Preventing supplier non-conformance: extending the agency theory perspective

The supply chain management literature and agency theory suggest that preventing supplier non-conformance—a supplier's failure to conform to the requirements of the buyer—requires monitoring supplier behavior. However, case studies collected to explore how buyers monitored suppliers revealed an unexpected empirical phenomenon. Some buyers believed they could prevent non-conformance by either trusting their suppliers or relying on a third party, without monitoring their behavior. The purpose of this article is to examine conditions when buyers should monitor supplier behavior to prevent non-conformance.

This article employs a mixed-method design by formulating an agent-based simulation grounded in the case-study findings and agency theory to reconcile observed unexpected behaviors with scholarly suggestions.

The simulation results indicate that buyers facing severe consequences from non-conformance should opt to monitor supplier behavior. Sourcing from trusted suppliers should only be reserved for buyers that lack competence and have a small number of carefully selected suppliers. Moreover, buyers facing minor consequences from non-conformance should generally favor sourcing from trusted suppliers over monitoring their behavior. The results also suggest that having a third-party involved in monitoring suppliers is an effective path to preventing non-conformance.

By combining a simulation with qualitative case studies, this article examines whether buyers were making appropriate decisions, thereby offering contributions to theory and practice that would not have been possible using either methodological approach alone.