Implementation costs and redistribution mechanisms in the economic evaluation of supply chain management initiatives

Abstract

PurposeThe purpose of the paper is to analyze how the choice of entity‐level investment criteria (net present value, or accounting rate of return) and negotiation terms (redistribution mechanisms for costs and assets) affect each entity's willingness to participate in supply chain management initiatives.Design/methodology/approachThe paper is based on numerical examples for a supply chain that consists of a single manufacturer and a single distributor. We assume information symmetry and a willingness of each company to participate only if its own entity‐level investment criterion is not adversely affected. The innovation may lead to positive or negative changes in the manufacturer's and distributor's unit costs and asset levels, as well as to implementation costs. We investigate the redistribution of these effects. The paper is also based on empirical results from a short case study.FindingsPrice adjustments are not always feasible for creating an acceptable redistribution of overall benefits. More opportunities exist if it is possible to transfer assets while the ownership remains with the company that has the lower discount rate or target for their accounting rate of return. Implementation costs reduce the possibilities for finding a solution, but this can only be analyzed using a net present value approach.Originality/valueThis paper contributes to the literature on economic barriers for supply chain implementation by providing an application of economic theory to a supply chain setting. The paper also provides a real‐world illustration of some of the issues identified.