An increase in product proliferation combined with a short product life cycle, advances
in technology and globalization have led companies to realize that it is problematic to
compete as an individual entity in today’s fast changing business world, and that they must
plan for and implement focussed strategic planning for an effective and efficient Supply
Chain (SC) to achieve better results. A number of companies, like Wal-Mart, IBM and
Dell, who have continually revised and enhanced their SC strategies, have reported
significant savings and improvement in their operations, while some other companies, like
Loblaws,1 have suffered losses in the market due to inappropriate planning and inefficient
operation of their SCs.
It seems imperative that Supply Chain Management (SCM) strategy should be in
alignment with overall business strategies of member organizations. However, achieving
effectiveness and efficiency in a SC from the stage of strategic planning to actual practice
can be very challenging. In a decentralized system, SC members, who are independent
entities, seek to optimize their own objectives and may not care how their decisions affect
the other entities or even the entire SC. For instance, the issues of coordination and
tradeoffs that exist among SC members are onerous and give rise to a number of questions.
How, for example, do companies in a SC balance self-interest and reduce risks? How do they ensure sharing of credible forecast information between SC members? How do they
solve various incentive conflicts among SC members? How do they adjust the
relationships of SC members to achieve coordination?
This type of questions have become of central concern to researchers and practitioners
in the last two decades. Arguably, cooperation between companies cannot depend solely
on morality, but must be normalized by feasible management mechanisms. Without these
mechanisms in place, it is extremely difficult to manage a SC effectively and efficiently.
Researchers studying SC strategy have focused on various parts or aspects of the SC,
for example manufacturing and upstream (Abdel-Malek et al., 2005), downstream or
marketing (Cox et al., 2007); on product (Fisher, 1997) or demand (Godsell et al., 2006);
on lean versus agile (Christopher et al., 2006), SC integration (Frohlich and Westbrook,
2001) and on strategy facilitation tools like electronic-supply (e-supply) chains (Chen
et al., 2004). However, there has been relatively scant focus on the key enabler of SC
strategy implementation, the common thread that runs through the SC, that is, the actual
contract that enables and acts as a binding force or a tool, without which SC strategy
cannot be carried out. SC contracts are control mechanisms that enable SC members to
actualize their strategies. They are widely considered to be necessary, at the strategic,
tactical and operational levels, to control foreseeable and specific aspects of the
transactions in the SC, and to lay ground rules for handling unforeseeable contingencies.
Contracts specify parameters that govern relationships among SC members. They also
directly affect decisions and actions of SC members, defining the coordination and
allocation of profits and risks among the SC members.
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