Partnership in a Dynamic Production System with Unobservable Actions and Noncontractible Output

Plambeck, Erica L.; Taylor, Telford

doi:10.1287/mnsc.1060.0569

Cited by 74 publications

(30 citation statements)

References 28 publications

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“…Recently, the role of information asymmetry has received considerable attention both in the adverse selection setting (representative articles include Corbett [8], Iyer et al [16], Lutze and Ozer [21] and Su and Zenios [32]) and in the moral hazard setting (for example, see Plambeck and Zenios [27], Chen [4] and Plambeck and Taylor [26]). The current paper contributes to this growing area as well.…”

Section: Literature Reviewmentioning

confidence: 99%

Performance Contracting in After-Sales Service Supply Chains

2007

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Performance-based contracting is reshaping service support supply chains in capital intensive industries such as aerospace and defense. Known as Power by the Hour in the private sector and as Performance-Based Logistics (PBL) in defense contracting, it aims to replace traditionally used …xed-price and cost-plus contracts in order to improve product availability and reduce the cost of ownership by tying a supplier's compensation to the output value of the product generated by theTo analyze implications of performance-based relationships, we introduce a multitask principalagent model to support resource allocation and use it to analyze commonly observed contracts. In our model the customer (principal) faces a product availability requirement for the "uptime"of the end product. The customer then o¤ers contracts contingent on availability to n suppliers (agents) of the key subsystems used in the product, who in turn exert cost reduction e¤orts and set spare parts inventory investment levels. We show that the …rst-best solution can be achieved if channel members are risk-neutral. When channel members are risk-averse, we …nd that the second-best contract combines a …xed payment, a cost-sharing incentive, and a performance incentive. Furthermore, we study how these contracts evolve over the product deployment life cycle as uncertainty in support cost changes. Finally, we illustrate the application of our model to a problem based on aircraft maintenance data and show how the allocation of performance requirements and contractual terms change under various environmental assumptions.The authors are grateful to the seminar participants at the Wharton School, Cornell University, University of Texas at Dallas, University of Washington, Columbia University, UC Berkeley, and Naval Postgraduate School for helpful discussions. The authors would also like to acknowledge input from L. Gill, S. Gutierrez, M. Lebeau and M. Mendoza, who provided valuable information concerning current practices. Finally, the authors are grateful for the assistance of Ashish Achlerkar of MCA Solutions, who provided valuable assistance in testing the model and providing access to a real-world data set.

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Section: Literature Reviewmentioning

confidence: 99%

Performance Contracting in After-Sales Service Supply Chains

2007

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“…This result has since been extended to supply chain management by Plambeck and Taylor (2006) and Taylor and Plambeck (2007a,b). In contrast to this approach, we solve a repeated moral hazard problem with risk averse agents and formal contracts, without any restriction on the discount factor.…”

Section: Related Literaturementioning

confidence: 71%

“…The "recurrent" states on the lower boundary bear some resemblance to the punishment threat in a "trigger strategy" in repeated games (Friedman 1971, Levin 2003, Plambeck and Taylor 2006. While punishment often involves termination of the cooperation and is thus the worst equilibrium for all players, under the optimal contract in our model, the recurrent states impose intense competition and low payoff for the suppliers but result in high effort input and the first-best value to the manufacturer, i.e., they are "punishment" to the suppliers but not to the manufacturer.…”

Section: State Evolution Under the Optimal Contractmentioning

confidence: 99%

Dynamic Business Share Allocation in a Supply Chain with Competing Suppliers

Zhang

Fine

2013

Operations Research

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This paper studies a repeated game between a manufacturer and two competing suppliers with imperfect monitoring. We present a principal-agent model for managing long-term supplier relationships using a unique form of measurement and incentive scheme. We measure a supplier's overall performance with a rating equivalent to its continuation utility (the expected total discounted utility of its future payoffs), and incentivize supplier effort with larger allocations of future business. We obtain the vector of the two suppliers' ratings as the state of a Markov decision process, and solve an infinite horizon contracting problem in which the manufacturer allocates business volume between the two suppliers and updates their ratings dynamically based on their current ratings and the current performance outcome.Our contributions are both theoretical and managerial: We propose a repeated principal-agent model with a novel incentive scheme to tackle a common, but challenging incentive problem in a multi-period supply chain setting. Assuming binary effort choices and performance outcomes by the suppliers, we characterize the structure of the optimal contract through a novel fixed-point analysis.Our results provide a theoretical foundation for the emergence of "business-as-usual" (low effort) trapping states and tournament competition (high effort) recurrent states as the long-run incentive drivers for motivating critical suppliers.

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“…Debo and Sun (2004) study a setup where inventory levels are non-contractible. Plambeck and Taylor (2006) study joint production with unobservable utility-relevant actions. Ren et al (2010) consider forecast sharing by a buyer in a setup where he has an incentive to inflate the forecasts.…”

Section: Literature Reviewmentioning

confidence: 99%

The Relational Advantages of Intermediation

Belavina

Girotra

2012

Management Science

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Abstract. This paper provides a novel explanation for the use of supply chain intermediaries such as Li & Fung Ltd.. We find that even in the absence of the well-known transactional and informational advantages of mediation, intermediaries improve supply chain performance. In particular, intermediaries facilitate responsive adaptation of the buyers' supplier base to their changing needs while simultaneously ensuring that suppliers behave as if they had long-term sourcing commitments from buying firms. In the face of changing buyer needs, an intermediary that sources on behalf of multiple buyers can responsively change the composition of future business committed to a supplier such that a sufficient level of business comes from the buyer(s) that most prefer this supplier. On the other hand, direct buyers that source only for themselves must provide all their committed business to a supplier from their own sourcing needs, even if they no longer prefer this supplier.Unlike existing theories of intermediation, our theory better explains the observed phenomenon that while transactional barriers and information asymmetries have steadily decreased, the use of intermediaries has soared, even among large companies such as Walmart.

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Partnership in a Dynamic Production System with Unobservable Actions and Noncontractible Output

Cited by 74 publications

References 28 publications

Performance Contracting in After-Sales Service Supply Chains

Performance Contracting in After-Sales Service Supply Chains

Dynamic Business Share Allocation in a Supply Chain with Competing Suppliers

The Relational Advantages of Intermediation

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