Discuss the optimal method for procuring inputs that have well-defined and measurable quality specifications and require highly specialized investments.
Inputs are required, by a firm to produce a good or product. It is the inputs translated into an identified output/product and then sold in a market. The method of procuring an input directly affects the cost of production, and it is reflected in the prices. There are several methods of procuring an input; however, only a few of these methods are considered more credible and optimal (Baye).
Spot Exchange: It is such a method of procurement of inputs, in which the buyers and the sellers meet at a spot (could be marketed) and exchange money (mostly) for inputs. Spot exchanges are usually unique episodes of exchange, which implies that one spot exchange does not have a direct association with another spot-exchanges.
Contracts: This method of procurement is very formal and structured. In such a procuring method, two parties sign a legal document that contains clauses about 1) the volume of inputs to be procured, 2) the amount to be paid against the procuring of inputs, 3) date and time decided to provide/procure inputs, etc. A contract could be regarding a single procurement, or the number of procurements spread over several days/months/years.
Vertical Integration: Such a procurement method is rarely employed. This method internalized the production of inputs, which means that a firm decides to produce inputs itself. Producing such a method sometimes complicates affairs and only large corporations have the financial resources to internalize the production of inputs (Amadeo).
The Most Optical Method of Procuring Inputs
The most optimal methods of procuring inputs are contracted. It is because it allows the firm to explore the best options. After exploring various options to procure inputs, a firm sign a contract with such firm/company, for the procuring of inputs which offers input at a very reasonable price. As this procurement method is a consequence of negotiations, which takes the form of a legal contract, it is binding for both parties to observe all the clauses of the negotiation/contract.
Work Cited
Amadeo, Kimberly. “Vertical Integration, Its Pros and Cons with Examples” The Balance. The Balance, 23 May 2018. Web. 1 October 2018. https://www.thebalance.com/what-is-vertical-integration-3305807.
Baye, Michael R. Managerial Economics and Business Strategy. McGraw-Hill Education, 2013.
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