Madhav V. Rajan

Supplier selection, monitoring practices, and firm performance

Abstract Our paper examines whether supplier selection and monitoring practices affect the association between supplier strategies and organizational performance. Management accounting researchers (Atkinson, A., Waterhouse, J., 1996. Strategic Performance Measurement: Scope and Implementation Issues; Gietzmann, M.B., 1996. Accounting, Organizations and Society, 21 (6), 611–626, p. 613) argue that supplier partnerships can enhance cost management efforts by improving product quality, accelerating the product development process, and increasing process efficiency through supplier-originated ideas and technologies. However, the development of effective supplier partnerships may also require different selection and monitoring practices than arms-length supplier transactions. Empirical tests using data from the automotive and computer industries indicated that the performance gains from supplier partnerships practices are contingent on extensive use of non-price selection criteria, frequent meetings and interactions with suppliers, and supplier certification. In contrast, these selection and monitoring practices appeared to have little effect on the performance of organizations following arms-length supplier relations.

Performance Measurement and Design in Supply Chains

This paper examines the relationship between product architecture, supply-chain performance metrics, and supply-chain efficiency. We model the contracting relationship between a supplier and a buyer. The supplier is privately informed about the outcome of his design/production investment. The buyer both appraises the suppliers component and does further processing/component production of his own. If the final product produced by the buyer exhibits decoupling and no function sharing with respect to the components termed separable architecture, the first-best outcome is attained if both internal and external failures are contractible. When only one type of failure can be contracted on, we derive conditions under which contracting on internal failure is superior to contracting on external failure, and vice versa. If the buyers final product has a nonseparable architecture with respect to the components, first-best cannot be achieved even if both internal and external failures are contractible. The value of contracting on internal failure alone is unaffected by the architecture design, while that of external failure declines relative to the separable setting; the net result is often to make the former the uniformly dominant performance metric. Our results highlight the interaction between the performance metrics used for contracting within the supply chain, the architecture of the product produced by the supply chain, and the incentive efficiency of the chain.

Incentive issues in inter-firm relationships

Abstract This paper discusses the incentive problems to which buyer-supplier transactions are subject and, by surveying the incentives literature, discusses some of the inter-firm design instruments that can be used to mitigate these problems. Most of the literature discussed is based on the incomplete contracting model, which is better suited to analyzing inter-firm issues. We also discuss some of the managerial accounting issues which are raised by this literature and suggest some managerial accounting issues for further research.

The Role of Information and Opportunism in the Choice of Buyer-Supplier Relationships

An important characteristic of any buyer-supplier relationship is the amount and type of information that is exchanged between the contracting parties. Buyer-supplier networks are characterized by greater information exchange than arm’s-length transactions. This enhanced information exchange allows for greater production efficiency but increases the potential for information misappropriation. In this paper we characterize the set of innovations for which each of these forms of exchange relationships is efficient. We then explore the effect of an initial information linkage between the buyer and supplier. Such linkages increase the set of innovations for which networks are efficient. However, such linkages have a negative effect on the buyer’s incentive to innovate and an ambiguous effect on the supplier’s incentive to invest in flexible production techniques. Finally, we identify settings in which the buyer-supplier surplus is greater with such linkages.

An Empirical Examination of Dynamic Quality-Based Learning Models

Using detailed data on defect rates and quality costs from twelve plants of a Fortune 500 company, we provide the first direct tests of predictions arising from two sets of dynamic quality-based learning models. We find greater support for quality-based learning models that assume learning is a function of both proactive investments in quality improvementand autonomous learning-by-doing, than for models that assume learning is a function of reactive investments in quality improvement alone. We then extend these two sets of models to examine the impact of individual prevention activities and past nonconformance expenditures on defect rates. We find that benefits from different types of prevention expenditures vary, and that past nonconformance expenditures provide learning opportunities that allow the organization to more efficiently cope with future failures, thereby reducing subsequent nonconformance costs. These important implications are absent in current quality-based learning models, providing an opportunity for future theoretical development.

Organizational Design For Business Units

This paper studies empirical differences across decentralized firms with respect to the allocation of tasks from the parent firm to its business units and the level of compensation risk imposed on business unit managers. We structure our empirical analysis around two hypothesized determinants of these organizational structure decisions: the parent firms task expertise relative to that of the business units and the relative importance of the business unit to the performance of the parent firm. We develop a principal-agent model of the task allocation and compensation risk decisions as a function of these two determinants, and test several research hypotheses suggested by this model. In our analysis, we use the term relative expertise to refer to the competence of the parent, relative to the business unit manager, to make the divisions operating decisions. Relative task expertise can be characterized in several ways; we consider three such characterizations and, using our model, find that they have different implications for the allocation of tasks and the imposition of compensation risk in decentralized firms.1 We label our three characterizations of relative expertise as follows: Cost

Depreciation Rules and the Relation between Marginal and Historical Cost

ABSTRACT The reported cost of a product frequently contains historical cost components that reflect past investments in productive capacity. We examine a setting wherein a firm makes a sequence of overlapping capacity investments. Earlier research has identified particular accrual accounting (depreciation) rules with the property that, on a per unit basis, the historical cost of a product captures precisely its marginal cost. Relative to this benchmark, we investigate and characterize the direction and magnitude of the bias in reported historical cost that results from alternative depreciation rules, including in particular straight-line depreciation in conjunction with partial direct expensing. In addition, we demonstrate that for a reasonable range of parameter specifications the resulting bias is rather small. Finally, we apply our framework to two specific settings. First, in a regulatory context, we establish the extent to which the accounting profit margin is indicative of a firms pricing power in the product market. Second, we model an internal control scenario in which a managers performance is evaluated using residual income, and identify the distortions in investment levels that result from the use of alternative depreciation rules. Copyright (c), University of Chicago on behalf of the Institute of Professional Accounting, 2009.

Knowledge, Compensation, and Firm Value: An Empirical Analysis of Firm Communication

Knowledge is central to managing an organization, but its presence in employees is difficult to measure directly. We hypothesize that external communication patterns reveal the location of knowledge within the management team. Using a large database of firm conference call transcripts, we find that CEOs speak less in settings where they are likely to be relatively less knowledgeable. CEOs who speak more are also paid more, and firms whose CEO pay is not commensurate with CEO speaking have a lower industry-adjusted Tobin׳s Q. Communication thus appears to reveal knowledge.

Optimal Team Size and Monitoring in Organizations

We formulate and analyze a model of team structure and monitoring within a LEN agency framework. We incorporate three key instruments in the internal design of an organization involving team production: team size, monitoring activities, and incentive contracts. We show that the complex trade-offs among these instruments lead to surprisingly simple implications. One such result is that the equilibrium level of pay-for-performance for workers is attenuated, and is at times invariant to most environmental variables of interest. As such, our model helps explain the empirical puzzle of the lack of a tradeoff for risk/incentives shown in standard agency models. Our work also demonstrates the presence of complementarities between team size and monitoring, and between worker talent and managerial monitoring ability. Finally, we derive predictions about the impact of environmental variables on the choice of optimal team size, incentives and employee quality, even in the presence of an external marketplace for talent.

Measurement of Productivity Improvements: An Empirical Analysis

In this paper, we test for productivity gains resulting from the introduction of a productivity-based incentive program in a large manufacturing plant of a Fortune 500 corporation. We develop a methodology based on a stochastic nonparametric frontier estimation technique to evaluate productivity in the postincentive plan period relative to the pre-incentive plan period. We also test for productivity gains using stochastic parametric frontier approaches. The results of both the nonparametric and parametric stochastic frontier analyses indicate that the incentive program has a positive effect on indirect labor, manufacturing services, and materials productivity and relatively little effect on direct labor productivity.