A transaction cost approach to supply chain management

Jill E. Hobbs

Supply Chain Management

1996, Vol 1, Issue 2, pp. 15-27

 

1)      Economics and supply chain management

  1. a) Historically supply chain management have not been economically evaluated due to a conflict with economic theory- the perfect market assumption
  2. b) Theory concentrates on market equilibrium, not how business relationships arise

2)      The Firm

  1. a) In order to understand what a firm does, we must understand its existence and the forces that govern the organizational transactions

3)      Transaction costs

  1. a) Costs of carrying out any exchange
  2. b) Transactions do not occur without friction
  3. c) Three main classifications
  4. i) Information costs
  5. ii) Negotiation costs

iii)     Monitoring costs

4)      Transaction cost analysis- four key concepts

  1. a) Bounded rationality- rational decision making is affected by peoples incapability to assess all possible alternatives
  2. b) Opportunism- individuals/businesses can intend to exploit other parties
  3. c) Asset specificity- invested resources without any alternative use
  4. d) Information asymmetry- incomplete exchanges of information
  5. i) Ex ante- opportunism occurring due to information hidden prior to a transaction
  6. ii) Ex post- opportunism occurring after a transaction because of hidden actions of individuals/firms

5)      Methodologies in measuring transaction costs

  1. a) Characteristics of transaction costs
  2. i) Difficult to separate from other managerial costs
  3. ii) Not readily measurable

iii)     Complexity makes it difficult to quantify

  1. iv) Data is not readily available from traditional sources, it must be collected
  2. b) 3 broad types of measuring transaction costs
  3. i) evaluating the effect of transaction costs on vertical coordination across industries using secondary data sources
  4. ii) investigating the industry-specific impact of transaction costs on vertical coordination using secondary data

iii)     investigating the industry-specific impact of transaction costs on vertical coordination using primary data

6)      Conclusions and key points

  1. a) As uncertainty rises, vertical integration increases
  2. b) As costs of coordinating activities with the firm increase, vertical integration decreases
  3. c) Transaction costs are a primary deterrent of vertical integration
  4. d) Quantitative measures are not necessary, methodologies which identify costs and measure their importance may suffice