Mitigating Sustainability Risk in Supplier Populations: An Agent-Based Simulation Study

Abstract

Many modern firms strive to become sustainable. To this end, they are required to improve not only their own environmental and social performance, but also the performance of their suppliers. Building on population ecology theory, we explore how buyers’ exposure to supplier sustainability risk and their subsequent risk management strategies at the buyer-supplier dyad level can lead to adherence to sustainability by the supplier populations. We rely on a bottom-up research design, in which the actions of buyers within buyer-supplier dyads lead to population-wide changes on the supplier side. Specifically, we use experimental data on managing sustainability risk to build an agent-based simulation model and assess the effect of evolutionary processes on the presence of sustainable/unsustainable business practices in the supplier population. Our findings suggest that buyers’ cumulative actions in managing sustainability risk do not necessarily result in effective population-wide improvements (i.e., at a high rate and to a high degree). For example, in high risk impact conditions, the buyer population is usually able to decrease the population-level risk in a long run, but they would need both power and resources for quickly achieving such improved outcomes. Importantly, this positive change, in most cases, is due to the fact that the buyer population selects out the suppliers with high probability of misconduct (i.e., decreased supplier population density). Drawing on the organizational population ecology theory, we explore when, to what degree, and how quickly the buyers’ cumulative efforts can lead to population-wide changes in the level of supplier sustainability risk, as well as the composition and density of supplier population. Methodologically, this paper is one of the first studies which use a combination of experimental data and agent-based modeling to offer more valuable insights on supply networks.