Design and implementation of a supplier incentive mechanism: financial penalties for delivery default – A case study from a buyer’s point of view
Delivery reliability is an important success factor for manufacturing firms and retailers. Since these are becoming increasingly involved in multiple relationships with suppliers, their delivery reliability can be only guaranteed if reliability is given on the supplier side. Therefore, it is crucial to enhance delivery performance control and improvements techniques that involve suppliers. This paper tackles the topic from the perspective of a buyer and analyses the challenges and the impact of a penalty contract for faulty delivery on supplier performance. The implementation of this contract type in form of a holistic process shows that apart from the penalty clause, the buyer should design and manage several aspects, from calculation method to supplier differentiation and logistical characteristics. By conducting a case Study at Lapeyre, a French manufacturer and retailer of home improvement products, evidence could be observed for the ability of penalty contracts to drive delivery reliability improvement, when a set of circumstances is given.