Which of the following may be a hidden cause of misalignment of incentives in a supply chain
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. 2004 Nov;82(11):94-102, 149. Affiliations
Aligning incentives in supply chainsV G Narayanan et al. Harv Bus Rev. 2004 Nov. AbstractMost companies don't worry about the behavior of their supply chain partners. Instead, they expect the supply chain to work efficiently without interference, as if guided by Adam Smith's famed invisible hand. In their study of more than 50 supply networks, V.G. Narayanan and Ananth Raman found that companies often looked out for their own interests and ignored those of their network partners. Consequently, supply chains performed poorly. Those results aren't shocking when you consider that supply chains extend across several functions and many companies, each with its own priorities and goals. Yet all those functions and firms must pull in the same direction for a chain to deliver goods and services to consumers quickly and cost-effectively. According to the authors, a supply chain works well only if the risks, costs, and rewards of doing business are distributed fairly across the network. In fact, misaligned incentives are often the cause of excess inventory, stock-outs, incorrect forecasts, inadequate sales efforts, and even poor customer service. The fates of all supply chain partners are interlinked: If the firms work together to serve consumers, they will all win. However, they can do that only if incentives are aligned. Companies must acknowledge that the problem of incentive misalignment exists and then determine its root cause and align or redesign incentives. They can improve alignment by, for instance, adopting revenue-sharing contracts, using technology to track previously hidden information, or working with intermediaries to build trust among network partners. It's also important to periodically reassess incentives, because even top-performing networks find that changes in technology or business conditions alter the alignment of incentives. Similar articles
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What causes incentive misalignment in supply chains?Incentive misalignment has three causes: You can’t see what your partners are doing, so you can’t create incentives that induce them to do what’s best for the entire supply chain. One partner has information that other partners don’t.
How do you solve incentive misalignment?First, a solution that resolves incentive misalignment for one company might exacerbate the problem for another. Executives should therefore coordinate the interests of all the companies in a supply chain at the same time. Second, companies must align the incentives of all the key decision makers in their supply chains.
How do supply chain incentives work?To induce supply chain partners to behave in ways that are best for everybody, companies have to create or modify monetary incentives. A supply chain works well if its companies’ incentives are aligned—that is, if the risks, costs, and rewards of doing business are distributed fairly across the network.
Do supply chains align their interests with their own interests?Aligning Incentives in Supply Chains. Every firm behaves in ways that maximize its own interests, but companies assume, wrongly, that when they do so, they also maximize the supply chain’s interests. In this mistaken view, the quest for individual benefit leads to collective good, as Adam Smith argued about markets more than two centuries ago.
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