Logistics Organization Mode Boundary Definition on the Basis of Transaction Cost Theory

Transcription

1 Logistics Organization Mode Boundary Definition on the Basis of Transaction Cost Theory WEI Juan, OU Guoli School of Economics and Management, Beijing Jiaotong University, Beijing, China, Abstract:With appearance of the modern logistics concept, enterprises are paying more and more attention to logistics management. To reduce logistics cost, they begin to inspect logistics organization modes. This article has applied transaction cost theory to analyze how the enterprises can choose logistics modes with the lowest total cost, and Williamson s Heuristic Model to define the boundary of three logistics modes, and concluded that technical progress will reduce logistics outsourcing transaction cost, change scale boundary of logistics outsourcing and self-supported logistics to shift towards a direction more conducive to logistics outsourcing, which is developing from short-term contract to strategic alliance. This is also of reference value for the logistics enterprises to choose logistics mode according to their real conditions, and has defined logistics industry development tendency theoretically. Keywords: Transaction cost, logistics, self-supported logistics, logistics outsourcing, logistics cooperation, boundary Introduction With appearance of the modern logistics concept, logistics has become one of the core competitiveness of enterprises, which are paying more and more attention to logistics management and considering logistics as a new profit source. To reduce logistics cost, the enterprises begin to inspect logistics organization modes. At present, research on logistics organization is mainly focused on the farm produce logistics organization mode, the third-party logistics organization mode and the virtual logistics organization mode appearing in recent years. Some scholars have conducted detailed research into the specific logistics organization mode [] and analyzed the driving mechanism for enterprises to choose logistics mode [2]. However, no one has studied the basis for enterprises to choose logistics mode and the boundary between different logistics modes so far. This article has referred to the existing research findings, applied transaction cost theory, compared operation results and transaction costs of different transaction modes, and the basis for enterprise to organize logistics activities, and established the boundary model with maneuverability. This is also of reference value for the logistics enterprises to choose logistics mode according to their real conditions, and has defined logistics industry development tendency theoretically. 2 Explanation of enterprise boundary by transaction cost theory In his book The Nature of the Firm, Coase innovatively put forward the brand-new concept of transaction cost. His explanation of transaction cost is the cost to apply market price mechanism. That is to say, market transaction is not based on the orthodox perfect competition, where the price information is fixed and mastered by all parties. On the contrary, the price is uncertain, unknown and one have to pay the price to convert the unknown into the known. Meanwhile, the market transaction process is not always favorable, disputes and conflicts frequently occur between the transaction parties, which entail performance negotiation and recourse to law, all of which require certain transaction costs. As a result, establishment of an organization and designation of an authority (an entrepreneur ) 237

2 to allocate resources can save certain market operation costs [3]. At the same time, enterprises as an institutional arrangement also require certain management costs. With expansion of enterprise scale and improvement of complexity, the enterprise management costs will gradually increase. Therefore, Coase believes that the enterprise and the market is peer-to-peer and mutually replaceable resource allocation methods, the market expansion is subject to transaction cost increase, and the enterprise expansion will also increase its organization costs. Therefore, the boundary between the enterprise and the market is actually based on the comparison between the enterprise internal organization cost and external market transaction cost, and the optimal boundary is positioned at a breakeven point where the marginal organization cost equals to the marginal transaction cost. Coase is the first to put forward at the transaction cost theory, but he didn't continue nor give a clearcut definition as to the transaction cost. Subsequently, many economists including Williamson made a further development and improvement to the transaction cost theory. Williamson expanded the enterprise organization cost and the transaction cost to all activities of the enterprises, and he particularly emphasized on the impact of asset specialty on organization mode. Williamson amended Coase s idea of the market and the enterprise are fully replaceable []. He put forward that the market and the enterprise have certain substitution relation, but the substitution is elastic due to their respective unique functions, so there is a certain boundary between the enterprise and the market. 3 Cost structure of logistics organization According to the transaction cost theory, the enterprise decision of a certain logistics mode is subject to the comparison of internal organization logistics operation cost and market transaction cost. 3. Logistics organization mode According to the subordination relationship between logistics and enterprises, there are three logistics modes including self-supported logistics, outsourced logistics (or logistics outsourcing) and logistics cooperation..self-supported logistics Self-supported logistics is also called as the first-party logistics or direct logistics, which refers to warehouses, fleets and logistics distribution companies of production or sales enterprises to satisfy demands for logistics services with self provision. There are two situations: first, functional departments such as the procurement, production and sales departments of the enterprises independently carry out the logistics tasks, which is an important characteristic of the early-stage logistics activities of the enterprises; second, integrate logistics resources and functions of functional departments of the enterprises and set up logistics departments or logistics companies to unify the management of logistics operation, which is a logistics mode universally adopted by large enterprises such as Haier Group. 2.Logistics outsourcing Logistics outsourcing is also called as the third party logistics or contract logistics. The outsourcing logistics is based on contract to entrust whole or part of the logistics activities to professional logistics enterprises. Logistics outsourcing places extra emphasis on one-off or short-term contract relation, and out sources certain periodical and repeated logistics activities or functions, and the enterprises are bargaining competitors. 3.Logistics cooperation Logistics cooperation is also called as logistics alliance, through which enterprises and logistics enterprises form long-term alliance of cooperation to achieve specific logistics targets. Logistics cooperation is actually an intermediate form between self-supported logistics and logistics outsourcing. Specifically, the enterprises will chose a few stable and dealing logistics companies to form strategic 238

3 alliance or through joint stock system to form logistics partnership characterized by advantage complementation, factor bilateral or multilateral direction, mutual trust, joint adventure, profit sharing, long-term mutual benefit and comprehensive logistics cooperation, so that enterprises and logistics enterprises can be integrated. Through strategic alliance, they can jointly expand the logistics market, lower logistics costs and improve logistics benefit. As a result, the strategic alliance with logistics enterprises can not only bring economy of scale and benefit of specialization of logistics outsourcing, but also lower other costs of the logistics outsourcing mode. 3.2 Cost structure of different logistics modes.cost structure of self-supported logistics Logistics activities in the traditional sense are decentralized in different economic sectors, different enterprises and different functional departments of enterprises, which can eliminate the cost of price discovery because the internal management can eliminate the cost for transaction negotiation and contract execution. However, self-supported logistics has also inevitably increased enterprise operation cost C i, which includes: logistics infrastructure cost C i, which is the sunken cost and requisites functional cost; inventory cost C i2, which arises because enterprises due to limited distribution capacity, have to guarantee sufficient inventory to prevent stock out with increased inventory cost; internal transaction cost C i3, which arises with deepened division of logistics work within the enterprises, gradual expansion of enterprise scale, thinning of enterprise internal functional departments, gradual increase of internal department transaction costs, and disperses the enterprises main business and increases management cost; the idle resource waste cost C i4, as the single enterprise logistics management capability is weak, the logistics system is not of scale and may give rise to resources waste. C i = C i +C i2 +C i3 +C i4 2.Cost structure of logistics outsourcing Logistics outsourcing cost C m has the following aspects: C m to look for the third-party logistics enterprise, C m2 contract execution costs to sign logistics contract with logistics enterprises, C m3 to supervise performance by the third-party logistics enterprise, C m4 information cost to communicate with logistics enterprise, C m5 out of control and disclosure cost, which means the cost for losing control of the enterprise logistics process or for disclosure of enterprise business secrets, C m6 default cost for the delinquent party to assume, and C m7 customer cultural barrier cost, which means the value difference between the enterprise, the customer, C m partner and the third party. C m = C m + C m2 + C m3 + C m4 + C m5 + C m6 + C m7. 3.Transaction cost saved with logistics cooperation ()Lower asset specialty risk. The transaction parties can establish long-term partnership to reduce investment risks in special assets, and the enterprises are willing to invest to improve the logistics infrastructure level. (2)Lower transaction uncertainty. The stable and long-term partnership between the transaction parties can enhance mutual understanding, improve cognitive competence of uncertainties, the transaction subject behavioral tendency of constrained competition can effectively overcome bounded rationality and optimistic behaviors of both parties. Because the fraud will trigger revenge from the partner and the high cost of adverse selection. (3)Lower transaction frequency. As a rule, the higher the frequency is, the higher the transaction cost will be. The transaction parties can establish long-term partnership, replace the series of loose and short-term contracts with a relatively longer-term contract to save the contract cost, and dilute the transaction cost to the continuous transactions to lower the relative transaction cost. Selection of different logistics mode will have different costs, the enterprises naturally will choose the mode with the lowest total logistics operation cost, which refers to all the incurred cost and expenditures in logistics operation and includes logistics operation cost and transaction cost. 239

4 4 The boundary of self-supported logistics, logistics outsourcing and logistics cooperation What kind of logistics activities will enterprise choose is decided by the equilibrium point of total operation cost of different logistics modes. Williamson (985) believes that asset specialty, uncertainty and transaction frequency in the transaction activities are important factors in deciding the transaction cost. We analyze with asset specialty, with asset specialty K as the horizontal ordinate, and cost C as the vertical ordinate, and apply Williamson's Heuristic Model to analyze the boundary of self-supported logistics, logistics outsourcing and logistics cooperation, as in Chart [4] C TC TC T C T C 0 K K* K* 0 K 0 K logistics outsourcing logistics cooperation self-supported logistics C curve represents the difference between enterprise internal self-supported logistics cost and logistics market transaction cost C=C i -C m () In the formula, C i represents enterprise internal logistics self-supported cost; C m represents enterprise logistics outsourcing cost. T curve represents the difference between logistics outsourcing transaction cost and enterprise internal self-supported logistics organization cost, usually called as transaction transfer cost: T=T i -T m (2) In the formula, T i represents enterprise internal logistics self-supported logistics organization cost, and T m represents logistics outsourcing transaction cost. Plus logistics operation costs difference and transaction cost difference for total cost difference. TC= C+ T =(C i -C m )+ (T i -T m ) Chart : The boundary of three logistics modes 240

5 =(C i + T i )-(C m + T m ) (3) If TC>0 enterprise self-supported logistics total cost is greater than logistics outsourcing total cost, the enterprise should choose the logistics outsourcing mode, that is to say, to choose logistics outsourcing mode when the asset specialty is less than K * ; If TC<0, enterprise self-supported logistics total cost is less than logistics outsourcing total cost, the enterprises should choose the selfsupported logistics mode, that is to say, to choose self-supported logistics when the asset specialty is greater than K*. K* is the boundary between enterprises of supported logistics and outsourced logistics. The development of logistics outsourcing has promoted the relationship between the enterprises and the logistics enterprises from random short-term cooperation to long-term stable cooperation, simultaneous reduction of C m and T m, shift of T curve and C curve towards T and C, shift of TC rightward to TC, K * to K *, the previous self-supported logistics between K * K * converts into logistics cooperation mode. K * and K * are the boundary points between logistics outsourcing and logistics cooperation, and between logistics cooperation and self-supported logistics respectively. 5 Conclusion Based on the above analysis, we can see that technical progress will reduce logistics outsourcing transaction cost, change scale boundary of logistics outsourcing and self-supported logistics to shift towards a direction more conducive to logistics outsourcing, which is developing from short-term contract to strategic alliance. References []. Coase Enterprise, Market and Law [M]. Shanghai: SJPC,2009.6:4. [2]. Li Song, Wang Yanmei, Virtual Logistics Enterprise Efficiency Boundary Analysis on the Basis of Transaction Cost Theory [J] Railway Transportation and Economics 2006(6): [3]. Williamson, Oliver. E. The Organization of Work [J] Journal of Economic Behavior and Organization, 980, (). [4]. WILLIAMSON O. The Economic Institutions of Capitalism [M]. New York: The Free Press, 985. [5]. Yu Xinru, Hou Junqi, Enterprise Logistics Self-Supporting-Procurement Mode Selection Strategy Research [J], Northwest A&F University Journal (Social Science Edition) 2003(6):