This paper analyzes coordination of a manufacturer-distributer-retailer supply chain, where the manufacturer exhibits corporate social responsibility (CSR). In manufacturer-Stackelberg game setting, the paper proposes a contract-bargaining process to resolve channel conflict and to distribute surplus profit among the channel members. The contract-bargaining process consists of two wholesale price discount-Nash bargaining. One between the distributer and the retailer based on the outcome of that between the distributer and the manufacturer. Although the contract-bargaining process cuts out channel conflict and distributes surplus profit, the wholesale prices are quite different from that of a pure profit maximizing supply chain. The wholesale price of the manufacturer is less than it’s marginal production cost above a threshold of CSR. Even it is negative for the manufacturer’s heavy CSR practice. So, the manufacturer’s profit may be negative. The behaviour of the wholesale price of the distributer is same as that of the manufacturer but for higher threshold of CSR.
Coordination through cooperation is imperative for improving channel wide performance because it offers the potential to realize substantial profit benefit. To coordinate a supply chain, contracts are designed among the decentralized decision makers such that the difference between outcome of a centralized decision and a decentralized decision can be neutralized. The basic objective behind designing a coordination contract is to incentimize decentralized channel members to act coherently with one another. A variety of side-payment contracts (eg. quantity discount (Li and Liu, 2006), two-part tariff (Goering, 2012; Modak et al. 2015c), revenue sharing (Panda, 2013a, 2014a), sales rebate (Wong et al., 2009), buy back (Ding and Chen,2008), credit option (Du et al., 2013), commitment to purchase quantity (Zhang et al., 2011), mail-in-rebate (Saha et al., 2015), etc have been used in supply chains as the ways of cutting out channel conflict. These contracts differ by the contractual clauses among the channel members and are primarily concerned with quantity, time, quality and price.1
CSR is a form of corporate self regulation that currently does not has unique definition. Broadly CSR can be defined as a doctrine that promotes expanded social stewardship by businesses and organizations. CSR suggests that corporations embrace responsibilities toward a broader group of stakeholders (customers, employees and the community at large) in addition to their customary financial obligations to stockholders. In the current global business environment CSR is now a determining factor in consumer and client choice, which companies cannot afford to ignore. According to the results of a global survey in 2002 by Ernst & Young, 94% of companies believe the development of a CSR strategy can deliver real business benefits, however only 11 per cent have made significant progress in implementing the strategy in their organization. Senior executives from 147 companies in a range of industry sectors across Europe, North America and Australasia have been interviewed for the survey. The survey has concluded that CEOs are failing to recognize the benefits of implementing CSR strategies, despite increased pressure to include ethical, social and environmental issues into their decision-making processes. For example, on social issue, largest apparel retailer GAP admits to charge of its substandard working conditions in as many as 3000 factories worldwide (Merrick, 2004). Nike is often accused for inhuman labour and business practices in Asian manufacturing factories (Amaeshi et al., 2008). For environmental issues, in 2009 a group of 186 institutional investors having assets of 13 trillion US dollars have signed a statement. It suggests directions to deal with global warming and greenhouse gases (Economist, 2009). The research has found that company CSR programs influence 70% of all consumer purchasing decisions, with many investors and employees also being swayed in their choice of companies. Recent empirical evidence shows that customers are willing to pay a higher price for products with CSR attributes (Auger et al., 2003). Modern theoretical and empirical analysis indicate that firms can strategically engage in socially responsible activities to increase private profits. Given that the firms stakeholders may value the firms social efforts, the firm can obtain additional benefits from enhancing the firms reputation and the ability to generate profits by differentiating its product. As a result many leading international brands like WalMart, Nike, Adidas, GAP have been impelled to incorporate CSR in their complex supply chains by a code of conducts (Amaeshi et al., 2008).
This paper intends to merge two research areas, CSR and channel coordination in a three-echelon supply chain that consists of a manufacturer, a distributer and a retailer. Beside pure profit motive the manufacturer has the intend to swell stakeholder’s welfare by exhibiting CSR. In manufacturer-Stackelberg game setting the paper proposes a contract-bargaining process to resolve channel conflict and to distribute surplus profit among the channel members. In the contract-bargaining process the manufacturer first provides wholesale price discount to the distributer and bargains with the distributer for profit share. Based on the intermediate profit, the distributer provides wholesale price discount and bargains with the retailer for profit share. While formulating the model instead of considering the manufacturer’s CSR activities the paper considers the effect of CSR in the form of consumer surplus in the manufacturer’s profit. So, the socially responsible manufacturer maximizes it’s pure profit plus a share of consumer surplus that it accrues from it’s stakeholders. (Lambertini and Tampieri (2010), Goering (2007, 2008), Kopel and Brand (2012)). The underlying principle of the paper is based on the classic paper of Vickers (1985) and hence the result supports the result of Vickers that non-profit maximizing firm may earn higher profits than would profit-maximizers. Here the objective of the manufactuer is to engage in CSR and to find the effects that CSR tends to bring about. The outcome of the paper indicates that when the manufacturer concentrates more on CSR than profit, it’s total profit is always higher than pure profit. On the other hand, the channel behaves more competitively than a pure profit maximizing supply chain by exhibiting CSR because it generates higher output by setting lower price. That is, wholesale price of the manufacturer behaves differently from that of a pure profit maximizing supply chain. The CSR has considerable impact on the wholesale price it may be less than marginal production cost or even negative for heavy CSR activity. Although total profit of the channel member increase, the pure profits may be zero of less, which is not desirable. Thus, for acceptable pure profit and for exhibition of social responsibility there must be a limit of CSR up to which a firm can practice CSR.
2. Literature review
Although use of coordination contract to cut out double marginalization in two-echelon supply chain has been explored extensively, models dealt with resolving channel conflict in three-echelon supply chain are notably fewer. In practice it is more difficult to resolve channel conflict in a three-tire supply chain by applying coordination contract than a two-tire supply chain. When the number of echelon increases, self cost minimizing/profit maximizing objectives increase. As a result, dimension of the solution space increases and the channel coordination using contract becomes more complex. Also, many difficulties remain when it comes to carry out any coordination contract for channel members. For example geographical constraints, administrative problems, performance measurement and incentives at individual forms based on local perspective, dynamically interchanging products and the like (Kanda and Deshmukh 2008). Focusing on multi-echelon supply chain Munason and Rosenblatt (2001) have developed a supplier-manufacturer-retailer chain and have explored channel coordination using quantity discount. Jaber et al. (2006) have extended Munason and Rosenblatt’s model by assuming profit function, discount dependent demand and profit sharing. Jaber et al. (2010) have studied a three-echelon supply chain with learning based continious improvement. Saha et al. (2013) have considered a three-echelon supply chain coordination problem, where demand is linear in price. They have used mail-in-rebate and downwarddirect-discount for channel coordination. Jaber and Goyal (2008) have investigated the coordination of order quantities in a three-tire supply chain, where they have allowed more than one member at each echelon. Ding and Chen (2008) have used flexible buy back contract to coordinate a three-level supply chain, where the profit is divided among the channel members freely. Panda et al. (2014) have used disposal cost sharing as the coordination contract for a manufacturer-distributer-retailer chain that deals with perishable product. They have assumed that the manufacturer and the distributer form a coalition and the coalition shares the retailer’s disposal cost. Modak et al. (2015a) have considered a three-tire supply chain, where in the downstream two retailers play Cournot, Collusion and Stackelberg games. They have used two-part tariff and franchise for channel coordination and have performed a preference analysis for the channel members’ preference of game behaviour.
Although there is a rich content on CSR consideration in individual firm in a supply chain, application of CSR in the entire supply chain has emerged in the last two decades. Murphy and Poist (2002) have considered a CSR supply chain and have suggested a total responsibility approach by adding social issues to traditional economy. Through a case study and survey research Carter and Jennings (2002) have explained the necessity of CSR consideration in supply chain decision making. Using French sample data Ageron et al. (2012) have found several conditions, which lead to a successful sustainable supply chain management. For an environmentally responsible supply chain network Cruz (2008) has traced equilibrium condition by using multi-criteria decision making approach. Cruz and Wakolbinger (2008) have extended the model to multi-period setting for measuring long-term effects of CSR. Hsueh and Chang (2008) have considered a socially responsible supply chain network and have demonstrated that social responsibility sharing through monetary transfer leads to channel optimization. Panda et al. (2014) have developed a two-echelon supply chain , where either the manufacturer or the retailer practices CSR and have used quantity discount to coordinate the chain. Savaskan et al. (2004) have focused on identifying a socially responsible close loop supply chain that is involved in product manufacturing and remanufacturing. Cruz (2009) has developed a decision support system framework for modelling and analysis of a CSR supply chain network. Ni et al. (2010) have developed a two-tire CSR supply chain by assuming that the dominant upstream channel member’s CSR cost is shared by the downstream channel member through wholesale price contract. Ni et al. (2012) have developed a two-echelon supply chain by assuming that each channel member has individual CSR cost. They have examined the effects of strategic interactions between the channel members under game theoretic setting. Hsueh (2014) has used a new revenue sharing contract to coordinate a CSR supply chain. Considering French sample data Crifo et al. (2015) have analyzed how different combinations of CSR affect economic performance and have compared the result based on quality of CSR and quantity of CSR. In this direction the works of Modak et al (2015b), Chen and Slotnick (2015), Ding et al. (2015), Subramanian and Gunasekaran (2015) are worth mentioning.
Bargaining refers to situations where two or more players, who have the opportunity to collaborate from mutual benefit in more than one way. There are two streams, axiomatic approach and strategic approach, of research and application of bargaining theory. The axiomatic approach requires the resulting solution should possess a set of axioms, whereas in the strategic approach the outcome is predicted by the concept of subgame perfect equilibrium. Bargaining in practice is the relationship that involves bargaining over the term of trade such as bargaining for compensation, wholesale price etc. Gurnani and Shi (2006) have used a generalized Nash bargaining model to study a business-to-business supply chain. Kohli and Park (1989) have first applied bargaining in supply chain, in which a buyer and seller negotiate the terms of a quantity discount contract in an EOQ setting by applying the approach of Kalai and Smordinsky (1975). Kalai and Smordinsky (1975) model suggests that both parties equally share system surplus to achieve channel coordination. Sheu (2011) has used Nash bargaining framework for a green supply chain to investigate the problem of negotiations between producers and reverse-logistics suppliers for cooperative agreements under government intervention. Gan, sethi, Yan (2011) have examined coordination contract in three different cases for a supply chain with risk averse agent. They have explored that their contract yield the Nash bargaining solution for the case, where the supplier as well as the retailer maximizes their own expected utility. Summary of cooperative bargaining models in supply chain can be found in review article of Nagrajan and Sosic (2008). In this direction the works of Panda (2013a,b, 2014b), Eartrogal and Wu (2001) are worth mentioning.
The objectives of the paper differ significantly from the prior works as follows. First, previous researches have explored CSR, effects of CSR on supply chain and channel coordination discretely. In contrast the present paper examines the double marginalization issues in a socially responsible supply chain. Although Hsueh and Chang (2008) have used exogenous monetary transfer to coordinate a socially responsible supply chain network, this paper uses an endogenous procedure not only to coordinate the channel but also to distribute the surplus profit among the channel members. Second, in Ni et al. (2010) the supplier performs CSR and the downstream firm shares the CSR cost through wholesale price contract though channel coordination is not examined. Assuming each channel member has CSR cost Ni et al. (2012) have found win-win profits through strategic interaction. The present paper assumes that the upstream channel member has CSR cost and demonstrates a procedure that finds optimal channel profit through coordination. Third, in almost all the papers in traditional supply chain management the double marginalization is resolved by using variety of side payment contract. However, in these settings, ex post to coordination, the question of how the shares are determined is left unaddressed (Nagrajan and Sosic, 2008). Besides channel coordination the present paper uses Nash bargaining product to distribute surplus profit among the channel members.