secure all of the benefits and to transfer all of the risk to the other party. However, if the agreement is inequitable, the long-term relationship, which is essential for supply chain integration, is bound to deteriorate. Incentive systems embodied in the contract should ideally align the parties so that each has an appropriate stake in the success of the joint undertaking. Generally, the party with the greatest influence on the success or failure of the venture should be allocated greater portions of the risks and rewards.

A legalistic way to safeguard transactions is to include financial penalties for a premature breach of the terms of the contract. For example, both parties might make specialized investments for which redeploy-ability outside of the contract will be difficult. Thus, their exposure is symmetrical. Alternatively, the parties may provide for the reciprocal disclosure of information and auditing contingencies. The parties could also agree in advance to specialized mechanisms for settling disputes, such as arbitration. Contractual risk can also be reduced by ensuring that the staff members responsible for implementing the contract have backgrounds in and an appreciation of the continuity value of the relationship.

Finally, differences among industries with respect to maturity, technology, size distribution of firms, and product differentiation can pose different contracting and organizational challenges. In general, a mature industry with a dominant design and multiple firms producing homogeneous products poses fewer problems for contracting. For newer industries with rapidly changing technologies, in which a few firms are competing for the dominant design and in which real-time responsiveness and innovation are critical, contracting is more complicated.

Recent Changes

As supply chain participants increasingly form alliances and partnerships, critics are starting to worry about the impact on competition. Regulators discourage schemes that reduce consumer options or price competition. In October 1999, the Federal Trade Commission, in consultation with the U.S. Department of Justice, issued antitrust guidelines for collaborations among competitors. The committee suggests that SMEs obtain competent legal advice to avoid legal problems associated with these complex issues.

Recommendation. Small and medium-sized manufacturing enterprises should develop a basic understanding of partnership agreements and, with legal assistance, use partnerships as a means of improving their responses to changing business conditions.



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