Purchasing (BMK3748) Diploma in Business Management

Chapter 9: Nature of Relationship with Suppliers

1. Competitive or Partnership

Competitive

a) Open Competition Exist when there are multiple suppliers available to fill purchaser specific requirement and

they are willing to vie for purchaser’s business. When strong competitive factors exist in the market place, buyer’s negotiating position is

stronger, and there are greater opportunities for gaining concessions in price as well as payment terms, service and support.

To continue to foster robust competition, buyer will avoid customization so as many companies as possible can easily supply the product or service and maintain the widest possible area of source selection to keep the number of competitors high.

b) Technical or Limited Competition Technical competition also known as limited competition. When only a limited number of suppliers are available for a particular product due to patents

or limited production capability. Competition in particular industry can also be limited to only few suppliers within a

geographical area.

Partnership

Definition: A partnership is a tailored business relationship based on mutual trust, openness, shared risk and shared rewards that yields a competitive advantage, resulting in business performance greater than would be achieved by the firms individually.

Organization will form a partnership to create a source of supply when none exist or to jointly share the expenses of developing new technology.

The interest in supplier partnerships started in 1980s by the studies of Japanese companies that maintain close relationships with their suppliers.

Early adopters of partnership are; Xerox, Honeywell, Polaroid, Motorola and IBM. Late 1990s, buying organizations continued to develop closer relationships or partnerships

with suppliers. For example; CompUSA form a partnership with Wallace, a large printing company, to print

and replenish forms to 210 retail stores. CompUSA consolidated its requirements for other supplies and purchased them from Wallace at a lower cost. Wallace prints quarterly catalog of supplies it provides to CompUSA. In the first year, supply expenditures were reduced by 32 percent.

Partner selection Selecting potential suppliers focus on soft as well as hard factors. Hard factors: delivery, cost, environment, financial and management stability, risk reduction,

technological accomplishment, etc.

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Purchasing (BMK3748) Diploma in Business Management

Soft factors: congruence of management values on issues like customer satisfaction, concern for quality, employee involvement, supplier relationships, etc.

Can we work well together? Can we respect and trust each other? Do we like each other? Therefore, more likely those potential partners are found among the organization’s

best current suppliers.

2. Collaborative Sourcing

Two statistics highlight the importance of collaborative sourcing between a manufacturer and suppliers.

Today, typically between 50% - 70% of the spending at the manufacturer comes from procurement.

Second, it is generally accepted that about 80% of the cost of a purchased part is fixed during the design stage.

Thus, it is crucial for a manufacturer to collaborate with suppliers in order to product cost are to be kept low.

Definition: the process by which two or more parties adopt a high level or purposeful cooperation to maintain trading relationship over time.

The relationship is bilateral; both parties have the power to shape its nature and future direction over time.

Mutual commitment to the future and a balanced power relationship are essential to the process.

Characteristics of Collaborative Buyer-Seller Relationship:1. One or a limited number of suppliers for each purchased item or family of items. 2. A win-win approach to reward sharing.3. Join efforts to improve supplier performance across all critical performance areas.4. Join efforts to resolve disputes.5. Open exchange of information.6. A credible commitment to work together during difficult times.7. A commitment to quality, defect-free products having design specifications that are

manufacturable and that the supplier’s process is capable of producing.

Two (2) of the most common approaches to collaborative cost management:1. Target pricing: an innovative approach used in the initial stages of the new-product

development (NPD) cycle to establish a contract price between a buyer and seller.

2. Cost-savings sharing: approaches require joint identification of the full cost to produce an item.

Benefits of collaborative sourcing:1. Both organizations are able to leverage their individual strengths toward the development of

a single process 2. Workload and responsibilities is divide accordingly3. Technology and expertise pass freely among partners

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Purchasing (BMK3748) Diploma in Business Management

4. Knowledge are shared between supplier and manufacturer5. Based on the benefits listed above, products that are brought to the marketplace are more

likely to add more value, because they are not easily copied and offer greater sustainability.

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