Internal Customers and Internal Suppliers

Sloan School Working Paper No. 3759

Posted: 2 Sep 1999

See all articles by John R. Hauser

John R. Hauser

MIT Sloan School of Management

Duncan Simester

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Birger Wernerfelt

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: January 1995

Abstract

In order to push a customer and market orientation deep into the organization many firms have adopted systems by which internal customers rate internal suppliers on some measure-- often satisfaction. The internal supplier receives a larger reward for a higher rating. We examine incentive systems based on such rating systems and show that gainsharing between the rater (internal customer) and the ratee (internal supplier) normally will occur. We show that, for two common internal customer-internal supplier incentive systems, the firm can select parameters for the reward functions such that this gainsharing can be factored out and such that both the internal customer and the internal supplier choose the actions that are the same that a risk- neutral firm would choose to maximize profit if it had to reimburse these employees for their costly efforts. Some risk is transferred from the firm to me employees and the firm must pay for this, but in return the firm need not observe either the internal supplier's actions or the internal customer's actions. The incentive systems are robust even if the firm guesses wrongly about what employees perceive as costly and about how employee actions affect profit.

JEL Classification: G30

Suggested Citation

Hauser, John R. and Simester, Duncan and Wernerfelt, Birger, Internal Customers and Internal Suppliers (January 1995). Sloan School Working Paper No. 3759. Available at SSRN: https://ssrn.com/abstract=6180

John R. Hauser (Contact Author)

MIT Sloan School of Management ( email )

International Center for Research on the Mngmt Tech.
Cambridge, MA 02142
United States
617-253-2929 (Phone)
617-258-7597 (Fax)

Duncan Simester

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

Management Science
Cambridge, MA 02142
United States
617-258-0679 (Phone)
617-258-7597 (Fax)

Birger Wernerfelt

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States
617-253-7192 (Phone)
617-258-7597 (Fax)

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