| (Taken
from the paper “Exploring the link between supply chain
management and transaction cost economics: a cursory evaluation
of export mango and small-hold banana marketing in the Philippines”
by Albert P. Aquino, Ernesto O. Brown and Richard B. Daite
presented during the “International Seminar on Economics
and Marketing of Tropical and Sub-tropical Fruits” held
in Kuala Lumpur, Malaysia on 16-18 July 2007.)
Supply chaining is now the name of the game in both domestic
and foreign markets. With increasing globalization, competition
exists not only among individual trading firms but also among
the interconnected and supply-chaining firms and enterprises.
But
why do supply chains exist? And how are they useful in raising
the efficiency of marketing Philippine agricultural products,
specifically tropical fruits?
In
Philippine agricultural marketing, low value addition, improper
product handling, inadequate post-harvest facilities, poor
infrastructure, and inefficient marketing information flow
are perennial problems.
From
a “traditional” supply chain view, “getting
the logistics right” solves these issues. Yet logistics-related
remedies of raising investment in facilities and infrastructure
and government programs on support services, albeit valid
and needed, fall short in improving significantly the efficiency
of the entire marketing chain.
This
is because inefficiencies along the agricultural marketing
chain stem not only from problems on logistics but also from
transactional problems brought about by asymmetric information,
adversarial relationships, and incomplete contracting.
Hence,
there is a need to frame the issues and the solutions in a
different light – that is, through supply chain (SC)
management approach using a transaction cost reasoning. From
a transaction cost economics perspective, a well-coordinated
supply chain is set up primarily to economize on transaction
costs.
SCM
and Transaction Cost Economics: The Concept
A
supply chain is “an association of customers and suppliers
who, working together yet in their own best interests, buy,
convert, distribute, and sell goods and services among themselves
resulting in the creation of a specific end product”
(US National Research Council 2000 in Wysocki et al. 2006).
Hence, every firm can be part of a supply chain.
In
producing, moving, and selling a product, firms and businesses
have always transacted with each other, either through the
market mechanism or through some form of relational contracting.
In
efficient markets, no long-term and personal relations among
economic agents are required. Market players transact impersonally
in sourcing inputs, further processing, and selling to final
consumers. Farmers can easily source inputs at low cost from
any supplier, and sell their products easily at fair prices
to any trader. Under these conditions, logistics-related solutions
can indeed raise efficiency along the chain.
But
in the real world, markets are never efficient. When the market
is inefficient, there are issues along the chain that may
not be relieved by logistics management.
Transaction
costs
Transaction
costs are the costs of using the market mechanism, as distinguished
from the usual production and marketing costs, which are the
costs of transforming inputs into outputs and moving them
along the chain. They are associated with ex ante (design
and negotiation) and ex post (implementation and performance)
problems of contracting and can be broadly understood as the
costs of negotiating, contracting, and consummating an exchange.
They
are said to be the economic equivalent of “friction”
in physical terms (Williamson 1985). As the product moves
along the chain, transaction costs increase. Surveying potential
suppliers, ascertaining the quality of inputs, comparing prices,
contracting transporters, and assuring quantity all entail
transaction costs.
In
this case, solving logistical problems may not necessarily
bring greater overall efficiency along the chain. Logistics
is “just a part of the supply chain process” and
getting it right is necessary but not sufficient to raise
supply chain efficiency. In this view, minimizing transaction
costs is key to raising marketing efficiency.
Governance
structures
But
how can transaction costs be minimized?
Transaction
cost economics posits that transaction costs are economized
by assigning transactions to “governance structures”
in a discriminating way. Governance structures are “the
organizational frameworks within which the integrity of a
contractual relation is decided” (Williamson 1985).
It is an “institutional arrangement that serves to influence
the exchange process” (Hesterly 1990 in Bijman 2006).
Hence, a coordinated supply chain can be viewed as a governance
structure formed to minimize transaction costs.
For
the tropical fruit industry, the coordinated supply chain,
as a governance structure, aims to bring down costs of transacting
and contracting when marketing the products across marketing
channels.
The
preservation of quality and quantity along the chain is a
must. Yet, this requires an incentive structure that allows
all players to internalize this goal. Notably, coordination
among agents is required in a well functioning supply chain.
Information on volume and quality of inputs and products,
as well as timing of delivery, need to be available and well
disseminated.
Adversarial
relationships among the agents, information asymmetry, and
opportunism in the current marketing modes should be curbed.
This is possible through the coordinated supply chain.
In
the case of the Philippines, there are indications that transaction
costs abound in agricultural products (including tropical
fruits) marketing. Technological innovation at the farm level
and the right logistics may not be sufficient. Addressing
these inefficiencies merits closer examination. (Richard B.
Daite, S&T Media Service)
(Next:
Case studies on Philippine export mango and small-hold banana
show how the constraints in marketing these fruits are better
understood using a supply chain management approach with a
transaction cost economics perspective.)
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