Components Of Purchase For Contract Purchase

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a. A subsystem that is similar to but not exactly the same as subsystems used by competitors; several large companies offer to make modifications to the subsystem to fit your requirements.

The recommend type of purchase is contract
The decision to move with contract purchase is influenced considering the subsystem is similar to many of the manufacture make it for our industry. The subsystem is not a general purpose product, so there are few companies that are ready to modify the subsystem to suit our need and the longer-term commitments are beneficial. The other consideration is the cost of negotiations with the suppliers, since the subsystem manufactures in the industry not just for us. This way the transaction costs are low and the input is readily available from many suppliers which are most often cost-effective methods. To minimize production cost, our company needs to use all inputs efficiently using the least cost method of obtaining them, since the cost function defines the minimum possible cost of producing each level of output. The subsystem is not specialized, so there is no unique advantage in manufacturing the subsystems by ourselves, which needs large capital and constant upgrading of technology.

We need subsystem for producing output, so need to have long term contracts with an assurance that the subsystem will be available over time without interruption based on the forecasted quantity needed for our production. A contract is nothing but a legal document
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