Performance-based contracting is reshaping service support supply chains in capital-intensive industries such as aerospace and defense. Known as power by the hour in the private sector and as PBL (performance-based logistics) in defense contracting, it aims to replace traditionally used fixed-price and cost-plus contracts to improve product availability and reduce the cost of ownership by tying a supplier's compensation to the output value of the product generated by the customer (buyer). To analyze implications of performance-based relationships, it is introduced a multitask principal-agent model to support resource allocation and it is used to analyze commonly observed contracts. In the model the customer (principal) faces a product availability requirement for the uptime of the end product. The customer then offers contracts contingent on availability to n suppliers (agents) of the key subsystems used in the product, who in turn exert cost reduction efforts and set spare-parts inventory investment levels. It is shown that the first-best solution can be achieved if channel members are risk neutral. When channel members are risk averse, it is found that the second-best contract combines a fixed payment, a cost-sharing incentive, and a performance incentive. Furthermore, it is studied how these contracts evolve over the product deployment life cycle as uncertainty in support cost changes. Finally, it is illustrated the application of the model to a problem based on aircraft maintenance data and it is shown how the allocation of performance requirements and contractual terms change under various environmental assumptions.


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    Title :

    Performance contracting in after-sales service supply chains


    Contributors:

    Published in:

    Management Science ; 53 , 12 ; 1843-1858


    Publication date :

    2007


    Size :

    16 Seiten, 31 Quellen




    Type of media :

    Article (Journal)


    Type of material :

    Print


    Language :

    English




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