On Friday evening, May 20, 2011, an explosion in a manufacturing factory in Sichuan, a southwestern province of China, killed four workers and injured 18. Given that tragedies happen around the world all the time, such news would usually not stir big interest among the general public in the Western Hemisphere. However, this explosion was different because it happened in the factory of a primary supplier to Apple Inc., Foxconn, which was building Apple’s iPad, a revolutionary product introduced just the prior year. Investigation of the blast uncovered demoralizing and dangerous working conditions in Foxconn's factories and suggested that the tragedy could have been avoided if proper safety measures had been implemented in advance. On January 25, 2012, the New York Times reported on the explosion and gave an inside look at working conditions in Foxconn. Responding to the report, angry readers posted thousands of comments to condemn Apple’s wrongdoing in China. The company’s stock value dropped $30 billion in one day.
The Apple-Foxconn incident also deeply stirred my heart, because I was born in Sichuan and many of my family and friends still live there. The tragedy also motivated me as a management scholar to study why companies would make dangerous, unethical, and unsustainable decisions and how we might persuade them from repeating such wrongdoings.
Many people believe that the justification for unethical and unsustainable decisions lies in the economic drive for low costs and high profits. However, my research challenges this common assumption and shows that, from an economic point of view, companies should stick to sustainability and ethical behavior to ensure high profits and low costs in the long run. In a paper recently published in the Journal of Business Ethics, my colleague Nader Asgary and I drew this conclusion based on careful examination of the economic data in the auto industry in past decades.
Take the General Motors (GM) recall of 800,000 of its small cars in February 2014. By the end of the second quarter of 2014, the problem had grown to the point where GM had recalled nearly 29 million cars worldwide, 15 million of them due to ignition switch defects. Investigations showed that the disruption was the direct result of an unethical decision made in 2006 by the company’s engineering managers who, instead of acknowledging a design problem and recalling all defective cars, chose to hide the information and quietly make corrective modifications. After comparing the penalty of hiding and being caught in 2014 versus the cost of acknowledging and correcting the defects in 2006, we found that the former was 12 times higher than the latter. Our studies of car recalls by Ford in 2000 and Toyota in 2009 also pointed to similar results: unethical decisions resulted in much higher costs than ethical decisions. The Volkswagen emissions scandal in 2015, unfortunately, confirmed these conclusions again.
To explain these findings, we expand the classic “bullwhip effect” concept (a distribution channel phenomenon which refers to increasing swings in inventory in response to shifts in customer demand resulting in supply chain inefficiencies) and have defined a special Bullwhip Effect due to Unethical Operations (BEUO). Similar to the Butterfly Effect in chaos theory where one flap of a butterfly’s wings in Brazil might cause a tornado in Texas, BEUO describes how disruptions originating in a “minor” unethical operational decision in the supply chain could result in a significant economic loss of a company’s reputation and bottom line on the demand side. Therefore, we recommend a bottom-up and proactive approach for companies to reexamine their critical business decisions.
In the Apple/Foxconn situation, Apple at least responded swiftly. The company’s chief executive, Tim Cook, announced “Any suggestion that we don’t care is patently false and offensive to us…accusations like these are contrary to our values.” In 2013 the company shifted about 30% of its iPad orders from Foxconn to Pegatron, a smaller but more socially responsible company. Meanwhile, Apple helped Foxconn create an action plan of 360 items to be addressed at the Foxconn facilities. By 2012 the Fair Labor Association (FLA) evaluated that 99% of the items had been completed.
While we can applaud Apple’s decisive actions from an ethical standpoint, they raise other questions: Was the new Apple-Foxconn-Pegatron partnership the right economic decision for Apple? According to the traditional supply chain configuration theory, the answer is “No,” because such a supply chain would result in higher costs and perhaps delayed delivery. So was Apple wrong again?
My research suggests that Apple took the right steps both ethically and economically, and that the traditional supply chain configuration theory isn’t the right tool to assess such complex situations. Partnering with a supply chain expert at Northeastern University, Yu Xia, my research has expanded to now include building a decision-support model to help companies address questions about ethics, sustainability, and economics. The model investigates not only the cost minimization but also the sustainability maximization; not only the current performance but also the long-term potentials. However, the model itself faces a serious technical challenge: the curse of combinatorial explosion.
A combinatorial explosion refers to the fact that the number of possible supply chain configurations can increase alarmingly with the number of possible suppliers. For example, if there are 10 suppliers, the total supply chain configurations are 210=1024, large but manageable. When the number increases to 100 suppliers, however, the total configurations are at 2100, a number larger than the total number of stars in the entire universe. It would be impossible for any super computer system to evaluate all the possibilities in our lifetime in such a case.
To address this we developed a smart algorithm that is able to identify the best supply chain configuration in one minute on a standard office computer for even a 100 supplier problem. We also used real world data to demonstrate the power of this model and the algorithm.
According to our calculation, Apple is now at “stage two” of its supply chain evolution, where a combination of two types of suppliers, such as Foxconn- Pegatron, is the best choice. Our model also forecasted that Apple would allocate more orders to Pegatron while Foxconn would catch up by investing further in sustainability; both predictions have been confirmed by the two companies’ recent strategic movements.
I believe that the future of sustainability and ethical business behavior lie in their integration with organizations’ operational decisions. Contrary to common assumptions, this type of integration will enable business leaders to achieve the goal of doing well – financially – by doing good. Crises like those experienced by Apple in its Foxconn facility should become increasingly rare as businesses accept that doing good is actually more profitable in the end.
Gang Li, Assistant Professor of Management at Bentley University, is a seasoned expert in modeling and solving challenging business problems by applying advanced optimization and information technologies. His research interests include optimization models for service operations management and supply chain management. In 2012, he received an honorable mention for the best 2011 dissertation in the decision sciences from DSI. His research reflects more than a decade of practical experience in information system analysis and design, and optimization model development and implementation for companies in the U.S. and China. His academic background includes teaching at the University of Texas at Austin, and research at the Academy of Mathematics and Systems Science (AMSS) in the Chinese Academy of Sciences (CAS) in Beijing. Li holds a PhD in Supply Chain and Operations Management from the University of Texas at Austin and another PhD in Systems Engineering from Beijing University of Aeronautics and Astronautics.