How Do Improperly Structured Incentives Lead to a Lack of Coordination

Question

Examlex · Accepted Answer

The Answer is Incentive obstacles refer to situations where incentives offered to different stages or participants in a supply chain lead to actions that increase variability and reduce total supply chain profits.Incentives that focus only on the local impact of an action result in decisions that do not maximize total supply chain profits.Buying decisions based on maximizing profits at a single stage of the supply chain lead to ordering policies that do not maximize supply chain profits.
Improperly structured sales force incentives are a significant obstacle to coordination in the supply chain.In many firms,sales force incentives are based on the amount the sales force sells during an evaluation period of a month or a quarter.The sales typically measured by a manufacturer are the quantity sold to distributors or retailers (sell-in),not the quantity sold to final customers (sell-through).Measuring performance based on sell-in is often justified on the grounds that the manufacturer's sales force does not control sell-through.This leads to spikes in orders that do not reflect actual customer needs.

How Do Improperly Structured Incentives Lead to a Lack of Coordination

Definitions: