• Increasingly, the production of raw commodities is being outsourced on a contract basis

  • It is estimated that more than 1 in every 10 farmers in the US is contracted to agribusiness (Rhodes, 1993)

• Increased specialization and closer ties with processors

• Outsourcing as a governance form in the agricultural supply chain

• Transaction cost analysis can contribute to a better understanding of outsourcing from the perspective of the outsourcer

• The need for responsive strategies and strategy requires firms to adopt organization structures that are able to react to changes in the market conditions (Abernathy and Lillis, 2001)

• Resource-based theory of strategic management – The firm concentrating its limited resources on core activities and divesting out of non-core activities in order to determine the boundaries of the firm (Coase, 1937; Mahoney, 1992)

• Joslin (2003) examines certain features of TCT to guide the make versus buy decision

• Van den Bogaard and Spekle (2003) suggest that the suitability of a strategy-based structure can be tested by adopting a TCA approach to determine the optimum structure

The make or buy decision

• As transaction costs increase the firm begins investigating self-producing the necessary goods and services (Williamson, 1979)

• Increased efficiency of the market place offsets the bureaucracy costs of self-production

• Why do firms outsource activities to minimize total cost?

  • Allows firm to focus on core activities and avoid in-house duplication of support facilities

  • Contracting out reduces costs because of economies of scale achieved by the supplier

  • In-house non-core activities increasingly require excessive training

  • Firms outsource activities to reduce reliance on people and to reduce fixed cost and replace with variable cost

• Nec-classical theory ignores the interplay between cost and the exchange characteristics of opportunism, asset specificity, uncertainty and the frequency of transactions (Anderson et al., 2000)

Transaction cost analysis (TCA)

• One stage of activity terminates and another begins (Rowlinson, 1997)

• Certain activities are better co-ordinated in the market place whilst others should be co-ordinated within the firm hierarchy in order to minimize transaction cost

• The firm can be viewed as a nexus of internal and external contracts that co-ordinate activities both inside and outside the firm

• A key feature of TCA is the matching of appropriate contract structures with the activities being co-ordinated in order to minimize transaction cost (Barney and Ouchi, 1988)

• Costs include:

  • Bureaucratic costs

  • Motivation costs

  • Cos of worker inefficiencies

  • Legal costs of monitoring long-term contracts (Hayes et al, 2000)

• Uncertainty can occur because:

  • of the nature of the goods and services being transacted

  • A lack of commitment by the parties

  • Information asymmetry

  • Situation where asset specificity exists

• Asset specificity can occur when one of...

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