The Impact of Manufacturer Spiff on a Supply Chain with Retailer-Hired Sales Agent

Abstract

In many industries, manufacturers pay commissions to retailer-hired sales agents to boost the demand for their products. This type of payments are often called Sales Performance Incentive Funds (SPIFF). In this paper, we study the implication of SPIFF payments on supply chain performance. We show that SPIFF payments can help the supply chain not only by allowing the manufacturers to motivate under-motivated sales agents, but also by encouraging the retailer to dramatically reduces the retail price to a level an integrated channel would set. Consequently, using SPIFF payments, sales increases beyond the mere increase in effort. We also show that the retailer and the supply chain as a whole always benefit from the SPIFF program but the manufacturer does not always benefit from it. More specifically, if the wholesale price decision is endogenous or if it is exogenous but not large enough, the manufacturer loses profit if she implements a SPIFF program. That is, the manufacturer should consider to implement the SPIFF program only if the wholesale price decision has been made before the selling season and it is large enough.

Keywords: Supply Chain Management, Interface with Marketing, Sales Force Compensation