Managing your own low-tier suppliers via donation to NGOs: Why do multi-national corporations bother?

Multi-national corporations (MNCs) face a challenge to avoid supply chain disruption risks due to increasing social and environmental responsibility (SER) violations by their low-tier (the second- and lower-tier) suppliers. Based on observation of emerging collaborations between MNCs and NGOs in practice, we extend traditional contract-based risk mitigation instruments to propose a donation approach by MNCs to manage SER risks from their low-tier suppliers. We model a business setting in which an MNC donates funds to an NGO and boosts the NGO's ability to monitor and disclose suppliers' SER violations, which in turn incentivizes the low-tier suppliers to make more SER efforts to avoid violations. The MNC needs to balance two losses: supply chain disruption loss and reputation loss due to a violation disclosure. We demonstrate that the MNC should donate funds only when the probability of a supply chain disruption is higher than a threshold. Further analysis of the optimal donation level reveals several counterintuitive findings. For instance, increased pressure from SER-conscious consumers or increased governmental fines for low-tier suppliers can decrease the MNC's donation, and thus possibly increase the probability of a supply chain disruption. Our comparison of two benchmarks, the MNC with no and perfect control over the supplier, shows that the MNC-NGO collaboration can bring the best SER outcome for the whole supply chain and the highest profit for the MNC. We contribute to theorizing the trend in which MNCs and NGOs collaborate with each other to strengthen supply chain SER management. Results from our modelling analysis also provide practical implications for MNCs to better manage SER risks, especially those from their low-tier suppliers.