Multinational firms’ local sourcing strategies considering unreliable supply and environmental sustainability

Abstract

After entering a new market (such as China and India), the full-fledged supply bases and networks (e.g., material, worker, logistics services, et al.) induce many multinational firms (MNFs) to produce and sell products using local materials. However, government’s random environmental inspection, weather disaster, and other accidents have resulted in supply disruption for local sourcing. In this paper, we study how operational decisions such as pricing, ordering, and the selection of sourcing structure between Overseas Sourcing (OS) and Domestic Sourcing (DS) help improve supply chain sustainability. We study both the economic and environmental sustainability performances under alternative sourcing structures (OS and DS), where we identify a win-win situation. Interestingly, the MNF’s profit difference between DS and OS is non-monotonic in its brand image advantage, because the domestic supplier might snatch the MNF’s “brand value” using the pricing power, resulting a high local sourcing price. When the MNF’s brand image advantage and the unit pollution/quantity ratio are both small, the MNF obtains more profits and incurs less pollutant under DS.