ArticlePDF Available

On the riskiness of lower-tier suppliers: Managing sustainability in supply networks

December 2018
Journal of Operations Management 64:65–87

DOI:10.1016/j.jom.2018.09.004

Authors:

Verónica H. Villena

Arizona State University

Dennis A. Gioia

Penn State Great Valley

Although multinational companies (MNCs) have increasingly embraced a sustainability strategy for their own operations, fewer have tried to engage their (tier-one) suppliers in their sustainability initiatives. It is even rarer that MNCs engage their suppliers' suppliers (lower-tier suppliers), despite the latter having a higher incidence of violations with more acute environmental and social impacts that can jeopardize the MNCs' operations and reputation. We conducted inductive research on three supply networks in the automotive, electronics, and consumer product/pharmaceutical industries. We collected data on three leading sustainable MNCs and a subset of 9 tier-one suppliers and 22 lower-tier suppliers and complemented that information with data on several NGOs and industry organizations. This study (1) reveals that many lower-tier suppliers address their environmental and labor issues passively and constitute the riskiest suppliers in a supply network; (2) provides a grounded theoretical framework for managing a sustainable supply network that accounts for multiple network members as well as three sustainability dimensions (the 3Ps: profit, people, and planet); and (3) shows how processes MNCs use to manage their suppliers differ from processes these suppliers use with their own (lower-tier) suppliers. The study reveals the practices that leading sustainable MNCs use to manage their supply networks and provides important future research directions.

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Contents lists available at ScienceDirect

Journal of Operations Management

journal homepage: www.elsevier.com/locate/jom

On the riskiness of lower-tier suppliers: Managing sustainability in supply

networks

Verónica H. Villena

a,∗

, Dennis A. Gioia

The Pennsylvania State University, Smeal College of Business, Department of Supply Chain & Information Systems, 412 Business Building, University Park, PA, 16802,

USA

The Pennsylvania State University, Smeal College of Business, Department of Management & Organization, 428 Business Building, University Park, PA, 16802, USA

ARTICLE INFO

Accepted by: S. de Treville

Keywords:

Sustainability

Supply networks

Lower-tier suppliers

Inductive research

ABSTRACT

Although multinational companies (MNCs) have increasingly embraced a sustainability strategy for their own

operations, fewer have tried to engage their (tier-one) suppliers in their sustainability initiatives. It is even rarer

that MNCs engage their suppliers' suppliers (lower-tier suppliers), despite the latter having a higher incidence of

violations with more acute environmental and social impacts that can jeopardize the MNCs’ operations and

reputation. We conducted inductive research on three supply networks in the automotive, electronics, and

consumer product/pharmaceutical industries. We collected data on three leading sustainable MNCs and a subset

of 9 tier-one suppliers and 22 lower-tier suppliers and complemented that information with data on several

NGOs and industry organizations. This study (1) reveals that many lower-tier suppliers address their environ-

mental and labor issues passively and constitute the riskiest suppliers in a supply network; (2) provides a

grounded theoretical framework for managing a sustainable supply network that accounts for multiple network

members as well as three sustainability dimensions (the 3Ps: proﬁt, people, and planet); and (3) shows how

processes MNCs use to manage their suppliers diﬀer from processes these suppliers use with their own (lower-

tier) suppliers. The study reveals the practices that leading sustainable MNCs use to manage their supply net-

works and provides important future research directions.

“My lower-tier suppliers are the ones who keep my director up all night.

My team's goal is to avoid my company being the next one to appear in

the news.”

—Supply chain manager for environmental compliance and social

responsibility

1. Introduction

The sustainable supply chain management literature has reported

how ﬁrms consider proﬁt, people, and the planet (the 3Ps) in their

decisions and how they engage their suppliers in developing “green,”

“responsible,” and “ethical” products and processes (e.g., Carter, 2004;

Huq et al., 2016;Klassen and Vereecke, 2012;Linton et al., 2007). This

literature also proposes how stakeholders can create accountability for

ﬁrms regarding their suppliers' behavior (Parmigiani et al., 2011) and

how they can help ﬁrms develop evaluation and veriﬁcation cap-

abilities (Gualandris et al., 2015). More recently, scholars have taken a

multi-tier approach to investigate: strategies that ﬁrms can use to

manage lower-tier suppliers (Meinlschmidt et al., 2018;Mena et al.,

2013;Tachizawa and Wong, 2014); critical factors for managing lower-

tier suppliers (Grimm et al., 2014); and the important role tier-one

suppliers play—fulﬁlling their MNC's requirements and imposing these

requirements on their own suppliers (Wilhelm et al., 2016a,2016b).

Despite notable progress, scholars know relatively little about how

ﬁrms actually manage their lower-tier suppliers and how risky these

suppliers are.

Without adequate attention to both tier-one and lower-

tier suppliers, large ﬁrms can, perhaps unwittingly, externalize their

sustainability costs to their suppliers, thus creating a weak link in

supply chain sustainability.

In an era when stakeholders are demanding sustainability, mis-

managing tier-one and/or lower-tier suppliers can damage a ﬁrm's

operations and reputation. For instance, Apple has recently faced in-

tense scrutiny because of the poor labor standards and unsafe working

conditions of one of its largest suppliers, Foxconn. Nike and Adidas

https://doi.org/10.1016/j.jom.2018.09.004

Received 9 December 2017; Received in revised form 13 September 2018; Accepted 23 September 2018

∗

Corresponding author.

E-mail addresses: vhvillena@psu.edu (V.H. Villena), dag4@psu.edu (D.A. Gioia).

Lower-tier suppliers are a ﬁrm's tier-two and tier-three suppliers. A tier-two supplier is a supplier's supplier (e.g., a tier-two supplier could be a leather wholesaler

that supplies leather to a ﬁrm that builds leather seats for an automaker). A tier-three supplier is a tier-two supplier's supplier (e.g., a leather tannery).

Journal of Operations Management 64 (2018) 65–87

Available online 08 October 2018

0272-6963/ Published by Elsevier B.V.

have also been criticized for doing business with a large Chinese textile

supplier found to be discharging toxins into a river. And these are only

the tier-one suppliers; another set of lower-tier suppliers has a higher

incidence of violations with even more severe environmental and social

impacts. We observed, for instance, lower-tier suppliers in China,

Taiwan, and Mexico that have chronic overtime issues, precarious

working conditions, turnover rates up to 100 percent, open cases with

local NGOs on job/sexual harassment, and/or highly polluted manu-

facturing processes, among others. These examples illustrate supplier

sustainability risks—the adverse impact on a buyer from a supplier's

social and environmental misconduct (Hajmohammad and Vachon,

2016).

Accounting for lower-tier suppliers brings a range of challenges,

however. Such suppliers are arguably less controllable, riskier to deal

with, and often even invisible. First, lower-tier suppliers are less gov-

ernable. There is often no direct contractual relationship, and the

business that a multinational company (MNC) represents might be a

small fraction of a lower-tier supplier's total business (Tachizawa and

Wong, 2014). Second, lower-tier suppliers often are more prone to

violating labor standards and contaminating the environment because

they lack awareness of sustainability-related practices; receive little

pressure from media, NGOs and other external stakeholders; and are

located in countries where environmental and social regulations are

relatively undemanding (Grimm et al., 2016;Tachizawa and Wong,

2014). Third, ﬁrms lack information about their lower-tier suppliers:

e.g., who they are, what capabilities they do (and do not) have, and

where they are located. In a study of 525 companies in 71 countries,

73.5% of the respondents reported they do not know who their tier-two

and tier-three suppliers are (Supply Chain Resilience Survey, 2015).

Limited data are available on these suppliers, particularly about their

environmental and labor practices. In fact, empirical studies that in-

clude data on MNCs; tier-one suppliers; and, particularly, second-tier

suppliers are rare.

Although MNCs monitor their tier-one suppliers' compliance with

the MNCs' sustainability standards, these suppliers do not often demand

similar compliance from their own suppliers. The diﬃculties worsen for

MNCs because lower-tier suppliers are further removed from their di-

rect supervision. Nonetheless, customers and society often blame the

MNC when a tier-one, tier-two, or tier-three supplier causes environ-

mental or social damage (Hartmann and Moeller, 2014). Customers feel

duped when a company they trust deviates from their expectations

(McDonnell and King, 2014), and they might even boycott. For these

reasons, tier-one and lower-tier suppliers’ violations can have acute

consequences for MNCs, with considerable ﬁnancial, environmental,

and human costs. Some of the practical challenges that MNCs and tier-

one suppliers face when implementing sustainable practices have been

investigated. However, the challenges and risks that lower-tier sup-

pliers face/bring are inadequately understood. Such lack of information

raises our research questions: (1) Do lower-tier suppliers constitute the

riskiest members of the supply network? If so, why? (2) How do MNCs

manage sustainability concerning both their tier-one and lower-tier

suppliers? (3) Are there diﬀerences between practices MNCs adopt with

their tier-one suppliers and those that tier-one suppliers use with their

lower-tier suppliers?

Given the nascent knowledge about managing sustainability in

lower-tier suppliers, we adopted an inductive, grounded research ap-

proach (Glaser and Strauss, 1967) to address these research questions.

We investigated how sustainability practices have been managed (or

disseminated) in three supply networks in the automotive, electronics,

and consumer-product/pharmaceutical industries. We deﬁne a supply

network as the dynamic inter-organizational relationships among a focal

organization and its tier-one and lower-tier suppliers (see Choi et al.,

2001). In this study, a supply network consisted of an MNC recognized

for its industry-leading sustainability eﬀorts and a subset of its tier-one

and lower-tier suppliers. Three MNCs, 9 tier-one suppliers, and 22

lower-tier suppliers participated. We conducted 165 interviews with

key informants from all participating ﬁrms. Thus, our research design

allowed us to compare the perspectives of each member within a given

supply network (e.g., the MNC's perspective vs. a tier-two supplier's)

and to discern patterns of sustainability practices across these three

industries. We followed the tenets of systematic inductive research from

Gioia et al. (2013) to ensure rigor in our research design and execution.

This approach enhanced our understanding of a complex pro-

blem—how to manage a sustainable supply network.

Our research contributes to the sustainable supply chain manage-

ment literature in three ways. First, we present empirical evidence that

not only demonstrates that lower-tier suppliers are likely to be the

supply network's riskiest members, but also identiﬁes reasons why they

do not adopt sustainability practices. We discovered that these suppliers

address their environmental and labor issues passively, at best, because

they perceive minimal consequences for non-compliance. These sup-

pliers are often small ﬁrms with limited resources and lack sustain-

ability expertise, operate in countries with less stringent labor and en-

vironmental laws, and receive little attention from external

stakeholders (e.g., media), all contributing to their passivity. Second,

we develop an empirically grounded framework for managing a sus-

tainable supply network that includes the perspective of multiple

supply network members and addresses all 3Ps. This more compre-

hensive perspective is particularly important when MNCs have a ma-

ture sustainability program, but their suppliers, especially lower-tier

ones, do not. In fact, directors recognize that a barrier to advancing

sustainability is lower-tier-suppliers’ inadequate sustainability perfor-

mance (Global Corporate Sustainability Report, 2013). Thus, we extend

supply network studies (e.g., Choi et al., 2001;Choi and Hong, 2002;

Kim et al., 2011) that have focused mainly on the economic (proﬁt)

pillar of sustainability to include the social (people) and environmental

(planet) pillars, as well. Third, we identify both proactive and reactive

processes that MNCs have developed for managing sustainability

among their tier-one suppliers, which, in a few instances, cascade to

their lower-tier suppliers. We also reveal how the processes that MNCs

use to manage their tier-one suppliers diﬀer from those they use with

their lower-tier suppliers.

Several scholars have called on researchers to address larger societal

issues (e.g., George et al., 2016;Montabon et al., 2016). To answer their

call, we adopted a practice-driven approach to constructing a theore-

tical framework for managing sustainable supply networks. If the ﬁeld's

focus on sustainability remains only at the ﬁrm or the ﬁrm/ﬁrst-tier-

supplier level, we as scholars will remain blind to the ﬁrms that argu-

ably pose the highest sustainability risks (i.e., lower-tier suppliers). Our

data show that lower-tier suppliers pose signiﬁcant environmental and

social risks and, thus, have a greater need to embrace sustainability.

Ironically, however, these are the least monitored, least equipped, and

least regulated companies. In the absence of a framework for under-

standing these suppliers, the unfortunate consequence would be that we

will mainly handle sustainability issues reactively (responding to en-

vironmental crises or scandals), rather than proactively (planning for

and implementing sustainable practices across a supply network).

2. Literature review

Sustainability is a major research domain, but scholars suggest that

this important domain is not only “atheoretical” (Corley and Gioia,

2011, p.24) but also “highly fragmented” (Aguinis and Glavas, 2012, p.

933). They also suggest shifting the main research focus from under-

standing “what” (deﬁning sustainability) and “why” (reasons for en-

gagement) to a greater concern with “how” companies can implement

sustainable practices (Basu and Palazzo, 2008;Gardberg and Fombrun,

2006). Porter and Kramer (2006) echo this call, criticizing existing

studies as having unclear practical relevance. The consensus seems to

be that economic, social, and environmental performance—the

3Ps—are all necessary for corporate sustainability (Bansal, 2005;

Elkington, 1998;WCED, 1987). To manage sustainability in lower-tier

V.H. Villena, D.A. Gioia Journal of Operations Management 64 (2018) 65–87

suppliers, we review two relevant research streams: supply networks

and sustainable supply chains.

2.1. Supply networks

Choi and his colleagues were the ﬁrst to bring attention to supply

networks, proposing that such networks should be characterized as

complex adaptive systems that “emerge,” rather than resulting from

purposeful design (e.g., Choi et al., 2001;Choi and Hong, 2002;Kim

et al., 2011). They challenged a widespread belief that supply chain

management's ultimate goal is to control an entire supply networ-

k—arguing instead that the more workable goal should be to develop a

strategy about how much of the supply network to control and how

much of it to allow to emerge. For instance, Honda controls its supply

network through several tiers deep for a limited number of critical

items; but for most other items, it empowers its top-tier suppliers to

manage their suppliers, thus letting the supply network emerge. These

researchers noted that a ﬁrm's priorities regarding cost reduction and

consistent quality can determine how much control the MNC imposes

on its supply network (e.g., by directing tier-one suppliers to source

from a pre-selected group of lower-tier suppliers). Too much control,

however, detracts from supplier ﬂexibility and innovation. They also

unveiled the structural characteristics (i.e., formalization, centraliza-

tion, and complexity) of supply networks in the automotive industry. In

adopting a social network perspective, Bellamy et al. (2014) found that

an electronics ﬁrm's supply network structure can improve innovation

output, especially if the ﬁrm has high levels of absorptive capacity and

works with innovative partners. Wang et al. (2015) showed the pre-

valence of overlapping tier-two suppliers and their impact on ﬁnancial

performance for buying ﬁrms in the high-tech sector. Yan et al. (2015)

proposed three types of “nexus suppliers” based on the supplier's po-

sition within the broader network and how each type distinctively in-

ﬂuences a buyer's operational performance. All these studies call at-

tention to reasons why ﬁrms must manage suppliers beyond the tier-one

level.

The focus of this research stream, however, has been mainly on only

one sustainability pillar: proﬁts. In fact, Choi and Hong (2002) sug-

gested that “cost consideration appears to be the overarching force that

shapes the supply network structure” (p. 469), whereas Bellamy et al.

(2014) noted that an important factor is “how a ﬁrm can accrue

knowledge and information ﬂow beneﬁts from its supply network to

enhance its innovation output” (p. 370). Based on these studies, the

reward for managing lower-tier suppliers is solely economic. More re-

cently, focusing on the planet dimension, Nair et al. (2016) suggested

that “the eﬀectiveness of green initiatives depends in part on knowing

how much control is possible, and how to nurture those processes that

lie beyond the direct control of the buyer ﬁrm” (p.84). However, all

three pillars have not yet been studied together; thus, we do not know

how the interplay among them could aﬀect the management of lower-

tier suppliers. In fact, focusing solely on the proﬁt dimension when

managing lower-tier suppliers could compromise the people and/or

planet dimension.

2.2. Sustainable supply chains

Supply chain scholars have documented how organizations engage

their suppliers in their environmental (e.g., Jira and Toﬀel, 2013;

Linton et al., 2007;Wu and Pagell, 2011) and labor and ethical prac-

tices (e.g., Huq et al., 2016;Jacobs and Singhal, 2017), including co-

development of environment-friendly products, ISO 14001 certiﬁcation

of supplier plants, compliance with supplier codes of conduct, and

audits. They have also suggested that organizations collaborate with

stakeholders to promote supplier sustainability (e.g., Gualandris et al.,

2015;Huq et al., 2016;Klassen and Vereecke, 2012;Pagell and Wu,

2009). Most of these studies have, however, focused on (1) the buyer's

perspective, without accounting adequately for the supplier's view

(Zorzini et al., 2015); (2) reactive monitoring of sustainability com-

pliance, without suﬃcient attention to proactive capacity building

(Awaysheh and Klassen, 2010); and (3) a rather narrow set of activities,

without providing a comprehensive view of how ﬁrms manage sus-

tainable processes throughout their supply networks.

Some progress has been made in extending these buyer-supplier

studies recently. For example, using three case studies in the food in-

dustry, Mena et al. (2013) proposed an approach to multi-tier supply

chain management.

They found that a buyer engages the supplier's

supplier if it wants to ensure compliance with social and environmental

standards within its supply chain. Wilhelm et al. (2016a) studied sus-

tainability in three multi-tier supply chains and suggest that tier-one

suppliers can play a double-agency role—fulﬁlling their MNC's re-

quirements and imposing these requirements on their own suppliers.

Tachizawa and Wong (2014) proposed four strategies to manage sus-

tainability in multi-tier supply chains—direct, indirect, work with third

parties, and don't bother. Meinlschmidt et al. (2018) provided evidence

for three of these strategies and suggested that buyers use each one

depending on the strengths of contextual factors (e.g., stakeholder

salience), whereas Wilhelm et al. (2016b) identiﬁed three factors—-

supply chain complexity, tier-one suppliers' sustainability capability,

and sustainability dimension—that determine when and how buyers

use such strategies on their sub-tier suppliers. Grimm et al. (2014)

identiﬁed 14 critical factors that inﬂuence the success of sub-suppliers’

compliance with sustainability standards, whereas Hofmann et al.

(2018) revealed key enablers and barriers to implementing supply

chain due diligence. Brockhaus et al. (2013) noted the consequences of

mandated implementation of sustainability requirements from powerful

to weaker supply chain members. Despite this progress, however, there

is limited empirical evidence to ascertain whether a supply chain is

truly sustainable (Montabon et al., 2016).

Building on these two research streams, we adopted the supply

network as our unit of analysis, considered multiple perspectives of each

network member (the MNC, tier-one supplier, and lower-tier supplier),

and employed all three sustainability dimensions to study how sus-

tainability leaders manage supplier relationships, particularly those

with lower-tier suppliers. The latter is a challenge and a danger for

sustainability directors, as illustrated in our introductory epigram.

Scholars are under-informed and lack an adequate framework for un-

derstanding lower-tier suppliers. As Kim and Davis (2016) warned, “the

dispersion of supply chains makes corporate accountability beyond the

boundaries of the ﬁrm one of the deﬁning grand challenges of our era.

Yet, there has been surprisingly little organizational research on ac-

countability in supply chains” (p. 1897). Little research bears directly

on our research questions. Rather than presuming that what we know

from ﬁrm-level and ﬁrm/tier-one supplier-level studies of sustainability

applies directly to the supply-network level, we instead adopted an

inductive, grounded-theoretical approach that enabled us to learn from

each supply network member (especially the lower-tier suppliers).

3. Methodology

To study how sustainability practices are deployed throughout the

supply network, we enlisted three MNCs that are sustainability leaders

in their industries (automotive, electronics, and pharmaceutical/con-

sumer product). Each one actively participates in industry-wide supply

chain sustainability eﬀorts; has a large percentage of plants certiﬁed in

quality (ISO 9001), environmental (ISO 14001), and safety (OSHAS,

18001) management systems; is a member of the Billion Dollar

Roundtable

; has been included in the Dow Jones Sustainability Index;

A multi-tier supply chain is composed of one MNC, one tier-one supplier,

and one tier-two supplier. The three ﬁrms can be interlinked vertically.

The Billion Dollar Roundtable, created in 2001, recognizes corporations

that spend at least $1 billion with minority and woman-owned suppliers.

V.H. Villena, D.A. Gioia Journal of Operations Management 64 (2018) 65–87

and is either a Carbon Disclosure Project (CDP) member or a United

Nations Global Compact signatory. Also, each is often cited in the media

as a sustainability leader. Furthermore, each has nurtured a sustain-

ability strategy for many years and has extended its own standards to

ﬁrst-tier suppliers and, more recently, to some lower-tier suppliers. By

studying these three sustainability leaders and a subset of their tier-one

and lower-tier suppliers, we not only learned the best practices they are

using to manage sustainable supply networks (Pagell and Wu, 2009)

but also captured each supply network member's perspectives.

3.1. Data collection

We collected data from January 2013 to November 2015. We

conducted face-to-face interviews with the MNC's sustainability

team, purchasing director, and several purchasing managers. Then

we selected a set of tier-one suppliers that supplied critical compo-

nents and were considered most relevant by MNCs. No restrictions

were imposed on suppliers' location, size, or type (private vs. public).

After a tier-one supplier agreed to participate, each supplier identi-

ﬁed the most knowledgeable informants (usually three to four) and

coordinated the interviews. We used the same procedure for MNCs to

interview the comparable sustainability manager,

purchasing di-

rector, and several purchasing managers. Most of these suppliers did

not have a formal supplier risk-assessment tool, so we selected their

(tier-two) suppliers according to their criticality (measured either by

the amount spent or their components' criticality in the ﬁnal pro-

duct), sustainability risk (i.e., whether manufacturing their products

is prone to environmental and labor violations), and location in

countries with a history of environmental and social problems. We

repeated the approach to identify a set of tier-three suppliers.

Of the

suppliers contacted, 31 (78%) agreed to participate; most of the

nonparticipants declined because they did not have a sustainability

program, were experiencing a production peak, or did not regard the

customer involved as critical.

We collected data on the three MNCs, 9 tier-one suppliers, and 22

lower-tier suppliers. To encourage open discussion of sensitive in-

formation, we oﬀered anonymity to each company and signed nondi-

sclosure agreements. We also certiﬁed to all participants that we did not

receive funding from any customer or governmental institution, and

assured participants that information would not be shared with custo-

mers or NGOs. Fig. 1 shows the three supply networks. In one case, a

tier-one supplier (Ench) for our electronics MNC is a tier-two supplier

for our automotive MNC. Also, one supplier (Tronics) is common across

the three supply networks but is located in diﬀerent tiers. These two

cases are highlighted in Fig. 1.Table 1 summarizes the proﬁle of all

participating companies by size, industry, country, and certiﬁcations.

To increase rigor in our qualitative research (Gioia et al., 2013), we

collected data from three diﬀerent sources: (1) semi-structured inter-

views as the prime source of information about the sustainability in-

itiatives within each ﬁrm, between each ﬁrm and its suppliers, and

between each ﬁrm and NGOs; (2) structured observations of how cor-

porate initiatives are implemented within plants; and (3) archival data

collected during each visit, along with industry reports, newspapers,

public databases, among others, when available. These multiple sources

allowed us to triangulate information about sustainability initiatives

within and across ﬁrms.

3.1.1. Semi-structured interviews

We conducted 165 interviews. From each ﬁrm, we interviewed at

least 2 and as many as 12 informants (see Table 1). We used the in-

terview protocol shown in Appendix 1 and conducted several follow-

ups with informants to corroborate information we gathered from other

sources and to ﬁll in missing data. To be consistent in gathering data,

we conducted each interview in the interviewee's native language.

Some of the tier-one suppliers and the majority of lower-tier suppliers

are located in China, Mexico, and Taiwan. Although their sales per-

sonnel speak English, their counterparts in EH&S, HR, purchasing,

quality, and operations do not; thus, we used a translator. We recorded

all interviews with the informants' permission. Three research assistants

whose native languages are Mandarin, English, and Spanish then

transcribed the interviews. To complement these data, we interviewed

representatives of a set of NGOs (e.g., CDP, CEREAL and IDH), who

discussed their relationship with MNCs and suppliers and who gave us

reports of open cases regarding health, safety, and labor violations.

3.1.2. Structured observations

Ninety-ﬁve percent of the participating suppliers allowed us to visit

their plants. We clariﬁed that our visit was not an audit, but a way for

us to better understand how they implemented corporate sustainability

initiatives in their plants, as well as to learn about their manufacturing

processes, labor practices and environmental challenges. Before each

visit, we arranged conversations with the plant manager and/or EH&S

representative. At all sites, we ﬁrst did job shadowing to understand the

manufacturing processes and to identify potential labor and environ-

mental issues. We then conducted ethnographic interviews with 45

randomly chosen plant workers at their work sites. Because recording

interviews was not permitted, we took ﬁeld notes, capturing key

phrases and direct quotations. We used a 24-h rule to construct detailed

memoranda of these meetings. These data allowed us to cross-validate

responses from directors with the practices that factory workers either

participate in (e.g., EH&S training) or observe (e.g., retaliation policy)

in a given ﬁrm. Finally, we attended annual conferences of three in-

dustry associations—the Electronics Industry Citizenship Coalition

(EICC), the Automotive Industry Action Group (AIAG), and the

International Pharmaceutical Supply Chain Consortium (RX 360)—be-

cause MNCs and some suppliers noted that such associations play a

fundamental role in their sustainability agendas.

3.1.3. Archival data

We collected several kinds of information in house: supplier sus-

tainability scorecards, supplier sustainability self-assessments, EH&S

training programs, purchasing terms and conditions, and sustainability

training certiﬁcates. We also collected external documents such as in-

dustry reports, NGO reports, and archival databases. The three MNCs

and a few tier-one suppliers are public companies, so much information

was available from open sources (e.g., ASSET4). More limited in-

formation is available for lower-tier suppliers because they are mostly

small, private ﬁrms. Thus, we spent more time gathering their in-

formation during our visits. In some cases, we gathered EH&S audit

reports from third-party organizations (e.g., EICC and local govern-

ment).

These data allowed us to triangulate information gathered from

interviews and observations. For instance, interviewees shared several

internal (and sometimes conﬁdential) reports supporting their state-

ments. The archival data also helped us focus our interviews on speciﬁc

themes. For instance, if an MNC provided supplier EH&S audit reports

or supplier sustainability scorecards, we could question its tier-one

suppliers more thoroughly and could choose to visit a supplier plant

where there were nonconformities. When visiting such a plant, we

devoted more interview time to determining how the supplier had dealt

with nonconformities, whether improvements were implemented, and

how the MNC helped these suppliers overcome such nonconformities.

A major diﬀerence between MNCs and suppliers was that all three MNCs

had a sustainability director, whereas suppliers assigned responsibility for

sustainability to various functions such as human resources (HR); environment,

health, and safety (EH&S); quality; or operations. In many cases, no single in-

dividual or function was formally responsible for sustainability.

For simplicity, in this paper we use the label lower-tier suppliers to refer to

both tier-two and tier-three suppliers.

V.H. Villena, D.A. Gioia Journal of Operations Management 64 (2018) 65–87

3.2. Data analysis

To address our ﬁrst research question (Do lower-tier suppliers con-

stitute the riskiest members of the supply network? If so, why?), we

employed archival data (displayed in Table 1), ﬁeld notes and interview

data. To address the second (How do MNCs manage sustainability con-

cerning both their tier-one and lower-tier suppliers?) and third (Are there

diﬀerences between practices MNCs adopt with their tier-one suppliers and

Fig. 1. The three studied supply networks.

*** This supplier participate in our three supply networks but is located in diﬀerent tiers.

** This suplier is a tier-one supplier for our electronics MNC and a tier-two supplier for our automotive MNC.

V.H. Villena, D.A. Gioia Journal of Operations Management 64 (2018) 65–87

Table 1

APharmaceutical/consumer product supply network

.B. Automotive supply networka. C. Electronics supply networka.

Name Sales ($) # Workers Industry Headqua-

rter

Facilities Certiﬁcation CDP GRI UNGC DJSI Informant Title (Interview length

in min)

MNC Pharma 74.33

Billion

126,500 Pharmaceutical/

Consumer

Product

United

States

Worldwide ISO 9001

ISO 14001

OHSA-

S18001

Yes Yes Yes Yes Senior Director Sustainable

Procurement (240)

Global Energy Director (60)

2Category Leaders (API &

Electronics) (90 each)

Relationship Manager (API) (90)

EHS&S Senior Manager (110)

EHS&S Auditor (60)

Risk Management Manager (60)

Risk Management Director (60)

TIER-ONE

SUPPLIERS

Tronics*** 25 Billion 150,000 Electronics

contract

manufacturing

United

States

America:37

Brazil: 6

EMEA:33

Asia: 52

ISO 9001

ISO 14001

OHSAS

18001

Yes Yes No No 2 Commodity Managers (80

each)

Supplier Sustainability Program

Manager (120)

CS&E Responsibility Manager

(100)

Director of RRHH (90)

General Manager (60)

3 Senior EH&S Auditors (90)

Capi 42.90

Million

800 Pharmaceutical

manufacturing

United

States

USA: 2

Europe: 1

ISO 14001 No No No Yes Global Supply Chain Director

(60)

Supply Chain Manager (90)

Corporate Responsibility Director

(95)

Director (86)

Ampaca

(private)

74 Million 250 Pharmaceutical

manufacturing

United

States

USA: 2 OHSAS

18001

No No No Na Procurement Director (100)

VP of Contracts & Commercial

Products (60)

VP Regulatory Aﬀairs (60)

Senior Director of Supply Chain

(90)

Sustainability Director (110)

LOWER-TIER

SUPPLIERS

Far (private) 7.17

Million

25 Pharmaceutical

manufacturing

United

States

USA: 1 ISO 9001 No No No Na Purchasing Manager (60)

Safety, Security and Regulatory

Manager (90)

Director (80)

Allsino

(private)

25 Million 200 Chemical China China: 1 No No No No Na Purchasing Director (95)

EH&S Manager (80)

Capot

(private)

30 Million 600 Chemical China China: 1 ISO 9001 No No No Na Purchasing Director (60)

HR Manager (95)

EH&S Manager (100)

Quality Manager (60)

JWW

(private)

2.62

Million

30 Chemical United

States

USA: 1

China: 1

No No No No Na Executive Director (110)

Purchasing Manager (60)

President (90)

Lacamas

(private)

17.5

Million

46 Chemical United

States

USA: 1 No No No No Na Chief Financial Oﬃcer (90)

Buyer (75)

Synthetics

(private)

No data No data Chemical China China: 3 ISO 9001 No No No Na President (90)

Vice General Manager (60)

EH&S Responsible (110)

Quality Manager (60)

Yiyi (private) 59 Million 1500 Electronic

components

Taiwan Taiwan: 1

China: 2

USA: 1

ISO 9001

ISO 14001

OHSAS

18001

No No No Na EH&S Manager (80)

Quality Manager (60)

General Manager (90)

Yantat 110

Million

1027 Printed circuit

board

China China: 3 ISO 9001

ISO 14001

Yes No No No General Manager (80)

Quality Manager (60)

Calientes

(private)

7.0 Million 112 Packaging Mexico Mexico: 5 ISO 9001 No No No Na EH&S Manager (100)

Quality Manager (95)

General Manager (60)

DBC

(private)

0.24

Million

10 Metal mecanic Mexico Mexico: 1 No No No No Na Sourcing Manager (60)

Quality Manager (90)

San Marcos

(private)

0.83

Million

41 Packaging Mexico Mexico:1 No No No No Na General Manager (80)

Operations Manager (100)

(continued on next page)

V.H. Villena, D.A. Gioia Journal of Operations Management 64 (2018) 65–87

Table 1 (continued)

Name Sales($) # Workers Industry Headqua-

rter

Plants Certiﬁcation CDP GRI UNGC DJSI Informant Title (Interview length

in min)

MNC Automotive 96.09

Billion

228,690 Automotive United

States

America: 75

Europe: 77

Asia:13

ISO 9001

ISO 14001

OHSA-

S18001

Yes Yes No Yes Commodity Specialist

Transmissions (90)

Head of Drive Systems

Purchasing (60)

3 Senior Buyers (seat, electrical,

& metal) (70 each)

Sustainability Director (150)

Sustainability Manager (130)

Supplier Relationship Manager

(90)

TIER-ONE

SUPPLIERS

Metallic

(private)

1.2 Billlion 2000 Fastener

manufacturing

United

States

USA: 10

Mexico: 1

ISO 9001

ISO 14001

No No No Na Supply Chain Director (90)

Purchasing Director (80)

EH&S Manager (120)

EH&S Supervisor (60)

Internal Auditor (60)

Powertrain 23.2

Billion

71,100 Auto parts

Manufacturing

Germany 230 plants

in 40

countries

ISO 9001

ISO 14001

OHSA-

S18001

No Yes Yes No Head of Sustainability (70)

Head of Materials Management

(80)

VP of Marketing (65)

Seat 42.83

Billion

168,000 Auto parts

Manufacturing

United

States

USA: 338

Mexico:19

Brazil: 10

ISO 9001

ISO 14001

Yes Yes Yes Yes 3 Commodity Managers (90

each)

Chair of Sustainability (70)

Plant Manager (90)

EH&S Supervisor (90)

EH&S Manager (90)

General Manager (100)

Electrical 39.7

Billion

142,171 Auto parts

Manufacturing

Japan Japan: 74

Europe: 39

Asia: 70

ISO 9001

ISO 14001

OHSA-

S18001

Yes Yes No No Director of Purchasing (60)

Director of EH&S (70)

Buyer Specialist (80)

LOWER-TIER

SUPPLIERS

Coating

service

(private)

No data No data Metal coating,

engraving &

heat treating

United

States

USA: 3 ISO 9001 No No No Na Vice President of Purchasing (90)

General Manager (60)

Quality Liaison (120)

Steel

(private)

No data No data Steel United

States

USA: 3 ISO 9001

ISO 14001

No No No Na Vice President of Supply Chain

(90)

EH&S Manager (100)

Quality Specialist (60)

Chemical

adhesives

26.7

Million

328 Fastener

manufacturing

United

States

America: 4

LATAM: 2

Europe: 13

Asia: 13

ISO 9001 No No No No HR Director (60)

Purchasing Manager (60)

Operations Manager (80)

Sales Manager (60)

Machinery 141.4

Million

1300 Auto parts

manufacturing

United

States

USA: 6

Europe: 3

China: 1

ISO 9001

ISO 14001

No No No No Supply Chain Manager (60)

Senior Buyer (80)

HR Manager (60)

Seat designer

(private)

148.7

Million

1600 Auto parts

manufacturing

United

States

Mexico: 3 ISO 14001 No No No No Director of Purchasing (90)

Procurement Manager (100)

EH&S Manager (90)

Human Resources Manager (90)

Vice President (60)

Tronics*** 25 Billion 150,000 Electronics

contract

manufacturing

United

States

America: 37

Brazil: 6

EMEA: 33

ASIA: 52

ISO 9001

ISO 14001

OHSA-

S18001

Yes Yes No No 2 Commodity Managers (80

each)

Supplier Sustainability Program

Manager (120)

CS&E Responsibility Manager

(100)

Director of RRHH (90)

General Manager (60)

3 Senior EH&S Auditors (90)

Ench** 2.80

Billion

10,940 Electronics

contract

manufacturing

United

States

USA: 9

Mexico: 3

Europe: 2

Asia: 5

ISO 9001

ISO 14001

OHSA-

S18001

Yes No No No Director of Supply Chain (80)

Global Compliance Manager (70)

EH&S Manager (90)

EH&S Trainer (60)

Procurement Manager (110)

HR Manager (80)

(continued on next page)

V.H. Villena, D.A. Gioia Journal of Operations Management 64 (2018) 65–87

those that tier-one suppliers use with their lower-tier suppliers?) research

questions, we analyzed the interview data and supplemented it with

archival and ﬁeld-note data. To build our grounded theoretical model,

we followed Gioia et al.’s (2013) systematic, three-step approach to

grounded theory building. We began by identifying 1

-order categories

in the data (at the informant's level of meaning). These categories

emerged when consistent patterns in the data constituted enough evi-

dence to note a distinctive sustainability practice. All 1

-order practices

were labeled based on each informant's language (Strauss and Corbin,

1990). We then grouped these 1

-order categories into 2

-order

Table 1 (continued)

Name Sales ($) # Workers Industry Headqua-

rter

Plants Certiﬁcation CDP GRI UNGC DJSI Informant Title (Interview length

in min)

MNC Electronics 92.79

Billion

379,592 Information

Technology

Services

United

States

Worldwide ISO 9001

ISO 14001

OHSA-

S18001

Yes Yes No Yes 3 Global Commodity Managers

(60 each)

Head of Production Procurement

(90)

Procurement Operations

Manager (90)

Director of Coporate

Environmental Aﬀairs (60)

VP Corporate Environmental

Aﬀairs (60)

Product Environmental

Compliance & SCSR (90)

Supply Chain Senior Manager

(80)

SCSR Manager (90)

SCSR/Supplier Communication

(80)

EICC Coordinator (70)

TIER-ONE

SUPPLIERS

Belca 30 Billion 96,015 Electronic

components

manufacturing

Taiwan Taiwan: 1

China: 3

Phillipine-

s:1

ISO 9001

ISO 14001

OHSA-

S18001

Yes Yes No Yes Purchasing Director (90)

2 Purchasing Managers (80 each)

EH&S Director (110)

EH&S Manager (120)

Ench** 2.80

Billion

10,940 Electronics

contract

manufacturing

United

States

USA: 9

Mexico: 3

Europe: 2

Asia: 5

ISO 9001

ISO 14001

OHSA-

S18001

Yes No No No Director of Supply Chain (80)

Global Compliance Manager (70)

EH&S Manager (90)

EH&S Trainer (60)

Procurement Manager (110)

HR Manager (80)

Adel 6.2 Billion 5421 Electronic

component

manufacturing

Taiwan EMEA: 21

Asia: 31

America: 14

ISO 9001

ISO 14001

OHSA-

S18001

Yes Yes No Yes 2 Senior Account Managers (80

each)

EH&S Manager (60)

Tronics*** 25 Billion 150,000 Electronics

contract

manufacturing

United

States

America: 37

Brazil: 6

EMEA: 33

Asia: 52

ISO 9001

ISO 14001

OHSA-

S18001

Yes Yes No No 2 Commodity Managers (80

each)

Supplier Sustainability Program

Manager (120)

CS&E Responsibility Manager

(100)

Director of RRHH (90)

General Manager (60)

3 Senior EH&S Auditors (90)

LOWER-TIER

SUPPLIERS

Inalways

(private)

8.64

Million

57 Electronic parts

and equipment

Taiwan Taiwan

China

ISO 9001

ISO 14001

No No No No General Manager (90)

Operation Manager (110)

PCB (private) No data No data Electronic parts

and equipment

Hong

Kong

China ISO 9001

ISO 14001

No No No No VP of Operations (100)

VP of Human Resources (90)

AVS 665.8

Million

415 Computer

Manufacturing

Taiwan Taiwan: 2 ISO 9001

ISO 14001

OHSA-

S18001

Yes Yes No No 2 Commodity Managers (60

each)

Human Resources Manager (80)

Quality Manager (70)

Internal Auditor (60)

Yiyo 52 Million 1400 Electronics parts Taiwan China: 2

Taiwan:1

USA:1

ISO 9001 No No No No Quality Manager Purchasing

Manager

Central

(private)

No data 50 Packaging United

States

USA:1 No No No No Na Purchasing Manager (90)

VP of Marketing (70)

VP of Operations (90)

Kete 838.2

Million

9625 Semiconductor United

States

No data ISO 9001

ISO 14001

OHSA-

S18001

Yes No No No CSE Manager (90)

2 Supplier Managers (60 each)

Quality Manager (100)

Health and Safety Manager (120)

*** This supplier participated in our three supply networks but was located in diﬀerent tiers. ** This suplier was a tier-one supplier for our electronics MNC and a tier-

two supplier for our automotive MNC.

Notes: Data reported as of December 31, 2014. CDP: Carbon Disclosure Program. GRI: Global Reporting Initiative. UNGC: United Nation Global Compact. DJSI:

Dow Jones Sustainability Index—this index applies to those publicly-traded companies. For private companies, this index does not apply (na).

V.H. Villena, D.A. Gioia Journal of Operations Management 64 (2018) 65–87

themes and distilled these themes into four dimensions (expressed in

theoretical terms). This step led to the generation of a data structure,

which served as the basis for a general framework for managing a

sustainable supply network. In both analyses, we used constant com-

parison of data (Glaser and Strauss, 1967) across informants (two em-

ployees within the same ﬁrm), international boundaries (a manager in

Mexico and a corporate director), data sources (an informant and

company reports), and ﬁrms (a MNC and its supplier).

To ensure the credibility of the ﬁndings, we independently coded

the interview data. Once each of us had a set of 1

-order codes, we

discussed discrepancies in coding and labeling until we reached con-

sensus. We applied a similar procedure for determining and labeling

-order themes and dimensions. The purpose of these discussions was

to ensure that the ﬁndings did not rely solely on a single analyst's in-

terpretations; instead, the ﬁndings represent a consensus from two

analysts. This approach enabled us to identify practice-based building

blocks to generate a theory of managing a sustainable supply network.

Therefore, the resulting framework addresses Thomas and Tymon's

(1982) call for theory that is useful for both practice and con-

ceptualization because its essential elements are practices shown to

work and its emergent dimensions are theoretically anchored. We next

present our ﬁndings in two related sub-sections—the empirical assess-

ment of lower-tier supplier risk and the comprehensive grounded re-

search model.

4. Findings 1: assessment of lower-tier supplier risk

The lack of empirical studies focusing on lower-tier suppliers leaves

us under-informed about those suppliers—especially concerning their

capabilities, how vulnerable they are, and where they operate.

Signiﬁcantly, none of the 22 lower-tier suppliers had ever participated

in academic research. Seventeen (77.3%) of them are private ﬁrms,

relatively unknown with little pressure from customers, NGOs, and the

media. As a result, most do not disclose their social and environmental

challenges on their websites or in their annual reports nor do they adopt

any standard for sustainability reporting (e.g., GRI). The majority are

much smaller than the MNCs and tier-one suppliers and, thus, have

more limited resources and lack of sustainability expertise. Their plants

are located worldwide; and our visits to their plants located in China,

Taiwan, Mexico and the United States revealed distinct issues in each

country. Table 1 shows the proﬁle of these suppliers.

If we assess their sustainability capabilities according to the widely

accepted 3Ps, we would expect strong emphasis on the proﬁt dimension

(as an existential matter for any ﬁrm); furthermore, given the now

widespread attention to social and environmental issues, we might also

expect some attention to both the people and planet dimensions.

However, based on our sample of 22 lower-tier suppliers, such ex-

pectations concerning these latter two dimensions are optimistic. If we

assume, for instance, that being ISO 14001-certiﬁed and participating

in the CDP program are proxies for being environmentally mature

(Corbett and Kirsch, 2001;Jira and Toﬀel, 2013), then lower-tier sup-

pliers are markedly worse compared to MNCs and tier-one suppliers

(see the column labeled Certiﬁcation and CDP in Tables 1a, 1b and 1c).

During our visits, we observed that these suppliers have manufacturing

processes that pollute and rarely oﬀer eco-friendly products, with the

exception of those plants that manufacture components included in

products sold to the European Union (EU).

Like other scholars (Koh

et al., 2012;Lee et al., 2014), we found that MNCs collaborate closely

with their tier-one and lower-tier suppliers so their ﬁnal products meet

EU environmental regulatory standards. If the products are sold to other

markets, however, this eﬀect disappears. In fact, in three cases, the

same plants have dual production lines—one for EU and another for

other markets. One manager explained, “To achieve ROHS compliance

is costly. Even though adopting ROHS for my full production is the right

thing to do, we have to keep our costs down to survive in this market.”

Interestingly, only one lower-tier supplier, Central, provided examples

of environmentally-friendly processes (e.g., 99% of a zero-waste landﬁll

goal) and product design (e.g., using high percentage of recycled con-

tent), indicating that environmental innovations can emerge from the

supply network rather than be mandated by MNCs (Nair et al., 2016);

however, this scenario was the exception rather than the norm in our

sample.

Our ﬁeldwork also revealed patterns showing that most lower-tier

suppliers in our sample lack training in safety, working conditions, and

human rights; have large percentages of temporary workers and em-

ployee turnover; and have open cases with NGOs that protect human

rights. During our visits to their plants in China (7), Taiwan (3), Mexico

(5), and the United States (6), we found some common patterns per

country. All Chinese and Taiwanese lower-tier suppliers recognize their

chronic problems of overtime and unsafe working conditions, which the

audit reports conﬁrmed. In fact, the 2013 EICC annual report states that

81% of EICC audits conducted from April 2013 to February 2014 found

that plants required workers to work > 60 h a week (thus violating the

EICC code of conduct). As shown in the audit reports, most of these

plants lack training in health and safety for their factory workers and in

working conditions/human rights for their general managers. For plants

in Mexico, overtime and unsafe working conditions were also present,

but to a lesser extent. As a manager said, “Let's say that in Mexico I have

an employee working 70 h including overtime. In China, I would have

an employee working 85 h or more.” Other human-treatment problems

were more severe. In three Mexican plants we visited, the percentage of

temporary workers was up to 50% and turnover rates were up to 100%,

making it hard for any sustainability program to succeed (Pagell et al.,

2014). Also, in addition to discriminatory hiring practices and unfair

dismissal of workers found in past research (Distelhorst et al., 2015),

these plants lacked procedures for de-escalating a problem (e.g., job or

sexual harassment), abusive supervisor behavior (e.g., retaliation), and

irregularities (e.g., delays in overtime payments). Our interviews with

factory workers and CEREAL representatives conﬁrmed these deﬁ-

ciencies. One of these suppliers' managers, said, “We lack a proper

management system for human resources.” Another manager said, “Yes,

we still have such problems [referring to job and sexual harassments],

but it was much worse before.” We found no social innovation in these

suppliers.

Our visits to the plants located in the United States revealed a few

health and safety problems. In particular, the concentration of chemi-

cals in the air was notably high in three plants, whereas the reporting of

health and safety accidents was not systematic (for more information

about safety issues in the U.S. and Canadian manufacturing ﬁrms, see

Pagell et al. (2015)). Also, one of our tier-one suppliers reported a ﬁre

in the facility of one of its plating (second-tier) suppliers and noted the

supply disruption and reputational damage to his company and major

customers. This manager also said, “After this ﬁre, we visited other four

plating suppliers and decided not to send our products to two of them

due to their precarious safety conditions.” Accidents in lower-tier sup-

pliers are not covered by the media unless they result in severe supply

disruptions—as in the case of Ericsson and its sub-tier supplier's ﬁre

accident (Norrman and Jansson, 2004), or have high human costs—as

did the ﬁre in the plant of a sub-tier automotive supplier, Zhongrong

Metal Products, in which 97 factory workers were killed and 163 were

seriously injured (Shirouzu and Li, 2014).

Although our research supports the warning of Kim and Davis

(2016) that, “the most questionable practices happen among distant

suppliers multiple tiers away” (p. 111) and of Tachizawa and Wong

(2014): “the most serious environmental and social issues in the supply

chain are often generated by suppliers located in the second tier or

EU enforces environmental regulatory standards such as Waste Electrical

and Electronic Equipment (WEEE); Restriction of the use of certain Hazardous

Substances (RoHS); and Registration, Evaluation, Authorization and Restriction

of Chemicals (REACH).

V.H. Villena, D.A. Gioia Journal of Operations Management 64 (2018) 65–87

further upstream” (p. 643), it also reveals that labor issues vary from

country to country and that even in highly regulated countries (e.g., the

U.S.), some health and safety deﬁciencies exist in lower-tier suppliers.

Therefore, our research shows that lower-tier suppliers, particularly

those that are small, private ﬁrms operating in countries with less

stringent regulations, exhibit consistently low performance on both the

social and environmental dimensions. These are the least-equipped and

the least-monitored members of the supply network and, consequently,

carry the highest risks.

Compared to tier-one suppliers that are in the spotlight and ex-

pected to meet sustainability standards because the three MNCs

monitor them, lower-tier suppliers are usually passive about addressing

their environmental and labor issues. Passivity, in this context, means

that a supplier could or would not respond to, or initiate, an action to

address sustainability problems. We found that lower-tier suppliers

perceive a very low risk of being penalized for not addressing labor or

environmental issues unless these issues become so big that MNCs get

involved. For instance, there were several open cases of sexual and job

harassment, as well as payment irregularities on 2 s-tier suppliers ac-

cording to CEREAL reports. CEREAL representatives noted that they

contacted their general managers, who did not respond for long per-

iods. CEREAL then reported these allegations publicly and informed the

major downstream customers (i.e., MNCs). As a tier-one supplier's EH&

S manager noted, “Our customer called me and pointed out the latest

CEREAL report: ‘Are you aware of what is going on with [supplier]?’ I

ﬂew to Mexico and met with the general manager and CEREAL. I sadly

admitted that, after investigation, this allegation was true; but my plant

manager didn't take any initiative to tackle it.” These suppliers adopted

a “wait and see” approach because there were no immediate con-

sequences for not addressing the issues. The suppliers are unknown

ﬁrms with no or little pressure from the media and even when such

suppliers were on NGOs' radar, they perceived the risk of being pena-

lized as very low. Also, these suppliers are in countries where social and

environmental regulations are less demanding. Their top managers

focus exclusively on the proﬁt dimension of sustainability and feel no

pressure to address their environmental and labor issues. This is be-

cause they were not penalized by their direct customers (i.e., tier-one

suppliers). In our sample, many of such customers struggle themselves

to comply with the MNCs' sustainability requirements (and therefore

monitoring supplier sustainability was not a priority), whereas those

that are more sustainability mature (3 out of 9 ﬁrms in our sample

conduct a type of supplier sustainability assessment), they have started

to oﬀer some supplier support for projects to improve social and en-

vironmental performance, but have not yet considered penalizing sup-

pliers for non-compliance. Thus.

Proposition 1. Compared to tier-one suppliers,lower-tier suppliers exhibit

passivity in addressing labor and environmental issues because they perceive

very low risk of being penalized for not doing so.

Interestingly, we identiﬁed only one lower-tier supplier, Tronics,

that has a relatively mature sustainability strategy. This supplier

(marked with three asterisks in Fig. 1) serves all three supply networks

although it is located in diﬀerent tiers. According to Yan et al. (2015), it

is an “informational nexus supplier” with diverse downstream ties

across multiple industries and, thus, has access to diverse markets and

technological information. This advantageous position, coupled with

the fact that this supplier has good downstream visibility (i.e., it

identiﬁes its downstream customers, many being sustainability leaders

that advocate supplier sustainability, including our three MNCs), which

is instrumental for this supplier's sustainability maturity. Its greater

visibility and exposure to these customers motivates this supplier to

mimic their sustainability initiatives and actively participate in their

industry organizations. One of its directors noted, “We operate in many

industries. We know that our ﬁnal customers eventually push for high

sustainability standards. So, we need to be better prepared.” In contrast,

we observed another supplier (marked with two asterisks in Fig. 1),

Bench, with characteristics similar to those of Tronics (e.g., it serves two

of the three supply networks, operates in the same industry, is a public

company smaller than Tronics) but most of its customers focused mainly

on proﬁts, as its global compliance manager explained, “Our customers

are mainly driven by cost. This makes my job very diﬃcult when I ask

for a larger budget for my environmental program. My top managers do

not perceive pressure from customers to do so.” Thus, the diverse in-

itiatives of our three MNCs aﬀect not only their own supply networks

but also a broader population of upstream suppliers in other industries,

suggesting that there can be a “virtuous circle” in fostering sustain-

ability among lower-tier suppliers that operate in multiple supply net-

works. Thus.

Proposition 2. Lower-tier suppliers that operate in multiple supply

networks and serve downstream customers that are sustainability leaders

are more likely to adopt 3P sustainability practices.

During our research, we observed consolidation of supply bases

across the three studied industries, in that 7 (out of 9) tier-one suppliers

either merged or were acquired. Consistent with a grounded research

approach, we then investigated an emergent research question: How

does consolidation aﬀect suppliers' adoption of sustainability? The

number of mergers and acquisitions (M&As) across industries has in-

creased; in particular, the consolidation of suppliers for electronics,

automotive,

and chemicals is rising. Consolidation could result in a

stronger supply base because, for instance, a struggling manufacturer

might be purchased by a ﬁnancially healthier company that continues

to manufacture the acquired manufacturer's products. However, we do

not know how this consolidation could aﬀect suppliers' labor and en-

vironmental practices.

Five tier-one suppliers we studied that experienced high growth

rates have more diﬃculty addressing their labor and environmental

issues for two reasons. First, their EH&S team must manage many more

plants, but with the same amount of human resources. As a result, their

attention was diﬀused and enforcement worsened (Huq et al., 2016). As

one corporate manager noted, “You are only as good as the resources

you dedicate to your program. And you have to prioritize things for the

resources you have, for the people you have ….” Another manager said,

“We recently acquired three plants in China. Even if we don't train all

40,000 new factory workers, we need to train at least some. It will take

a lot of our eﬀort to have these plants up to our standards, especially if

my team remains the same.” Second, the idiosyncrasies of acquired

plants add more complexity. If the acquired plant is located in a country

where the ﬁrm has no operations or has unrelated operations to the

ﬁrm's, the EH&S corporate team has more to learn (e.g., new labor and

environmental regulations). Or, if the acquired plant is located in a

country where the ﬁrm has related operations, the plant does not ne-

cessarily have the same EH&S standards and reporting systems. As an

EH&S manager noted,

The manufacturing processes of the new two acquired plants are

very similar to our core business; however, my visit revealed that

their EH&S standards are very diﬀerent from us and their reporting

system is so deﬁcient [compared to the corporate standards]. On top

of that, their managers seem to have diﬀerent labor, safety, and

human rights expectations. It will take us years to get them fully

embedded in our own standards.

For the two tier-one suppliers that were acquired, the concern was

whether their EH&S teams would remain because M&As often have

high top-management turnover (Walsh, 1989). In fact, the sustain-

ability director of one of these suppliers was removed after the M&A, so

http://www.electronics-sourcing.com/2017/08/31/pace-of-electronics-

supply-base-consolidation-slows/ Retrieved on May 7, 2018.

https://www.strategyand.pwc.com/reports/consolidation-global-

automotive-supply/ Retrieved on May 7, 2018.

V.H. Villena, D.A. Gioia Journal of Operations Management 64 (2018) 65–87

the corporate EH&S team that assumed this responsibility faces these

same challenges. The resources for some of its sustainability initiatives

were frozen, whereas its sustainable procurement program that in-

cluded lower-tier suppliers was suspended. This scenario coupled with

strong cost-reduction pressures, has resulted in suppliers’ cutting more

resources from EH&S areas than from production and quality areas.

Thus, the consolidation of supply bases generates economic eﬃciencies,

but also creates diﬃculties for suppliers because resources assigned to

social and environmental compliance typically remain the same for

managing a larger number of plants and because the acquired plants

have distinct manufacturing processes and are exposed to diﬀerent

national regulations that create yet more complexities. Thus.

Proposition 3. Tier-one suppliers with higher growth rates will have greater

diﬃculty allocating resources to their social and environmental initiatives

and to those initiatives involving their own suppliers.

5. Findings 2: developing a grounded theoretical model of

managing a sustainable supply network

In this section we provide evidence supporting each theme con-

stituting the four emergent theoretical dimensions of the grounded

model. Our analysis showed that the participating ﬁrms’ responses to

their sustainability issues can be classiﬁed as passive (most of partici-

pating lower-tier suppliers), reactive (most of participating tier-one

suppliers), or proactive (the MNCs)–a classiﬁcation characterized by two

factors—temporal focus (from short-term and long-term orientations)

and resource commitment (from low to high commitment) (see Fig. 2).

Passive ﬁrms do not address their social and environmental issues un-

less there is customer intervention—if so, they determine the level of

temporal and resource commitment. Reactive ﬁrms have a short-term

view and dedicate limited resources to sustainability, displaying prac-

tices that serve mainly to comply with regulations and customer de-

mands and to mitigate consequences. Proactive ﬁrms have a long-term,

anticipatory or preventive perspective and devote substantial resources

to sustainability practices. The three MNCs in this study could be

viewed as “ambidextrous” in that their practices encompass both

proactive and reactive orientations. Fig. 2 shows the placement of each

participating ﬁrm based on its temporal focus and commitment of re-

sources to sustainability.

Fig. 3 displays the data structure, showing the emergent 1

-order

categories (left) that generated the 2

-order themes (center), which we

distilled into four overarching dimensions (right). Appendix 2 shows

additional 1

-order evidence from informants for each 2

-order theme

and the aggregate dimension whereas Fig. 4 shows the corresponding

grounded model. We next report our ﬁndings by each theoretical di-

mension in the grounded model. We describe the ﬁndings for each

supply network member by ﬁrst reporting the practices used by MNCs,

then tier-one suppliers’ practices, followed by the practices used (or not

used) by lower-tier suppliers.

5.1. Committing to sustainable supply network [dimension 1 in Fig. 3]

5.1.1. Having a supportive organizational structure

Each MNC has an organizational structure with a top executive re-

sponsible for sustainability and a steering committee with a sustain-

ability representative. Most notably, each MNC assigns a full-time

person (with titles such as supply chain social responsibility manager or

sustainability procurement director) to extend the MNC's sustainability

agenda and expectations to suppliers. This person serves as a liaison

Fig. 2. Supply network members' responses: Passive, reactive, and proactive.

*Lower-tier suppliers do not address their environmental and social issues unless MNCs intervene. Depending on the type of issue and stakeholders involved (e.g., the

MNC, tier-one supplier, or NGO), the lower-tier supplier decides the time horizon and level of resources to commit to tackle the problem.

**The three MNCs and a few tier-one suppliers (i.e., Powertrain and Seat) are ambidextrous—they show proactive and reactive orientations for their sustainability

practices and, thus, are depicted between reactive and proactive categories.

V.H. Villena, D.A. Gioia Journal of Operations Management 64 (2018) 65–87

across internal functions (e.g., risk management, purchasing, and sus-

tainability) and has primarily a boundary-spanning role (e.g., working

with tier-one suppliers to engage lower-tier suppliers). In that way, the

main sustainability initiatives such as supplier training, supplier as-

sessments, and supplier risk-management programs are orchestrated.

For instance, the pharmaceutical MNC's sustainability procurement

director was promoted to senior director. With more resources (i.e., a

new budget) and power (i.e., same hierarchical level as the sustain-

ability director), this director organized supplier sessions in which long-

term sustainability goals were communicated, enlisted a consulting

company to map the ﬁrm's supply network, and worked closely with his

EH&S counterpart to implement an EH&S training plan for tier-one

Fig. 3. Data structure.

V.H. Villena, D.A. Gioia Journal of Operations Management 64 (2018) 65–87

suppliers.

For tier-one and lower-tier suppliers, however, the picture is very

diﬀerent. For instance, we found that most tier-one suppliers have an

EH&S director responsible for their EH&S program and an HR director

who supervises labor and human resources practices. For tier-one

suppliers that have ISO 14001 and/or OSHAS 18001 certiﬁed plants,

full-time employees are designated to deploy and monitor EH&S in-

itiatives. In smaller tier-one suppliers, EH&S and HR are often one of-

ﬁce. However, all these professionals have an inward-looking or-

ientation—they are dedicated to complying with sustainability

standards within the ﬁrm. Their procurement counterpart is expected to

communicate the MNC's requirements to lower-tier suppliers (which

happens rarely). We found a similar situation for lower-tier suppliers.

The EH&S responsibilities are often divided between operations and

human resources. Again, however, their orientation is only inward

looking. Having supplier sustainability practices is not a priority for

most tier-one and lower-tier suppliers.

5.1.2. Setting long-term goals for the ﬁrm and its (tier-one and lower-tier)

suppliers

Each MNC has set long-term goals for itself and for its tier-one

suppliers. These goals seek to facilitate both MNCs and tier-one sup-

pliers in developing a long-term orientation to address their major

sustainability concerns (Flammer and Bansal, 2017). Without worrying

about short-term outcomes, these goals encourage ﬁrms to invest in

sustainability training, buy environment-friendly equipment, among

others. One MNC has a ﬁve-year program that includes sustainability

goals, and some objectives for its tier-one suppliers. Its purchasing di-

rector noted, “We expect our strategic suppliers to do a materiality

assessment; and depending on this result, they pick two areas [e.g.,

energy and recycling] that are more relevant to their own business.

They then have to commit to two long-term goals that must be disclosed

publicly.” Another MNC's sustainability director said, “There are 62

long-term objectives that cover diverse areas. Two of them are that all

strategic suppliers disclose their CO

emissions through CDP and that

all suppliers complete a sustainability self-assessment [including a few

questions on lower-tier supplier sustainability].” Because these goals

are annually reviewed and their progress is publicly reported, MNCs

and tier-one suppliers strive for accountability to achieve their sus-

tainability agendas (New, 2010;Parmigiani et al., 2011).

In one exceptional case, an MNC has a minority supplier program

that includes its tier-two suppliers. This MNC not only speciﬁes how

much of its own purchasing should be from minority suppliers, but also

demands that seven percent of its tier-one suppliers' procurement come

from certiﬁed minority (tier-two) suppliers. Its tier-one suppliers noted

that this MNC's minority supplier program has been very successful,

owing to the MNC's hands-on approach. The other two MNCs, however,

have diﬃculty setting goals involving tier-two suppliers because of

other priorities and lack of resources. As an executive noted, “We rea-

lize the importance of engaging tier-two suppliers, but also have a

supply base with more than 10,000 suppliers. We just don't have the

capacity.”

Our sample also included two automotive suppliers and one elec-

tronics tier-one supplier that have set long-term goals to reduce energy

and water use and gas emissions; develop green technologies and pro-

ducts; and provide a safe, healthy workplace for employees. However,

these goals do not include their own (tier-two) suppliers—again be-

cause of limited resources and other priorities. As a manager noted,

“The sustainability of our supply chain is not on the list of priorities that

our C-level executives feel they need to tackle.” Only one lower-tier

supplier, Tronics, exhibits a long-term orientation encompassing the

3Ps. Most lower-tier suppliers focus on delivering short-term results

and, thus, ignore the interests of many stakeholders, especially those

with disparate perspectives (Slawinski and Bansal, 2015). Thus, they do

not address environmental and social issues.

5.1.3. Incentivizing sustainability commitment to suppliers

The three MNCs have systems to recognize and reward their tier-one

suppliers that contribute to their sustainability eﬀorts (Porteous et al.,

2015). These incentives not only align MNC goals with those of their

suppliers but also promote a healthy competition among suppliers.

MNCs provide incentives to suppliers with high scores in their sus-

tainability key performance indicators (KPIs) as well as sustainability

awards for those with high performance in environmental programs

and who make important contributions to the MNC's sustainability

goals. For instance, the automotive MNC monitors two sustainability

KPIs for its suppliers. When quality, cost, and delivery are equal, sup-

pliers may be rewarded (e.g., with more business) if they outperform

competitors on these two KPIs. The pharmaceutical MNC has recently

implemented incentives (e.g., longer-term contracts) for suppliers that

cascade the MNC's sustainability requirements to their own suppliers.

One of its plastic suppliers indicated, “We received the Ecovadis sup-

plier award [for sustainability performance]. We are very proud of this

recognition … We now report two sustainability goals publicly and are

evaluating to use the Ecovadis program with our own suppliers.”

Clearly, these MNCs incentivize suppliers to meet their sustainability

requirements and agenda.

Two tier-one suppliers, Powertrain and Seat, have also recently in-

stituted their own supplier sustainability awards. These suppliers’

managers recognize that the awards have fostered sustainability

awareness among their suppliers. One of them said, “There is an in-

creasing interest among our suppliers to know the selection criteria for

this award. In fact, a few have proactively evidenced sustainability

projects that they conducted in their plants to be considered as award

candidates.” For lower-tier suppliers, we found no evidence of in-

centives for supplier sustainability accomplishment, indicating that a

strategy oriented toward network sustainability is not a priority.

5.2. Building sustainability capability [dimension 2 in Fig. 3]

5.2.1. Collaborating with key stakeholders

As studies have shown (e.g., Gualandris et al., 2015;Huq et al.,

2016;Parmigiani et al., 2011), the three MNCs collaborate with ex-

ternal stakeholders to gain access to valuable expertise, standardize

sustainability requirements, and legitimize their sustainability pro-

grams. They also partner with these stakeholders to cascade their sus-

tainability initiatives throughout their supply networks. They are sig-

natories of international eﬀorts to address climate change (CDP) and

human rights (UN Global Compact) and invite their strategic suppliers

to participate in these eﬀorts. The latter are critical to cascading their

initiatives to these suppliers. For instance, six tier-one suppliers parti-

cipate in CDP's supply chain program; thus, they must collect, analyze

and report GHG emission data—a learning experience, especially for

less-environmentally mature suppliers. Also, MNCs collaborate with

multiple NGOs with positive outcomes. However, collaborations with a

few NGOs have been less successful. For instance, IDH (an NGO that

seeks to improve responsibility among electronics suppliers in China by

helping them improve their production eﬃciencies and worker-man-

ager communication) has unsuccessfully tried to develop links with the

electronics MNC and its major suppliers.

The three MNCs are founder members of their industry organiza-

tions (i.e., EICC, AIAG, and RX-360). Through these organizations,

MNCs have developed a standardized supplier EH&S self-assessment/

audit and have organized industry-wide sustainability training sessions

for suppliers. These initiatives increase eﬃciencies for suppliers (by

avoiding audit duplication because one supplier can use the standar-

dized self-assessment or audit for multiple customers), involve more

suppliers (because suppliers that have multiple customers with the

same requirement are more willing to participate), and make sustain-

ability initiatives doable (because supplier training conducted by only

one MNC could be prohibitively expensive). These initiatives also help

MNCs cascade their sustainability requirements to second- and third-

V.H. Villena, D.A. Gioia Journal of Operations Management 64 (2018) 65–87

tier suppliers, especially if MNCs help their tier-one suppliers become

members. For instance, seven tier-one suppliers are members of the

same industry organizations and, thus, need to adopt the same industry

standards with their own suppliers. One supplier requires a small group

of its suppliers to pass an EICC audit, whereas another does the same

with the AIAG self-assessment. Notably, the automotive MNC has

convinced several of its top suppliers to become AIAG members and to

participate in AIAG's sustainability working groups to increase such

initiatives' credibility and eﬀectiveness (rather than simply to impose

such initiatives, see Brockhaus et al. (2013)). As a result, its tier-two

and tier-three suppliers attend AIAG's annual meetings; 4 of the 22

lower-tier suppliers conﬁrmed participation.

5.2.2. Oﬀering sustainability training for (tier-one and lower-tier) suppliers

Each MNC oﬀers sustainability training as part of its eﬀorts to build

sustainability capability in its supply network, using three methods.

First, MNCs use their own sustainability team to exchange best practices

during supplier visits (e.g., EH&S supplier audit) or events (e.g., sup-

plier training week) (Klassen and Vachon, 2003). One chemical sup-

plier's sustainability director reported, “I was invited by [the MNC] to

attend an EH&S training session, but actually learnt that it is EHS&Sfor

them. That was my ﬁrst time where I learnt what that second “S”

[sustainability] stood for. My customer has helped us set our own

sustainability program.” Second, MNCs promote supplier peer learning

on sustainability. The automotive MNC created a supplier sustainability

panel comprised of tier-one suppliers that are sustainability leaders.

This panel facilitates supplier-to-supplier learning as its members dis-

cuss their environmental and social challenges and what they are doing

to address them. The same MNC also publicizes the projects of supplier

sustainability award winners in its supplier portal with the goal of

fostering other suppliers' adoption of similar projects. The pharma-

ceutical MNC created a preferred supplier program composed of its

strategic suppliers. Beyond cost considerations, the reason for engaging

these suppliers is to treat them as incubators of ideas, to learn what

problems they encounter in trying to comply with MNC's sustainability

requirements, and to use that learning to engage the other suppliers.

This program not only allows the MNC to roll over its sustainability

initiatives to its tier-one suppliers but also cultivates a collaborative

environment in which both MNCs and preferred suppliers exchange

ideas on the best approaches to engage lower-tier suppliers. Third,

through their industry organizations, the three MNCs provide training

to their tier-one and lower-tier suppliers. Each encourages its suppliers

to attend industry organization conferences and participate in industry-

wide sustainability training. For instance, the 2014 AIAG Sustainability

Summit attendees were representatives of several global automakers

and suppliers that belong to tier-one; tier-two; and, to a lesser extent,

tier-three. These suppliers beneﬁt from exchanging best practices with

peers and learning about industry-wide initiatives.

Most tier-one suppliers provide health and safety training to factory

workers. The workers we interviewed in Mexico, China, Taiwan, and

the United States conﬁrmed their participation in this training, espe-

cially new workers or those who had undergone a major job change. For

almost all tier-one suppliers, there was no evidence of training for

general managers

on issues such as labor rights, human traﬃcking,

and employing migrant or student workers, even though these issues

recur in social audits. Because seven tier-one suppliers are members of

the industry organizations, they and their own (tier-two) suppliers

could beneﬁt from these organizations’ sustainability training. Five

lower-tier suppliers provide health and safety training to their factory

workers, and a few conﬁrmed their participation in industry-wide

sustainability training.

5.2.3. Setting and enforcing sustainability expectations in contracts

Our MNCs set clear expectations for their tier-one suppliers re-

garding respect for human and employment rights, compliance with

regulations, promotion of safety and well-being for employees, and

ethical behavior. Two MNCs have recently modiﬁed their terms; thus,

suppliers are contractually bound to these expectations, although this

modiﬁcation has been diﬃcult even for these sustainability leaders.

One sustainability director noted, “Our purchasing team likes the idea,

but the pushback is from our legal group.” We found that MNCs include

ROSS and REACH compliance in their contracts, indicating that non-

compliant suppliers will be removed. As a result, MNCs and their tier-

one and lower-tier suppliers work together to have the ﬁnal product

meet these regulations. However, supplier compliance with labor re-

quirements is more diﬃcult. After a ﬁrst oﬀense, the MNC assesses its

causes and works with the guilty supplier to rectify the situation. If the

oﬀense is repeated, the MNC will impose some penalties or end business

with the supplier. As a supply chain social responsibility manager

stated, “We ﬁrst aim to work out the issue with a supplier. In many

cases, we visit the supplier, train its personnel, and provide suggestions.

But suppliers are ultimately responsible for executing the needed

changes. Otherwise, we cancel their contracts.” For tier-one and lower-

tier suppliers, we found no evidence that their contracts include a

clause or stipulation regarding sustainability, mainly because of lack of

legal expertise, absence of control over contractual changes, and sus-

tainability not being a top priority.

5.2.4. Collaborating to deal with surprises

If their suppliers violate sustainability stipulations, MNCs contact

other aﬀected, like-minded companies. One sustainability manager

said, “My counterpart at one of my competitors called me to ask whe-

ther I knew about the increasing number of accidents at one of our

common suppliers. I did my own investigation, and he was right! Later,

our companies united forces to press the supplier to improve its EH&S

management system.” The MNC and its supplier may also collaborate

when both are faced with an imminent threat. For instance, an elec-

tronics supplier received a major order that would have caused it to

violate the 60-h overtime limit. Its sustainability manager explained,

We didn't want to tell our customer that we can't produce its pro-

ducts, because otherwise it's going to try to ﬁnd someone else that

can. But our customer didn't give us enough notice to hire enough

skilled people to do the job. At the end, we presented diﬀerent al-

ternatives of our production schedule. . . . They understood that we

[could] not work [within] the 60-h limit given the short-time notice.

5.3. Assessing sustainability practices [dimension 3 in Fig. 3]

5.3.1. Conducting supplier sustainability assessments

Like others (e.g., Klassen and Vereecke, 2012;Porteous et al., 2015),

we found that the three MNCs survey their tier-one suppliers to assess

whether they comply with EH&S and labor standards. MNCs use either

an on-site audit or a self-assessment questionnaire developed by their

own sustainability team, industry organization, or a third party (e.g.,

Ecovadis). However, their assessments have two distinct features: (1)

they contain a few questions regarding sub-tier supplier sustainability

and (2) they are included in the MNC's supplier risk assessment and/or

supplier scorecard. A procurement director noted, “We believe the

[Ecovadis] self-assessment is solid. We make sure that somebody is

using the results from that score. The focus for future improvement is

coming out of the [Ecovadis] report.” This was conﬁrmed by some tier-

one suppliers that agreed with the following statement: “In our Ecov-

adis report, our lowest score was on the sustainable purchasing section,

which has questions about our sustainability standards on our own

suppliers. We know that Ecovadis will assess our company again in a

General managers (GMs) have ultimate responsibility for plant workers'

health and safety. GMs do not always embrace sustainability. Thus, sustain-

ability professionals' priority is to provide sustainability training to their GMs

and work closely with them and their directors to drive changes.

V.H. Villena, D.A. Gioia Journal of Operations Management 64 (2018) 65–87

year, and we better address this section now if we want to improve our

score.” The electronics MNC uses supplier audits based on EICC code of

conduct, which focuses on labor, EH&S, ethics, and management sys-

tems. This last topic includes mitigating supply chain risks and evalu-

ating processes to cascade MNC requirements to second-tier suppliers.

In all these assessments, MNCs periodically control whether their sup-

pliers comply with sustainability requirements (supplier sustainability

performance has improved over time) and whether these suppliers

monitor their own suppliers' sustainability performance (which has

been consistently rated very low, according to our ﬁeld notes).

We found that 4 (out of 9) tier-one suppliers have implemented

similar assessments with their own (second-tier) suppliers, and these

four suppliers faced several barriers. One has developed its own sup-

plier self-assessment to ascertain if its suppliers comply with the cus-

tomer's ethics policy, disclose CO

emissions to the CDP program, and

have an EH&S program. Its purchasing director noted, “We have 215

from our 2000 suppliers that have completed this questionnaire. The

response rate has increased in the last two years, but we still have a long

way to go.” The other three suppliers use industry-wide standardized

assessments (e.g., EICC supplier audit and AIAG supplier self-assess-

ment) with a small percentage of their suppliers, but these three sup-

pliers also face challenges. Most interviewed lower-tier suppliers de-

clined to participate because they felt the information gathered in these

assessments is too sensitive and they were reluctant to disclose that they

do not comply with most of their customers' sustainability requirements

(ﬁeld notes). Lower-tier suppliers also know that their customers (i.e.,

tier-one suppliers) do not penalize them because the data gathered is

not being used properly (in contrast with MNCs that include scores in

their supplier risk assessment and scorecard). As a result, only a small

group of lower-tier suppliers are being monitored; and even when they

are monitored, they do not suﬀer adverse consequences.

5.3.2. Managing supplier sustainability scorecards

The three MNCs have modiﬁed their scorecards to include labor and

environmental criteria, so their procurement managers periodically

track these criteria along with traditional outcomes. The advantages of

these scorecards are that suppliers know they are periodically mon-

itored on sustainability KPIs and that given equal quality, price, and

delivery, they can beat a competitor if their sustainability score is

higher. The best example is the automotive MNC's scorecard, which

includes two sustainability KPIs—an expenditure target for purchases

from minority suppliers and the supplier's score on a sustainability self-

assessment. If a supplier scores low on these KPIs, the purchasing

manager uses that information in the supplier review meetings and

follows up regarding corrective action plans. Interviewed suppliers

commented that the MNC closely work with them to develop action

plans, and they provided evidence of diverse projects on which they

embarked to improve KPIs that were in “red” or “orange.” Interestingly,

suppliers recognize that these KPIs are clear and objective and help

guide their eﬀorts. As one manager said, “We serve the three U.S. au-

tomakers, and each has diﬀerent requirements. However, [the MNC]

makes it easier for us because its expectations [referring two KPIs] are

clear. We now focus on how to improve them, whereas this is not ne-

cessarily true for other automakers.”

Many tier-one suppliers do not have a formal supplier scorecard.

Only 2 (out of 9) tier-one suppliers implemented a sustainability scor-

ecard for their own suppliers. Both are large, public ﬁrms and thus

receive pressure from their multiple customers (e.g., our MNCs' com-

petitors), investors, and NGOs. One of these suppliers noted, “We assess

whether our suppliers have contingency plans for earthquake, ﬂoods,

etc., whether they report to the CDP project, whether they conﬁrm the

age of their employees. . . . But the human rights questions are a yes-no,

… knock-out criterion. If there is any violation, that's it …. the process

with this supplier stops.” The other supplier said, “Our suppliers take it

very seriously and they take pride in having a score that allows them to

be eligible for the supplier sustainability award. Two [of the 17

questions] are related to whether they monitor their own suppliers on

environmental and social matters.” Except for one lower-tier supplier,

we found no evidence of a supplier scorecard. Lower-tier suppliers'

procurement personnel noted that they monitor cost, quality and de-

livery, but several do not keep records of this monitoring. They ac-

knowledged that their monitoring does not include labor or environ-

mental criteria because they are not priorities for them and because of

lack of resources.

5.3.3. Closing corrective actions plans

After an EH&S and/or social audit/self-assessment, the MNCs and

suppliers need to demonstrate how they address any nonconformities.

In many cases, customers or third parties (e.g., industry organizations)

suggest a timeline for doing so, with contract renewal or membership at

stake. Depending on the violation's severity, a plan's implementation

may take from weeks to years and involve plant managers and senior

executives. For instance, if a plant has exceeded the allowed level of

water pollution, changing a ﬁlter may bring it back into compliance

within a few weeks. However, if overtime exceeds the permitted limit,

addressing this long-term problem will require several meetings with

plant representatives and customers. Although our MNCs and most tier-

one suppliers track the number of unresolved violations and their

progress, we observed that most lower-tier suppliers do not.

5.4. Managing sustainability risks and opportunities [dimension 4 in

Fig. 3]

5.4.1. Mapping the ﬁrm's supply network

Our three MNCs show a strong commitment to gaining more visibility

in their supply networks with the goal of identifying “potentially risky”

lower-tier suppliers and tailoring their risk-mitigation plans for them.

Two have invested in mapping their supplier networks with the help of

consulting companies and some of their strategic suppliers. Like Norrman

and Jansson (2004), we found that this mapping provides key informa-

tion about lower-tier suppliers: location (e.g., where they manufacture

their products), dependence (e.g., whether a lower-tier supplier has full

control of the ﬂow of speciﬁc commodities), and risks (e.g., whether a

key part is manufactured in locations that are poorly regulated or are

prone to natural disasters). Furthermore, MNCs could discover oppor-

tunities based on this information. As a sustainability director said, “This

has been a great exercise for us. We now need to take actions on those

who are potentially risky. Collaboration with our top tier-one suppliers is

a priority; my team is now considering diﬀerent options that were not in

the table before.” Some tier-one suppliers conﬁrmed their participation

in the MNC's eﬀort to map its supply network, believed that this eﬀort

could increase transparency, and acknowledged the learning process.

One manager noted, “This shows the commitment of [our customer]. By

participating, we learned how they assess supplier sustainability risks

and how our own materiality assessment should look.” However, another

set of tier-one suppliers did not support mapping because they did not

trust the MNC. They echoed the following sentiment: “[The customer]

has asked us to participate on this, but who can assure us that they won't

use this information to transact directly with our own suppliers or share

such sensitive information with our competitors? I simply don't trust

them. In the past, they tried to gather the same information using other

means.” These suppliers consider their own suppliers' identity proprie-

tary information and often resist disclosing it to their customers, as

conﬂict minerals studies have shown (Hofmann et al., 2018;Kim and

Davis, 2016). We found only one tier-one supplier, Powertrain, that made

a similar eﬀort to map its supply network. In all these cases, the pro-

minent barrier is the lack of trust in those mapping their supply net-

works. Among lower-tier suppliers, we found no evidence of attempting

to create a supplier network map.

5.4.2. Conducting a risk assessment program

Because stakeholders hold MNCs responsible for unfair conditions

V.H. Villena, D.A. Gioia Journal of Operations Management 64 (2018) 65–87

within their supply chains (Hofmann et al., 2014), MNCs assess their

suppliers based on multiple criteria and develop sustainability risk

strategies to minimize reputational consequences (Busse et al., 2016;

Foerstl et al., 2010;Hajmohammad and Vachon, 2016). In our study,

tier-one suppliers are assessed on ﬁnancial stability, business volume,

commodity type, location, environmental risks, and labor issues. After

suppliers are ranked (from high to low risk) or classiﬁed (red versus

green), MNCs choose the type of risk-mitigation strategy—a colla-

boration-based or a control-based approach or both (Hajmohammad

and Vachon, 2016). As a sustainability manager noted, “For those

suppliers at the highest level of our risk assessment, we do a most

rigorous review. After collecting proper information, we determine

where we can help most. After our intervention, the supplier should

overcome its issues. If that doesn't happen, we stop doing business with

them.” In one exceptional case the pharmaceutical MNC extended its

risk assessment to include lower-tier suppliers identiﬁed through its

supply network map. Such suppliers are also classiﬁed based on risk

potential; and that MNC has developed a few three-way partnerships

(MNC, tier-one supplier, lower-tier supplier) to address the identiﬁed

risks.

Only two tier-one suppliers, Powertrain and Seat, have developed a

risk assessment tool. These are companies with global operations that

have experienced major supply disruptions from natural disasters, po-

litical instability, or customer pressure. These suppliers modiﬁed their

tools to include more precise measures of their suppliers’ social and

environmental performance as part of their overall risk assessment. In

one exceptional case, a lower-tier supplier, Tronics, has formed a spe-

ciﬁc team dedicated to work with its “risky” Chinese suppliers. Our

interviews with three members of this team highlighted how each one

conducts EH&S on-site audits, provides in-situ training, and keeps

monthly progress records. This supplier has cut ties with a few suppliers

that have not redressed their labor and environmental non-con-

formities. This particular case illustrates that this supplier uses multiple

rather than single risk-mitigation strategies (Hajmohammad and

Vachon, 2016).

5.4.3. Managing crisis

All three MNCs have experienced crises such as labor strikes, en-

vironmental scandals, or natural disasters. To mitigate the con-

sequences of such crises, they develop plans with clear goals, nominate

a spokesperson responsible for delivering a consistent message, form a

multifunctional team, and communicate to all aﬀected stakeholders.

Because of their global operations, they also must coordinate eﬀorts

between aﬀected plants and their corporate oﬃces. As a manager

noted, “During the last crisis, we coordinated closely with the aﬀected

plants and delivered a consistent message by my vice-president in the

U.S. and the general manager in China. We also consulted with a group

of advisors. This helped us mitigate the consequences of this crisis.”

Another manager related, “My company and more broadly the auto-

motive industry was greatly impacted by the earthquake in Japan a few

years ago. Competitors and I worked closely with [aﬀected suppliers] to

switch our components to unaﬀected plants.” Tier-one and lower-tier

suppliers sometimes adopt a similar approach but are less sophisticated.

The type of response depends on supplier size, operations, and the

magnitude of the crisis.

6. Findings 3: comparing sustainability practices across MNCs,

tier-one and lower-tier suppliers

As described in detail above, MNCs display both proactive and re-

active sustainability practices. They not only have long-term sustain-

ability goals that include their upstream suppliers and dedicate con-

siderable resources to achieve them, but also employ practices that

allow them to go on the oﬀensive during a crisis. First, they have a

hands-on approach to manage sustainability in their supply networks

by oﬀering diverse supplier sustainability training, by collaborating

with diverse stakeholders and extending invitation to suppliers to do

likewise, and by enforcing their sustainability requirements con-

tractually. Second, they conduct periodic supplier sustainability as-

sessments, monitor supplier sustainability scorecards, and work with

their supplier to take corrective actions. Third, they have mapped their

supply networks to the best of their capabilities and have built robust

risk management programs in which they assess their suppliers' sus-

tainability risks. These characteristics show MNCs’ commitment to

managing sustainability in their supply networks.

In contrast, tier-one suppliers are primarily reactive. Several have

successfully responded to the MNCs’ sustainability demands whereas

others struggle to comply with such demands. All these suppliers tend

to have an “inward-looking” view of their sustainability goals—in that

the sustainability of their supply chain is not a priority. For instance,

they often oﬀer health and safety training to their factory workers, but

do not make such training available to their suppliers. These suppliers

have more limited resources, so they take advantage of the sustain-

ability training oﬀered by their customers and/or an industry associa-

tion. Only two tier-one suppliers, Powertrain and Seat, show some level

of proactivity, because they have established some long-term sustain-

ability goals, conduct periodic supplier sustainability assessments, and

include their suppliers in their risk monitoring/mapping tools. These

two suppliers include sustainability as part of their corporate strategy;

however, they are also cognizant of the high pressure to deliver proﬁts.

Finally, lower-tier suppliers are overwhelmingly passive in their

orientations toward sustainability. They do not address their labor and

environmental issues because they do not perceive that they will be

penalized for not doing so. They do not monitor the sustainability

practices of their own suppliers because there is no pressure to do so.

Their top managers prioritize mainly the proﬁt dimension and will re-

spond to labor and environmental issues only if MNCs or customers

become involved. Among 22 participating lower-tier suppliers, only

one, Tronics, shows a long-term orientation of its EH&S program; but

again, the high pressure on proﬁts force even this supplier to dedicate

only modest resources. To date, Tronics has monitored sustainability

only in its Chinese suppliers because of limited resources (although

other suppliers have also been ranked as “high risk”). This supplier has

made a few steps in the right direction due to high pressure from sev-

eral downstream customers in diﬀerent industry sectors that prioritize

sustainability of their supply chains.

7. A grounded theoretical model for managing a sustainable

supply network

The grounded theoretical model for managing a sustainable supply

network appears in Fig. 4. It involves three core processes: assessing

sustainability practices, building sustainability capability, and managing

sustainability risks and opportunities. All three processes are recursively

interrelated as indicated by the reciprocal arrows interconnecting them,

indicating that managing sustainability in a supply network is a com-

plex eﬀort that cannot be adequately depicted in terms of linear, causal

relationships (Senge et al., 2008;Slawinski and Bansal, 2015). Instead,

there is interplay and periodic feedback among the three core processes.

Such reciprocal relationships are common to the three MNCs, which are

all sustainability leaders that have learned not only by trial and error

but also vicariously by benchmarking sustainability practices within

and outside their industries.

The reciprocal arrows between the assessing sustainability practices

and building sustainability capability dimensions indicate that both are

mutually interdependent (e.g., the results of a supplier's social audit

might suggest deﬁcient sustainable procurement processes and, thus,

could be subsequently included in the MNCs' supplier training. Upon

delivering this training, the MNC could re-assess its supplier and ex-

amine whether its sustainable procurement processes have improved).

Similarly, the recursive relationship between building sustainability

capability and managing sustainability risks and opportunities indicates

V.H. Villena, D.A. Gioia Journal of Operations Management 64 (2018) 65–87

that both dimensions are reciprocally interdependent (e.g., an MNC can

dedicate resources to build supplier sustainability capabilities that in-

clude managing lower-tier suppliers only if it ﬁrst knows some of the

sustainability risks these suppliers entail; in doing so, the MNC could

then identify new risks not previously considered). The reciprocal ar-

rows between assessing sustainability practices and managing sustainability

risks and opportunities indicate that the results of a MNC's risk man-

agement program can help determine the types of assessment suppliers

should receive and that the results of a supplier assessment showing low

social and/or environmental performance could serve as input to revise

a ﬁrm's risk management program. The three MNCs exhibited this

pattern of recursive processes over this research period as they adjusted

and ﬁne-tuned each process in attempting to manage lower-tier sup-

plier sustainability. MNCs engage a group of its tier-one suppliers to

cascade their requirements to lower-tier suppliers, but this engagement

still represents a challenge because these suppliers often struggle to

comply with such requirements and because most lower-tier suppliers

passively address their social and environmental issues.

The model also depicts a fourth dimension, committing to a sustain-

able supply network, as an antecedent to the three core processes.

Perhaps unsurprisingly, the three MNCs exhibit a high degree of

proactivity in pursuing sustainability throughout their supply networks

(because each MNC is an acknowledged sustainability leader in its in-

dustry). They consider the network of suppliers when developing a

sustainability strategy and commit resources to implementing sustain-

able practices; they have long-term sustainability goals; and they pro-

vide incentives to tier-one suppliers that comply with MNCs' sustain-

ability requirements, particularly if they cascade such requirements to

their own suppliers. Even if tier-one suppliers are capable of cascading

MNCs' requirements to lower-tier suppliers, MNCs must reward them

for doing so. The interplay of these four dimensions constitutes a the-

oretical framework rooted in MNCs’ demonstrably eﬀective processes

and, thus, provides a comprehensive approach to managing sustain-

ability throughout a supply network.

8. Discussion and future research directions

This study oﬀers three contributions to the sustainable supply chain

management literature: (1) it provides empirical evidence indicating that

lower-tier suppliers are likely to be a supply network's riskiest members

and reveals that they generally tend to address social and environmental

issues passively; (2) it proposes a comprehensive grounded-theoretical

framework for managing sustainability throughout a supplier network,

based on practices developed by sustainability leaders in their industries;

and (3) it identiﬁes supply network members' three predominant re-

sponses—passive, reactive, and proactive—that inﬂuence how each

member manages sustainability within its operations and with its sup-

pliers. Thus, by including the perspectives of MNCs, tier-one suppliers,

and especially lower-tier suppliers, and by accounting for the 3Ps, we

aim to bring more attention to the risks associated with lower-tier sup-

pliers and propose a practice-based theoretical framework for managing

sustainable supply networks, both of which have important future re-

search implications.

8.1. On the precariousness of lower-tier suppliers

In addition to the obstacles MNCs face in engaging lower-tier sup-

pliers, such as lack of information and resources, as well as power and

trust asymmetries (Grimm et al., 2014;Hofmann et al., 2018;Kim and

Davis, 2016), this study reveals a notable passivity that lower-tier

suppliers exhibit regarding social and environmental issues. Our ﬁnd-

ings show that many tend not to address these issues of their own vo-

lition, mainly because they so far perceive no consequences for not

doing so. They are often unknown ﬁrms with no pressure from the

media; and even when they are monitored (e.g., by CEREAL), they tend

to take actions only if MNCs and/or customers intervene. Like other

researchers (Grimm et al., 2014;Tachizawa and Wong, 2014), we also

ﬁnd that these suppliers are often smaller ﬁrms with limited resources,

lack sustainability expertise, and operate in countries with less stringent

labor and environmental laws, all of which constitute reasons con-

tributing to their passivity. Their environmental and social performance

is not well monitored by either MNCs or the MNCs' tier-one suppli-

ers—several of which struggle themselves to comply with the MNCs’

sustainability requirements. Yet, the world is changing. Media and

other social movements suggest increasing concern for people and

planet issues, so the current passivity toward addressing social and

environmental issues is unlikely to be a viable approach in the not-too-

distant future.

Because of this passiveness, existing theories about how suppliers

adopt sustainability may not actually apply well to lower-tier suppliers.

For example, we rarely observed “internal championing for environ-

mental management” (Lee and Klassen, 2008) or “social innovation

capabilities” (Klassen and Vereecke, 2012) among lower-tier suppliers.

Because a supply network is only as strong as its weakest link, it is im-

perative to focus on those that pose more sustainability risks to the

supply network. More research is needed to better account for lower-tier

suppliers to learn more about their behaviors and challenges, as well as

the factors that support or oppose sustainable practices among them. The

key is to collect data on how lower-tier suppliers adopt the MNC's or

industry's sustainability standards. We recognize the daunting eﬀort (in

terms of time, budget, language skills, etc.) of doing so, however.

Our grounded research identiﬁed one exception among 22 lower-

tier suppliers. Besides being a large, public ﬁrm, Tronics participates in

all three supply networks and, thus, has access to diverse in-

formation—it is a “nexus supplier” (Yan et al., 2015). This situation

coupled with the fact Tronics knows that most of its downstream cus-

tomers are committed to improving their supply chains' social and en-

vironmental performance have contributed to its proactivity regarding

Fig. 4. A grounded theoretical model of managing a sustainable supply network.

V.H. Villena, D.A. Gioia Journal of Operations Management 64 (2018) 65–87

sustainability. Likewise, we observed how the increasingly common

consolidation of supply bases makes it more diﬃcult for suppliers with

higher growth rates to continue their environmental and labor in-

itiatives (because of limited resources, complexity added by the ac-

quisitions, and strong cost-reduction pressures). This ﬁnding contrasts

with Klassen and Vereecke's (2012) work, which suggests that vertical

integration of a ﬁrm's downstream supply chain partners might have

positive social implications (e.g., improved product safety). This con-

trast could be because upstream suppliers usually have fewer resources,

face stronger cost reduction pressures, and are less exposed to external

stakeholder demands compared to downstream customers. We did not

intentionally study a nexus supplier or the implications of supply base

consolidation. These phenomena surfaced during our research, how-

ever, and revealed some novel insights with implications for future

research. Scholars could investigate, for instance, how supply base

consolidation might aﬀect a buying ﬁrm's sustainability performance or

other factors that induce nexus suppliers to be key players in cascading

sustainability throughout a supply network. Finally, our ﬁnding that

labor issues diﬀer across countries implies that researchers need to

more deeply investigate the variations of social issues across national

settings among suppliers in emerging countries. Also, the health and

safety deﬁciencies found in lower-tier suppliers in the United States

challenge the belief that suppliers operating in a more stringent reg-

ulatory environment are likely to have better labor practices. That these

lower-tier suppliers are the least compliant, least monitored, least well-

equipped concerning sustainability suggest that they are indeed a

supply network's riskiest members.

8.2. Toward a theory of sustainable supply networks

Although some empirical work on supply networks has been done

using complex adaptive system theory (e.g., Choi et al., 2001;Choi and

Hong, 2002;Kim et al., 2011), its focus has been mainly on only one

sustainability pillar: proﬁts. In this study, we intended to advance this

research stream by including the other two pillars: people and planet.

Accounting for all 3Ps in managing a supply network requires a dif-

ferent mindset, even for such sustainability-savvy MNCs as those stu-

died here. For instance, if MNCs use a directed sourcing strategy (i.e.,

demanding that top-tier suppliers work with a pre-selected group of

lower-tier suppliers), the operational and technical capabilities of these

suppliers clearly need to be thoroughly assessed. Their social and en-

vironmental capabilities also need to be evaluated, even when MNCs

anticipate that they could end up with a smaller set of compliant lower-

tier suppliers and when MNCs’ sustainability agendas might not pay oﬀ

in the short term, especially for the social and environmental initiatives.

Choi et al. (2001) noted that ﬁrms that deliberately manage their

supply networks through both control and emergence outperform ﬁrms

that try to manage their supply networks by either control or emergence

alone. Our framework for managing a sustainable supply network af-

ﬁrms this premise. The three MNCs exercise both control and emer-

gence through their sustainability practices. In particular, the most

proactive practices (e.g., asking suppliers to set up their own long-term

sustainability goals) allow suppliers to have some level of autonomy in

identifying their major sustainability challenges and in developing ap-

propriate capabilities (rather than imposing the same sustainability

standard on all suppliers). This study reveals, however, that many

lower-tier suppliers do not prioritize the social and environmental di-

mensions; thus, such suppliers are less likely to develop breakthroughs

for improving labor conditions or reducing green gas emissions by

themselves (as they can do with breakthroughs in product quality, for

instance). Past studies suggest that environmental innovation can

emerge from a supply network (Nair et al., 2016); in our sample of 22

lower-tier suppliers, however, this type of innovation is the exception

rather than the norm. To see improvements in a supply network's social

and environmental dimensions, buying ﬁrms could (1) exercise more

control than emergence (at least until upstream suppliers become more

sustainability-mature) and (2) embrace more complexity because the

addition of people and planet dimensions creates new challenges in

managing supply networks (in addition to horizontal, vertical, and

spatial complexity inherent in the three supply networks we studied

(Choi and Hong, 2002)). Fortunately, some MNCs are already working

toward that end. Researchers are also called to embrace complexity

(e.g., going beyond the buyer-supplier dyads and embracing 3Ps

jointly) in their sustainability research agendas to address the kinds of

conundrums that practitioners face.

We identify four major dimensions that serve as the basis for our

grounded theoretical framework (see Fig. 4). Few of the practices in this

framework are individually revelatory; instead the revelation is in the

constellation of practices that sustainability leaders use to manage their

supply networks, as well as the distinct attributes of the three core di-

mensions. First, each includes how MNCs manage sustainability in both

tier-one and lower-tier suppliers (e.g., managing a sustainability KPI that

has speciﬁc spending targets for sub-tier suppliers), suggesting that MNCs

have a hands-on approach to managing their supply networks. Most

proactive practices require collaboration across several functions within

the ﬁrm (e.g., risk management and EH&S) and across external stake-

holders (e.g., industry associations); thus, our theoretical framework

adopts a more integrative perspective by going beyond analyzing speciﬁc

supply chain functions (Grimm et al., 2016). Second, assessing supplier

sustainability and building supplier sustainability capabilities were es-

sential. Both practices have been suggested in buyer-supplier dyads

(Klassen and Vachon, 2003;Vachon and Klassen, 2006) and supply

chains (Brockhaus et al., 2013). Extending these studies, our research

shows that MNCs use both practices, but they do not do it alone. By

joining eﬀorts with industry associations, MNCs seek to standardize

sustainability assessments and provide sustainability training with eﬃ-

ciencies for both sides—MNCs and suppliers, especially when MNCs help

tier-one suppliers become members of these associations. If so, such

suppliers can use industry-wide sustainability assessments with their own

suppliers and invite them to beneﬁt from industry-wide learning op-

portunities. Third, the recursive relationships among the three core

processes are fundamental to understanding how MNCs account for

feedback loops. Scholars are attempting to understand a very complex

phenomenon (encompassing the 3Ps and multiple supply network

members), which is unlikely to be adequately understood in terms of

simple linear eﬀects. The three MNCs account for reciprocal feedback

loops that they employ to enact sustainability (Weick, 1995). Enactment

implies that actions by one party aﬀect those of related parties and,

therefore, inevitably involve recursive interrelationships. When an MNC

takes an action aﬀecting their suppliers, those suppliers' subsequent ac-

tions are likely to lead the MNCs (and perhaps lower-tier suppliers, as

well) to assess its own actions' consequences and the suppliers' responses.

The MNC and all aﬀected suppliers then re-assess consequences and

decide on further action. These interrelationships imply a context that is

not only complex, but also dynamic, uncertain, and ambiguous. In future

research, supply chain scholars should use not only more longitudinal

research designs capturing these feedback loops but also measures ac-

counting for lower-tier suppliers’ actions. They could also test in a large-

scale survey the eﬀectiveness of our theoretical framework or collaborate

with industry organizations to collect data on suppliers located in dif-

ferent tiers and analyze how industry-wide standards cascade thorough

the supply network.

The theoretical dimension, committing to a sustainable supply net-

work, is characteristic of the three sustainability leaders we studied and

is a probably a necessary hallmark for any ﬁrm concerned about sus-

tainability. This commitment serves as the foundation for MNCs to

implement their core sustainability processes. Each has dedicated per-

sonnel to extend its sustainability agenda to suppliers, set long-term

goals for its operations and suppliers, and provided incentives to its

suppliers that help them achieve the MNC's sustainability goals, parti-

cularly if they cascade such requirements to their own suppliers. In fact,

all three MNCs have a long-term approach to sustainability that

V.H. Villena, D.A. Gioia Journal of Operations Management 64 (2018) 65–87

contributes to their resilience (Ortiz-de-Mandojana and Bansal, 2016).

They also adjust and ﬁne-tune their sustainability practices, however,

because achieving lower-tier supplier sustainability is a long-term

project for them.

8.3. Passive, reactive and proactive

Our research approach generated a diﬀerent way of understanding

the sustainability-related actions of supply network members, espe-

cially the (non)actions of lower-tier members. We tend to think about

ﬁrms’ actions dichotomously—as either proactive or reactive. This

method of categorizing an important phenomenon, however, does not

account for what we observed for most of our participating lower-tier

suppliers, which could not be described according to a proactive/re-

active scheme concerning social and environmental sustainability.

Rather, their stance toward these issues is much better described as

passive. Because passive does not appear in traditional depictions,

supply-chain researchers should pay even more attention. In other

words, like the postmodern stance that exhorts researchers to focus on

not only what is said, but also what is not said (Rosenau, 1991), supply

chain researchers should focus on both what is evident (reactivity and

proactivity) and what is less so (the passivity of lower-tier suppliers).

Our analysis identiﬁed three types of responses—passive, reactive

and proactive, each based on two key factors: temporal focus and re-

source commitment (see Fig. 2). Temporal focus is at the heart of sus-

tainability research because tensions between short-term business in-

terests and long-term societal interests are well-known (Ortiz-de-

Mandojana and Bansal, 2016;Slawinski and Bansal, 2015). Resource

commitment is also important because sustainability initiatives and

practices require important investments of ﬁnancial and human re-

sources (Sethi, 1979;Sharma and Vredenburg, 1998), not only to

maintain proﬁts, but also to account for people and planet concerns.

Each of these factors has been explored separately in sustainability and

CSR research focusing mainly at the single-ﬁrm level. This research

suggests, however, that both temporal focus and resource commitment

are important in combination.

The MNCs we studied are perhaps best described as “ambidextrous,”

in that they use both proactive and reactive processes to manage sus-

tainability with their tier-one suppliers. MNCs employ both processes to

allow them to implement more integrated solutions with long- and

short-term time horizons, as well as to invest resources in their de-

ployment. Several tier-one suppliers use predominantly reactive pro-

cesses to manage their lower-tier suppliers. The few that have some

proactive practices are large, public suppliers whose top executives

support having an EH&S program and collaborate with MNCs to engage

lower-tier suppliers. Most of the 22 lower-tier suppliers we examined do

not use such processes. This ﬁnding is revelatory on a conceptual level

and troubling on a practical level. Many ﬁrst-tier suppliers simply react

to sustainability violations as they arise. In contrast, many lower-tier

suppliers usually do not act without MNC and/or customer interven-

tion. Their passivity makes them vulnerable to penalties, law suits,

contract cancellations, and negative publicity that can threaten their

survival.

8.4. Practical implications

MNCs must devote resources to managing sustainability in lower-

tier suppliers, even if only for risk-control purposes. The sustainability

leaders we studied exhibit the following best practices. First, they have

created a supportive organizational structure to manage sustainable

supply networks. Second, besides their comprehensive supplier assess-

ments, the three MNCs invest in building sustainability capability for

their suppliers. For instance, oﬀering sustainability training (through

MNC–supplier, supplier–supplier, and industry organization–supplier

interactions) is vital. Their suppliers recognize these learning oppor-

tunities as major drivers of their own sustainability agendas. The MNCs

also partner with industry and international organizations to tackle

social and environmental challenges and encourage tier-one suppliers

to do likewise. Third, they have supply-network mapping and risk-

management programs that help them improve their visibility with

lower-tier suppliers. Yet, they must reinforce collaboration with their

tier-one suppliers to cascade their sustainability requirements

throughout their supply networks. Despite their high commitment, they

recognize that there is room for improvement and that their feedback

loops will help them develop more robust processes over time.

This research also suggests actions for suppliers. Although tier-one

suppliers are fully aware of MNC sustainability requirements, many

lower-tier suppliers are not. Several tier-one suppliers are struggling to

fulﬁll these requirements, and some are still skeptical of whether the

MNC's sustainability eﬀort is genuine. We recommend that suppliers

become more proactive to protect themselves. If they continue relying

mainly on reactive practices, they will soon experience the real sus-

tainability risks to which they are exposed—not just some vaguely

conceived public disfavor, but termination of contracts and even loss of

operating licenses. Their inward perspective also puts them in a vul-

nerable position because their suppliers' misconduct could have severe

consequences. Lower-tier suppliers' passivity in addressing social and

environmental issues is striking, but that worrisome stance could

change if tier-one suppliers become more proactive in their sustain-

ability orientations.

The old bumper-sticker advice “think globally, act locally” sum-

marizes the practical implications of our ﬁndings. The three MNCs set

sustainability targets for their tier-one suppliers, monitor them peri-

odically, and provide training and incentives to suppliers so they pass

down such sustainability practices. This strategy is not only econom-

ically feasible (because an MNC cannot monitor tens of thousands of

tier-two suppliers directly) but also eﬃcient (because tier-one suppliers

know their own suppliers’ operations and challenges better than the

MNC does). If this strategy is coupled with key partnerships with in-

dustry and international organizations as well as NGOs, the require-

ments of the MNC can have a global eﬀect on its supply network.

9. Conclusion

Many MNCs take sustainability management seriously and have

experienced some notable successes in managing their ﬁrst-tier sup-

pliers. The greatest risk is in the lower tiers, however. A supply network

cannot be sustainable if lower-tier suppliers are not addressing their

social and environmental issues. Our main goal was to propose a

grounded framework for managing sustainable supply networks; this

goal is relevant for both theory and practice (Thomas and Tymon,

1982). Yet, this study represents only a ﬁrst step in reaching this am-

bitious goal. Indeed, our ﬁndings based on three sustainability leaders’

supply networks may underestimate the real magnitude of sustain-

ability-related challenges because other MNCs might have less mature

sustainability programs and their suppliers might be even less com-

mitted than those we studied. Nevertheless, we hope to begin a con-

versation about the focus of future sustainability research. It is time for

sustainability researchers to consider lower-tier suppliers in more

depth.

Acknowledgement

We are grateful to the factory workers, managers, directors, and

vice-presidents of all participating companies, as well as representatives

of industry organizations and NGOs for the time they devoted to our

research. We are also grateful to Forrest Briscoe (Penn State

University), Terry Harrison (Penn State University), Mark Barratt

(Marquette University), Lance Ferris (Michigan State University) and

research seminar participants at the Johnson Graduate School's OM

department (Cornell), the Mendoza College of Business's ITAO depart-

ment (Notre Dame) and Saïd Business School's TOM department

V.H. Villena, D.A. Gioia Journal of Operations Management 64 (2018) 65–87

(Oxford) for comments and suggestions on earlier versions of this

manuscript. We would also like to thank the Sustainability Research

Initiative at the Smeal College of Business of the Pennsylvania State

University for ﬁnancial support in the development of this research.

APPENDIX. 1a. Interview instrument for companies

a) About the company's sustainability program

⁃What is the overall sustainability strategy for your company?

⁃What are the key priorities in your sustainability strategy?

o Environment: (e.g., waste reduction, energy use reduction, etc.)

o Health and safety (e.g., reduction of accidents, well-being of workers, etc.)

o Social: (e.g., human rights, working conditions, diversity, etc.)

⁃How does your company deploy this strategy? What is the infrastructure that your company has to implement its sustainability strategy?

b) About sustainability initiatives with (ﬁrst-tier) suppliers

⁃Does your company have any speciﬁc sustainability practices/processes for your suppliers? What are they? How do you deploy them? Please

explain.

⁃Does your company have a systematic approach to assess the beneﬁts of these practices/processes?

⁃What are the major barriers when deploying these practices/processes?

⁃Does any third party (e.g., industry organizations, NGOs, etc.) play a key role in your sustainability practices/processes with your suppliers?

c) About sustainability initiatives with lower-tier suppliers

⁃What do you know about your second- and third-tier suppliers?

⁃How does your company ensure that such suppliers comply with your sustainability standards?

APPENDIX. 1b. Interview Instrument for NGOs

⁃Which are your major responsibilities in this organization?

⁃What are the major initiatives your organization have to improve environmental/labor conditions of companies? How closely do you work with

these companies?

⁃Please describe the relationship with company [Name]. Do you have any open case(s) with company [name]? If so, please describe them

⁃What are the long-term sustainability plans for your organization?

APPENDIX 2. Representative informant quotes underlying second-order dimensions

Dimension 1: Committing to A Sustainable Supply Network

Having a supportive organizational structure “My executive steering committee and I [Sustainability director] meet quarterly. I

meet with them to make sure that my group continues with their direct support.”

“The biggest challenge I think we face as a company right now is on expanding the

sustainability initiatives farther down in the supply chain than what we have today.

My group [Sustainable procurement] is working to achieve it.”

“My major responsibilities is to have an integrated sustainability strategy for our

supply chain and coordinate with diﬀerent functions [such as risk management and

EH&S] so this strategy is eﬀectively implemented”

Setting long-term goals for the ﬁrm and its (tier-one and

lower-tier) suppliers

“Many of them are 2020 goals, and there are a few that are speciﬁc to our suppliers.

With this long-term perspective, we are seen and appreciated as a leader in

sustainability.”

“There were a few key commitments that we agreed upon, but one was on setting

longer term goals. One set of such goals is dedicated to supplier sustainability. Our

company has speciﬁc metrics and we conduct an annual review of these metrics.”

“We require that our [strategic tier-one] suppliers conducted a business continuity

assessment. Based on this assessment, they should select two sustainability goals that

are relevant to their business and then publicly report such goals. Last year, we have

more than 75% of such suppliers that accomplish this goal.”

Incentivizing sustainability commitment to suppliers “We have an award ceremony, where all winner suppliers are presented and

recognized in front of the whole industry.”

“Last year, we organized our ﬁrst council with our strategic suppliers to brainstorm

how we can work together to engage our sub-tier suppliers.”

Dimension 2: Building Sustainability Capability

Collaborating with key stakeholders (e.g., NGOs,

industry and international organizations, etc.)

“One of the industry group that we work with heavily is called AIAG. My team is very

active on the AIAG corporate responsibility group. To date, we use its supplier self-

assessment questionnaire and training.”

“I have a full-time employee dedicated to be our liaison with EICC. Our company was

V.H. Villena, D.A. Gioia Journal of Operations Management 64 (2018) 65–87

one of the founding member of this organization. We are committed to its code of

conduct and participate in its diﬀerent group. We also promote our suppliers to

become EICC members.”

“We are members of RX 360 and support the activities that they do. For example, we

comply with its standardized member audits. We also work with API. We have

leveraged its supplier training in Asia and India, as suppliers in these two countries are

a big concern for us.”

Oﬀering sustainability training for (tier-one and lower-

tier) suppliers

“We perceived that suppliers in the Asia paciﬁc region are in need of most health and

safety training, and we partnered with industry eﬀorts such as PSCI to do it.”

“Sometimes, we hold supplier sustainability panel here, while at other times, it is

hosted by our suppliers. It works as a two-way channel … companies present

something that they are doing on sustainability. Here is our overall program, or here is

something that we did, and we want you to know about it. This panel is a non-

confrontational platform that was oriented towards sustainability.”

“We use a small group of preferred suppliers to test some of our sustainable purchasing

initiatives. Our resources are limited so we piloted such initiatives with this group and

then rolled out such initiatives to our supply base.”

Setting and enforcing sustainability expectations in

contracts

“Our lawyers are not going to include a stronger message in our contracts unless we

are willing to step up to that.”

“We can't aﬀord to be associated with such misbehavior [referring to precarious

working conditions on suppliers]. This is why our contract explicitly includes

sustainability requirements. If a supplier can't comply with them, there will be

consequences.”

“We removed a group of repeated oﬀenders. They did not show a genuine commitment

to address their problems.”

Collaborating to deal with surprises “We reach out to our suppliers and customers when we face a supply disruption. We all

work together to mitigate its consequences.”

Dimension 3: Assessing Sustainability Practices

Conducting supplier sustainability assessments (e.g., self-

assessments, audits, etc.)

“Our industry has its own supplier self-assessment and my company and a few others

have adopted it. To date, we require that all our suppliers complete this industry-wide

self-assessment.”

“In the Ecovadis assessment there is a section called sustainable procurement so our

expectations can cascade our suppliers' suppliers. It is scored individually along with

the environmental section, labor section, and fair business practice section.”

“If there is a need for an environmental protection or health and safety audit, we will

then complete the audit internally using internal resources. If there is a need for an

audit for labor practices or ethical business practices, we then outsource it through a

couple preferred vendors like Intertek, Bureau Veritas and SGS.”

Managing supplier sustainability scorecard “To incentivize our suppliers, we have a sustainability criterion that makes up 5% of

their scorecard rating along with quality, delivery, and cost.”

“We have a speciﬁc KPI for our supplier diversity spend—our (tier-one) suppliers

needs to purchase 7% of their total spent from minority (lower-tier) suppliers. If we

didn't push for this KPI, the success of our supplier diversity program throughout the

supply chain wouldn't happen on its own.”

“Our company issues supplier scorecards quarterly; however, our commodity

managers monitor this more carefully. They keep track of suppliers' performance and

take corrective actions if necessary.”

Closing correcting action plans “If my supplier has non-conformities in our audit, it has to set corrective actions. We

follow-up on those corrective actions in our next visit/meeting.”

“Our category managers will work with the suppliers to ensure that the checklist of

non-conformities is being worked on. Once it is resolved, they will let us [the

sustainability team] know the action plans that were completed.”

Dimension 4: Managing Sustainability Risks and Opportunities

Mapping the ﬁrm's supply network “As part of our materiality assessment, we began mapping the supply network for our

critical products. We have not only identiﬁed our lower-tier suppliers for such

products are but also learnt about their interdependences.”

“Last summer, we conducted a pilot test for mapping our supply network of one of our

electronics sub-systems. We learnt a lot about our tier-two/three suppliers during this

process. We are now evaluating a consulting company to help us map our supply

network to a large scale.”

“My team [procurement] and our strategic suppliers brainstormed all day long in our

ﬁrst supplier sustainability conference, and they come up with new good ideas that are

doable in the long-term.”

Conducting a risk assessment program “We have an enterprise risk management process that we do across our organization.

Particularly, there is supply chain risk management process that is speciﬁc to how we

decide which suppliers we are more concerned about. This process is based on several

V.H. Villena, D.A. Gioia Journal of Operations Management 64 (2018) 65–87

criteria … If there is a supplier who ﬂoats to the top, that supplier will get an outside

audit and, then, a risk mitigation plan. Now they are in our territory.”

“Our [purchasing] team along with our business continuity team have developed a

comprehensive risk management program that include our suppliers. We are now

considering how to include those lower-tier suppliers that we know little about.”

“The audit, the onsite type, is reserved for either high-risk or new suppliers. Also, the

most important categories such as external manufacturing and active ingredients will

have the highest priority.”

Managing crisis “We have a few cases of labor scandals, and our team is evaluating their impact on our

company reputation.”

“My company was greatly impacted by the earthquake in Japan a few years ago. We

had several suppliers in that region. A major supply disruption was an eminent treat.

Competitors and I worked closely with these suppliers to switch our components to

unaﬀected plants in other countries. There was a full-time dedicated team to monitor

it.”

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Aug 2016
INT J PROD ECON

Buying firms must pay increased attention to supply chain sustainability issues, as stakeholders might hold them responsible for non-sustainable supply chain activities. Frequently, sustainability problems occur upstream at the sub-supplier level. Building on the literature on multi-tier supply chains (MSCs), we investigated the sustainability management strategies of buying firms in the food, apparel, packaging, and consumer electronics with regard to second-tier suppliers and beyond. In particular, we analyzed seven cases of global MSCs and found four different characteristic MSC types—open, closed, third party, and “don't bother”. We identified three main factors—supply chain complexity, the sustainability management capabilities of the first-tier supplier, and the type of sustainability in focus (i.e., environmental or social sustainability)—that determine when and how buying firms actually extend their sustainability strategies to their sub-suppliers.

Post-Modernism and the Social Sciences: Insights, Inroads, and Intrusions

Book

Jan 1992

Pauline Marie Rosenau

Supply networks and complex adaptive systems: control versus emergence

Article

May 2001
J OPER MANAG

In much of the current literature on supply chain management, supply networks are recognized as a system. In this paper, we take this observation to the next level by arguing the need to recognize supply networks as a complex adaptive system (CAS). We propose that many supply networks emerge rather than result from purposeful design by a singular entity. Most supply chain management literature emphasizes negative feedback for purposes of control; however, the emergent patterns in a supply network can much better be managed through positive feedback, which allows for autonomous action. Imposing too much control detracts from innovation and flexibility; conversely, allowing too much emergence can undermine managerial predictability and work routines. Therefore, when managing supply networks, managers must appropriately balance how much to control and how much to let emerge.

Risky Suppliers or Risky Supply Chains? An Empirical Analysis of Sub-Tier Supply Network Structure on Firm Performance in the High-Tech Sector

Article

Jan 2015

The effect of the Rana Plaza disaster on shareholder wealth of retailers: Implications for sourcing strategies and supply chain governance

Article

Feb 2017

Supply chain and reputational risks are often assumed to motivate firms to source production in developed, high-cost countries rather than developing, low-cost countries. To examine this assumption, we provide evidence from the collapse of the Rana Plaza building on April 24, 2013, which with its 1133 fatalities and 2438 injuries is seen as one of the worst industrial accidents in history. Do markets reactive negatively enough to such events to motivate firms to shift their sourcing strategy? We analyze the stock market reaction to the Rana Plaza disaster in the Bangladeshi ready-made garment industry to address this question. Our analysis is based on a sample of 39 publicly traded global apparel retailers with significant garment sourcing in Bangladesh. Stock market reaction to retailers on the day of the Rana Plaza disaster is negative, but its magnitude and significance dissipate by the following day. We find no evidence of significant stock market reaction during the 11 trading days (approximately two weeks in calendar time) following the disaster. Retailers responded to the disaster by developing two different agreements to improve factory and worker safety in Bangladesh - the Accord on Fire and Building Safety in Bangladesh (AFBSB), and the Alliance for Bangladesh Worker Safety (ABWS). We find no evidence of significant stock market reaction to the announcements of the AFBSB and the ABWS. The insignificant negative economic impact from the Rana Plaza disaster suggests that retailers have little economic incentive to move sourcing out of Bangladesh or other low-cost countries so as to reduce the risk of being involved in such events. We discuss the implications of our results for retailers, non-governmental organizations (NGOs), garment factory owners in Bangladesh, the Bangladeshi government, and academic researchers.

Does a long-term orientation create value? Evidence from a regression discontinuity: Does a Long-Term Orientation Create Value?

Article

Dec 2016
STRATEGIC MANAGE J

Research summary: In this paper, we theorize and empirically investigate how a long‐term orientation impacts firm value. To study this relationship, we exploit exogenous changes in executives' long‐term incentives. Specifically, we examine shareholder proposals on long‐term executive compensation that pass or fail by a small margin of votes. The passage of such “close call” proposals is akin to a random assignment of long‐term incentives and hence provides a clean causal estimate. We find that the adoption of such proposals leads to (1) an increase in firm value and operating performance—suggesting that a long‐term orientation is beneficial to companies—and (2) an increase in firms' investments in long‐term strategies such as innovation and stakeholder relationships. Overall, our results are consistent with a “time‐based” agency conflict between shareholders and managers. Managerial summary: This paper shows that corporate short‐termism is hampering business success. We show clear, causal evidence that imposing long‐term incentives on executives—in the form of long‐term executive compensation—improves business performance. Long‐term executive compensation includes restricted stocks, restricted stock options, and long‐term incentive plans. Firms that adopted shareholder resolutions on long‐term compensation experienced a significant increase in their stock price. This stock price increase foreshadowed an increase in operating profits that materialized after two years. We unpack the reasons for these improvements in performance, and find that firms that adopted these shareholder resolutions made more investments in R&D and stakeholder engagement, especially pertaining to employees and the natural environment. Copyright © 2016 John Wiley & Sons, Ltd.

On the riskiness of lower-tier suppliers: Managing sustainability in supply networks

Abstract and Figures