Flashcards
Purchasing lecture 6
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- 1contract types-fixed-rice plus incentive fee (provides additional rewards when agreed performance is exceeded)
- cost-reimbursable (builds on fixed hourly rates for labor and equipment, no bonus or penalty. used when work cannot be specified or fixed price is too big risk)
- unit-rate contract ( builds on cost for standardized units (price per m2, for products that are hard to estimate in volume and timing)
- agreement with price-adjustment (used for long-term agreements or price sensitive materials) - 2contract design-specification (term specificity; tasks, activities and responsibilities)
- reward structure ( rewards being linked to performance; fixed fee, variable fee, combination)
- payment structure (paying full upfront, periodical payments, paying half upfront and half after completion) - 3Principal-agent theory suggest two types of contracts- behavior-based contracts build on process controls
- outcome-based contracts build on outcome controls - 4selecting one contract over the other depends on- degree of task programmability
- outcome measurability
- outcome uncertainty - 5difference RFT and EVTto address the psychological impact of contracts, they use RFT and EVT. RFT suggests that contractual provisions can be framed either as a loss or as a gain. EVT suggests that meeting or violating expectations set by contractual frame during contract execution further affects the exchange and ongoing relationship
- 6promotion/bonus/carrot framedraws more attention to positive relationship, lead to emphasis cooperation and develop close, personal and trusting relationship. RFT suggest, this lead to creativity and flexibility needed to achieve objectives. EVT suggest this will lead to behavior that go beyond the contract, a close and cooperative relationship will exist.
- 7prevention/penalty/stick frameleads to emphasis negative aspects of the relationship & keep the relational response at arm's length. RFT suggest this will lead to minimum performance to only avoid not meeting the targets. EVT suggest that this will lead to impersonal behaviors and transactional relationships
- 8main findings; positive effect of promotion- and hybrid framedthe positive effects of promotion- and hybrid-framed incentives are met when there is contractual clarity regarding to responsibilities and inputs of buyer and third parties, uncontrollable factors influencing performance, attributability of performance, and feasibility and evolution of performance targets
- 9purpose of the contract as moderaterthe overarching purpose of the contract moderates the effects of contract framing on supplier responses: prevention framed can be more effective to control and mitigate opportunism in transactional supplier relations, while promotion or hybrid-framed can be more effective to drive collaboration and win-win outcomes in strategic supplier relations
- 10implications for managers- effective design of promotion- and hybrid-framed requires paying attention to:
1. realistic performance targets
2. salient bonus related to these targets
3. incentive structures that appropriately balance rewards and risks; and:
4. mechanisms that explicate and consider uncontrollable factors in the calculation of bonus-malus payments - 11Performance-based contractsfocuses on the outputs, quality and outcomes of service provision and may tie at least a portion of a contractor's payment as well as any contract extension or renewal to their achievement
- 12the supplier in performance-based contractsthe supplier is paid for the performance he achieves
is evaluated on the extent to which he contributes to realizing business objectives of the buyer - 13supplier and buyer in performance based contractssupplier and buyer each have KPIs and assess each other on results achieved
give much attention to collaboration and communication - 14conceptual blocks of PBCperformance; specification and evaluation
incentives; payment scheme, incentive impact
risk; risk attitudes and risk transfer to supplier - 15PBC vs fixed price and cost reimbursable contracts- all contract types have a typical duration of about 5 years; contracts with longer duration are typically FP and CR contracts
- PBCs on average represent higher financial value
- PBCs are highly-tailored contracts
- design of PBC is more a collaborative effort
- the collaboration is usually more detailed for PBC
- suppliers under PBCs have more freedom
- PBCs usually result in more innovation and results - 16Why not always PBC- buyer fear that the supplier will take over
- buyers have insufficient experience for PBCs
- basis for performance measurement and evaluation is not easily defined
- PBCs are difficult to implement - 17difficulties with Performance-based contracting- PBS perceived as risky and costly and needs clearer specifications
- Thorough agreement about effectiveness and reward scheme essential
- more responsibilities and risk shifted to supplier ( supplier may not accept this, and buyers needs to be able to deal with this remote responsibility) - 18Shared values and norms as knockout criterionverify similarities in terms of:
- objectives
- compliance culture/internal regulations and procedures
- communication style/preferences
-ideas about the collaboration - 19contract managementcontract management is part of contract use and refers to monitoring a supplier's behaviors or performance during execution: includes contactual enforcement, is preceded by contract design
- 20three functions of contracts- as a safeguard mechanism
- as a coordination mechanism
- as an adaptation mechanism - 21contract as safeguard- protecting investments, knowledge, etc: minimizing risks;
- degree of contactual completeness
- contract termination
- conflict - 22contract as a coordination mechanism- contract; defines roles and responsibilities, documents how to monitored and evaluated, identifies the project manager
- contract is not static, but adjusted when necessary
- 'framing' of contracts critical for execution and results - 23contract as an adaptation mechanism- used when environmental uncertainty is high; defines 'tolerance zones', defines procedures that apply in case of external changes
- two ways; revenue/cost sharing which depends on external factors, agreement on how to adjust over time to external developments - 24contractual vs relational governancecontractual and relational governance interplay in affecting performance.
contractual governance; contracts between firms and its formal rules to safeguard against opportunism and conflicts
relational governance; trust and relational norms - 25relational embeddednessfirms often use both contractual and relational governance. however in the literature one group argues that the two types of governance substitute each other, another group contends that the two types may be complementary.
- 26when complements or substitutescontextual factors impacting whether contractual and relational governance are complements or substitutes:
- institutional environments
- inter-organizational relationship types and length
- construct measurement of contract - 27a relational response still results in a failed project- if resources are extremely limited
- if there are long delays in change to resources (incompetent contractors with very limited resources)
- if project complexity is extremely high (high innovative project or contract)
- if contractual requirements are extremely high (unrealistic offer) - 28a contractual response may result in a successful project- if initial effort from contractor is extremely high
- if project complexity is extremely low
- if contractual requirements are extremely low
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- Flashcards on Purchasing lecture 6, created by Elisa Vink on 06/10/2020.
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- Elisa Vink
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