Case study Vegetables procurement by Asian supermarkets: a transaction cost approach

Purpose – The paper seeks to understand the conditions that motivate Asian supermarkets ’ choices for vegetable sourcing through wholesale procurement or preferred supplier systems. Design/methodology/approach – Insights from transaction cost theory are used to analyze the evolution of fresh produce procurement regimes by supermarkets in Bangkok and Nanjing. Findings – Trade-offs between higher production-cum-investment costs (i.e. fixed investments, variable production costs and economies of scale) with expected savings in transaction costs (governance and opportunistic behaviour) are registered that could hinder contractual delivery. Research limitations/implications – Transaction costs play an important role in shaping procurement regimes. Information, negotiation and monitoring costs are high in early phases of market development, but may be reduced when retailers establish direct and contractual relations with selected producers. Such preferred supplier arrangements may be helpful to reduce risks related to delivery frequency and product quality, but require substantial investments that only become feasible when opportunistic behaviour is adequately controlled. The nature of supplier-buyer relations alters in a number of subsequent phases from chain optimisation to integral chain care. Practical implications – With the establishment of large-scale supermarkets in Asia, buyers need more information about the quality of products and the creditworthiness and reputation of sellers and therefore increasingly rely on contractual delivery relationships. For preferred supplier regimes, scale economies and enforcement of mutual trust are key issues to establish stable relations. Originality/value – The shift from wholesale purchase towards preferred supplier regimes in emerging economies involves large investments that can only be met if governance costs are reduced