Possible Transaction Costs Related to Gloablization

     As the “Rethinking Procurement in the Era of Globalisation” article points out, supply chains have experienced a shift towards increased division of the production process, which is “manifested by growth in outsourcing, global sourcing and direct foreign investments” (1). With this increased fragmentation comes increased detachment between large retailers and their suppliers as the supply chain grows and spans across the world. This detachment generally creates the inability of the retailer to directly monitor and control production processes, which can have some major implications as detailed in a recent article published September 1, 2013 in the New York Times.

     The article, titled “Fast and Flawed Inspections of Factories Abroad,” details various instances where American retail companies who contract with foreign suppliers received poor quality goods as a result of poor factory regulation or breakdown of processes overseas. In one example, a Walmart supplier called ‘Quaker’ subcontracted its production to a different factory that was not approved by Walmart’s supplier monitoring body. The finished products were then passed through an approved Walmart supplier in order for the goods to be accepted by Walmart. When the products ultimately reached Walmart’s shelves a large number of quality complaints were received, and the products failed when put through quality testing (2).

     In other examples provided by the author, even overseas suppliers that go through the auditing process have been shown to seek loopholes that allow the factory to pass an audit despite the factory’s many safety violations. The author cites instances where factory managers cover up violations such as employing underage workers, filling the factory with machinery beyond capacity, or blocking fire escapes or stairwells. In cases where the violations eventually surface or employee safety is compromised, retail companies linked to these suppliers can lose customer trust and tarnish the company image (2). 

     This article is extremely relevant in that it illustrates what types of transaction costs can arise due to globalization and outsourcing segments of the supply chain. When considering the hard transaction costs related to the actual audit process, most retailers have contracts with external auditing companies that charge more money for more thorough auditing. In the face of the pressure to lower costs the retailers often choose less thorough auditing processes. In instances where the audits fail to recognize poor factory conditions or other issues the “soft costs” incurred by the retailers become fairly substantial. Production quality is compromised in most cases while company image and consumer trust is compromised in others. 

Sources:

(1) den Butter, F.A., & Linse, Kees. (2008). Rethinking Procurement in the Era of Globalisation. MIT Sloan : Management Review, 50.1, 76-80.

(2) Clifford, S., & Greenhouse, S. (2013). Fast and Flawed Inspections of Factories Abroad. . New York Times. Retrieved from http://www.nytimes.com/2013/09/02/

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