Principal-Agent Theory In Supply Chain Management
This theory relates to business relationships that consist of a principal and an agent engaged in cooperative behavior but have differing goals and attitudes toward risks (Plambeck & Gibson, 2010; Fayezi, O’Loughlin & Zutshi, 2012; Eisenhardt, 1989). Agency theory is aimed at the ever-present agency relationship in which one party called principal delegates work or tasks to another party called agent, who performs that work on his behalf (Eisenhardt, 1989; Zsidisin & Wagner, 2010).
Principal-agent theory has been applied to various activities associated to supply chain management including, risk management, outsourcing, sourcing and supply chain collaboration (Plambeck & Gibson, 2010). In this study, principal-agent theory was adopted to support
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In addition, the operational nature of supply chain expenditures decisions must be taken by the firm’s management (agents) on behalf of the company proprietors (principals) under the authority entrusted to them through employment. This theory therefore contends that, the goals of the principal and agents are not in conflict and that the principal and agent can reconcile different tolerances for risk (Lavassani & Movahedi, 2010). Both principals and agents seek to maximize their utility from the same organizations. The trouble faced by the principal is how to secure some service benefit from the agent while not knowing the true value of those benefits, or being forced to accept those benefits the agent wishes to supply (Zsidisin & Wagner, 2010; Fayezi, O’Loughlin & Zutshi, …show more content…
It also involves a considerable information asymmetry; the principal does not only know how the professional agent does the job, but also what he or she does. This information asymmetry also makes it difficult for the principals to know beforehand how much service is actually needed. The intention of the owners who are the principals is for the managers (agents) to make decisions that will ensure the SMEs thrive which include supply chain collaboration success (Eisenhardt, 1989).
The objective of agency theory is therefore to design and build a contract that minimizes agency problems (Lavassani & Movahedi, 2010; Byrne & Power, 2014). The most effective and efficient contract must have both the appropriate blend between outcome and behavioral based incentives, in order to motivate the agent to behave in the best interest of the principal (Plambeck & Gibson, 2010; Eisenhardt,
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