Analytical framework for sustainable supply-chain contract management

Abstract

Investments in a supply chain (in distribution centers, stores, and with suppliers) face risk when buyer-supplier contracts do not adequately address the elements responsible for a sustainable exchange relationship. Supply chains become vulnerable due to natural and man-made catastrophes and due to ineffectiveness in operations. Contracts form the basis for communication and relationship management between a buyer and a supplier. We provide an analytical framework that addresses supply chain effectiveness (costs, risks, transaction costs, stakeholder issues) and would help inform managers who grapple with such concerns. We propose three factors (costs, benefits, and risks) that capture the objective nature and one parameter that deals with the subjective nature of sustainable contracts. To illustrate the framework we collect representative cost (objective) data from suppliers, integrate behavioral (subjective) elements, and employ constrained optimization techniques to compare five supplier-engagement contract policies. We then refine this cost-based solution, for a given contract policy, to develop three cost-benefit-risk trade-off formulations and illustrate them using simulated data. The framework addresses supplier and network-based externalities, supplier and network level effectiveness, and transaction costs, and thus provides a mechanism to enable a coordinator-driven sustainable supply network. The analysis informs contract development and evaluation process and helps align buyer-supplier interest in the long-run. We believe the analysis will help build sustainable buyer-supplier relations. Network coordinators who would benefit from our framework include original equipment manufacturers (OEMs), suppliers (say tier-1 suppliers in automotive industry), retailers (especially as retailers pursue private labels and become more involved in manufacturing and branding), etc.