The competition in the commercial environment is increasing day by day. Every product and service now has several sellers which results in creating more competitive environment. This has caused a change in the relationship between buyers and suppliers over time. Nowadays, the prime focus of the businesses is not only on the maximization of profit but also on the enhancement of good relationship with the customers. The requirements of the buyers have changed with the passage of time as now they tend to choose only quality products for meeting their needs. The future success of the suppliers is possible only when they introduce innovative products and services in the market on constant basis in order to maintain a good relationship with the customers. This report discusses the development of the buyer and supplier relationship in an increasingly competitive and sophisticated commercial environment.
Due to the increasing competition in the commercial market and existing market structure, there is the availability of a number of alternative buyers and sellers (Holmen, et.al., 2005). Close relationships are developed by the companies for attaining the benefit of reduced cost and increased profit. In order to deal with a specific buyer or seller, resources are tailored by making “durable transaction specific investments” which are considered as the company’s major adaptations to the relationship. A commitment is marked by the buyer and seller in the form of these adaptations which is clearly demarcated in the special products developed by the suppliers for the customers (Gebert, 2013).
The overall relationship of buyers and suppliers depends upon the delivery of product, social meeting and price negotiation and is established and developed over time. The development of relationships can fail depending upon the actions of either party or of rival buyers and sellers. The five stages of the evolution of such buyer- seller relationship are described below:
Stage 1: The Pre- Relationship Stage
Generally, buying companies show their inactiveness when it comes to seeking new sources of supply. In other words, buyers have very little knowledge of the availability of widely spread supply market and therefore they continue with the existing sources. When a company relies on a main supplier for the specific product on regular basis, potential new suppliers are evaluated by such company as a result of a particular episode in a current relationship (Kim & Choi, 2015). For example, a consumer durables producer of UK started the evaluation of alternative suppliers due to an increase in the prices by the earlier supplier of the company which supplied all the requirements of the company for a certain product.
New potential buyers are also evaluated due to a variety of other reasons which include assessment of the potential and performance of existing suppliers in the form of a regular vendor analysis, a major change in the offerings of a non- supplying company resulting in its efforts to obtain business, for example, introduction of a new product, and changes in market conditions or requirements experienced by the buyer.
General policy of the company can also result in evaluation of the potential suppliers. At this stage, the evaluation is conducted by the company without any commitment to the supplier (Sillanpaa, Shahzad & Sillanpaa, 2014). Three factors are considered as the conditions to the evaluation namely uncertainty, experience and distance. The judgement of a new partner is dependent upon the experience in previous and existing relationships which provides criteria regarding the performance and potential. Uncertainty is faced by the buyer regarding the potential benefits and costs which are likely to be involved in dealing with a new supplier. There are several aspects of the distance which is perceived to exist between the buyer and supplier such as social, cultural, technological, time and geographical distance.
Stage 2: The Early Stage
This is the time when purchasers come in contact with the potential suppliers for negotiating or developing a specification for the purchase of capital goods. Sample delivery for regularly purchased supplies or components is also involved in this stage (BPP Learning Media, 2012). This stage is characterized as follows.
Experience: At this stage, the parties get a restricted view of the requirements of the other party along with their hopes from the relationship.
Uncertainty: Investment in human resource is made at a time of uncertainty, when the pattern of future cost is undecided and the assessment of potential rewards from the relationship is difficult.
Distance: At this early stage, opportunity is provided for reducing the distance between the parties.
Commitment: Risks involved will be assessed by both the companies and they will have no or little evidence for making the judgement relating to their partner’s commitment to the relationship.
Stage 3: The Development Stage
With the increase in the deliveries of constantly purchased products, the development stage follows. It arises after signing the contract for major capital purchases. The aspects of integration of purchased product into pre-delivery training or customer’s operations are dealt by both buyer and supplier (Caniels & Gelderman, 2004).
Experience: The experience regarding the operations of each other companies increase in the development stage between the companies along with the knowledge of each other’s values and norms.
Uncertainty: Experience reduces the uncertainties existing between the companies. Adaptations of other company are better judged for meeting their own requirements.
Distance: Social exchange reduces the social distance between the companies which in turn results in reducing the effects of cultural and geographical distance. The adaptations made by the companies to suit each other lead towards reducing the technological distance between them.
Commitment: During relationship development, the evaluation of customer or supplier made by the company will depend on the perceptions of their commitment to its development.
Stage 4: The Long- Term Stage
The long-term stage is characterized by the mutual importance of the companies to each other. This stage is reached after the delivery of continuously purchased products on a large scale or after a number of purchases of major unit products (Woodside & Baxter, 2013).
Experience: Trust, standard operating procedures and norms of conduct are developed between the two companies as a result of considerable experience.
Uncertainty: This stage reduces the uncertainty relating to a process of dealing with a specific partner to minimum which sometimes even results in problems.
Distance: Social distance is minimized in the long term stage. Extensive formal adaptations are a result of successive agreements and contracts between the companies.
Commitment: The commitment of buyer and seller companies towards the relationship is demonstrated by the adaptations that took place whether formal or informal.
Stage 5: The Final Stage
Stable markets results in this stage over long periods of time. It initiates when the industry codes and practice are taken into consideration while conducting business with the extension of the process of institutionalization. This stage is corresponded to the right way of doing business rather than commercial considerations (Arlbjorn, 2010).
The impact and scale of global events on supply chains have emphasized on the importance of mitigating and understanding supply risk. The shift of focus among the companies has led towards the growing importance of preferential or exclusive supplier agreements which provides increasing leverage to the suppliers. With the increased expectations of the buyers to extract more value from the suppliers, the approach adopted consists of retrieving the expertise within it such that it can help in innovating and expanding into a new market (Luzzini, Amann, Caniato, Essig & Ronchi, 2015). For example, when a buyer is entering into a new market, it looks for a supplier who has already experienced this process and can offer great lessons (Saric, 2013).
The process of selecting suppliers is expected to become more complicated and riskier in future due to the production of different companies by the emerging economies for competing on the global level. Moreover, greater pricing transparency is expected in the future as online communities and global trading networks will take steps for reducing the importance of price negotiations. Digital trading communities and networks are allowing more effective collaboration with suppliers (Hingley, Lindgreen & Grant, 2015). Collaboration has become more secure, faster and easier with the help of ongoing technological innovations which is expected to accelerate the change of relationships in future (Brien, 2014).
Procurement can be defined as the act of purchasing goods and services. Acquisition covers conceptualization, instigation, design, expansion, testing, contracting, manufacturing, disposition, logistics support, adaptations and disposal of systems and weapons along with services and supplies for the satisfaction of organizational requirements for being utilized in or supporting the defined missions (Wilinson, Lewis & Lubas, 2015). The process of procurement and acquisition management assists in making the purchase of required goods and services from the external suppliers. In other words, procurement and acquisition management assists in determining the manner required to be followed which will allow the delivery of ordered products needed for producing deliverables on time and within the allocated budget.
A logical order is followed in procurement management. Firstly, a plan is made regarding what is required to be contracted and then the manner of executing the plan is decided. The contract requirements are then sent to the suppliers who then bids for getting a chance for working with the buyer. The best bid is selected and the contract is signed. After the commencement of work, the buyer continuously monitors the process in order to ensure that the terms of the contract is being followed appropriately. After the comp
letion of work, the contract is closed and paperwork is completed (Watt, 2014).
Material management deals with campus planning and design building for material movement or with logistics dealing with tangible components of a supply chain. The function of material management is responsible for the coordination of planning, finding, buying, moving, storing and regulating materials in an optimal manner for the purpose of providing the pre- decided services to the buyer at a lowest cost. The maintenance of a constant flow of materials for the purpose of production is a major challenge for the material managers. The inaccuracy of inventory may result in shortages in production, premium freight, etc. (Arnold, 2011).
Similarly, resource management is concerned with the effective and efficient development of resources of the organization when they are required. These resources may include inventory, financial resources, production resources, human skills or information technology (IT) (Kantola, 2015). Planning plays a very important role in resource management for the purpose of assigning right resources to the right tasks. The management of resources also involves budgets and schedules for people, supplies and equipment.
The strategies for managing materials and resources include the introduction information and communication technology which plays a vital role in complementing and leveraging materials and resources. It also includes keeping complete record of the materials with the help of technology in order to avoid errors. Performance management through technology acts as a strategy for resource management which will help in assessing human skills and production resources (Nkechi, 2014).
The customer/ supplier relationship suffers from various contractual and legal issues. When a biased contract is signed, it may proof to be unpleasant for the supplier. This is the case when the benefits arising from the contract are only one sided. The contractual issues that may arise between the parties are issues related to renewal and automatic termination conditions, legal ramifications of contract duration, terms and conditions, etc. Contract issues such as mutual bonds, affective commitment and locked- in period sometimes also create problems in the relationship between customer and supplier (Alshurideh, 2017).
The contract between the buyer and seller may get terminated as a result of frustration when unexpected events lead to excusing a party from its obligations (Jap, 2015). Sometimes contracts are also terminated by mutual agreement between the parties i.e. the voluntary agreement of the parties for releasing each other from their respective obligations. Moreover, breach of contract can also result in its termination i.e. when there is failure of the parties to meet their promises under the contract. The harsh terms and conditions of the supplier may create risks for the buyer thereby creating problems in the smooth functioning of buyer-supplier relationship. Sometimes the risks are passed on to the purchaser which should be known in advance which can create issues at a later stage. The key areas in which risks are required to be checked include passing of title, delivery, terms of payment, insurance, acceptance/ failure, loss or damage fitness for purpose, rejection and quality. The terms and conditions should be analyzed in advance regarding their acceptability and non- acceptability.
Buyers enter into contracting/ tendering frameworks with the suppliers for the procurement and acquisition of materials and resources. Such framework is in the form of agreement with the suppliers for the purpose of establishing terms that governs the contracts during the life of such agreement. Framework agreements are gaining popularity in the manufacturing organization which requires procuring various materials from the suppliers to initiate the process of manufacturing. The contracting or tendering frameworks acts as a ‘smarter’ way for them rather than placing ‘one- off’ orders for recurrent contracts for supplies or works. This allows them to minimize the repetitive purchasing tasks along with bringing optimization in volume purchasing discounts.
Framework agreements are set up by some organizations by way of sending strict terms and conditions to the merchants as a part of inviting them to tender documentation. The suppliers are required to agree to the proposed terms and conditions for getting awarded the framework contracts. ‘Boiler plate’ conditions relating to the contract are also sent to suppliers on some occasions. Even in cases when the delivery and payment are required to be made after a long time, the terms and conditions which are agreed at today’s date will apply therefore the requirement arises for the original framework document to accommodate it. A disclaimer is also included in the contract to the effect that the placement of order does not oblige the buyer and any estimates of measurements of demand are non-binding (Chartered Institute of Procurement and Supply, 2018).
Some organizations also make the use of contracting frameworks for the purpose of pre-agreeing on some terms and conditions which constitute the basis of trading agreement in cases when suitable opportunities arise in future. For this purpose, the buyer organizations are made aware of such arrangements in order to avoid needless debate. Acceptability of the buyers standard terms laid down by the supplier might be confirmed by the buyer such that re-negotiation is not required every time.
The process of negotiation is involved in the purchasing process starting from the period when communication is established between the buyer and supplier for the first time and continues till the time when the contract is finally signed. The process of negotiation is sometimes very simple while at some other time it is very complex. It is helpful to the companies as it reduces their expenditure along with maximizing their purchasing power. (Murray, 2017)
Now in many industries, the balance of power has been shifted to suppliers from buyers. For example, in the year 1900, the railway builders of North America had choice between 35 suppliers of cast rail wheels. After a century, no such luxury was provided to the railroad builders as there were only two suppliers. These days, such builders are left with no choice as there is just one supplier so they have to accept the supplier’s price. There are many cases where the competitors are eliminated by the suppliers by developing disruptive technologies or reducing the costs. The demands have been consolidated by the buyers which have subsequently forced the suppliers to lower down their prices to that extent which has led some suppliers to exit the market. This has given the remaining suppliers the power to lead the market (Paranikas, Whiteford, Tevelson & Belz, 2015).
Negotiating process is the easiest way undertaken by buyers in manufacturing organizations for the purpose of redefining their relationship with a powerful supplier. The power equation is rebalanced and the commercial transaction is turned into a strategic partnership with the help of negotiation. Negotiation is possible when both the parties are ready to modify their positions and are willing to compromise. Both the parties believe that such negotiation will result in satisfactory outcomes for them (Maude, 2014).
The process of negotiation involves preparation which consists of gathering information, evaluation of leverage, understanding the people involved, establishing rapport, knowing the objectives and preparing the plan. Then the next stage consists of the opening phase where both the parties present their cases to each other. After the opening phase, the bargaining phase follows which involves convincing the other party regarding the appropriateness of demand along with persuading them to concede to those demands. The next stage is the closure phase which represents the opportunity for capitalizing on all of the completed tasks in previous phases.
The following are the principles of contract negotiations along with their application.
Using strengths and managing weaknesses- In case of negotiation, every party has strengths and weaknesses. Contract negotiations between buyer and seller requires being aware of the strengths by the parties along with knowing the ways of using them in a best way. It also requires awareness regarding their weaknesses along with knowing the ways of managing them.
Breaking complex issues into simple elements- Contract negotiations require the breaking of complex issues into simple elements as large amount of information cannot be processed by human brain in one run. However, some negotiators have the capability to process large amount of information and therefore they try keeping the negotiation complicated. Therefore, if it is not the strength of the negotiators it must be kept simple (Tanskanen, 2015).
Talk in terms of benefits rather than features- Negotiators always try to amaze the other party with the features when actually there are no benefits to the other party. Therefore, while making contract negotiations, the parties must have their minds focused on the benefits which will help them from being sidetracked by such tricks.
Knowing what is relevant and what is not- When negotiators know what they want, they are guided as to what concessions they can make. However, it is considered as the part of the negotiating strategy to make the other party believe that their irrelevant issues are important ones and important issues are irrelevant ones.
Conclusion
The competitive environment has led towards the inclusion of various stages in the development of relationship between the buyer and seller. The evaluation of the suppliers made by the buyers depend upon factors namely uncertainty, experience, distance and commitment. This report also focuses on the procurement and acquisition management process along with the management of materials and resources along with the relevant strategies. This report also discusses the legal and contractual issues that affect the relationship of buyer and supplier. The contracting or tendering framework along with the key aspects of the negotiating process has also been discussed. Therefore, it can be concluded that the development of relationship between buyer and supplier is a complex process and depends upon various factors such as distance, uncertainty, experience and commitment. Relationship development also involves contract negotiations which start from the time when communication is established between buyer and supplier and continues till the time of final signing of the contract.
References
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