Inbound inventories and uncertainties from the viewpoint of transaction cost economies

According to transaction cost theory, a business operation between companies often starts many negotiations, co-ordination and monitoring mechanisms.
These, in turn, result in the use of resources and thus sizeable transaction costs in financial terms.
By their nature, transaction costs arise during a production company’s procurement. When determining the order lot size, the typical aim is to minimize the total inventory holding costs and ordering costs using traditional economic order quantity models (EOQ).
These accounting models ignore the costs of co-ordination, control and negotiation that arise during the purchase transaction. We argue that in dimensioning the inbound inventory levels there is good cause to take account of the transaction costs that will arise during the on-going transaction.
Production carried out by subcontractors according to the client’s specifications often gives rise to a continuous need for co-ordination and the accompanying monitoring mechanisms and negotiations. Increasing order batch sizes enables a reduction in the number of unfulfilled purchase orders.
Reducing the number of purchase orders has the further effect of reducing uncertainties and thus the need for co-ordination. The consequence is nonetheless an increase in inventory costs.
In the above-mentioned expression, increasing the inventory costs reduces the transaction costs arising from co-ordination, control and negotiations.
In this study, we aim to develop a new decision support model to explain the causalities between the inventory level, transaction costs and inventory costs.