Anna Sáez de Tejada Cuenca
Can Brands Claim Ignorance? Unauthorized Subcontracting in Apparel Supply Chains
In 2013, the collapse of the Rana Plaza building in Bangladesh, in which more than 1,000 people were killed, brought into focus the poor safety conditions faced by many workers in the apparel industry. A common way in which safety and environmental standards are violated is through unauthorized subcontracting, i.e, when suppliers outsource part of their production to third parties without their retailers' knowledge or authorization. Because retailers cannot audit those third parties, the production process becomes obscure and the product's origin becomes untraceable. In this paper we present an empirical study of the factors that can lead suppliers to engage in unauthorized subcontracting. We use data provided by a global supply chain manager with over 30,000 orders, of which 36% were subcontracted without authorization.
Our results show that there are different factory types, ranging from factories that used unauthorized third parties for all of their orders to factories that used none. Moreover, the degree of unauthorized subcontracting in the past is highly related to the probability of engaging in unauthorized subcontracting in the future, which suggests that factories behave as if they choose a strategic level of unauthorized subcontracting. At the order level, we find that state dependence (i.e., the status of an order carrying over to the next one) followed by price pressure are the key drivers of unauthorized subcontracting. Buyer reputation and factory specialization can also play a role, whereas the size of an order shows no effect. We find that the main effect (state dependence) is tied to factory utilization.
Finally, we show that unauthorized subcontracting can be predicted correctly for more than 80% of the orders in out-of-sample tests. This indicates that retailers can use business analytics to predict unauthorized subcontracting and help prevent it from happening.
This paper is joint work with Felipe Caro, from UCLA, and Leonard Lane, From UCI. It is currently under second-round major revision at Management Science, and won the 2018 POMS College of Sustainable Operations Best Student Paper Award.