Can Buyer Consortiums Improve Supplier Compliance

When suppliers (i.e., contract manufacturers) fail to comply with environmental or safety regulations, several non-governmental agencies and consumer activists put pressure on the buyers (customers) to take necessary actions to improve supplier compliance. Due to concerns over negative image and public boycotts, many buyers conduct costly audits to improve supplier compliance. By considering a common practice that calls for independent audits (i.e., each buyer performs its own audit) as a benchmark, we examine the implications of joint audit mechanism arising from a buyer consortium. Under this mechanism, buyers conduct joint audits by sharing the joint audit cost and impose a collective penalty on the supplier if the supplier fails their joint audit. We evaluate the efficacy of joint audits against the commonly practiced independent audits. Our analysis reveals that the joint audit mechanism is beneficial in two important ways. First, it can make the supplier increase its compliance level in equilibrium. Second, the joint audit mechanism can increase the supply chain profit when the audit cost is below a certain threshold.