Agency theory and quality fade in buyer‐supplier relationships

The purpose of this paper is to propose using agency theory for assessing the likelihood of quality fade in buyer‐supplier relationships and prescribing contractual mechanisms for reducing quality fade. In this paper, quality fade, an element of supply chain vulnerability, is defined as the unforeseen deterioration of agreed to or expected quality levels with respect to product and/or service requirements. The use of outcome‐based, behavior‐based, or mix contracts can be used to reduce the likelihood of quality fade and illustrate preferred scenarios for buyer and suppliers.

This paper proposes a conceptual model for using agency theory to explain and address a type of supply chain vulnerability called quality fade. A 2×2 matrix is proposed that contrasts outcome measurability with outcome uncertainty to illustrate buyer and supplier vulnerability and to suggest contractual mechanisms that can be used to mitigate vulnerability for both parties.

A typology of governance mechanisms is presented and described with the use of a manufacturer third‐party logistics provider example to illustrate the theoretical framework. Four different scenarios are discussed and described. Contractual mechanisms are provided to mitigate vulnerabilities and reduce quality fade.

Quality fade is a term that has not been described extensively in academic literature but is a term that is relevant in the broader discussion of supply chain vulnerability. Given that quality fade is a behavioral, as opposed to process oriented, approach, it requires a theoretical framework rooted in behavioral considerations. Agency theory is an appropriate framework for studying governance options.