific
items used and their sources).
The first three constructs (i.e. Supplier Development Practices,
Suppliers’ Social Performance and Buying Firm’s Operational
Performance) have been adapted from available studies in the
literature, and all used a seven-point Likert scale, where higher
values indicated higher level of adoption or better
performance. We measured the fourth construct (i.e. Buying
Firm’s Economic Performance) via two commonly used
objective indicators: sales and profit (Gallear et al., 2012). The
data of these two variables were obtained from SABI Bureau
Van Dijk Database. Following Peng and Lai (2012)
suggestions, we have considered both the Buying Firm’s
Operational and Economic Performance as formative constructs.
In formative constructs, the direction of causality is from the
indicators to the construct. In the case of a firm’s operational
performance, the construct is defined by its costs, quality and
flexibility performances, not the opposite way (Jarvis et al.,
2003). In fact, the different dimensions that form the
constructs are not expected to change in the same direction
and the same magnitude (Peng and Lai, 2012). This is also
clear in the case of economic performance; an increase in sales
does not necessarily imply an increase in total benefits.
Additionally, the items that form each of the constructs are not
interchangeable with other items in the construct. For
example, cost performance cannot be changed by quality or
delivery performance (Peng and Lai, 2012). All these points
suggest that the Buying Firm’s Economic and Operational
Performance are formative constructs in which the combination
of the considered items defines the concept by postulation.
This is not the case for Supplier Development Practices and
Suppliers’ Social Performance, which have been designed as
reflective constructs. The interchangeability of their items as
well as the high expected covariation among them suggest
their reflective nature (Jarvis et al., 2003; Peter et al., 2007).
For instance, in the case of Suppliers’ Social Performance, item
Figure 1 Describes the hypothesized relationships
Supplier
Development
Practices
Buying firm’s
Operational
Performance
Buying firm’s
Economic
Performance
H1
H3
H4
H6
H7
H5
H2
Suppliers’
Social
Performance
Direct effect
Mediating effect
Social supplier development practices
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Volume 20 · Number 4 · 2015 · 389 –403
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SuppSoc1 is expected to highly covariate with item SuppSoc2
because a violation on the compliance with the use of child
labor (SuppSoc2) would imply no compliance with human
rights (SuppSoc1). Regarding interchangeability, items Ext1
and Ext3 from Supplier Development Practices provide a good
example. In addition, the elimination of any of the included
items in the Suppliers’ Social Performance and Supplier
Development Practices will not change the meaning of the
underlying latent variables. For instance, if items Ext1 and/or
SuppSoc2 are eliminated, the remaining items will be still
referring to Supplier Development Practices and Suppliers’ Social
Performance.
Sample and data collection
To test our model, we decided to ask buying firms about the
supplier development practices they were using, the social
performance of their most critical supplier and their (buying
firm’s) operational performance. This way, Spanish buying
firms answered about their perceptions on:
● the level of implementation of supplier development
practices with their most critical supplier;
● their (buying firm’s) operational performance; and
● the social performance of their most critical supplier in
terms of sustainability.
The starting population in this study was made up of Spanish
manufacturing companies that had at least 50 employees in
the following sectors:
● textile (NACE codes 13-15);
● wood and wood products (16);
● paper and paper products (17);
● printing (18);
● chemical (20);
● pharmaceutical (21); and
● electronics (26-27).
We used SABI Bureau Van Dijk Database to extract this
information. This database contains information of more than
two million Spanish firms. We also extracted from this
database the economic performance measures of the firms
comprising our sample (i.e. profit and sales). SABI Bureau
Van Dijk Database contains financial and economic
information extracted from the firm’s P&L accounts. Data
collection took place during March-June 2011. The original
sample was made up of 580 firms. To increase the response
rate, a phone call was made to all 580 firms to ask for
participation in this study; however, 204 declined to
participate. We conducted the survey using the telephone but
gave firms the opportunity to answer the questionnaire by
other means (mail/e-mail). Finally, 99 answered the
questionnaire by phone and 21 by e-mail. In total, we
obtained 120 responses, representing a response rate of 20.69
per cent. Table I shows the description of the sample. All
buying firms were Spanish. However, the location of their
most critical supplier in terms of sustainability varied across
the final sample. Please see Table II for a summary on the
location of suppliers.
To minimize key-informant bias, we contacted each firm by
phone and identified the most suitable respondent with
respect to sustainability issues in the supply chain (Kumar
et al., 1993). As firms did not have a common position that
dealt with these issues, there is high diversity in terms of the
position held by respondents (Table I).
In addition, the use of different data collection methods (i.e.
phone and e-mail) may pose a threat to the validity of our
results. To check for possible differences with respect to the
data collection method, we randomly selected a subsample of
Table I Descriptions of the sample
Position n (%)
Health and safety director or manager 7 5.83
Environmental director or manager 14 11.67
Health, safety and environmental director
or manager 13 10.83
Quality and environmental director or
manager 23 19.17
Quality, health, safety and environmental
director or manager 13 10.83
Managing director 7 5.83
Operations or supply chain director or
manager 8 6.67
Quality director or manager 8 6.67
Human resources director or manager 16 13.33
Other 11 9.17
Total 120 100
Position in the supply chain
End-consumer market 37 31
Not end-consumer market 83 69
Total 120 100
Industry
Textile (NACE codes 13, 14 and 15) 12 10.00
Wood and products of wood and cork,
except furniture (NACE code 16) 11 9.20
Paper and paper products (NACE code 17) 16 13.30
Printing (NACE code 18) 6 5.00
Chemical (NACE code 20) 25 20.80
Pharmaceutical (NACE code 21) 15 12.50
Electronics (NACE codes 26 and 27) 35 29.20
Total 120 100
Number of employees
Less than 50 1 0.80
Between 50 and 249 75 62.50
Between 250 and 499 31 25.80
More than 500 13 10.80
Total 120 100
Table II Location of suppliers
Region n
Africa 1
Asia 20
Europe 80
USA 6
South America 1
Missing 12
Total 120
Social supplier development practices
Cristina Sancha, Cristina Gimenez, Vicenta Sierra and Ali Kazeminia
Supply Chain Management: An International Journal
Volume 20 · Number 4 · 2015 · 389 –403
394
20 responses from each group and performed parametric and
non-parametric tests. Results suggest that there are no
significant differences between participants who answered by
phone and those who answered by e-mail. Finally, non-
response bias may also be a threat to the study. We performed
non-response bias tests comparing the demographic data of
respondents and non-respondents and found no statistically
significant differences in the responses of the two groups.
Data analysis and results
To simultaneously determine the effect of Supplier
Development Practices and Supplier Social Performance on both
the Buying Firm’s Operational and Economic Performances, we
used path modeling analysis using hierarchical multiple
regression. A single multiple regression model can only specify
one response variable at a time. However, path analysis
estimates as many regression equations as are needed to relate
all the proposed theoretical relationships among the variables
in the explanation at the same time. That is, we performed a
set of multiple regressions to estimate the presence of
relationships in the hypothesized structural model. This is an
iterative algorithm that separately estimates the beta
coefficients for every hypothesized relationship using ordinary
least squares (OLS) regression.
The evaluation of our model followed a two-step approach.
In the first step, we assessed the adequacy and quality of our
measurement model, which specifies the relationships
between indicators (i.e. observable variables) and latent
constructs. In this evaluation, different measures for reflective
and formative constructs were used. The second step includes
the analysis of the structural model, which covers the
estimation of direct and indirect path coefficients and tests the
strength of the hypothesized relationships between constructs.
Measurement assessment
To assess the adequacy of the reflective scales (i.e. Supplier
Development Practices and Suppliers’ Social Performance), we
analyzed convergent validity, discriminant validity and
reliability. Convergent validity was checked both at the item
and the construct levels. As shown in Table III, all items’
loadings are greater than the 0.70 suggested threshold level
(Hulland, 1999). At the construct level, we checked that the
average variance extracted (AVE) of each construct is greater
than 0.50 (Chin, 1998; Fornell and Lacker, 1981). Table III
shows that convergent validity is met at both levels (i.e. item
and construct). Discriminant validity is fulfilled if the square
root of the AVE of each construct is greater than all the
inter-construct correlations (Chin, 1998; Fornell and Lacker,
1981). Table III provides support for this condition and shows
sufficient discriminant validity. Finally, to check the reliability
of reflective constructs, we used the Cronbach alpha
coefficient. All reflective constructs show values greater than
the threshold value of 0.70 for Cronbach’s alpha (Table III),
suggesting that they are all reliable.
The measurement assessment for formative scales is
different than for reflective scales. Neither convergent validity
and discriminant validity nor reliability can be used to assess
their quality because formative indicators do not have to be
strongly interrelated (Diamontopoulos, 1999). To evaluate
the quality of formative measurement models, Chin (1998)
suggests checking the following criteria:
● multicollinearity between indicators;
● indicators’ relative importance; and
● indicators’ absolute importance.
Regarding multicollinearity, high values indicate that the
indicator’s information is redundant. As shown in Table IV,
all variance inflation factor (VIFs) are lower than the
boundary value of 5; therefore, multicollinearity is not a
problem. To check for the indicators’ relative and absolute
importance, we looked at the indicators’ outer weights and
outer loadings, respectively. When an indicator’s weight is
significant, there is empirical support to retain it. In case it is
not significant but the corresponding loading is relatively high
(� 0.5), the indicator should also be retained. In the case of
the Buying Firm’s Operational Performance, although not all
indicators’ weight are significant (i.e. opperf2 and opperf3), all
loadings are greater than 0.5. In the case of the Buying Firm’s
Economic Performance, there is one indicator (i.e. sales) that is
non-significant and has a loading value of 0.410 (Table IV).
However, formative indicators should not be eliminated based
on statistical outcomes. In this sense, we have decided to keep
it, as deleting it will change the construct under study (Chin,
1998).
Finally, common method variance (CMV) becomes a threat
when two variables that have a hypothesized relationship are
measured using the perceptions of the same individual. This is
especially problematic when the variables are the independent
and dependent variables of the study. To prevent and
Table III Assessment of reflective measurement model
Social supplier development practices
Cristina Sancha, Cristina Gimenez, Vicenta Sierra and Ali Kazeminia
Supply Chain Management: An International Journal
Volume 20 · Number 4 · 2015 · 389 –403
395
minimize CMV, the design of a survey study can be adjusted.
In that sense, in the survey, the dependent variables were
placed after the independent ones (Podsakoff et al., 2003).
Additionally, after data have been collected, different
statistical procedures can be performed to assess if CMV
influences the study results. We performed the following tests
suggested in the literature (Podsakoff et al., 2003):
● First, following Harmann’s single-factor test, we checked
that neither a single nor a general factor accounted for the
majority of the covariance among measures. The results
show that a single factor accounts for 34 per cent of the
variance, confirming the absence of CMV.
● Second, we analyzed the correlation matrix between the
different constructs in our study (Bagozzi et al., 1991).
The existence of high correlations (i.e. r � 0.90) between our
constructs would be a signal of CMV. As shown in Table V,
none of the values surpasses the suggested threshold,
providing evidence that CMV is not a threat to the study.
Third, we followed Lindell and Whitney’s (2001) method and
examined the correlations between a marker variable (i.e. a
variable that is theoretically unrelated to the constructs under
study) and Supplier Development Practices, Suppliers’ Social
Performance and Buying Firm’s Operational Performance. If the
marker variable and the studied constructs are highly
correlated, then CMV is present. However, results in Table VI
suggest that CMV is not an issue in our study, as the highest
value corresponds to Supplier Development Practices (Pearson’s
r � �.147). If we square the Pearson correlation coefficient,
we get the maximum percentage of variance shared by the
marker and the construct (R2). CMV would be a threat if R2
shows high values. In our case, R2 equals 2 per cent, which is
a low value and suggests that CMV is not an issue.
Structural model
As we have already mentioned, to test the hypothesized
relationships between our latent constructs, we used path
modeling analysis by hierarchical multiple OLS regression.
Based on the estimated path coefficients, we can obtain the
direct, indirect and total effects between variables. The total
effect of one variable on another is the sum of the direct effect
(i.e. no intervening variables involved) and indirect effect
(i.e. through one or more intervening variables). This
decomposition lets us check for the possible mediating effects
of the variable Suppliers’ Social Performance between Supplier
Development Practices and Buying Firm’s Operational and
Economic Performance. It is also important to mention that to
test our model, we controlled for the firm’s size using the
number of employees (mean � 339.14; SD � 820.96).
Before looking at the results of the direct and indirect path
coefficients, it is important to assess the structural model for
multicollinearity issues. Because the estimation of the path
coefficients is based on OLS regression, just as in regular
multiple regression, the path coefficient might be biased if the
estimation involves multicollinearity between the studied
constructs. As shown in Table VII, VIFs between constructs
are under the suggested threshold of 5, showing that
multicollinearity is not an issue.
The analysis of the hypothesized relationships is divided
in two sections. First, we will report the results related to
the hypothesized direct effects, which correspond to
H1-H5. Then we will discuss the results corresponding
to the hypothesized mediating role of Suppliers’ Social
Performance in the relationship between Supplier
Development Practices and Buying Firm’s Operational and
Economic Performance (H6 and H7).
Direct effect results
As shown in Figure 2, our results provide support for four of
the five hypotheses that correspond to the hypothesized direct
effects between the constructs under study. Supplier
Development Practices are positively related to both Suppliers’
Social Performance (� � 0.309, p � 0.001) and the Buying
Firm’s Operational Performance (� � 0.
396
, p � 0.001),
providing support for H1 and H2. In addition, Suppliers’ Social
Performance is positively associated with both the Buying
Table IV Assessment of formative measurement model
Social supplier development practices
Cristina Sancha, Cristina Gimenez, Vicenta Sierra and Ali Kazeminia
Supply Chain Management: An International Journal
Volume 20 · Number 4 · 2015 · 389 –403
396
Firm’s Operational (� � 0.326, p � 0.001) and Economic
Performance (� � 0.412, p � 0.001), supporting H4 and H5,
respectively. Regarding H3, which posited a direct and
positive effect between Supplier Development Practices and
Buying Firm’s Economic Performance, our results show that the
effect is significant (p � 0.023). However, the direction of the
effect is opposite to what we hypothesized (� � �0.188),
meaning that Supplier Development Practices negatively impacts
the Buying Firm’s Economic Performance. Thus, not providing
support for H3.
Mediating effect results
In the literature, different approaches to test for models that
include mediating effects have been proposed: Causal steps,
evaluating differences in coefficients and computing and
testing indirect effects by the products of coefficients. Based in
the last approach, we can also find different resources available
for testing models with mediating effects (i.e. R, SAS and
SPSS macros). In our study, we run the Sobel test described
by Preacher and Hayes (2004) for bootstrapped mediation
analysis. Table VIII shows the main numerical reports to
analyze the mediation effect of Suppliers’ Social Performance
between Supplier Development Practices and Buying Firm’s
Operational and Economic Performance.
Supplier Development Practices was significantly predictive of
the hypothesized mediating variable (a � 0.309, p � 0.001).
When controlling for Supplier Development Practices, the
mediator (Suppliers’ Social Performance) was significantly
predictive of Buying Firm’s Operational Performance (b �
0.328, p � 0.001). The estimated direct effect of Supplier
Development Practices on Buying Firm’s Operational
Performance, controlling for mediator, was also significant
(c’ � 0.396, p � 0.001). Based on these values, the total effect
of Supplier Development Practices on Operational Performance
takes a value of 0.497 (i.e. total effect: (a � b) � c’).
The mediating effect (ab) equals 0.101 (i.e. 0.309 � 0.328).
This is judged to be statistically significant using the Sobel test
(z � 2.66, p � 0.05). Bootstrapping procedure using 5,000
samples was performed, and a bias-corrected and accelerated
confidence interval (CI) was created for ab. The lower and
Social supplier development practices
Cristina Sancha, Cristina Gimenez, Vicenta Sierra and Ali Kazeminia
Supply Chain Management: An International Journal
Volume 20 · Number 4 · 2015 · 389 –403
397
upper limits of the 95 per cent CI for the ab mediation effect
ranges between 0.030 and 0.184.
To assess the significance of the mediating path, several
criteria can be used. First, both a and b coefficients are
statistically significant. Second, the Sobel test for the ab
product is also significant. However, as several authors point
out, the limitations related to the Sobel test power (i.e. power
is low due to the test statistic not being really normally
distributed), we have decided to additionally use boostraping
procedures to compute CIs to be able to decide on the
statistical significance of the mediating effect (MacKinnon
et al., 2002; Shrout and Bolger, 2002). Therefore, as a third
step, it is necessary to check that the boostrapped CI for ab
does not include zero. Based on these criteria, we can state
that the mediating effect of Suppliers’ Social Performance
between Supplier Development Practices and Buying Firm’s
Operational Performance is statistically significant. As the direct
path from Supplier Development Practices and Buying Firm’s
Operational Performance controlling for the mediating variable
is also significant, Social Suppliers’ Performance is meant to be
a partial mediator rather than a full mediator. These results
provide support for H6.
The same analysis was carried out for the remaining
independent variable (i.e. Buying Firm’s Economic
Performance). The mediating role of Suppliers’ Social
Performance in the relationship between Supplier Development
Practices and Buying Firm’s Economic Performance was found to
be non-significant for the following reasons: although the
direct effects (a � 0.309 and b � 0.412) are both significant
(p � 0.001) and, according to the Sobel test, the mediating
effect (a � b � 0.127) is also found to be significant (p �
0.001), the CI for ab includes zero ([�.014 : 0.230]). This
suggests that Suppliers’ Social Performance does not mediate the
relationship between Supplier Development Practices and the
Buying Firm’s Economic Performance. In other words, no
support was found for H7 (Table IX for a summary of the
hypotheses results).
Finally, to check for the predictive relevance of the model, it is
important to consider the determination coefficient R2. An
acceptable R2 should be greater than the suggested threshold
of 10 per cent and significant (Falk and Miller, 1992). In our
case, as shown in Figure 2, the R2 of all our dependent
constructs are significant and with values close or above the
suggested threshold.
Discussion
Our discussion will be centered around two main points:
1 the impact of social supplier development practices on
suppliers’ social performance; and
2 the impact of supplier development practices on both the
buying firm’s operational and economic performance.
Supplier development practices and the suppliers’
social performance
Supplier development practices are described as aiming to
improve the suppliers’ performance and/or capabilities
(Krause et al., 2000). In the sustainable SCM literature, the
scarce research that has considered the suppliers’ performance
is limited to the environmental dimension of sustainability,
while the literature adopting a social focus has only considered
the buying firm’s performance; hence, providing a partial view
on the effectiveness of these practices. In our paper, we have
studied this neglected relationship (i.e. social supplier
development and suppliers’ social performance), and our
results indicate that buying firms perceive that the
implementation of these practices leads to an improvement on
the suppliers’ social performance. That is, by auditing
suppliers and by directly working with them with respect to
social issues, the buying firm perceives improvements on the
compliance of its suppliers’ facilities with human rights and
child labor employment. These supplier development
practices also contribute to improve the safety and labor
conditions in the suppliers’ facilities. Our results extend the
previous positive results of Foerstl et al. (2010), Lee and
Klassen (2008) and Lippmann (1999) from the
environmental stream of the literature and support the fact
that the implementation of these supplier development
practices helps to improve not only the suppliers’
environmental performance but also the social one.
Supplier development practices and the buying firm’s
performance
We hypothesized direct and indirect effects of supplier
development practices on the buying firm’s operational and
economic performance.
Regarding the buying firm’s operational performance, our
results support the fact that supplier development practices
have a direct and positive effect on operational performance
and that this impact is also mediated by the suppliers’ social
performance. The direct effect could be explained as follows:
in a more socially responsible firm, employees are more
motivated, increasing their productivity and quality outcomes
(Pagell et al., 2010). Our results extend this idea and suggest
that better operational results can be achieved if these supplier
development practices really contribute to improve the
suppliers’ social performance. Buying firms will experience
operational improvements not only because their own
Table IX Hypotheses: results
Hypotheses Result
Direct effects
H1. Supplier development practices -> suppliers’
social performance Supported
H2. Supplier development practices -> buying
firm’s operational performance Supported
H3. Supplier development practices -> buying
firm’s economic performance Not supported
H4. Suppliers’ social performance -> buying
firm’s operational performance Supported
H5. Suppliers’ social performance -> buying
firm’s economic performance Supported
Mediating effects
H6. Supplier development practices -> suppliers’
social performance -> buying Firm’s
operational performance Supported
H7. Supplier development practices -> suppliers’
social performance -> buying Firm’s
economic performance Not supported
Social supplier development practices
Cristina Sancha, Cristina Gimenez, Vicenta Sierra and Ali Kazeminia
Supply Chain Management: An International Journal
Volume 20 · Number 4 · 2015 · 389 –403
398
employees are motivated because of the implementation of
these practices but also because the working conditions on the
suppliers’ premises have improved. In addition, better
working conditions at the suppliers’ premises lead to a
reduction in the number of accidents and hence fewer
disruptions in the supply chain leading to better delivery
outcomes (Freire and Alarcon, 2002; Yuan and Woodman,
2010).
Regarding the buying firm’s economic performance,
contrary to what we expected, our results show that there is a
negative relationship between the implementation of supplier
development practices and the buying firm’s economic
performance. To better understand this unexpected result and
the impact of social supplier development practices on the
buying firm’s economic performance, we also run the model
considering only the sales indicator in the economic
performance construct (see Appendix 2 for further details on
the results). The results of the sales model indicate that the
social supplier development practices – buying firm’s
economic performance (only sales) relationship – is not
significant. This together with the results of our initial model,
which indicated a significant and negative impact of these
practices on economic performance (i.e. sales and EBIT) can
be interpreted as follows:
● the implementation of social supplier development
practices does not lead to an increase in sales; and
● the implementation of these practices implies a cost for the
buying firm in the short term, negatively affecting its
economic performance (i.e. EBIT).
Our results also show that suppliers’ social performance has a
positive impact on the buying firm’s economic performance
when we consider both EBIT and sales. However, the results
for the model that considers only the sales figure indicate that
the relationship between suppliers’ social performance and
buying firm’s economic performance is non-significant. These
results suggest that an improvement in the suppliers’ social
performance does not lead to an increase in sales but to an
improvement in EBIT by reducing costs and increasing
productivity. In terms of sales, this means that “working with
suppliers that are socially oriented” can be described as an
order qualifier rather than an order winner.
In addition, contrary to what we expected, suppliers’ social
performance does not mediate the relationship between
supplier development practices and the buying firm’s
economic performance. Taken together, these results imply
that although supplier development practices help to improve
the suppliers’ social performance, and the suppliers’ social
performance has a positive impact on the buying firm’s
economic performance (trough increased EBIT), this latter
positive impact is not explained by the implementation of
these supplier development practices (i.e. no mediating role of
suppliers’ social performance) but by other factors such as the
implementation of internal social practices in the suppliers’
premises and/or the suppliers’ sustainability commitment.
Further research should consider including these variables in
the model.
In summary, from an economic point of view, our results
suggest that the implementation of supplier development
practices does not pay off in the short term. These results
position us on the stream of the literature that advocates for a
negative effect on economic outcomes, and these are in line
with the results of Gallear et al. (2012) who also used objective
measures for the economic performance construct. The
differences in the results from Gimenez et al. (2012), who
found a positive relationship, could be explained because
these authors measured economic performance using a single
and self-reported indicator related to manufacturing costs,
which is more in line with operational measures rather than
economic. As mentioned before, our results indicate that, in
the short-run, the implementation of these practices implies
higher cost, which could be related to the cost of evaluating
suppliers or to the provision of training. However, in the
literature, there are authors who state that when firms work
with their suppliers for more than short periods both buying
firms and suppliers are able to achieve cost reductions through
reduced evaluative and control costs (Hakansson, 1982). Over
time, both parties develop trust, which allows them to better
adapt to the needs of the counterpart and reduce transaction
costs in the relationship (Hakansson and Sharma, 1996;
Ganesan, 1994; Gold et al., 2010). In that sense, it could be
the case that when the buying firm has developed a strong
relationship with its suppliers, the cost of evaluation
diminishes, as the supplier may have adapted to the buying
firm’s requirement with respect to social compliance. Future
studies should consider the role of supplier development
practices taking a long-run perspective.
Based on our results, the implementation of social supplier
development programs such as audits to suppliers or the joint
collaboration with them contributes to improve the suppliers’
social performance and the buying firm’s operational
performance, but it worsens the buying firm’s economic
performance in terms of increased cost in the short term. As
suggested by the relational view, the joint collaboration
between two partners (i.e. supplier and buying firm) results in
rents for both parties (Dyer and Singh, 1998). Our results are
in line with this statement and have shown that when
implementing supplier development practices, the supplier
experiences improvements on its social performance and the
buying firm is able to improve its operational outcomes.
Additionally, our results also serve to emphasize that, in the
case of buying firms, these higher rents, in the short term, take
the form of operational improvements rather than economic.
Conclusions
The objective of this paper was to investigate the impact of
social supplier development practices on the suppliers’ social
performance and to analyze if the implementation of these
practices pays off in terms of operational and economic
outcomes. These two objectives have been analyzed for the
context of manufacturing firms. Regarding the first objective,
we have found that the implementation of social supplier
development practices contributes to improve the suppliers’
social performance. These results have helped contribute to
the existing literature on the effectiveness of sustainable
supplier development practices by analyzing their role with
respect to the suppliers’ performance, which has been
generally neglected. Regarding our second objective, our
results show that, while implementing, supplier development
practices pays off in terms of operational performance (i.e.
improved quality and delivery times and reduced costs), but it
Social supplier development practices
Cristina Sancha, Cristina Gimenez, Vicenta Sierra and Ali Kazeminia
Supply Chain Management: An International Journal
Volume 20 · Number 4 · 2015 · 389 –403
399
does not in terms of economic outcomes in the short term. By
including objective measures for economic performance, we
have been able to overcome the limitations of previous studies
which included self-reported measures for this construct. Our
results have some managerial implications. First, if buying
firms aim to make their suppliers more socially responsible,
they can rely on the use of supplier development practices
such as auditing suppliers and/or working directly with them
in terms of social issues. Second, it is important that managers
care about the suppliers’ social performance. The buying firm
can achieve better operational results if the implementation of
the aforementioned practices leads to real improvements in
the suppliers’ facilities. In the case of economic results,
selecting suppliers with high social performance levels can
result in better economic outcomes for the buying firm.
Finally, managers should bear in mind that although
implementing supplier development practices may damage
the firm’s economic performance in the short term, it is
important to acknowledge that it helps to improve the working
conditions in the suppliers’ premises. Therefore, managers
may decide which cost is more important to bear: the cost of
implementing these practices or the cost of their suppliers
acting unethically.
Besides these contributions, our study has some limitations
that need to be acknowledged. Our study uses cross-sectional
data and therefore we are not able to account for possible
recursive relationships. Future research should consider the
use of longitudinal data to study the relationship between
these constructs. Our study is limited to the Spanish scope as
data was only collected in Spain. Future research should try to
replicate the presented research in other countries, especially
countries that differ in the level of social risk. An additional
limitation of our study is that, in our sample most of the
buying firm’s suppliers are located in Europe. It could be the
case that the positive effect of supplier development practices
on the supplier’s social performance may not be significant in
a sample in which suppliers are mostly located in developing
countries. Thus, further research should analyze the
effectiveness of these practices in the context of suppliers
located in developing countries. Finally, as we already
mentioned, our sample considers only manufacturing firms.
Therefore, our results are not applicable to the case of service
firms. Future research should include both type of firms and
analyze the differences between both sectors.
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Cristina Sancha can be contacted at: cristina.sancha@
esade.edu
Social supplier development practices
Cristina Sancha, Cristina Gimenez, Vicenta Sierra and Ali Kazeminia
Supply Chain Management: An International Journal
Volume 20 · Number 4 · 2015 · 389 –403
402
http://www.netimpact.org/whatworkerswant
mailto:cristina.sancha@esade.edu
mailto:cristina.sancha@esade.edu
Appendix 1
Appendix 2
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Table AI Measures
Construct No. Phrase Sources
Social supplier development practices SDP1 We assess our suppliers’ performance through formal
evaluation, using established guidelines and
procedures
Adapted from Krause et al.
(2000), Bowen et al. (2001)
SDP2 We provide suppliers with feedback about the results
of their evaluation
SDP3 We perform audits for suppliers’ internal management
systems
SDP4 We visit our suppliers’ facilities to help them improve
their performance
SDP5 We make joint efforts with these suppliers to improve
results
BF’s operational performance OpPerf1 The company has improved its product/service quality Adapted from Rao and Holt
(2005) and Cruz and
Wakolbinger (2008)
OpPerf2 The company has reduced delivery times to clients
OpPerf3 The company has reduced total costs
OpPerf4 The company has reduced purchasing costs
BF’s economic performance Sales Difference on sales figure 09 and 10 SABI database
EBIT Difference on EBIT figures 09 and 10
Suppliers’ social performance SupPerf1 We have improved compliance with human rights in
the suppliers’ facilities
Adapted from Maxwell et al.
(2006)
SupPerf2 We have improved compliance with child labor
employment in the suppliers’ facilities
SupPerf3 We have improved safety and labor conditions in the
suppliers’ facilities
Figure A1 Model with BF’s economic performance including only sales
Social supplier development practices
Cristina Sancha, Cristina Gimenez, Vicenta Sierra and Ali Kazeminia
Supply Chain Management: An International Journal
Volume 20 · Number 4 · 2015 · 389 –403
403
mailto:permissions@emeraldinsight.com
Reproduced with permission of the copyright owner. Further reproduction prohibited without
permission.
Does implementing social supplier development practices pay off?
Introduction
Literature review and hypotheses development
Social supplier development and performance
Hypotheses development
Methodology
Questionnaire development
Sample and data collection
Data analysis and results
Measurement assessment
Structural model
Direct effect results
Mediating effect results
Discussion
Supplier development practices and the suppliers’ social performance
Supplier development practices and the buying firm’s performance
Conclusions
References
Appendix 1
Appendix 2
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