Supply Chain Governance and Efficiency: A Transaction Frontier Analysis

Project: Research

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We propose to advance a theory of supply chain transaction cost, which incorporates inter-stage transaction characteristics into supply chain coordination as a necessary measure of supply chain efficiency. Currently supply chain performance has been measured by firm-based output productivity conditioned on newsvendor-type supply chain coordination (e.g., coordination of supplier-manufacturer and manufacturer-retailer supply chains), largely leaving out the aspects of inter-stage transaction cost. According to transaction cost economics (TCE) by Williamson (2008), transaction cost constitutes an intrinsic measure of supply chain performance. For example, the cost of implementing a revenue-sharing contract, a form of transaction cost that is excluded from supply chain modeling, is found to be the key factor that has limited practical adoption of a coordinated revenue-sharing contract (e.g., Cachon and Lariviere 2005). On the other hand, a price-only retailer-supplier contract, which is shown to be non-coordinated, is popularly adopted in practice. It has been argued that these findings can be interpreted by inter-stage transaction costs, which will be theorized and characterized in the proposed project.Nevertheless, supply chain inter-stage performance depends on whether and how transaction costs, including that of logistics, infrastructure and governance, interact with production output measures. There is a critical need for a unified assessment framework of supply chain efficiency, with which the following research questions can be addressed: 1) how supply chain efficiency can be fully measured by a unified measure which incorporates both production and transaction costs into supply chain performance assessment; 2) how supply chain governance structure affects supply chain efficiency under different governance structures and different contract structures; 3) how supply chain transaction attributes, together with production input factors, affect supply chain composite frontier (which is defined as maximized production output as a function of minimized combined costs of production and transaction).We develop a transaction-embedded supply chain frontier (TESCF) model of a retailer-supplier supply chain, so as to address the research questions raised above. We begin with obtaining analytical properties and characteristics of TESCF model. Our initial analysis of the TESCF model indicates the non-smooth and nonlinear nature of supply chain transaction cost, concurring with the conjectures of transaction cost economics, to which rigorous derivations and characteristics will be obtained in this project. We then conduct extensive numerical tests to verify the TESCF model and its properties and characteristics.


Project number9041904
Grant typeGRF
Effective start/end date1/01/1423/12/15