The Effect of Unethical Behavior and Learning on Strategic Supplier Selection

The unethical behavior of suppliers, such as the use of child labor or the use of unsafe processes, is becoming an increasingly common problem in many industries. Despite lower sourcing costs, such social irresponsibility can have a severe negative effect on firms because of growing awareness and punishment from consumers toward unethical practices. To study how ethical behavior of suppliers and supplier learning affect a firm׳s sourcing strategy, we analyze a buying firm׳s strategic sourcing decision on supplier selection between unethical and ethical suppliers by considering the risk likelihood and the impact to the firm of unethical events, and the supplier learning. We show that supplier learning matters and that the benefit of high learning rates may outweigh the concerns of unethical behavior or high ethical sourcing cost and so, long-term contracts are optimal. We also show that the firm may prefer a selection policy contingent on the realization of unethical events only when risk is low or impact is high. In addition, we show that a changing environment may cause the firm to take a more proactive sourcing strategy by adopting short-term switching policies.