Incentivizing suppliers using scorecard: A behavioral study

Abstract

Supplier scorecards are a tool used by manufacturers to track supplier performance. We investigate the effectiveness of two manufacturer approaches for incentivizing desirable performance based on scorecard evaluations: the absolute and relative approaches. Under the absolute approach, the manufacturer incentivizes the supplier to achieve a prespecified targeted score. Under the relative approach, the manufacturer incentivizes suppliers based on scorecard rankings of suppliers in the supply base. We consider a two-period supplier–manufacturer contractual agreement where the manufacturer evaluates and reviews supplier performance (acceptable or unacceptable) during each period. The per-period supplier performance for each period is determined by its binary effort decision (high or low). We derive the optimal targeted score and reward scheme resulting in the highest supplier performance under the absolute and relative approaches, respectively, then characterise the conditions under which each approach is preferable for the manufacturer. We test these analytical model findings by conducting a human-subject experiment that varies both the reward and incentive approach. We observe that subjects overprovide effort versus the analytical model benchmark under both approaches. Another observation is that subjects overexert effort under the relative versus the absolute approach, indicating that the competition involved in the relative approach motivates greater effort.