Information Sharing in a Supply Chain: Using Agency Theory to Guide the Design of Incentives

Abstract

Sharing accurate and timely supply and demand information throughout a supply chain can yield significant performance improvements to all members of the supply chain. Despite the benefits, many firms are reluctant to share information with their supply chain partners due to an unequal distribution of risks, costs, and benefits among the partners. The information shared will usually benefit the recipient, yet the majority of costs will be incurred by the provider. Many firms are also reluctant to share information due to the risk of it being divulged to competitors or used for opportunistic bargaining. This paper uses agency theory to (1) help explain the reasons firms are reluctant to share information and (2) guide the design of incentives to redistribute risk and encourage information sharing in a supply chain. A principal-agent model is described that suggests traditional fixed payment incentives or investments are insufficient for ensuring timely and accurate sharing of information. Instead, a mix of profit sharing, payments for sharing forecasts, and nonmonetary incentives is required. Using the model, managers can examine the feasibility of information sharing in their supply chain and devise appropriate strategies to manage and redistribute the risks, costs, and benefits among their supply chain partners. This paper also makes an important contribution to the literature by re-examining the role of agency theory in supply chain information sharing.

Additional information

Notes on contributors

Priscilla R. Manatsa

Priscilla R. Manatsa is a researcher in international economics and finance at Ryerson University in Toronto, Canada.

Tim S. McLaren

Tim S. McLaren is an assistant professor of information technology management in the Ted Rogers School of Management at Ryerson University in Toronto, Canada. Dr. McLaren has over ten years of experience working for large organizations in the manufacturing, retail, government, and financial services sectors in technology-enabled process improvement, supply chain management, and enterprise systems implementation projects. His research on information systems, supply chains, and organizations appears in several journals and books including Journal of Enterprise Information Management, International Journal of Production Economics, Internet Research, International Journal of Internet and Enterprise Management, Information Systems and eBusiness Management, and Measuring Supply Chain Performance. Dr. McLaren is a member of the Institute for Supply Management, the Purchasing Management Association of Canada, the Canadian Operations Research Society, and the Association for Information Systems. He holds a Ph.D. and an MBA from McMaster University and a BScEng from Queen’s University.