Disintegration Hiving Off Processes

Disintegration Hiving Off Processes

Disintegration, hiving-off processes or products and buying them from external suppliers; also called 'contracting out'. More generally it is the situation in which firms obtain all that they need for the manufacture or sale of a product through the mechanism of the market. The limit of disintegration would be reached if all transactions were individual and there were no co-ordination within firms (a firm is essentially a device that supersedes the price mechanism; within it there is no price system). The less integration there is within firms, the more the prices of their inputs, i.e. the services of the factors of production they buy, are determined by the play of market forces.

Integration takes place for reasons of cost, quality control, security of supplies and spreading of risk. But conversely it may be cheaper to buy materials or components from specialist suppliers. If, for instance, there are advantages in producing a component on a larger scale than the user requires for himself, he is more likely to buy it in rather than produce more than he needs and face the additional problems of selling off surpluses. The same principle applies to selling to a wholesaler who can carry a range of goods rather than going into direct dealing with retailers. Quality control is often easier for the firm if it makes the product itself, but other means may be as effective: making part of its supplies as a method of control, buying to precise specification, buying from competing suppliers.

Security of supply and definite delivery dates are important, but they can often be assured by the eagerness of suppliers in a com-petitive market to retain the custom of the buyer. If a service such as road transport is needed to fulfil particular requirements and schedules, it is possible to arrange it on a contractual basis thus ensuring availability as and when required. If the financier depends on external suppliers, they undertake the necessary investment in fixed assets, have to hold stocks, and bear part of the strain of any decline in demand for the main product. Sub-contracting is a good example of disintegration which frees the main contractor from some tasks and releases his resources for other activities which may be more profitable for him.

Dismal Science, The. See Malthus, T. R.

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