Facilitating Incentive Alignment through Contracts for Enhanced Innovation and Supply Chain Resilience: Insights from the Defence Industry
Creators: name: Alqahtani, Faris
Publisher: name: Lancaster University
Year: 2024

description: Innovation and supply chain resilience (SCRES) are important objectives
 that contribute to overall firm performance. Achieving these objectives
 requires incentive alignment across the supply chain (SC). Contracts are
 recognised as a well-known solution for aligning incentives in the SC.
 However, there is limited knowledge of how contracts facilitate incentive
 alignment to achieve innovation and SCRES. This thesis aims to explore how
 contracts can contribute to
 
 attaining these goals, focusing on the defence industry. The defence
 industry is a suitable setting due to the prevalent role of alliances of
 Original Equipment Manufacturers (OEMs) in the manufacture and support of
 weapon systems and the use of Performance-Based Logistics (PBL) contracts
 as an alignment strategy.
 
 
 The thesis consists of three papers, each contributing to an improved
 understanding of how contracts along the SC facilitate the achievement of
 the overall performance of the customer. The first paper is a systematic
 literature review that explores performance-based contracts, also known as
 PBL, between providers and customers in the defence industry. It evaluates
 how these contracts are measured and identifies factors influencing their
 effectiveness. Synthesizing 45 peer-reviewed articles, the review
 identifies 15 factors influencing PBL effectiveness, grouped into six
 categories: governance, supply chain management, defence buyer input,
 innovation, environmental factors, and resources and capabilities. The
 paper extends prior research by developing a classification framework for
 these factors and highlights several research gaps. The second and third
 papers address two of these gaps: the lack of research on
 
 how contracts between the provider and sub-suppliers facilitate innovation
 in contracts (i.e., PBLs) between the provider and its customers, and the
 lack of research on how contracts facilitate SCRES across the SC.
 
 
 The second paper examines contracts between providers and sub-suppliers
 and aims to explore how incentive alignment through contracting
 facilitates incremental innovation. It utilises two case studies conducted
 in different countries, with six embedded cases of subsupplier contracts,
 and employing multiple data collection methods, including 21
 semistructured interviews, documents, and other secondary data sources.
 The findings reveal four
 
 strategies for fostering incremental innovation in performance-based
 contract (PBC) providers and their sub-suppliers. These strategies
 encompass two contract design strategies: reducing goal incongruence and
 addressing information asymmetry; as well as two contract management
 strategies: reducing outcome uncertainty and promoting inter-firm
 integration between
 
 providers and sub-suppliers. This study contributes to the PBC literature,
 showing the contingent effect during contract design and management of a
 sub-supplier’s offering (product vs. service), which, in turn, impacts
 incremental innovation. The research also demonstrates that aligning
 incentives for innovation outcomes does not solely depend on the type of
 contract
 
 used; specific factors pertaining to contract design and management also
 play a role.
 
 
 The third paper examines both the upstream and downstream contracts of the
 focal firm, exploring how contracts facilitate SCRES. Since the SCRES
 literature lacks any dedicated study of the relationship between contracts
 and SCRES, a single in-depth case of a global defence manufacturer was
 undertaken. Multiple data collection methods, including 26 semistructured
 interviews, documents, and secondary data, were used to obtain rich
 insights into the relationship between contracts and different forms of
 SCRES. The findings highlight the
 
 dual role of contracts: they can facilitate persistent forms of resilience
 for upstream contracts, but they potentially inhibit adaptive forms of
 resilience for downstream contracts. Including more Key Performance
 Indicators (KPIs) in the contract can improve visibility and enable
 resilience as persistence; however, this lowers a supplier’s autonomy and
 adversely affects resilience as adaptation. To counter this effect, the
 OEM introduced a set of Key Resilience Indicators (KRIs) that were not
 linked to supplier payments. These KRIs evaluate SCRES
 
 without affecting the supplier’s autonomy and, therefore, resilience as
 adaptation. The study expands on recent SCRES literature to provide a more
 granular understanding of the relationship between contracts and SCRES
 forms.
 
 
 More generally, the thesis offers insights into how contracts are designed
 and managed across the SC to attain innovation and SCRES targets. It also
 sheds light on the relationship between innovation and SCRES and their
 impact on the performance of the end customer. The thesis proposes several
 avenues for future research, including investigating the effectiveness of
 customer performance by directly contracting with sub-suppliers and
 bypassing the provider to enhance innovation and SCRES.