Week 2: Performance Measurement
Article: Bilateral dependency and supplier performance ambiguity in
supply chain contracting: Evidence from the railroad industry
1. Abstract
Through a combination of theoretical reflection rooted in transaction cost economics and an
empirical analysis of Indian Railways' supply chain, we argue that in the case of bilateral
dependency, “the benign approach” is more efficient than “the muscular approach,”.
Specifically, while the latter is founded on unilateral decisions by the comparatively more
powerful party, the former is based on voluntary long-term cooperation, and calls for mutual
credible commitments and joint problem-solving
2. Introduction
Supplier performance ambiguity constitutes a critical complicating factor to bilateral
dependency.
When a supplier unilaterally depends on a comparatively larger buyer, the contracting
implications of supplier performance ambiguity are a nonissue: The comparatively more
powerful large buyer sets the terms, and the supplier either accepts them or walks away.
Ex ante (contract negotiation phase) and ex post (contract enforcement phase)
3. Bilateral dependency in SC relationships
“Muscular approach”: one of the parties, usually the large buyer, deals with smaller suppliers in
a peremptory way, [and] often ‘use up’ their suppliers and discard them.
“The benign approach,”: which emphasizes cooperation and mutual gains in an attempt to
contract efficiently. This alternative approach has economic theories of efficiency—most
notably TCE (transaction cost economics)—at its foundation
The premise in TCE is that efficient contracting works toward safeguarding the exchange
relationship precisely because it focuses on mutual benefits
, 4. Buyer-supplier dependency: four contracting
scenarios
5. The drivers of bilateral dependency: asset specificity
and the fundamental transformation
Asset specificity: “durable investments that are undertaken in support of particular
transactions.”
• Investments made specifically for a transaction such that the next best use leads
to loss of productive value
• Transaction specific investments can lead to vulnerability
• Types include location, skills, dedicated machinery, temporal requirements
Fundamental transformation: “[A] large-numbers condition at the outset (ex ante competition)
is transformed into a small-numbers condition during contract execution and at contract
renewal intervals (ex post competition)”. The fundamental transformation occurs because asset
specificity develops over time through mutual learning and adjustment.
Article: Bilateral dependency and supplier performance ambiguity in
supply chain contracting: Evidence from the railroad industry
1. Abstract
Through a combination of theoretical reflection rooted in transaction cost economics and an
empirical analysis of Indian Railways' supply chain, we argue that in the case of bilateral
dependency, “the benign approach” is more efficient than “the muscular approach,”.
Specifically, while the latter is founded on unilateral decisions by the comparatively more
powerful party, the former is based on voluntary long-term cooperation, and calls for mutual
credible commitments and joint problem-solving
2. Introduction
Supplier performance ambiguity constitutes a critical complicating factor to bilateral
dependency.
When a supplier unilaterally depends on a comparatively larger buyer, the contracting
implications of supplier performance ambiguity are a nonissue: The comparatively more
powerful large buyer sets the terms, and the supplier either accepts them or walks away.
Ex ante (contract negotiation phase) and ex post (contract enforcement phase)
3. Bilateral dependency in SC relationships
“Muscular approach”: one of the parties, usually the large buyer, deals with smaller suppliers in
a peremptory way, [and] often ‘use up’ their suppliers and discard them.
“The benign approach,”: which emphasizes cooperation and mutual gains in an attempt to
contract efficiently. This alternative approach has economic theories of efficiency—most
notably TCE (transaction cost economics)—at its foundation
The premise in TCE is that efficient contracting works toward safeguarding the exchange
relationship precisely because it focuses on mutual benefits
, 4. Buyer-supplier dependency: four contracting
scenarios
5. The drivers of bilateral dependency: asset specificity
and the fundamental transformation
Asset specificity: “durable investments that are undertaken in support of particular
transactions.”
• Investments made specifically for a transaction such that the next best use leads
to loss of productive value
• Transaction specific investments can lead to vulnerability
• Types include location, skills, dedicated machinery, temporal requirements
Fundamental transformation: “[A] large-numbers condition at the outset (ex ante competition)
is transformed into a small-numbers condition during contract execution and at contract
renewal intervals (ex post competition)”. The fundamental transformation occurs because asset
specificity develops over time through mutual learning and adjustment.
