Facilitating Incentive Alignment through Contracts for Enhanced Innovation and Supply Chain Resilience: Insights from the Defence Industry

Alqahtani, Faris and Stevenson, Mark and Selviaridis, Kostas (2024) Facilitating Incentive Alignment through Contracts for Enhanced Innovation and Supply Chain Resilience: Insights from the Defence Industry. PhD thesis, Lancaster University.

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Abstract

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.