The Decision Process of Contracting in Supply Chain Management

Contracts are a formal mode of governing interorganizational relationships. They specify the terms and conditions of the agreement between two parties, interpret and adapt the relevant legal and industrial norms, serve as framing devices, and establish the rules and norms underpinning the relationship. The objective of this chapter is to synthesize the extant literature on interorganizational contracting to guide future research and practice. This chapter focuses on the three phases of contracting: (1) designing the contracting portfolio; (2) negotiating initial contracts; and (3) managing the relationship using contracts. The chapter explores the key decisions in each phase and the criteria involved in making these decisions. In doing so, it draws on existing research and theoretical frameworks that have contributed to the development of the contracting literature. The chapter also identifies some important and interesting directions for future contracting research and offers suggestions regarding how selected theoretical lenses might guide these endeavors. The principal conclusion is that while the existing research has primarily focused on the structural issues guiding contracting design, a more processual, social, and behavioral focus is required in future developments of the contracting literature.