Augmenting Fixed Framework Agreements in Humanitarian Logistics with a Bonus Contract
Framework agreements (FAs) are commonly used by relief organizations to cooperate with suppliers to pre position relief items. Many Chinese local authorities with disaster responding experience choose a specific type of FA, the fixed framework agreement (FFA) which contains fixed terms for item quality, quantity, price, and delivery lead time. These FFAs, however, do not fully motivate suppliers to further improve the effectiveness of a humanitarian logistics (HL) operation. We suggest using a bonus contract as a supplemental agreement to FFAs to incentivize suppliers to reduce delivery lead times. We develop a performance measurement model using deprivation level functions (DLFs) to measure effectiveness, efficiency and cost effectiveness of an HL operation. With this model, we quantify the performance of an FFA with and without bonus contract and study the feasibility and optimality of the bonus contract. A case study on an FFA observed in practice is used to illustrate our methodology. The results show that the bonus contract can be both practical and capable of improving the performance of an HL operation.
Production and Operations Management