Supplier Sustainability Assessments in Total‐Cost Auctions

Buyers are increasingly pressured to ensure sustainability of their suppliers, but they are also under pressure for low‐cost procurement. To make a more informed procurement decision, a buyer can choose to invest in sustainability assessments, and select a supplier based on their price bids and cost markup terms informed by the sustainability assessments. However, sustainability assessments are costly, and whether to use them is at the discretion of the buyer. Hence, the buyer can instead choose to forgo the assessments and select a supplier based on price only. In this study, we explore this trade‐off. We find that the value of assessments depends on the buyer’s business environment in some surprising ways. For example, although sustainability assessments are used to identify the suppliers’ sustainability levels, greater ex ante variability and a decrease in suppliers’ average sustainability levels (e.g., facing a supplier base in a country with looser sustainability regulations) can decrease the value of sustainability assessments. We find that the presence of an outside option (e.g., internal production) alters the assessment policy significantly. We also explore when the buyer may prefer to assess only a subset of her suppliers. Although motivated by the use of sustainability assessments, our results are generalizable to settings where the buyer has the option to invest in total‐cost assessments on her potential suppliers’ unknown, non‐biddable, differentiator‐type attributes.