Upstream complex power relationships and firm’s reputation in global value chains

Abstract

Previous research into the upstream supply chain governance mechanisms that focal firms use with suppliers to improve their ethical performance and reputation is incipient. The original contribution includes the development of empirical model using global value chain and transaction cost perspective by exploring the complex power relationship between upstream supply chain governance mechanisms (Modular, relational and captive), value co-creation efforts, sustainable ethical performance and reputation through an original survey of companies from an emerging economy – India. The results indicate that, supplier modular and relational governance mechanisms have an impact on suppliers' ethical performance, supply chain performance and reputation. Additionally, suppliers' ethical performance plays a mediating role between governance mechanisms in upstream supply chain networks and the supply chain performance and reputation of focal companies. In agreement with the literature, focal firms' sustainability-related value co-creation activities were found to positively influences the ethical performance of both suppliers' and focal firms’ reputation. This provides implications for practitioners which was previously unknown with respect to food supply chains.

Introduction

In recent times, sustainability and ethics-related issues have been gaining attention among stakeholders, particularly firms are faced with challenges in ensuring the adoption of sustainable and ethical principles along an entire supply chain comprising numerous individual entities that influence one another's reputation and performance (Klassen and Vereecke, 2012; de Sousa Jabbour et al., 2019). There have been instances of unethical practices in upstream supply chains that have caused tremendous damage to the reputation of the relevant focal firm (Ehrgott et al., 2011; Goebel et al., 2012; Klassen and Vereecke, 2012; Mani and Gunasekaran, 2018; Mangla et al., 2018). For instance, unethical practices in suppliers including food contamination, dangerous chemicals used in children's toys, faulty automobile design and subsequent recall have caused huge financial losses and damaged focal companies' reputations (Roth et al., 2008).

Additionally, McDonalds faced severe criticism and consumer backlash in China for serving expired meat in its restaurants, meat which was procured from one of its suppliers (LA Times 2014). Other recent examples also show how the reputation of focal companies can be damaged by social and environmental problems originating in the distant reaches of their supply chains, such as the collapse of the Rana Plaza garment factory in Bangladesh in 2013 (Hoskins, 2016), Mattel's recall of toys due to the wrongdoing of a third-party supplier in China (Dou et al., 2018) or the Foxconn-Apple issue concerning workplace conditions in Asia (van Heerden 2012).

Early definitions of ethical responsibility proved to be contradictory. Scholars have not fully agreed on the distinction between the terms ‘social responsibility’ and ‘business ethics’, and often use them interchangeably (Beauchamp and Bowie 2001; Carter 2000). Carroll (1979) suggests that ethical responsibilities are encompassed within the broader area of social responsibility. In the supply chain literature, thus enriching the definition of Carter (2000), and Eltantawy et al. (2009), supply chain ethical responsibility refers to supplier's ability to produce and supply high quality components or services, value for money materials in a fair, reasonable and consistent manner that meets and exceeds societal norms (Eltantawy et al., 2009). This definition implies the need for products and services that are ethically responsible and accepted by all users.

The biggest dilemma with which corporations are faced is how they can produce goods and services which are socially responsible without compromising their financial goals (e.g., outsourcing to low-cost nations in order to reduce production costs). At the same time, over the past decade supply chain managers have begun to recognize ethically responsible practices, policies and their potential benefits for supply chain performance, and this trend has been bolstered by the growing body of studies that describe the link between ethical responsibility and performance benefits (Carter, 2000; Maloni and Brown, 2006; Eltantawy et al., 2009; Kamble et al., 2019) Further, studies have identified benefits of ethically responsible practices in supply chains' and focal firms’ cost performance (Pullman et al., 2009) and reputation (Eltantawy et al., 2009; Ehrgott et al., 2011).

However, management of unethical supply chain practices has been a major challenge for corporations in emerging economies due to different institutional dynamics. On the other hand, many firms have developed strategies that extend their established governance processes to their supply chain partners. One such mechanism is the implementation of supplier codes of conduct (Jiang, 2009; Gimenez and Sierra, 2013; Clarke and Boersma, 2017). Other mechanisms include supplier selection, supplier development and supplier integration, through which firms aim to minimize ethical concerns arising from their network partners (Goebel et al., 2012; Gimenez and Sierra, 2013; Yadlapalli et al., 2018).

Other strategic motivations for focal companies include supplier management for risk mitigation and performance benefits, and supplier management for sustainable and socially acceptable products (Seuring and Muller, 2008). The first of these motivations is driven by fear of reputational damage due to sustainability related issues, while the second aims to develop life cycle-based standards in the supply chain to improve the social and environmental performance of products (Seuring and Muller, 2008; Savino et al., 2015). The two strategies are complementary. Although the underlying presumption is that firms can no longer enjoy the luxury of ignoring unethical practices as such practices affect their reputation, there is a lack of holistic, theory-driven empirical investigations of ethical issues through governance mechanisms and their performance benefits (Eltantawy et al., 2009; Gimenez and Sierra, 2013).

On the other hand, the global value chain perspective (GVCP) is considered an appropriate approach to examine the relationship between upstream supply chain network partners and the benefits they bring to downstream members of the supply chain (Gereffi and Lee, 2016; Gereffi and Fernandez-Stark, 2016). The advantage of the global value chain approach is that the impact of both upstream and downstream events is taken into account (van Dijk and Trienekens, 2012). GVCP also insists that value must be created not just for shareholders but also for all stakeholders. GVCP focuses on network governance systems, the transaction aspects that were subject to coordination and control, and practical approach to governance process. According to Humphrey (2014) GVC theory is the intermediate forms of governance- “without ownership how control can be exercised in chains where performance of one entity in the chain has significant consequences for others in other parts of the chain”. This distinctive characteristics of GVC theory make it particularly relevant to the analysis of how firms might address sustainability issues and in more, how sustainability standards impact chain governance.

The important benefit of value chain governance is to reduce the governance cost. While it reduces cost for buyers through prescriptive standards scheme, the supplier enjoys the benefit of economies of scale in design, management and reputation building (Humphrey, 2014) (Detailed discussion on GVCP can be found in section 2.1). On the other hand, transaction cost perspective focuses on cost efficiency which can be accomplished by efficient transactions and governing structures. TCP postulates that the transaction cost is depending on three aspects: the overall enterprise structure; the activities that the company can perform internally, and the activities outsourced; and defining the efficient boundaries (governing mechanism's) (Williamson, 1981). As both GVCP and transaction cost perspective provide guidance in governance mechanisms, and reduction in transaction cost in global value chains, are said to be complimentary. Although there are studies in the literature examining supply chain governance mechanisms and related benefits, research examining these relationships using a global value chain perspective is scant (Gimenez and Sierra, 2013; Yadlapalli et al., 2018) Additionally, such studies examine either environmental or social issues in a standalone fashion, using a transaction cost or agency mechanism perspective and suggesting a global value chain perspective for future research (Gereffi and Lee, 2016). Furthermore, the available studies' contributions are limited in their potential benefits to either supply chains or focal companies.

Additionally, governance mechanisms in relation to ethical issues are only emerging in the research so far. This study examines empirical evidence from one of the largest poultry manufacturing industries in India. This is due to important reasons as follows: India has exported 659304 MT poultry products for the worth of USD 4.1 Billion in 2017-18, majority accounts for Middle east, Vietnam, Egypt, Indonesia and 5000 MT into Europe including Germany and Netherland(Food processing India report, 2018). In India, per capita consumption of poultry (chicken) has gone up from 400 g to 2.5 kg/annum over last five years. This is primarily due to growing young population and their quality consciousness, especially on good and healthy food. However, poultry industry is plagued with severe problems including supplier's low standards, resulting in low productivity, lack of quality standards including excessive use of antibiotics, potentially threatening not only exports but also domestic consumption due to consumers backlash (CSE Report, 2018). This study is relevant because it addresses ethical and sustainability issues through effective governing mechanism's that is still scant in the literature.

In order to address this theoretical void, our research aims to address important research questions: What is the effect of upstream value chain governance mechanisms in relation to ethical issues? To what extent do governance mechanisms impact supply chain performance and reputation? Thus, our contributions are twofold: First, by applying the theoretical lens of the global value chain perspective we examine the effectiveness of upstream supply chain governance mechanisms specifically in global food supply chains, thereby contributing to the development of theory in the supply chain literature. Second, we contribute to the development of upstream supply chain governance mechanisms and their benefits to the rest of the supply chain. As our evidence touches on upstream supply chain governance mechanisms and their positive effect on supply chain performance and focal firms’ reputations, our results assume significant implications for practitioners who can apply this framework in food supply chains and not only achieve performance benefits but also avoid reputational risk.

The remainder of this article is organized as follows. In Section 2 we describe the results of our literature review, covering governance mechanisms for supply chain sustainability, theoretical background and hypothesis development. In Section 3, the research design is illustrated. This is followed by data analysis and results, which are reported in Section 4. Section 5 discusses the findings, along with a detailed examination of theoretical and practical implications. Finally, in Section 6, we present our conclusions, highlight certain limitations of this study and provide suggestions for future research.