Customers today are increasingly knowledgeable about companies’ social responsibility (SR) practices. As a result, they’re also increasingly suspicious when companies do not provide clear information about their approach. One way to overcome this skepticism is to strengthen consumer trust through improved supply chain transparency. But gaining better visibility into a supply chain is an arduous and costly endeavor for companies, and it’s not immediately obvious whether the effort is worthwhile. How much do customers care about socially responsible supply chains?
A new study led by researchers at the MIT Sloan School of Management shows that increasing supply chain visibility is an effective way for companies to build trust with their customers — and, in certain cases, can lead to higher sales. The working paper’s authors areY. Karen Zheng, Associate Professor at MIT Sloan,Tim Kraft, Visiting Assistant Professor at MIT Sloan, and León Valdés, Assistant Professor at the University of Pittsburgh’s Katz Graduate School of Business.
“Creating transparency requires a company to both gain visibility into its supply chain and disclose information to consumers,” says Prof. Kraft. “It’s a massive undertaking: it’s expensive, risky, and incredibly time-consuming. But at a time when customers are becoming savvier — and more skeptical — about social responsibility, our findings show that the investment can be worthwhile as it always engenders consumer trust.”
While improved consumer trust certainly has many tangible and intangible benefits, one key question concerning many companies is if and when this trust translates into higher sales. The answer depends on the type of consumers a company pursues, according to the researchers. If a company’s target customers are either philanthropically-minded and empathetic to others’ wellbeing, or they tend to be naturally skeptical, then investing in visibility builds trust with these consumers that can help drive sales.
These findings underscore the importance of how companies convey their SR initiatives, according to Prof. Kraft. “To reap sales benefits in these cases, companies should reinforce consumer trust as part of their SR communication efforts,” he says. “This way, companies can leverage their greater visibility to either overcome consumers’ lack of inherent trust or help highly socially conscious consumers feel good that they are purchasing ethically-made products.”
The researchers also find that the scale of a company’s SR initiatives affects consumers’ purchase decisions: companies that undertake an initiative with a small impact — for instance, marginally increasing the pay to workers in the supply chain — but offer greater visibility are more likely to see a rise in trust-driven sales. “This is because investing in visibility mitigates skepticism,” says Prof. Zheng. “Consumers may interpret the smaller initiative as requiring less effort, and therefore may be skeptical of the company’s motives. Knowing that the company has also made a significant investment to improve its visibility into the actual impact of the initiative can help to assure consumers of the company’s good intentions.”
The researchers conducted a laboratory experiment at two large US universities, with a total of 467 participants, that mimicked the dynamics of a supply chain. As part of the experiment, they ran control tasks and a post experiment survey to elicit participants’ prosociality and general trust beliefs. Specifically, the researchers designed a three-player game where participants played the roles of a consumer, a seller, or a disadvantaged worker. Participants were provided with a background story stating that the worker had helped the seller to make a product; the seller had made an effort to increase the worker’s payoff; and the seller wanted to sell the product to the consumer.
The decisions in the experiment were monetarily incentivized, with SR being represented by the potential additional increase in the worker’s payoff. In the experiment, the seller’s decisions involved one, (potentially) investing to gain a better sense of the possible increase to the worker’s payoff; and two, communicating, truthfully or not, to the consumer what he or she knew about the increase. The consumer then decided whether he or she believed the seller (i.e., trusted the seller’s message) and if he or she wanted to purchase the product.
As companies face challenges around how and where to build transparency, the lesson from the research is clear, according to Prof. Zheng. “Customers — even ones who are skeptical by nature—want to know more about where and how the products they purchase are made,” she says. “And even small investments in supply chain visibility can make a big difference for a company.”