Collaborative Planning, Forecasting, and Replenishment (CPFR) as a Relational Contract: An Incomplete Contracting Perspective

Sung Min Kim and Joseph T. Mahoney
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Sung Min Kim: Cleveland State U
Joseph T. Mahoney: U of Illinois at Urbana-Champaign

Working Papers from University of Illinois at Urbana-Champaign, College of Business

Abstract: This paper analyzes Collaborative Planning, Forecasting, and Replenishment (CPFR) from an incomplete contracting perspective. In the absence of economic incentive problems, CPFR enables trading partners to improve operational efficiency through a structured process of sharing and utilizing information across firm-level boundaries. From the review of the incomplete contracts literature and a case study of CPFR arrangement, it is proposed that this IT-supported vertical arrangement also becomes the preferred governance mode as a relational contract. With efficient coordination and enhanced economic incentives for mutual commitment, CPFR allows contracting parties to avoid the difficulties of formal contracting while realizing the benefits that would be anticipated from vertical financial ownership.

Date: 2006-04
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