A Canadian aluminum fabricating company buys out a bauxite mine from a Jamaican mining company previously supplying it with bauxite. In doing so, it will incur capital costs in acquiring the mine and almost certainty, additional intra-firm communication and organisational costs in operating and managing the company. It is also likely to reduce its options for buying bauxite from alternative sources.
On the other hand, it may reduce the transaction costs of procuring the product from an external supplier. These include the possibility of supply disruptions, the costs of not being able or willing to supply raw material of the right quality, the chance of price hikes and the possibility of a supplier concluding a relationship with a competitor to the firm’s disadvantages.