Making agency theory work for supply chain relationships: a systematic review across four disciplines

Abstract

PurposeContemporary supply chain relationships inherently rely on delegation of work between organizations and, thus, are subject to agency problems for which a wide range of governance mechanisms exist. This review of agency theory (AT), across four distinct fields, explains the connection between governance mechanisms and supply chain relationship types.Design/methodology/approachThe study uses a systematic literature review (SLR) of articles using AT in a supply chain context from the operations and supply chain management, general management, marketing, and economics fields.FindingsThe authors categorize the governance mechanisms identified to create a typology of agency relationships in supply chains.Research limitations/implicationsThe developed typology provides parsimonious theory on different forms of supply chain agency relationships and takes a step towards a “supply chain-oriented agency theory” explaining and predicting relationship types and governance in supply chains. Furthermore, a future research agenda calls for more accurate measuring of agency costs, to examine residual gains alongside residual losses, to take a dual-sided perspective of agency relations and to adopt AT to examine more complex supply networks.Practical implicationsThe review provides a menu of governance mechanisms and describes situations under which these mechanisms could be deployed to guide managers when developing their supply chain relationships.Originality/valueThe first review to combine and elaborate views from four major disciplines using AT as a lens to supply chain relationships. Expanding the traditional set of governance mechanisms provides academics and practitioners with a bigger “menu” of options to consider.

“If only we'd known”: Theory of supply failure under two‐sided information asymmetry

“…First, it responds to earlier work in multiple fields criticizing the dominant assumption of agent opportunism (Bosse & Phillips, 2016;Donaldson, 1990;Nilakant & Rao, 1994) by arguing that agency problems in buyer-supplier settings can also derive from hidden expectations between the parties, not only from hidden action by the supplier. This further addresses Lumineau and Oliveira's (2018) concerns regarding a single-party focus in interorganizational relationship studies and answers calls to reconsider the assumptions of agency relationships in supply chain contexts (Fayezi et al, 2012;Matinheikki et al, 2022).…”

“…The present research focuses on the dyadic relationship between a buyer and a supplier, and attributions are considered at the firm level. The dyadic level is where the contract is agreed upon and where information sharing and goal setting take place (Matinheikki et al, 2022). Of course, a failure in a buyer-supplier setting may originate beyond the dyad, in the work of a lower tier supplier.…”

“…Sanctions may be seen through higher penalties connected to delivery time, order accuracy, and product or service quality (Heide et al, 2007) or decreased order allocation and assigning the supplier to a worst performing list (Liang & Atkins, 2021). Tackling a problem of opportunism with contracts, incentives, and monitoring is a suitable approach, although it will incur agency costs to both the principal and the agent (Matinheikki et al, 2022). This approach typically results in a relationship focused on minimizing losses rather than maximizing mutual gains (Davis et al, 1997).…”

Supplier goal commitment in performance-based contracts: the lens of goal-setting theory

“…One of the strategies agency theory suggests is using performance-based incentives to reduce the supplier's moral hazard/opportunistic behavior and align the goals of both parties (Matinheikki et al, 2022;Ross, 1973). By linking rewards to performance outcomes, PBC aligns or leads to a closer alignment of the interests/goals of the buyer and supplier and reduces the likelihood of the supplier's self-interest maximizing opportunistic behaviors, such as shirking, overbilling, (Eisenhardt, 1989;Kim et al, 2007;Sumo et al, 2016;Williamson, 1985) etc.…”

“…One of the strategies agency theory suggests is using performance-based incentives to reduce the supplier's moral hazard/opportunistic behavior and align the goals of both parties (Matinheikki et al. , 2022; Ross, 1973).…”