Solution
Rochak answered on
May 30 2022
Introduction
Transaction cost economics is a mode of transactions where the different transactions are organized to minimize the overall transaction costs. The popular transaction cost theory was given by Williamson which was started as ‘economics of organization’ and later on the author released and stated that the firms have a very specific incentive and control in relation to markets. Later on, Williamson find out the key factors that would determine the transactions getting structured withing markets and within hierarchies. He, therefore, quoted that the transactions happen within the organization when the market transactions are not beneficial, by this way he compared the internal and external transactions. Transaction cost economics (TCE) focuses on the question of why the firms are founded in the first place, and what is the governance structure. The theory argues that every transaction must be handled in such a way that the cost involved in ca
ying out any of the activities is minimized.
Transaction Cost Economics (TCE) stated that the main advantage of vertical integration is that the routine of the transaction will lead to a lower transaction cost overall because of the increase in efficiency. This is said because when any activity is performed regularly there is a learning curve which starts to build and as the task is done routinely the learning curve starts to get steeper which leads to the reduction of the transaction cost at a more rapid pace because of the increase in efficiency.
Transaction costs can be affected by three factors according to Williamson which are:
· Asset Specificity
· Uncertainty
· Frequency
And this has been the base for every firm and research that is conducted on the aspects of how the firms look to reduce the transaction cost across industries.
The three different kinds of transaction costs identified are:
· Information related costs which can also include the search costs like finding information on the products, inputs required, and more
· Negotiation cost which includes the cost of agreement like legal, document, delivery, etc. etc.
· Monitoring is the third and last type of transaction cost which is associated with the monitoring of the product which is majorly from the feedback stage
Transaction cost is all about minimizing the overall cost which will benefit the company or nay firm and therefore identifies ways to increase the profit and overall add value to the global ecosystem, and this can only be done using various governance structures which will help in minimizing the cost and finding the optimum governance structure.
Transaction cost in the global supply chain
With the increase in globalisation, ‘outsourcing’ has become an important and a concept that is applied everywhere within the organization across industries which can be manufacturing, Information technology or any other. This happened because the suppliers across industries are not the people who only look to provide raw materials to the firms for production, but they have also started to provide a host of services which include systems, components, and many more to take care of the value-adding steps which the firms take during the production process of any product.
Increasing globalisation also led to the firm asking questions other than making or buy to local or global, this happened because of the cost differences that have arisen across the globe, where the wages are lower in emerging markets, and the market increasing because of the access, and technical competencies that arise at a different place across the developing and emerging markets.
Though transaction cost showcases many benefits it also integrates transaction risk (i.e., the risk that the other party will make a
each and
eak the agreement).
Transaction cost is one part of the many costs associated with the total cost of ownership that will come into the picture while purchasing any good. The other costs that are included in the total cost of ownership (TCO) are purchase price, transportation costs, depreciation, cost of risk, and many more. The cost of risk is the cost of insurance to protect the buyer from any unforeseen circumstances that may arise from the product purchase until it reaches the destination.
An example of costs associated with the purchase can be when a purchaser in the United States goes to China to make the purchase rather than purchasing the same good from a local supplier. This change in the supplier from local to a
oad will come with a lead time which will lead to capital getting stuck for weeks which will be taken to deliver the goods, and if the damages increase while shipping the product the lead time will increase and therefore the capital stuck will be more because companies often need working capital to take care of these costs.
The Transaction Cost Economics (TCE) model used for global sourcing is as follows:
· Asset Specificity
· Uncertainty
· Transaction Cost
· Governance Structure
· Supply chain performance
The global supply chain faces one problem the increase in unexpected transaction cost leads to the failure of the projects, this is because the transaction cost leads to a make or buy decision which is very crucial in the overall supply chain globally.
Transaction Cost Economics Analysis – Making Outsourcing effective
In the paper, the authors Chenlung Yung, and John G. Wacker identified how outsourcing is effective by utilising the transaction cost economics theory where they focused that the selection of outsourcing is dependent on the selection of various mechanisms and the most effective one is the governance mechanisms. The data captured for the study was from 989 manufacturing plants across the 17 countries chosen by the authors, and they found out that the firms rely a lot on outsourcing to gain a competitive advantage.
Interdependencies between the Supply Contracts and Transaction Costs
Supply contracts are an integral part of any company because it is one of the main tools which facilitate the relationships between the partners with the supply chain network within the company. These contracts allow the companies to look at the transaction costs related to many things like...