Measure Transaction Risk and Build Your Supplier Relations

Measure of Transaction Cost / Risk

Transaction cost to an organization rises due to uncertainty in business transactions with external sources, information asymmetry, lack of trust and commitment, and frequent re-negotiations with suppliers.

In scale economy, transaction costs were quite high due to less reliability of suppliers. This enticed firms to acquire or internalize the sources of supply. In knowledge economy, however, transaction cost is getting flattened due to supplier reliability and advancements in transportation, telecommunication and information technology capabilities, and thus encouraging dispersing the operations and ownership of production.

Measure the relative transaction cost of your unit/division/company for each critical supplier. Using the pictorial scales 1 to 4 (ranging from 25 to 100) measure Trustworthiness, Information Asymmetry, Power Asymmetry and Supplier Fit/Alignment, and Calculate the score for transaction cost.

Higher the number on the scale, larger the transaction risk and coordination cost. Compare your score with benchmarks.

Example: Company A: Transaction Cost = 75 (trustworthiness)+ 50 (information asymmetry) + 50 (power asymmetry) + 25 (supplier fit) = 200

A unit/company having low transaction risk and cost will have the least score of 100 ; A unit/company with high transaction risk and cost will have the high score of 400. See the following link for downloading the scales.

http://www.schooloffishstrategy.com/#!measure-of-transaction-cost/c11l6