Contract design and supplier performance: an empirical investigation using multi-criteria, decision analysis

Abstract

Purpose

This study aims to investigate how contract design influences supplier performance. This study synthesises three theoretical views (efficiency, relational, contingency) and provides empirical support on how effective contract design improves supplier performance.

Design/methodology/approach

This study reviewed contract design literature and uncovered 18 factors that may impact supplier performance. Multi-criteria, decision-making analysis examined the impact of contract factors on three supplier groups: average-, over- and under-performers. Procurement experts working with a large multinational company dealing with hundreds of procuring contracts, yearly, provided their judgement on the impact of these factors on supplier performance. Semi-structured interviews with experts and other evidence were used for data and method triangulation.

Findings

Results show that contracting with under- and over- performers presents significant differences: in the case of over-performers, contracts have a dual, yet discrete, efficiency and relational role: at transaction level, they emphasise formality, protect from opportunism and include both liquidated damages and legal action clauses. At relational level, they focus on relational learning and incentivising suppliers. However, in the case of under-performers, contracts appear to focus on contingency factors, which can be a source of ambiguity, particularly in complex environments, and trust, which has a negative impact on supplier performance.

Social implications

Improving contract design can help reduce partner opportunism, reduce inter-firm conflicts and avoid disputes that can bear a social cost. This study demonstrates that companies can use advanced analytical tools to reflect upon their own decision-making process of contact design in making transparent supplier performance assessments.

Originality/value

To the author’s knowledge, this is the first study using decision-making techniques to enhance supplier performance by improving the contract design process.

Citation

Vlachos, I. (2021), "Contract design and supplier performance: an empirical investigation using multi-criteria, decision analysis", International Journal of Productivity and Performance Management, Vol. 70 No. 7, pp. 1655-1681. https://doi.org/10.1108/IJPPM-10-2019-0492