Transaction Costs and Slanghter Cattle Procnrement:

Processors' Selection of Supply Otiannels

/ . / / E. Hobbs

This article investigates the hypothesis that different Introduction

supply channels impose different types (and levels of)
transaction costs on beej processors in the Vnlted
Kingdom. The choice of supply channel is therefore
influenced by these transaction costs. Recent food safety
legislation and increasing consumer concerns over farm
animal welfare may have altered the transaction costs
arising from different supply channels. Conjoint
analysis is used to measure the relative importance of
selected transaction costs in a processor's procurement
decision. A survey of VK beef processing firms is used to
collect data for the conjoint analysis. The results
suggest that the monitoring costs arising from the
traceability of cattle to the farm of origin are
particularly important. The implications for vertical
coordination in the beef marketing chain are
discussed. ©1996 John Wiley & Sons, Inc.
When purchasing slaughter eattle, meat processors
in the United Kingdom have a uumber of procure-
ment alternatives from which to choose. Cur-
rently, approximately 50% of slaughter cattle are
sold to processors" through live-ring auctions, with
the remainder largely purchased direct from indi-
vidual cattle producers. The proportion of cattle
sold through live-ring auctions declined from a
level of 72% in 1964. Electronic auction systems
were introduced to the United Kingdom iu 1989
and now account for approximately 8% of slaugh-
ter cattle sales. Cooperative group marketing
schemes account for a further 5% of sales.

"Throughout this article, thr terms beef processor, abattoir,

slaughterhouse, or parkier will hv used inteirhanf^'ably.
The use of rattle dealers or agentJ^ is no longer a signiTicant vcrtU'al
alternative.

Tbe author gnilefully acknowledges {he helpful commenis of anonymous reviewers. The research for ihui article was carried out uhile the
author was with the Economics Division, Department of Agriculture, University of Aberdeen and the Scottish .Agricultural College, Aherdeen,
Scotland.
• The author is with the Excellence in the Pacific Research Institute, University of Lethbridge and Faculty of
Management, University of Calgary, 4 219 Village Terrace SW, Calgary T3H 2L4, Canada.

, Vol. 12, No. 6, 509-523 (1996)

1996 by John Wiley & Sons, Inc. CCC 0742-4477/96/060509-15

'509
 Hobbs
This atudy investigated the hypothesis that differ-
ent supply channels impose different types (and
levels) of transaction costs on heef processors.
Consequently, the choice of supply channel is in-
fluenced hy these transaction costs. Clearly, the
transaction costs that arise from different supply
channels do not provide the sole explanation for a
processor's choice of supply channel. Other im-
pi)rtant factors include technological innovations
that generated economies of scale in meat process-
ing. This led to larger plant sizes with lower aver-
age total costs of produ<'tion that, in turn,
generated economies in procurement. Longer
term, regular supply relationships with producers
he(^ame more attractive for the processor because
of the need to fully utilize the capacity of the
plant. However, this may he more significant in
the North American industry than in the UK in-
dustry. The North American industry has seen
considerable rationalization and concentration on
both the processing and production sides, which is
characterized by relatively large feedlots. This led
to clftser relationships between the produc tion and
processing stages of the beef chain, either through
vertical integration, forward contracting, or pur-
chasing agreements with processors.^ The struc-
ture of beef profhictii>n in the United Kingdom,
however, is quite different. Relatively small scale
family farms still (Umiinate the industry (the aver-
age beef herd size in England and Wales is around
20 head of cattle, 41 in Scotland). Hence, a trans-
action cost explanation of the processors' choice of
supply channels bears further investigation.
Transaction costs are simply the costs of carrying
out a transfer of goods between technically separ-
able pbases of production or distribution, or in
and Jones vertical coordination to include:
"*. . . all ihe ways of harmonizing the suci-t^«»ive vertical steptt
of jirodui-tion uml marketing. The market-price sywtem. verti-
cal iiilegratiiiii, rontractin^, ciiuperatiun singly or in conihinu-
tion are some of ihc nlternative meant; of eoordination" (p-1)-
Note that in thiif article the broad deHnition of vertical coordination
arrangements, which includes market prices, will he used. Sometimes
a narrower ilefinitiim of vertical coordination arrangements is used
that is confined to nonmarket arrangements. This problem of defini-
tions can sometimes lead to confusion.
510
Other words the costs of carrying out an exchange
of goods or services. They arise wherever there is
any form of economic organization.-* Traditional
neoclassical economic theory implicitly assumes
transaction costs to be minimized. When modeling
economic hehavior, they are assumed, for sim-
plicity, to be zero. The standard neoclassical
transaction involves the exchange between eco-
nomic agents (buyers and sellers) of a homogenous
product: there are no quality variations between
products and consequently no costs involved in
measuring the value of a proiluct. Where products
do exhibit (|uality differences, they are treated as
separate products serving distinct markets. Eco-
nomic agents are assumed to possess full informa-
ti()n; hence, there is no uncertainty regar<ling
prices, product characteristics, or the beha^ior of
competitors and trading partners. Neoclassical
economic analysis concentrates on equilibrium
outcomes between firms in a market. There is no
direct consideration of how transactions occur.
Transaction cost economics (TCE) focuses instead
on reas<)ns for the existence an<l behavior of firms
and on the nature of business transactions. '••'' It
suggests that tbe nature and level of transaction
costs determines the vertical coordination out-
come. For example, if the transaction costs of pro-
curing cattle through live-ring auctions were to
rise, meat processors may turn to other form of
vertical coordination such as procuring cattle di-
rectly from farmers or through electronic auc-
tions.
The UK meat processing industry faeces a number
of external pressures that may alter the transac-
tion costs associated with procuring cattle. Two
examples are the recent Food Safety Act (FSA,
1990) and increasing consumer <'oncerns over ani-
mal welfare on farms. This article investigates the
importance of transaction costs in the selection of
supply channels. The effects of food safety legisla-
tion and animal welfare concerns on these transac-
tion costs are (considered.
Transaction Costs
In terms of cattle procurement, transaction costs
are more than simply the monetary costs associ-
 Cattle Procurement
ated with the purchase and delivery of slaughter
cattle. Instead, they encompass all aspects of the
transactional relationship between buyers and sell-
ers in the supply chain. It is useful to divide
transaction costs into three main classifications:
information costs, negotiation costs, and monitor-
ing (or enforcement) costs.
Information Costs
Information costs arise prior to a transaction.
Economic agents face costs in the search for infor-
mation about products, i)rices, inputs, and buyers
or sellers. For example, beef processors may incur
price information costs in deciding the price to of-
fer for cattle purchased direct from farmers.
When purchasing cattle through the live-ring auc-
tion, prices are set by the process of competitive
hidding among hnyers. The subsequent market
prices become publicly available information. This
reduces price information costs for the ahattoir
because market forces determine prices for each
transaction. The residtant pri(^e information acts
as a guide to live-weight auction prices in other re-
gions or later in the week. Furthermore, pro-
cessors in the United Kingdom often hase their
dead-weight prices on the previous week's live-ring
auction price. The price discovery process is de-
scribed by Ward^ as a two stage process. The first
stage involves finding and assessing the overall
price level for tbe product in terms of the influ-
ences of supply and demand. The use of publicly
available price information from live-weigbt mar-
kets in tbe United Kingdom reduces this cost of
price discovery for processors. The paradox of
this situation is that as increasingly more pro-
cessors source their cattle directly from farms,
while basing their prices on live-ring auction
prices, the volume of cattle sold through auctions
declines. Auction prices inevitably become less
representative of slaugbter cattle transactions.
This "thin market" problem bas been discussed
extensively in the literature, see, for example,
and
' .A Turlher concern raised by Tomek~ is thai ihin marketN can re-
suli in ilie manipulation of reported prices by selective reporting or
511
According to Ward^ the second type of price dis-
covery process involves adjusting tbe general price
level for the specific characteristics of the prod-
uct. In other words, for dead-weight sales, a car-
cass grading system is used to reward (tr penalize
carcasses that deviate from some established aver-
age carcass evaluation.
Procuring cattle through a live-ring auction ex-
poses proc^essors to a degree of grade uncertainty
because cattle are purchased on a live-weight per
head basis. Hence, the processor bears the risk
that the cattle will not grade as expected. Buyers
may have paid a high price for an animal that
looked promising in the auction ring, only to dis-
cover that it does not grade well once slaughtered.
Research has suggested that the amount of infor-
mation about cattle quality affects the degree of
risk associated with the buyer's pricing deci-
sion.**-^ Live-weight sales offer buyers tbe least in-
formation about cattle: buyers know the live
weight of the cattle, nsually the farm of origin,
and they may (or may not) be aware of tbe pro-
duction methods used on that farm. Direct dead-
weight sales provide the buyer witb far more in-
formation. Price is based on the actual deac!-
weigbt carcass grade and should more accurately
reflect the quahty of the animal. Fausti and Feuz^
show that, assuming l)uyers to be risk averse, av-
erage prices paid for cattle sold through live-
weight marketing channels are lower than those
paid for cattle sold throngh various dead-weight
marketing channels in which the buyer has more
information about the quality of the animal. Con-
versely, sellers face greater nncertainty when sell-
ing animals as dead-weight because they incur the
risk that the cattle will not grade as expected. Dif-
ferent sellers will have different levels of risk
aversion that will affect their preferences for dif-
ferent marketing channels.'^ Processors face less
grade uncertainty because of the live cattle assess-
ment abilities of procurement staff. To achieve a
bigh level of proficiency in procurement staff,
however, requires investment in human capital.
misreporting jirices. However, this may be Icsn nf H concern in the
United Kingdom where national average live-weight prices arc col-
lected and puhhshed hy a separale industry body, the Meal and Ltve-
Btuck Commission.
 Hobbs
This is a transaction cost. Alternatively, the pur-
chase of cattle direct from farmers or through
electronic auctions on a dead-weight carcass grade
hasis reduces grade uncertainty for processors.
Additional information costs may arise in identi-
fying appropriate sellers. If processors purchase
cattle direct from farmers they can develop long-
term supply relationships with individual pro-
ducers. Although not <-omniitted to buy/sell from
one anttther, both parties often value the relative
security that this type of arrangement can bring.
Under a coo]>erative gronp marketing scheme
(GMS) a group of producers agrees to sell cattle of
a particular (]uality to a specific buyer. Tbis often
involves a processor and a retailer in a three-way
partnership with the farmer group. A GMS allows
processors to reduce their supplier information
costs by providing a regular source of supply for
cattle (tf a relatively consistent quality. On the
other hand, a processor relying on live-ring or
electronic auction markets for a supply of cattle
depends on the regular use of this marketing
channel by farmers wbo are known to produce
good (piality cattle. If this is not the case, the in-
formation costs of de< iding which producer''s cattle
to purchase will rise.
In adtlition to lowering the information costs fac-
ing processors, a further motivation to engage in
long-term regular supply relationships may be to
secure an atiequate supply of slaughter cattle to
ensure that slaughter plants are not run consis-
tently below full capacity. This has become in-
creasingly important as the beef processing
industry in the United Kingdom has rationalized
into fewer and larger nnits. Average costs rise rap-
idly if a plant is not operated at its optimum
rate.2 In the United States in particular, pro-
cessors have taken steps to ""capture" their future
supplies of slaughter cattle thrcuigh backward inte-
gration into the feeding of cattle, forward contrac-
ting with large feedlot companies, and purchasing
agreements with livestock producers whereby tbe
producer agrees to market a certain number of
cattle to the processor over a specified time peri-
od. While backward integration and forward t-on-
tracting have not o<'currcd in the UK industry,
group marketing schemes represent purchasing
agreements between groups of producers on the
S12
one hand and a processor (and sometimes retailer)
on the other. Part «f a processor's motivation for
engaging in this type of supply relationship may be
to ensure a steady supply of cattle to keep plants
at full capacity. Plowever, an additional incentive
may also be to reduce information costs for the
processor. This becomes particularly important as
consumers develop more specific reciuiremcnts for
product characteristics such as improved food
safety standards and animal welfare standards.
Negotiation Costs
Negotiation costs arise from the physical act of the
transaction and are influenced by tbe way in
which the transaction is carried out. For example,
the opportunity cost of the time that procurement
staff take to locate supplies of cattle is a negotia-
tion cost. This cost may he higher for direct dead-
weight pur<-hases from individual producers than
for auction market purchases where many cattle
are present at one location. The use of electronic
auctions avoids some of the negotiation costs of
procuring cattle because the visual assessment of
cattle is carried out by the electronic auction com-
pany rather than by the processor's own procure-
ment staff.
A GMS will impose different types of negotiation
costs on a processor. Rather than dealing with in-
dividual producers, with whom the prctcessor has
considerable bargaining pi)wer, the firm must ne-
gotiate the quality and price details of the forth-
coming transactions with representatives of the
producer group. The increased bargaining power
tbat tbis gives sellers may be viewed as an increase
in negotiation costs for buyers, because their rela-
tive bargaining strength is diminisheil. On the oth-
er hand, if a group of regular suppliers is
established, the supply of cattle is secured and
buyers need not spend as mucb time canvasing lo-
cal producers for supplies of cattle.
Another negotiation cost that differs among sup-
ply channels is haulage. The uplift of cattle from
farms and delivery to the abattoir is always neces-
sary; tbis is not a transaction (M)st. However, when
additional transportation is required to facilitate a
transaction, such as the extra transportation leg
 Cattle Procurement
involved in moving animals to and from an auc-
tion, this additional cost is considered to be a ne-
gotiation cost. When using the live-ring auction,
the abattoir is responsible for the transportation
of stock from the marketplace to the slaughter-
house. On the other hand, stock purchased pri-
vately from producers may either be delivered to
the slaughterhouse hy producers or collectetl from
the farms by the processor. When cattle are pur-
chased through an electronic auction system, pro-
cessors tend to be responsible for the collection of
cattle. On the other hand, if the processor is re-
sponsible for collecting cattle directly from farms,
it has more control over the timing of delivery to
the slaughterhouse. This can be beneficial in terms
of optimizing the efficiency of the slaughter line.
Monitoring Costs
Monitoring or enforcement costs arise after a
transaction. It may be necessary to monitor tbe
quality of goods from a supplier or to monitor the
behavior of a supplier (or buyer) to ensure that
all preagreed terms of the transaction are com-
plied with. The costs of seeking restitution when a
contract is broken are also considered to he mon-
itttring costs. Some of the key monitoring costs
facing processors arise because retailers need to
ensure that animal welfare and food safety stan-
dards have been adhered to hy farmers.
Monitoring and enforcement costs have become
more important in the UK food sector since the
revisions to food safety standards embodied in the
FSA of 1990. The FSA places a new legal respon-
sibility »n all those involved in the production,
processing, distribution, and retailing of food to
ensure that the UUHI within their possession con-
forms to the provisions of the Act. It does so by
the introduction of a "due diligence" defense
clause. This means that, if acxused of an offense
under the Act, a defentlant must prove that he or
she took all reasonable precautions and exercised
all due diligence to ensure the standard and safety
of the food that they sell. In order to invoke the
due diligence clause, if charged under the Act, a
firm must prove that it undertook adequate mon-
itoring of incoming supplies. Tbis applies to all
513
firms along the food chain. Monitoring costs for
all food firms arc increased because they must
monitor the standards and processes of firms fur-
ther upstream in the marketing chain, carrying
out and documenting tests on food (piality and
safety.'" F'or example, if tbere is a food safety
problem with beef sold in a supermarket that was
caused by a particular on-farm [)roduction prac-
tice or that was the result of a cattle disease, the
retailer (and processor) are now legally responsi-
ble for taking all reasonable precautions to detect
this problem.
This has two main implications for processors.
First, they must have procedures in place to moni-
tor the quality and standards of their supplies.
Second. })rocessors face increased pressure frctm
supermarkets to provide them with information on
the history of their beef supplies, including assur-
ances about the production prac tices used on the
farms from which the cattle originated. Easier tra-
ceability of cattle to the farm of origin greatly re-
duces this monitoring cost. Cattle purchased from
a cooperative GMS or direct from individual farm-
ers may be more easily traced than cattle pur-
chased through live-ring or electronic auctions. To
improve traccability and lower the costs of mon-
itoring production practices, processors may re-
quire clearly documented information ahout the
breeding and production history of the cattle; cat-
tle from known sources could be pro<-essed in
bat(;hes, thereby enhancing traccahility through-
out the food supply chain.
Two types of monitoring costs arise from animal
welfare concerns. The first involves the monitoring
of on-farm production |!ractices. Processors in the
United Kingdom have been encouraged by super-
markets to source tbeir cattle supplies from farms
with proven high welfare standards. Conse(|uently,
the traceability of stock to the farm of origin is
important. Processors facing this kind of pressure
from their major customers will ])refer to pur-
chase cattle with a known background, that is,
from farms where the production practices are
recognized as "welfare friendly." Their monitoring
costs will be rediu ed if they can establish long-
term r(>lationshi|)s with these preferred farmers. It
may be more difficult for processors to give wel-
fare assurances to retailers if they are purchasing
 Hobbs
cattle from a wide variety of occasional suppliers
through hve-weight marketing channels/' Vertical
coordination channels that faciUtate these longer
term relationships will be transaction-cost reduc-
ing.
The handling of cattle hetween the farm and the
abattoir can also impose monitoring costs on pro-
cessors. With increased handling of cattle, there is
a greater risk of carcass damage and weight loss
due to stress, which reduces the value of the car-
cass. Vertical coordination methods that involve
an additional transportation leg, such as live-ring
auctions, may increase this monitoring cost for
processors. Cattle purchased directly from indi-
vidual producers or through most of the UK elec-
tronic auction systems are transported directly
from the farm to the abattoir. Furthermore, as
with grade uncertainty, if cattle have been pur-
chased through an auction on tbe basis of a Uve-
weigbt price per kilogram, tbe processor bears the
risk that weight Io8.s will occur before the cattle
are slaughtered. However, if cattle have been pur-
chased on a dead-weight carcass grade basis, this
risk remains with tbe producer. Tbe method of
payment iletermines the incidence of this transac-
tion cost.
Processors are increasingly pressured by re-
tailers to produce beef of a consistent and reliable
<|uahty. Tbis requires tbat the processors' slaugh-
ter cattle are also of a consistent <]uality. The use
of a dead-weight carcass grading system encour-
ages farmers to produce cattle to more consistent
quality specifications. It may be more difficult to
ensure a consistent product quality if cattle are
procured through live-ring or electronic auctions.
Although the auction system should provide tbe
appropriate price signals to encourage producers
to sell cattle of a consistently high quality, an indi-
vidual processor can never be sure of obtaining a
particular farmer's cattle at an acceptable price in
any one week because of the competitive nature of
auction markets. Direct dead-weight purchases
''The recent development of a numlier of national "farm
srhcmes" through whirh farmers rear their livestock according to
rertain animal welfan- cod«'i* iif practice may, however, reduw this
m(init(>rin|( cast.
514
may therefore reduce monitoring costs for pro-
cessors because they do not bave to monitor on-
farm pro<luction practices that could affect (|uali-
ty. Instead, dead-weight grade payment provides
farmers with tbe incentive to produce bigb quality
cattle."*'"
Research Method
The analysis that follows is based on tbe premise
that each supply channel displays different attri-
butes or characteristics, just as goods and services
are sometimes viewed by economists as buudles of
attributes.'-^ A processor's preference for a supply
cbannel is determined by the particxdar bundle of
attributes that characterize that channel. Some of
these attributes are transaction costs or they may
be transaction cost reducing. Transaction costs
vary among supply channels and. bence., affect
processors' preferences for the different channels.
Tbe key transaction cost features of beef supply
channels are first identified. Conjoint analysis is
then used to evaluate tbe relative importance of
each feature to a processor's procurement deci-
sion.
Conjoint analysis has become a popular method
of measuring the joint effect of product attributes
on preferences for a product. Tbe technifiiic has
been applied, for example, to consumer purchase
decisions,'-* the evaluation of transportation alter-
natives,'* and the valuation of environmental ame-
nities.^'* Although often used to measure
preferences for products or services, conjoint
analysis can also he applied to the choice among
supply cbannel alternatives. Procurement chan-
nels are characterized as bundles of attributes. A
processor is assumed to evaltiate tbe "total worth"
of a channel by combining separate evaluations of
the "part wortb" of each attribute. In this analy-
••Many producers, however, still prefer live-weight ]tayment
and distrust the system of dead-weight grades wlit-n selling dircel to
processors. Tbey cannot withdraw cattle if the price is unsatisfactory
and they faee greater risks of fcrade uncertainty, a» dinteuKxed earlier.
For a discussion of LK producers' attitudes toward dead-weight will-
ing, see McLean—Builen."
 Cattle Procurement
sis, the channel attributes are the transaction
costs of using the channel. The underlying model
is, therefore.
total evaluation of a channel; = pHrt worth of level i for transaetion
rust attribute l--' +
part worth of level_/ for transaction
cost attribute 2--- +
part worth of level n for transaction
cost attribute m.
where the supply channel has m attributes, each
having two or more levels. Each scenario consists
of level i of attribute 1, level j of attribute 2, and
so on up to level n for attribute m. Tbe total eval-
tiation (or total wortb) of a cbannel is therefore
the Hum of the part-worth evaluations of each con-
stituent attribute level. Comparisons of tbe total
wortb of different cbannel scenarios can then be
ma<le.
Data for a conjoint analysis are collected through
a survey in which respondents evaluate a number
of hypothetical scenarios. The scenarios are hased
on combinations of the product (or supply chan-
nel) attributes. The contribution tbat each attri-
bute level makes to the respondent's evaluation of
the scenarios is calculated. A conjoint experiment
c(tnsists of three phases: designing the scenarios,
collecting the data, and analyzing the results."*
Designing Channel Scenarios
The first step involves choosing tbe supply channel
attributes. It is necessary to limit tbe number of
attributes to avoid overcomplicating the data col-
lection procedure. Problems occur if too many at-
tributes are used, altbougb there is a trade-off
between tbe number of attributes and the extent
to which the scenarios are "realistic" for respon-
dents.'" Through a series of discussions with abat-
toir managers, the Ust of potential transaction cost
attributes was reduced to four.*^ Tbese were conti-
•^The diseussions with industry representatives were vital i>ecaiise
the seleetUin of attributes is critical to the success of conjoint analy-
sis. The four attributes were chosen because they represented impor-
tant aspects of processors' supply decisions, were easily
<ominunicated to respondents, and could be used to distinguish be-
tween marketing channels.'^
515
nuity of supply, tbe degree to wbicb animals were
bandied when being transporteil from tbe farm to
tbe abattoir, tbe method of payment (hve-weigbt
or dead-weight), and the degree of traceability.
Continuity of supply is important for two rea-
sons. If cattle are procured from long-term regu-
lar suppliers, the processor faces lower
information costs in searching out new suppliers.
Monitoring costs are also reduced because there
should be greater consistency in the quality of ani-
mals entering the abattoir.
The transportation of cattle from farm to ahat-
toir is important for two reasons. First, the pro-
cessor's monitoring costs are reduced if animals
are transported directly from the farm to the
ahattoir. Less bandling of cattle means less stress,
less potential for bruising, and may also be more
acceptable to tbe processor's customers on animal
welfare grounds. Second, if cattle are transported
directly to the abattoir from farms, abattoir man-
agers tend to have more control over the timing of
delivery to the plant. Tbis reduces their negotia-
tion costs.
The basis of payment affects the grade uncertain-
ty that processors face. Payment on a live-weigbt
basis may involve greater grade uncertainty than
payment on a dead-weight carcass grade. Supply
channels that require live-weight payment impose
the information cost of grade uncertainty on pro-
cessors.
Finally, the traceability of cattle was identified as
an important factor in tbe cboice of supply cban-
nel. Ease of traceability reduces the monitoring
costs facing processors because they can more eas-
ily check on-farm production standards. These
standards may be of concern to tbe processor's
customers.B
Tbe next step was to assign levels to the attri-
butes. Hair et al."' suggest that each attrihute be
assigned tbe same number of levels. The estimated
importance of an attribute may increase as tbe
four attributes, therefore, alt represent distinct aspects of the
processors' purchasing decisions. For examjilc, ciintinuity of HuppU
focuses on whether suppliers are occasional or long-term regular sup-
pliers whereas tracealiility refers tn hnw easy or difficult it is for pro-
cessors to link specinc cattle with specific suppliers and how much
information they have about the supplier.
 Hobbs
number of levels increases because respondents fo-
cus disproportionately on that attribute. For this
reason, and to keep the presentation of alterna-
tives as simple as possible, each attribute was as-
signed two levels. The levels were: for supplier
type, long-term reftular and orc-asional; for rattle
handlin<r, handled once between farm and abattoir
and handled more than once; for payment meth-
od, dead-weight carcass grade and per kilo live
weight; for traceability, easy and diffi<'ult.
Different levels of these four transaction cost at-
tributes were combined to prodnce hypothetical
supply channel scenarios. The number of scenar-
ios depends on the number of attributes and the
number of levels. A full factorial design inc hides
all possible combinations of attributes and levels.
This would have generated 16 scenarios (because
there are four attributes with two levels each, 2^
~ 16). It was felt that this woidd be too many for
respon<lents to evaluate accurately. Instead, a
fractional factorial design was generated using the
Categories procetlure of the SPSS computer pack-
age,'^ This resulted in eight scenarios designed to
capture the main effects of each attribute.
An example of one of the supply channel scenar-
ios is: type of supplier, regular; handling of cattle,
once (direct from farm to processor); payment
method, dead-weight carcass grade; and tra-
ceability to farm of origin, easy. This might de-
scribe purehases from individual farmers or from
a GMS. The scenarios do not, however, bave to
describe existing supply channels. Conjoint analy-
sis allows the presentation of hypothetical sceuar-
ios in order to measure tbe extent to which
respondents will trade off one attribute for anoth-
er. This can sometimes create credibility prob-
lems. Because tbe scenarios are hypothetical,
attribute levels must be plausible and capable of
being traded off by respondents. They must be
communicated easily to respondents and realis-
^jp 16,17 Eaph scenario was checked to ensure that
the combinations of attribute levels, although hy-
pothetical, were realistic. The realism of the eval-
uation task required of respondents is crucial in
determining tbe response rate received from the
survey and in determining the extent to which tbe
results truly reflect individuals'' preferences. This
also underlies the importance of carefully choosing
•616
attributes and levels through close consultation
with industry representatives.
In a survey of commercial users of conjoint
methodology, Cattin and Wittink'" raise a number
of caveats to the use of this technique. Among
them is the need to check the validity and re-
Uabihty of the results. Some resean'hers test for
reliabihty by asking respondents to evaluate one
or more of the scenarios twice at different times.
The nature of this mail survey precluded tliis type
of reliability test. However, the validity of tbe re-
sults, in terms of the ability of the conjoint model
to predict individual preferenires accurately, was
tested using hold-out scenarios. There were two
additional supply channel scenarios that respon-
dents evaluated along with the other eight scenar-
ios. Data from the hold-out scenarios were not
used in the computation of the part worths for the
model. The validity of the model results for each
individual was then tested by comparing each
individuaPs preference score for the two bold-
out scenarios witb the individual's actual prefer-
ence scores. Tbe predictive accuracy of the aggre-
gate model with regard to the twa hold-out
scenarios t^ould also be tested. These tests gener-
ated Kendall's T and Pearson's R statistics that
report the correlation between observed and j)re-
dicted preference ratings for the two hold-out
scenarios.
Collecting Data
A postal survey of UK beef processing firms was
carried out in May 1994. A short ([uestionnaire
collected data for the conjoint analysis together
with summary information about the company. A
total of 255 companies were contacted. Ninety-
three usable responses were received, a response
rate of 36%.
The respondents represented a range of different
types of com])anies in terms of size, ownership, lo-
cation, use of supply channel, product range, and
customer type. Respondents were presented with
the 10 scenarios (including the two hold-out sce-
narios) and asked to evaluate each scenario on a
preference rating scale of 1 to 9, wbere 1 repre-
sented least preference and 9 the highest prefer-
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 Hobbs

Figure 1 displays the survey question used basis, zero if on a per kilo live-weight basis; T
to collect the conjoint data and describes the 10 1 if traceability of cattle is easy, zero if diffi<rult.
scenarios. The regression equation is, therefore.

Results
Averaged Results for Whole Sample
Ordinary least squares (OLS) analysis was used to
estimate the model. The dependent variable was
the respondents' rating of each scenario. The in-
dependent variables (the attrihute levels) were
treated as dummy variables. The explanatory
variahles are defined as 8 — I if the supplier type
is long-term regular, zero if occasional; H — I if
cattle are handled once, zero if more than once; P
= 1 if payment is on a dead-weight carcass grade
weri- asked tn fvaltial<- rarh st-eiiurui on a jircfcr-
ence ratiii); HCUU* ratlicr than Ut'ing asked to rank thi^ srenarioh in ur-
di-r af preference lieraiisr it was recof^ized that the use of ranking
sralcw ill mail surveys van make the survey instrument extremely dif-
ficult to ut
= C + o,S 4- + + +
where R is the respondents' 1 to 9 ratings of ihe
scenarios, C is the constant, and |i, is the error
term.
There were 744 observations in the data set be-
cause the 93 respondents each provided eight ob-
servations (the two hoid-<tut strenarios were not
used to estimate the model). Initially, the model
was estimated for each individual. This was pos-
sible because there were eight ohservations per re-
spondent. The individual results were averaged to
give results for the entire sample.'^'"^'
The OLS coefficients produ<:ed by this analysis
were transformed into part-worth evaluations of
the attribute levels hy the conjoint procedure in
SPSS."'••** If an attribute was generally preferred
over another, it had larger part-worth estimates.''*
Table I rejiorts the averaged part-worth evalua-
tions and relative importance of each attribute for
the whole sample, together with Pearson's R and

Tdile 1. Avcraircd Ciinjuinl Results for Whole Sample

Ri>lative Impiirlanie
Allribute Level Part-Horlh Kvalualiun of Attribule

Constant 4.7030
Supplier 17.90%
Long-term relationship with regular supplier 0.6411
Orcasinnal stipplier -0.6411
Handling 23.92%
(battle handled once from farm to abattoir 0.8535
(battle handled more than once from farm to abattoir -0.8535
Basis of Payment 19.44%
Df'ad-weight carcass grade 0.6949
Per kilo live weight -0.6949
Kase of Traceability 38.74%
Easy 1.3831
Diffuuh -1.3831
Pearson's R 0.995
Kt-ndall's T for two holdout;^ 1.0

Recall that results from individual respondents are averaged Io give the part-worth evaluationH fur the whole sample.

518
 Cattle Procurement
T statistics for the model. Statistics close
to 1.0 indicate that the model is a good fit. The
Pearson's R correlation coefficient (0.995) mea-
sures the correlation between all observed and es-
timated preferences. Tbe accuracy with which tbe
model predicts eacb respondent's preference score
for the bold-out scenarios is compared to their ac-
tual preference scores. Tbe Kendall's T correlation
coefficient (l.O) reports tbe extent of this correla-
tion and confirms tbe vali<lity of the model.
The part-worth evaluations in Table I can be
Slimmed to give a total evaluation for any combi-
nation of tbe attribute levels. Hence, scenario 1
(occasional supplier., cattle bandied more tbau
once, payment on a per kilo live-weigbt basis and
easy traceability of cattle to the farm of origin)
would have a total evaluation (or total worth) of
(4.7030) + (-0.6411) + (-0.8535) + ( 0.6949)
+ (1.3831) - 3.9,
which represents the sum of tbe attribute level
part worths and the constant term. On the other
band., scenario 6, which consisted of a regular
supplier, cattle handled just once from farm to
abattoir, payment on a dead-weight carcass grade
basis and easy traceability of cattle to tbe farm of
origin, has a total evaluation of
(4.7030) + (0.6411) + (0.8535) (0.6949) +
(1.3831) = 8.28.
Scenario 6 was, therefore, preferred to scenario 1.
Scenario 6 combined attribute levels that most re-
spondents said they would prefer. If we assume
that the expected value of the transaction costs as-
sociated with each attribute were equal across all
levels, a risk averse firm would naturally choose
scenario 6.
Table II reports tbe predicted preference scores
for each of the eight scenarios (omitting tbe two
bold-out scenarios). Tbese were subsequently con-
verted to a predicted ranking of the eight scenar-
ios. The predicted preference scores and rankings
demonstrate the way in which processors trade off
between attribute levels wben making their pro-
curement decisions. For example, scenarios 2 and
8 bave in common dead-weight carcass grade pay-
519
Table 1 . Predicted Prelerence Scores and Hanks.
Predicted Prcdicled
Scenarios Prpferencf Score Raik
1 3.9 5
2 4.2 4
3 6.9 2
4 2.8 7
5 2.4 8
6 8.3 1
7 5.3 3
a 3.8 fi
TIu' sffnarios are as follows:
t. Siipplipr, occaNiiinal: handling, more than onre:
[laymenl, live weight; traifabiiity, <"asy.
2. Supplier, oecaaiona); handling, once; payment, deiid-
weight gra<li*: trarealiility. difrinilt.
3. Supplier, regular; liandling, once; payment, live weight;
traceability, easy.
4. Supplier. occaNiiinul: haniiling. onec; payment. live
weight; traceahility. diffiriill.
5. Supplier, regular; handling, more than onee; payment,
tivt' weight; trareabilily. diffti-ult.
6. Supplier, regular; handling, once; payment, dead-wright
grade; traceability. easy.
7. Supplier. orca«ii>nai; handling, more then once;
payment, dead-weight grade: lra<'t'ability., easy.
8. Supplier, regular; handling, more than once; payment,
dead-weight grade: tmreability. dirficult.
Predicted rank calculated from the predicted preference
geores.
ment and difficult traceabiUty of cattle. Tbey dif-
fer in tbat scenario 2 bas an occasional supplier
and direct transportation of cattle from the farm
to the abattoir, while scenario 8 bas a regular sup-
plier but cattle are handled more than once. The
predicted preference scores for scenarios 2 and 8
are 4.2 and 3.8 placing them fourth and sixtb, re-
spectively, in tbe ranking of scenarios. Tbis illus-
trates bow respondents traded off an occasional
supplier against additional bandling of cattle. It
implies that respondents would be willing to give
up a degree of regularity of supply from a supply
channel in return for a reduction in the amount
that cattle are handled. The monitoring and nego-
tiation costs that arise from the transportation of

Supplier Handling
Type
Supply Channel Attributes
2. Relative importance of supply rhannel attributes for full
processors compared with subsample of large processors.
cattle to the ahattoir may he more important tban
the information anH monitoring costs that arise
from locating suppliers.
The attrihute with the widest range (from bigb to
low) of part-worth estimates is the most important.
Figure 2 compares the relative importance of each
of tbe four attributes. Clearly, for tbe full sample,
the most important attrihute in the choice of sup-
ply channel scenarios was ease of traceahility
(39%) followed hy handhng of cattle (24%), meth-
od of payment (19%), and, finally, the type of re-
lationship witb tbe supplier (18%). Tbis suggests
tbat tbe monitoring costs arising from tbe tracing
of cattle to tbe farm of origin are the most impor-
tant determinants of the choice of supply channel.
A fnrther reason for tbe importance of traceahility
could he that processors fare higher uncertainty
regarding monitoring costs that arose as a result
of the 1990 FSA. While processors bave heen deal-
ing, for some time witb tbe issues of payment meth-
od, regularity of supply, and handling of cattle,
traceahility is a relatively new concern for tbe UK
heef industry. Tbere has heen considerahle uncer-
tainty surrounding the bkely outcomes of the FSA
for food firms, and few legal precedents existed
when the Act was first passed, i*' This may partly
explain the increased importance given the tra-
ceahility attrihute over the other three attributes.
Second, the monitoring and negotiation costs as-
sociated witb ensuring that cattle are handled cor-
Hobbs
Full Sample
Large Processors
Basis of Ease of
Payment Traceability
of
rectly when heing transported to the slaughter-
house, and in controlling the timing of
delivery to the slaughterhouse., are important. The
information costs arising from different payment
methods (for exam])Ie, grade un( ertainty when
huying cattle on a per kilo live-weigbt basis) are
slightly less important. Finally, the information
and monitoring costs associated with searching out
new suppliers and ensuring a consistency in the
quality of suppbes appear to he tbe least impor-
tant of these transaction costs.
Results for Largest Processors
The UK slaughtering and processing sector bas
undergone con.siderahle rationalization in recent
years. The numher of abattoirs fell from 1890 in
1971 to 1972 to 552 in 1993, with further rational-
ization occurring.'** There has heen a correspond-
ing rise in the scale of production. Consequently,
industrial concentration in this sector has in-
creased. Processors that slaughter over 30000 cat-
tle a year, while representing only 4% of total
ahattoirs, account for approximately 4 1 % of na-
tional slaughterings. These are the most important
firms in the industry in terms of their influence on
procurement trends. To reflect this, the sample
was segmented according to the size of the ahatioir
as measured hy average weekly slaughterings. A
520
 Cattle Procurement
Table III. .Averaged lonjuinl Rt^sulU f( r Subsample of Larjfi' Pruressors
Atlribnto Level
Constant
Supplirr
Loiifi-term relationship with regular supplier
Ocrasional sui)plier
Han<lliii<:
Cattle handled once from farm to ahalloir
Cattle handled more than onee frtim farm to abattoir
Basis of Payment
Deatl-weipht carcass grade
Per kilo live weight
Ease of Traceahility
Easy
Difficult
Pearson's R
KenddlTs T for two holdoiit^^
conjoint analysis was carried out on the data from
the 21 largest processors in the sample (slaughter-
ing over 1000 (tattle, on average, per week).
Table III reports the averaged results for tbe
subsample of large companies. The Pearson's R
and Kendall's T statistics indicate that tbe model is
a good fit. Clearly, the major difference between
the subsample and tbe full sample results is tbe in-
creased importance placed on tbe traceability at-
tribute by the larger processors. This can also be
seen in Figure 2. The increased importance of tra-
ceahility appears to have been traded off against a
reduced importance for supplier type. Super-
markets in the United Kingdom now require more
information from beef pro<'essors about tbe origin
of cattle and the conditions under which animals
were reared. Hence, traceability of cattle is likely
to be important for tbose processors who supply
supermarkets. Twenty of the 21 large processors in
the suhsample sold products to supermarkets. For
all but tbree of tbese processors, supermarkets ac-
counted for at least 50% of their beef sales.
Wben compared witb the results for the full sam-
ple, a second change is the increased importance
of the method of payment attribute relative to tbe
521
Rflalivi' Impiirlanfe
Parl-Wortb l*]valaalioii (if Altrjbuli'
4.6071
12.36%
0.5119
-0.5119
20.69%
0.8571
-0.8571
23.85%
0.9881
-0.9881
43.14%
1.7857
-1.7857
0.994
1.0
handling of cattle attribute. Tbe information costs
arising from grade uncertainty appear to be more
important to larger processors than to processors
as a whole.
Discussion
The ease with which processors could trace cattle
back to the farm of origin was clearly the most im-
portant of the tran.saction cost attributes. This
was the case for the full sample and for the sub-
sample of larger processors. Ease of traceabiiity
reduces monitoring costs for processors. This has
become particularly important in the United King-
dom sint-e the introduction of the 1990 FSA.
Shortly after the FSA came into force, indications
that the monitoring costs arising from traceahility
might alter vertical coordination in the beef mar-
keting chain began to emerge^": "According to the
Meat Industry Liaison Group (MLG), auction mar-
kets are in danger of being declared a "no-buy"
area hy powerfnl supermarket companies as they
prepare to meet the supply (-hain audits demanded
hy the 1990 Food Act . . . Supermarket buyers
 Hobbs
. . . biggest objection is the way animals sold un-
der the hammer lose their identity." (N/5)
Furthermore, one UK supermarket meat buyer
was quoted as saying^**: "This means we have to
know where our animals have come from and how
they were managed. This cannot he done through
the auction system. As soon as we can establisb a
network of three-cornered quality assurance part-
nersbips with farm-groups, abattoirs and our-
selves, we will refu,se to handle any auction
animals. We will eventually tell abattoirs tbey
must not give us auction stock." (N/6) This sug-
gests that auction companies should take steps to
improve the traceability of cattle in order to an-
swer these concerns. The supply channel scenarios
were hypothetical and were designed to elicit pro-
cessors' preferences toward different supply chan-
nel chara<'teristics. Whether the behavior of
processors changes in response to the traceahility
requirements of the FSA and consumer animal
welfare concerns may not be clear until the uega-
tive consequences of not changing behavior be-
come known. The consequences for vertical
coordination in the UK beef marketing chain have
yet to be fully realized.
The extent to which cattle were handled during
transportation from the farm to the abattoir was
the second most important attribute for the full
sample (the third most important for the larger
processors). Minimized handling of cattle reduces
the potential for carcass damage and shrinkage re-
lated to stress; this may also he more acceptahle
to consumers on animal welfare grounds. The re-
sult is lower monitoring costs for processors. Cat-
tle procured direct from individual farmers or
through a GMS tend to he handled less than those
sold through live-ring auctions. Electronic auction
systems differ in the extent to which cattle are
handled. Under most of the UK electronic auction
systems, cattle are transported dire( tly from the
farm to the abattoir, thcrehy reducing this mon-
itoring cost. Those electronic anction systems re-
quiring farmers to deliver cattle to a central
collection point before transportation to the buyer's
plant impose higher monitoring and negotiation
costs on the buyer. Hence, they would be less ap-
peaUng as vertical coordination alternatives.
The basis of payment was the third most impor-
•S22
tant attribute for the sample as a whole (the
second most important for the larger processors).
Responses to other survey questions revealed that
dead-weight carcass grades were by far the pre-
ferred method of payment by processors. Payment
on a live-weight basis places the risk <tf grade un-
certainty on the pnM-essor. Live-ring aui'tions re-
quire payment on a live-weight hasis and,
therefore, impose higher information costs on the
processor. Direct purchases from individual farm-
ers through group marketing schemes and through
most UK electronic auction systems use a dead-
weight carcass grade payment system.
Finally, the relationship with the supplier, al-
though not as important as the other three trans-
action costs, did influence the selection of supply
channels. The survey revealed that long-term reg-
ular supi)liers were preferred to oc<'asional sup-
pliers. Processors incur lower information costs if
they do not constantly have to seek out and assess
new suppliers. The quality of cattle entering the
abattoir sbould also be more consistent. Generally
speaking, direct purchases from individual pro-
ducers and from GMSs are tbe supply cbannels
characterized by long-term regular suppliers.
Live-ring and electronic auctions create occasional
supply relationships as far as an individual pro-
cessor is concerned. There is no guarantee that a
processor will consistently be able to purchase cat-
tle from preferred producers each week at an ac-
ceptable price.
Conclusions
TCE provides many useful insights into the struc-
ture and organization of industries, suggesting
that, all things being equal, industries will be or-
ganized to minimize the cost of carrying out trans-
actions. This article provided a transaction cost
explanation of the choice of supply channel by
beef processors in the United Kingdom.
The results of the conjoint analysis indicate that
the monitoring costs arising from the traceability
of cattle are important to tbe selection of beef sup-
ply cbannel(s). In the United Kingdom, pressures
for greater traceability of cattle and tbe need to
provide consumers with farm and quality assur-
 Cattle Procurement
ance guarantees suggest that the monitoring costs
that processors (and retailers) incur through auc-
tions and i)ccasional supply relationships with in-
dividual producers may become prohihitive.
Instead, there will he increasing pressure from
downstream firms to move toward closer forms of
vertical coordination. Unless auction markets can
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