According to new research, when bad news about a supply chain issue reaches consumers, they are more likely to believe that a company’s product is inferior in quality — even when the supply chain problem has nothing to do with product quality. There are ways for firms to mitigate damage caused by bad supply chain news: Firms that engaged in recovery efforts (large or small) and made these efforts transparent to the public were able to eventually increase customer’s perceptions of product quality and even win deeper loyalty.
It’s always been true that when companies behave badly, consumers react by spreading the word and sometimes boycotting. But our recent research found that negative news is also bad for business in a new way: Consumers react even when the bad news extends beyond the company to its supply chain. We discovered that consumers are more likely to believe that a company’s product is inferior in quality when there is a supply chain mishap, even when the product quality has nothing to do with the supply chain problem. This was true across the triple bottom line (TBL): Consumers assume a product has decreased in quality whether the supply chain problems are related to an economic issue (like managers embezzling), a social issue (like unfair wages), or an environmental issue (like polluting).
The past 30 years have seen significant globalization of supply chains. Outsourcing and offshoring have led to extended supply chains that are prone to increased levels of complexity and disruption. And the longer the supply chain is in terms of geography and complexity, the more likely it is that bad things will happen somewhere along the way. With all the risks and opportunities for operational failures, including some risks global supply chains managers not even be aware of, managers can all but guarantee that at some point something will go wrong somewhere in the supply chain, and, particularly with the rise of social media, that consumers will hear about it.
First and foremost, firms need to understand that it is mostly bad news that consumers care about. We found that negative news about TBL operations in the supply chain significantly decreased consumer perceptions of product quality and influenced purchase intentions, even though the news had nothing to do with the product whatsoever. When negative news does emerge, firms need to be prepared to reinforce positive consumer perceptions about their brands and product quality.
Second, it doesn’t matter if the bad news is simply a little troubling or catastrophic. For example, while a consumer may dislike that a firm does not recycle or find it shocking if another firm was knowingly dumping toxic waste, their perception of each firm’s product would be equally negative. The spillover effect studies we conducted tested the impact of varying intensities of news from very bad (near bankruptcy, waste dumping, and child labor) to moderately bad (5 percent decrease in profit, no energy conservation certification, and no pay raises for its factory workforce) on both quality perceptions and consumer willingness to buy. The results indicate that consumers’ reactions to all negative news are equally condemning regarding perceptions of product quality whether the news is more or less severe. The results were slightly different for consumer willingness to buy: As news grew worse about the environmental and social actions of a company, the less willing consumers were to buy.
Finally, our research did suggest ways that firms can mitigate damage. When we tested the spillover effect of recovery news on consumer perceptions and willingness to buy, we found all recovery actions of a company, whether small or great, increased both the perception of quality and the willingness of consumers to buy the company’s product in the future. Social and environmental recovery efforts had a more dramatic effect than economic initiatives, but news of recovery efforts across all three types of TBL initiatives can drastically reduce the negative spillover effects of bad news and improve consumer perceptions. This suggests that firms can recover from bad news with just a little bit of effort and communication. Further, we found purchase intention could easily be boosted with any amount of effort to fix the problem and communication about positive efforts moving forward. We also found that a strong brand name may buffer the extent of these “spillover effects” on quality and purchase interests.
Interestingly, we found that positive news related to social issues (like providing exceptional benefits for factory workers) and environmental issues (like gains in closed-loop recycling) did nothing to enhance quality perceptions. This outcome highlights what psychologists call the negativity bias – that negative information is more compelling to consumers than positive information.
These findings may be grim for companies managing global supply chain complexity, particularly retail and consumer products companies, which have struggled to maintain effective accountability of their suppliers and contract manufacturers for many years now. And we know that while many firms may claim to be aware of the actions of their direct suppliers (aka, tier-one suppliers), few have information about their direct suppliers’ suppliers.
Still, our research did offer a glimmer of hope in that when there is a problem, it can be overcome. Firms that engage in recovery efforts (large or small) and make these efforts transparent to the public. At the end of the day, it is better to take ownership of bad news and find a productive solution that increases customer’s perceptions of product quality and may even win deeper loyalty.