Performance Contracting in After-Sales Service Supply Chains

13 years 4 months ago

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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 …xed-price and cost-plus contracts in order 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 principalagent 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 o¤ers contracts contingent on availability to n suppliers (agents) of the key subsystems used in the product, who in turn exert cost reduction e¤orts and set spare pa...

Sang-Hyun Kim, Morris A. Cohen, Serguei Netessine

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