Certified Supply Chain Professional (CSCP) Practice Exam

What does a sharing agreement in an incentive contract generally involve?

1. The buyer retains all profit over a certain threshold

2. Cost savings below the target cost are shared between both parties

3. The seller absorbs all costs exceeding the agreed limits

4. The buyer pays extra for any cost overruns

The correct answer is: Cost savings below the target cost are shared between both parties

A sharing agreement in an incentive contract typically focuses on the principle of collaboration between buyers and sellers by promoting mutual benefits from cost savings. In such agreements, cost savings that fall below a predetermined target cost are shared between both parties, creating a win-win scenario. This encourages both the seller to act efficiently and the buyer to support and incentivize effective management of costs. This approach aligns the interests of both parties, as the seller benefits directly from managing costs effectively, and the buyer enjoys reduced expenses. By sharing these savings, both parties are motivated to work together toward common efficiency goals, thereby enhancing overall supply chain performance and fostering long-term relationships. In contrast, other options describe scenarios that place the burden exclusively on one party, reducing incentives for cooperation. For instance, retaining all profits or absorbing costs could lead to a lack of collaboration and misalignment in objectives.