Who Should Donate? A Socially Responsible Supply Chain with Prosocial Customers

Abstract

Problem definition: Donations to the "bottom of the pyramid" in less developed areas have been widely practiced by upstream manufacturers and downstream sellers involved in the supply chain to exercise corporate social responsibility. In addition to generating social benefits (i.e., donation value), donations can also contribute to building a brand's reputation and expanding the customer base, as today's consumers are increasingly socially responsible. This study addresses the question of whether a firm should engage in direct donations or opt for a "free ride" by leveraging supply chain partner's donation initiatives to improve operational performance. Methodology/results: We consider a socially responsible supply chain consisting of a manufacturer and a product seller, who seek to maximize his/her mixed objective, i.e., a weighted sum of their respective profit and donation value. Both firms consider donation as a means of managing demand, which depends on the total amount donated by the supply chain members. Following a Stackelberg game setting, we study the interactive donation and inventory decisions involved in the supply chain. To encourage both firms to participate in donation and enhance their overall performance, we then investigate several collaborative donation strategies. Managerial Implications: We show that under equilibrium, only one firm donates and the other simply takes a free ride without donating anything. Furthermore, a firm could offer monetary incentives to its supply chain partner in the form of price discounts or refunds, contingent upon the partner making charitable donations. Such a collaborative donation approach can always benefit the firm offering the monetary incentives, while paradoxically it may harm its supply chain partner (who receives the discounts or refunds).

Keywords: Corporate Social Responsibility, Prosocial Customers, Charitable Donation, Bottom of the Pyramid, Supply Chain Management