Advanced Search
MyIDEAS: Login

Performance Contracting in After-Sales Service Supply Chains

Contents:

Author Info

  • Sang-Hyun Kim

    ()
    (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

  • Morris A. Cohen

    ()
    (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

  • Serguei Netessine

    ()
    (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

Registered author(s):

    Abstract

    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 "performance-based logistics" (PBL) 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, we introduce a multitask principal-agent model to support resource allocation and use it to analyze commonly observed contracts. In our 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. We show that the first-best solution can be achieved if channel members are risk neutral. When channel members are risk averse, we find that the second-best contract combines a fixed payment, a cost-sharing incentive, and a performance incentive. Furthermore, we study how these contracts evolve over the product deployment life cycle as uncertainty in support cost changes. Finally, we illustrate the application of our model to a problem based on aircraft maintenance data and show how the allocation of performance requirements and contractual terms change under various environmental assumptions.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://dx.doi.org/10.1287/mnsc.1070.0741
    Download Restriction: no

    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 53 (2007)
    Issue (Month): 12 (December)
    Pages: 1843-1858

    as in new window
    Handle: RePEc:inm:ormnsc:v:53:y:2007:i:12:p:1843-1858

    Contact details of provider:
    Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA
    Phone: +1-443-757-3500
    Fax: 443-757-3515
    Email:
    Web page: http://www.informs.org/
    More information through EDIRC

    Related research

    Keywords: games; principal-agent; replacement-renewal; military; logistics; inventory-production; maintenance-replacement; government; defense;

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Dachs, Bernhard & Biege, Sabine & Borowiecki, Marcin & Lay, Gunther & J├Ąger, Angela & Schartinger, Doris, 2012. "The Servitization of European Manufacturing Industries," MPRA Paper 38873, University Library of Munich, Germany.
    2. Nowicki, David R. & Randall, Wesley S. & Ramirez-Marquez, Jose Emmanuel, 2012. "Improving the computational efficiency of metric-based spares algorithms," European Journal of Operational Research, Elsevier, vol. 219(2), pages 324-334.
    3. Erzurumlu, S. Sinan, 2013. "The compatibility of durable goods with contingent generic consumables," Omega, Elsevier, vol. 41(3), pages 574-585.
    4. Huber, Sebastian & Spinler, Stefan, 2012. "Pricing of full-service repair contracts," European Journal of Operational Research, Elsevier, vol. 222(1), pages 113-121.
    5. Jin, Tongdan & Tian, Yu, 2012. "Optimizing reliability and service parts logistics for a time-varying installed base," European Journal of Operational Research, Elsevier, vol. 218(1), pages 152-162.
    6. Karl Inderfurth & Rainer Kleber, 2010. "An Advanced Heuristic for Multiple-Option Spare Parts Procurement after End-of-Production," FEMM Working Papers 100005, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    7. Mirzahosseinian, H. & Piplani, R., 2011. "A study of repairable parts inventory system operating under performance-based contract," European Journal of Operational Research, Elsevier, vol. 214(2), pages 256-261, October.
    8. Colen, P.J. & Lambrecht, M.R., 2012. "Cross-training policies in field services," International Journal of Production Economics, Elsevier, vol. 138(1), pages 76-88.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:53:y:2007:i:12:p:1843-1858. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.