Effect of Transaction Cost and Coordination Mechanisms on the Length of the Supply Chain

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2005-12-05

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Abstract

A drastic reduction in the cost of transmitting information has tremendously increased the

°ow and availability of information. Greater availability of information increases the ¯rm's ability

to manage its supply chain and, therefore, increases its operational performance. However, current

literature is ambiguous about whether increased information °ows leads to either a reduction or

increase in transaction cost, which enable supply chains to migrate towards more market-based

transactions or hierarchal-based transactions. This research empirically demonstrates that the

governance structure of the supply chains changes towards market-based transactions due to a

lowering of transaction costs after 1987. Much of the results is based on the theory of Transaction

Cost Economics (TCE) and the role of asset speci¯city, uncertainty, and frequency in determin-

ing whether or not industries are moving towards markets or hierarchies. Unlike previous supply

chain management literature that focuses on relatively short supply chains consisting of two or

three supply chain members, Input-Output tables allow for analysis of supply chains with many

more members. This paper uses the 1982, 1987, 1992, and 1997 U.S. Benchmark Input-Output

tables published by the Bureau of Economic Analysis to analyze supply chains. In so doing, this

dissertation not only provides insight into how supply chain structures are changing but also o®ers

a sample methodology for other researchers interested in using Input-Output analysis for further

supply chain management research.

The second part of the dissertation focuses on looking at the e®ect of di®erent coordination

mechanisms on supply chain length and supply chain performance using simulation. Three di®erent

heuristics that model ordering policies are used to simulate coordination mechanisms. E±ciency is

measured on the basis of minimized total net stock for each heuristic used. The results are checked

for robustness by using four di®erent demand distributions. The results indicate that if a supply

chain has minimized its net stock, then the heuristic used by various echelons in the supply chain

need not be harmonized. Also, disintermediation helps in improving the performance of the supply

chain.

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