Supply Chain Management Tutorial | Agency theory (AT)

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Agency theory (AT)

Agency theory is a division of economics that looks at conflicts of interest between people with different interests in the same assets. This primarily addresses the conflicts between shareholders and managers of companies. The distinctive characteristic of the theory is to separate of ownership of the supply chain of a firm from controls of the supply chain. The supply chain is still owned by the shareholders of the organization. However, the control over the day-to-day operations is under professional managers who can be defined as the agents. The consequences of the actions carried out by the agents are largely carried by the owners of the firm. Shareholders put in place authorization, monitoring and sanctioning in the form of compensation and other measures. The authorization measures put in place to authenticate the decisions made by the agent.

There are two general models of supply chain management i.e. centralized decision-making and the decentralized decision-making. The agency theory places emphasis on the decentralized supply chain with the advantage of more effective cooperation and coordination.

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