Which of the following are incentives for suppliers to perform well on a contract? Select TWO.

Incentive-based contracts are designed to align the supplier's objectives with the buyer's goals by linking payment to performance.

Outcome-based pricing (C) directly ties a supplier's compensation to the achievement of specific, measurable results or outcomes, such as equipment uptime or service availability. This creates a powerful incentive for the supplier to focus on delivering the results that the buyer values most.

Revenue-based pricing (A), a form of gain-sharing, links the supplier's payment to the revenue generated by the buyer from the supplied good or service. This motivates the supplier to provide high-quality inputs that will maximize the buyer's commercial success, creating a true partnership.

Both models shift risk to the supplier and reward them for delivering superior value and performance.

B. Market-based pricing: This method sets prices based on prevailing market rates. It ensures competitiveness at the point of agreement but does not provide an ongoing incentive for superior performance within the contract itself.

D. Quality-based pricing: While this is a type of incentive, it is a specific subset of the broader and more comprehensive category of outcome-based pricing. Outcome-based pricing (C) encompasses quality along with other critical performance metrics.

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1. CIPS Body of Knowledge (BoK), Part 3: Sourcing and Contract Management, Section 3.3.3 Payment Mechanisms. The CIPS BoK distinguishes between input-based, output-based, and outcome-based payment mechanisms. It explicitly identifies outcome-based and performance-related pay as key mechanisms for incentivising supplier performance and aligning objectives.

2. Cachon, G. P., & Lariviere, M. A. (2005). Supply Chain Coordination with Revenue-Sharing Contracts: Strengths and Limitations. Management Science, 51(1), pp. 30–44. This seminal academic paper details how revenue-sharing contracts (a form of revenue-based pricing) align the incentives of suppliers and buyers. The model shows that by giving the supplier a share of the revenue, the supplier is motivated to act in a way that maximizes total supply chain profit, which directly relates to performance. Available at: https://doi.org/10.1287/mnsc.1040.0215

3. Selviaridis, K., & Spring, M. (2007). Third party logistics: a literature review and research agenda. The International Journal of Logistics Management, 18(1), pp. 125-150. This review discusses performance-based logistics (PBL) contracting, a well-documented form of outcome-based contracting. It highlights that in these arrangements, "payment is based on the achievement of a predefined set of performance outcomes" (p. 132), thereby incentivizing the supplier to deliver results rather than just goods or activities. Available at: https://doi.org/10.1108/09574090710748186