A comprehensive theoretical framework for sustainable network contracts: Contracting dimensions and Contract classification

Abstract

Disruptions in the supply chains/networks result in both performance failures and a poor return on investment (ROI) of network assets. We propose that addressing this situation requires the governance of exchange relationships through contracts guided by sustainability principles. Specifically, we refer to these contracts in the supply and distribution context as “sustainable network contracts”, and the overall framework as the “sustainable contracting framework (SCF)/theory”. Despite the critical role of sustainable network contracts for all key stakeholders in the network, we identify a gap in the existing literature regarding the theory of sustainable network contracts. We bridge this gap by extending the extant dimensions of contracts, as described in Transaction Cost Economics and Relational Exchange Theory, to include sustainability dimensions - constituting the ‘what’ of theory building. To inform sustainable contracts, we propose and employ three factors: costs, benefits, and risks (CBR). We present the ‘how’ of the theory building, outlined in a five-step approach along with an analytical tool, to demonstrate the practical application of our framework. Additionally, we provide a rationale for adopting sustainable network contracts (the ‘why’ of the theory building). Our research methodology involves collecting interview-based data from senior executives (CXOs) (secondary and primary), collecting primary and secondary cost data (objective), integrating behavioral elements (subjective), and employing constrained optimization techniques to determine quantity allocation under various contract policies. Further, we map the proposed eight distinct contract types onto the CBR-space, thereby highlight the relevance of the contract types to real-world practices. This mapping considers network externalities, risks, and allows for a coordinated sustainable approach to contracting from the buyer's (retailer's) perspective. For managers, our framework would serve as an important tool that would inform the contract evaluation process, facilitate local versus global decision-making, safeguard network investments, and help align the interests of buyers and suppliers in each contracting cycle.