An Agency Theory Investigation of Supply Risk M anagement

TLDR

Managing supply risk is essential to overall supply management, and as risk complexity grows, responsiveness is dominated by inventory level adjustments and multiple supply sources to create buffers. The study applies agency theory to manage supplier behaviors in order to reduce supply risk and mitigate detrimental events. The authors employ agency theory as a framework for guiding supplier behavior management. Empirical results show that purchasing organizations implement techniques that lower the likelihood of detrimental events, and that firm size, purchase volume relative to sales, and industry characteristics influence how supplier behaviors are managed.

Abstract

SUMMARY Managing supply risk is an essential element of the overall supply management task. As the complexity of risk management has increased, responsiveness seems dominated by varying the level of inventory and using multiple supply sources as means of creating buffers. This research uses the framework of agency theory in managing supplier behaviors as a means to reduce supply risk and the impact of detrimental events. Empirical results indicate that purchasing organizations address various sources of supply risk by implementing management techniques that reduce the likelihood that detrimental events will occur. Firm size, purchases as a percentage of sales, and industry characteristics were also found to influence the manner in which supplier behaviors are managed.