2. Transaction Cost Economics
• Transaction costs: the price associated with buying or selling goods or
services
• Transaction cost economics (TCE) is an economic explanation for the
existence and scope of a commercial organization
• TCE is based upon 4 behavioural assumptions:
– bounded rationality – acting on limited knowledge
– opportunism – improving ones relative standing
– asset specificity – considers specialisation of assets
– uncertainty – conditions in the business environment
3. The key point is…
• When an organization’s overall transaction costs with
external organizations are higher than its internal transaction
costs, it will often grow. This is because it is cheaper and
easier to do activities in house.
• Conversely, if internal transaction costs are higher than
external transaction costs, an organization can benefit from
downsizing or outsourcing its operations, because it is
cheaper and easier to get another organization to perform
these activities.
4. Supply Chain Management is…
• …the management of the relationships and
flows between the ‘string’ of operations and
processes that produce value in the form of
products and services to the ultimate
customer.
9. Enterprise Relationships
• An ‘enterprise’ is a group of different companies, or
group of parts of different companies, working
together to deliver a product or service in a highly
integrated way
• An enterprise:
– Is based on using complementing core
competencies from parts of different companies
– Uses a number of different organisations to jointly
deliver a complex product or service to an end
customer
13. Inventory Dilemmas - positives
• Inventories -
– Are insurance against uncertainty
– Can substitute for flexibility
– Can support opportunism – either buying or
selling
– Can increase in value
– Can ensure a continuous pipeline
14. Material Requirements Planning (MRP)
• IT based manufacturing Information system
for inventory control & production planning
• Schedules component items when they are
needed - no earlier and no later
15. How much to order?
Material
requirements
planning
Master
production
schedule
Customer
orders
Forecast
demand
Bill of materials Inventory
records
Purchase
orders
Materials plans Works orders
20. Just In Time (JIT)
• Eliminates stock holding by ensuring
materials arrive just when they are required
no sooner no later.
• From what we have seen what are the
ramifications?
