Difference Between Negotiation and Bargaining

Bargaining

Bargaining or haggling is a type of negotiation in which the buyer and seller of a good or service dispute the price which will be paid and the exact nature of the transaction that will take place, and eventually come to an agreement. Bargaining is an alternative pricing strategy to fixed prices. Optimally, if it costs the retailer nothing to engage and allow bargaining, he can divine the buyer's willingness to spend. It allows for capturing more consumer surplus as it allows price discrimination, a process whereby a seller can charge a higher price to one buyer who is more eager (by being richer or more desperate). Haggling has largely disappeared in parts of the world where the cost to haggle exceeds the gain to retailers for most common retail items. However, for expensive goods sold to uninformed buyers such as automobiles, bargaining can remain commonplace.

Dickering refers to the same process, albeit with a slight negative (petty) connotation.

Bargaining is also the name chosen for the third stage of the Kübler-Ross model (commonly known as the stages of dying), even though it has nothing to do with price negotiations.


Negotiation


Negotiation is a dialogue between two or more people or parties, intended to reach an understanding, resolve point of difference, or gain advantage in outcome of dialogue, to produce an agreement upon courses of action, to bargain for individual or collective advantage, to craft outcomes to satisfy various interests of two or more people/parties involved in a negotiation.

Negotiation is a process where one party involved in negotiating attempts to gain an advantage, not only for their own party, but also for at least one other involved party, by the end of the process. Its aim is distinct from that of compromise, in which more than one party suffers a net loss of goals or resources. Instead, basic negotiation is aimed toward efficiency in either resource distribution, goal and resource integration, or most commonly, both.

Negotiation occurs in business, non-profit organizations, government branches, legal proceedings, among nations and in personal situations such as marriage, divorce, parenting, and everyday life. The study of the subject is called negotiation theory. Professional negotiators are often specialized, such as union negotiators, leverage buyout negotiators, peace negotiators, hostage negotiators, or may work under other titles, such as diplomats, legislators or brokers.

What is the difference between negotiation and bargaining?

Good negotiation actually either gets you to the point where you can bargain or better yet get you to the point where you don’t need to bargain at all. Bargaining is what people typically think of as haggling, point counterpoint or pushing back and forth in what many people look at as a zero sum game. Most people look at point counter point as being all that negotiation involves. What I want, what I’m unwilling to give up and what I’m willing to trade in order to get what I want.

Negotiation is a broader communication between two people that involves what influences the other side and what drives them. It’s asking open ended questions about what their motivations and goals are, the entire communication process around bargaining. Bargaining is a small subset of negotiation. Negotiation is a much broader idea. A negotiation is really any communication between two parties where you need or want the other party to do something.

You might communicate with them in a way that gets them to do something and because it’s not a request, they won’t have any idea that you influenced their decision. Negotiation is the process of influentially communicating in a way that prompts the other side to react. It’s communication that’s designed to provoke or create a response.

Negotiation is synonymous with navigation. We say the most dangerous negotiation is the one you don’t know you’re in. So if people don’t understand the difference between negotiating and bargaining someone could be negotiating with them in a way that influences their mindset.

Economic Theory of Price and Its Determination

Price refers to the value of a commodity and services expressed in terms of money. Now we are fixing price for any kind of goods and services. Even consider a labor we fix a price for his service in terms of wage.

Functions of price

In the early time people were used ‘Barter’ system for the exchanging of goods and services. Now almost all the economies are using money for exchanging goods and services. So, money plays a vital role in an economy and many theories were developed in Economics. Price performing numbers of functions in an economy. Some of them are described below.

I) Median of exchange

As said above, the removal of ‘Barter’ system leads to got money value for all things, even consider services.

II) Unit of account

Now, the value of goods and services are measured in terms of money. So, money considered as a unit of measure.

III) Incentive to production

A high price enables incentive to production. Suppose the wage is very high, normally laborers have a tendency to work more or suppose the price of the commodity is high then the firm ready to produce more, because they want more profits.

IV) Signaling mechanism

Suppose the price of a product is high, automatically the consumer have a tendency to consume related complimentary goods (complimentary goods= different goods can be used to satisfy a particular want)

Price determination

In a perfect competitive market price is determined by the interaction point of demand and supply.

Demand curve is inversely related with price (when price increase demand decrease) and supply is directly related with price (when price increase supply also increase)

For simplifying we can explain this with a diagram below. SEE DIAGRAM BELOW

Here consider apple is the commodity. In the diagram consider price ‘P’. at point ‘P’ the quantity demanded equal to the quantity supplied. Here point ‘E’ is the equilibrium point and ‘P’ is the price of the commodity Apple.

Consider price ‘P1’ the demand of Apple is less but the supply is high. This excess supply is known as “excess supply”

Consider price ‘P2’ the demand of apple is more than supply. This excess demand is known as “excess demand”

Since at point ‘E’ the quantity supplied equal to the quantity demanded, ‘E’ is the equilibrium point and ‘P’ is the market determined price.

Just in time (JIT) in business

Just in time (JIT) is a production strategy that strives to improve a business' return on investment by reducing in-process inventory and associated carrying costs. To meet JIT objectives, the process relies on signals or Kanban  between different points, which are involved in the process, which tell production when to make the next part. Kanban are usually 'tickets' but can be simple visual signals, such as the presence or absence of a part on a shelf. Implemented correctly, JIT focuses on continuous improvement and can improve a manufacturing organization's return on investment, quality, and efficiency. To achieve continuous improvement key areas of focus could be flow, employee involvement and quality.

JIT relies on other elements in the inventory chain as well. For instance, its effective application cannot be independent of other key components of a lean manufacturing system or it can "end up with the opposite of the desired result." In recent years manufacturers have continued to try to hone forecasting methods such as applying a trailing 13-week average as a better predictor for JIT planning; however, some research demonstrates that basing JIT on the presumption of stability is inherently flawed.


Effects

A surprising effect of JIT was that car factory response time fell to about a day. This improved customer satisfaction by providing vehicles within a day or two of the minimum economic shipping delay.

Also, the factory began building many vehicles to order, eliminating the risk they would not be sold. This improved the company's return on equity.

Since assemblers no longer had a choice of which part to use, every part had to fit perfectly. This caused a quality assurance crisis, which led to a dramatic improvement in product quality. Eventually, Toyota redesigned every part of its vehicles to widen tolerances, while simultaneously implementing careful statistical controls for quality control. Toyota had to test and train parts suppliers to assure quality and delivery. In some cases, the company eliminated multiple suppliers.

When a process or parts quality problem surfaced on the production line, the entire production line had to be slowed or even stopped. No inventory meant a line could not operate from in-process inventory while a production problem was fixed. Many people in Toyota predicted that the initiative would be abandoned for this reason. In the first week, line stops occurred almost hourly. But by the end of the first month, the rate had fallen to a few line stops per day. After six months, line stops had so little economic effect that Toyota installed an overhead pull-line, similar to a bus bell-pull, that let any worker on the line order a line stop for a process or quality problem. Even with this, line stops fell to a few per week.

The result was a factory that has been studied worldwide. It has been widely emulated, but not always with the expected results, as many firms fail to adopt the full system.

The just-in-time philosophy was also applied to other segments of the supply chain in several types of industries. In the commercial sector, it meant eliminating one or all of the warehouses in the link between a factory and a retail establishment. Examples in sales, marketing, and customer service involve applying information systems and mobile hardware to deliver customer information as needed, and reducing waste by video conferencing to cut travel time.



Benefits

Main benefits of JIT include:

• Reduced setup time. Cutting setup time allows the company to reduce or eliminate inventory for "changeover" time. The tool used here is SMED (single-minute exchange of dies).

• The flow of goods from warehouse to shelves improves. Small or individual piece lot sizes reduce lot delay inventories, which simplifies inventory flow and its management.

• Employees with multiple skills are used more efficiently. Having employees trained to work on different parts of the process allows companies to move workers where they are needed.

• Production scheduling and work hour consistency synchronized with demand. If there is no demand for a product at the time, it is not made. This saves the company money, either by not having to pay workers overtime or by having them focus on other work or participate in training.

• Increased emphasis on supplier relationships. A company without inventory does not want a supply system problem that creates a part shortage. This makes supplier relationships extremely important.

• Supplies come in at regular intervals throughout the production day. Supply is synchronized with production demand and the optimal amount of inventory is on hand at any time. When parts move directly from the truck to the point of assembly, the need for storage facilities is reduced.

• Minimizes storage space needed.

• Smaller chance of inventory breaking/expiring.

The concept of TQM (Total Quality Management)

Total Quality Management is a management approach that originated in the 1950's and has steadily become more popular since the early 1980's. Total Quality is a description of the culture, attitude and organization of a company that strives to provide customers with products and services that satisfy their needs. The culture requires quality in all aspects of the company's operations, with processes being done right the first time and defects and waste eradicated from operations.

Total Quality Management, TQM, is a method by which management and employees can become involved in the continuous improvement of the production of goods and services. It is a combination of quality and management tools aimed at increasing business and reducing losses due to wasteful practices.

Some of the companies who have implemented TQM include Ford Motor Company, Phillips Semiconductor, SGL Carbon, Motorola and Toyota Motor Company.



TQM Defined

TQM is a management philosophy that seeks to integrate all organizational functions (marketing, finance, design, engineering, and production, customer service, etc.) to focus on meeting customer needs and organizational objectives.

TQM views an organization as a collection of processes. It maintains that organizations must strive to continuously improve these processes by incorporating the knowledge and experiences of workers. The simple objective of TQM is "Do the right things, right the first time, every time". TQM is infinitely variable and adaptable. Although originally applied to manufacturing operations, and for a number of years only used in that area, TQM is now becoming recognized as a generic management tool, just as applicable in service and public sector organizations. There are a number of evolutionary strands, with different sectors creating their own versions from the common ancestor. TQM is the foundation for activities, hich include:

• Commitment by senior management and all employees

• Meeting customer requirements

• Reducing development cycle times

• Just In Time/Demand Flow Manufacturing

• Improvement teams

• Reducing product and service costs

• Systems to facilitate improvement

• Line Management ownership

• Employee involvement and empowerment

• Recognition and celebration

• Challenging quantified goals and benchmarking

• Focus on processes / improvement plans

• Specific incorporation in strategic planning

This shows that TQM must be practiced in all activities, by all personnel, in Manufacturing, Marketing, Engineering, R&D, Sales, Purchasing, HR, etc.

The core of TQM is the customer-supplier interfaces, both externally and internally, and at each interface lie a number of processes. This core must be surrounded by commitment to quality, communication of the quality message, and recognition of the need to change the culture of the organization to create total quality. These are the foundations of TQM, and they are supported by the key management functions of people, processes and systems in the organization.

Strategic Alliance

A strategic alliance is an agreement between two or more parties to pursue a set of agreed upon objectives needed while remaining independent organizations. This form of cooperation lies between Mergers & Acquisition M&A and organic growth.

Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property. The alliance is a cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance often involves technology transfer (access to knowledge and expertise), economic specialization, shared expenses and shared risk.



Advantages/Disadvantages

Advantages


The advantages of forming a strategic alliance include:

• Allowing each partner to concentrate on their competitive advantage.

• Learning from partners and developing competencies that may be more widely exploited elsewhere.

• Adequate suitability of the resources and competencies of an organization for it to survive.

• To reduce political risk while entering into a new market.

Disadvantages

• Risk of losing control over proprietary information, especially regarding complex transactions requiring extensive coordination and intensive information sharing.

• Coordination difficulties due to informal cooperation settings and highly costly dispute resolution.

• Agency costs: As the benefit of monitoring the alliance's activities effectively is not fully captured by any firm, a free rider problem arises (the free rider problem seems to be less pronounced in settings with multiple strategic alliances due to reputational effects).

• Influence costs because of the absence of a formal hierarchy and administration within the strategic alliance.

Stages of Alliance Formation



A typical strategic alliance formation process involves these steps:

• Strategy Development: Strategy development involves studying the alliance’s feasibility, objectives and rationale, focusing on the major issues and challenges and development of resource strategies for production, technology, and people. It requires aligning alliance objectives with the overall corporate strategy.

• Partner Assessment: Partner assessment involves analyzing a potential partner’s strengths and weaknesses, creating strategies for accommodating all partners’ management styles, preparing appropriate partner selection criteria, understanding a partner’s motives for joining the alliance and addressing resource capability gaps that may exist for a partner.

• Contract Negotiation: Contract negotiations involves determining whether all parties have realistic objectives, forming high calibre negotiating teams, defining each partner’s contributions and rewards as well as protect any proprietary information, addressing termination clauses, penalties for poor performance, and highlighting the degree to which arbitration procedures are clearly stated and understood.

• Alliance Operation: Alliance operations involves addressing senior management’s commitment, finding the calibre of resources devoted to the alliance, linking of budgets and resources with strategic priorities, measuring and rewarding alliance performance, and assessing the performance and results of the alliance.

• Alliance Termination: Alliance termination involves winding down the alliance, for instance when its objectives have been met or cannot be met, or when a partner adjusts priorities or re-allocates resources elsewhere.

Joint Venture

joint venture n. an enterprise entered into by two or more people for profit, for a limited purpose, such as purchase, improvement and sale or leasing of real estate. A joint venture has most of the elements of a partnership such as shared management, the power of each venturer to bind the others in the business, division of profits, and joint responsibility for losses. However, unlike a partnership, a joint venture anticipates a specific area of activity and/or period of operation, so after the purpose is completed, bills are paid, profits (or losses) are divided, and the joint venture is terminated

An association of two or more individuals or companies engaged in a solitary business enterprise for profit without actual partnership or incorporation; also called a joint adventure.

A joint venture is a contractual business undertaking between two or more parties. It is similar to a business partnership, with one key difference: a partnership generally involves an ongoing, long-term business relationship, whereas a joint venture is based on a single business transaction. Individuals or companies choose to enter joint ventures in order to share strengths, minimize risks, and increase competitive advantages in the marketplace. Joint ventures can be distinct business units (a new business entity may be created for the joint venture) or collaborations between businesses. In a collaboration, for example, a high-technology firm may contract with a manufacturer to bring its idea for a product to market; the former provides the know-how, the latter the means.

All joint ventures are initiated by the parties' entering a contract or an agreement that specifies their mutual responsibilities and goals. The contract is crucial for avoiding trouble later; the parties must be specific about the intent of their joint venture as well as aware of its limitations. All joint ventures also involve certain rights and duties. The parties have a mutual right to control the enterprise, a right to share in the profits, and a duty to share in any losses incurred. Each joint venturer has a fiduciary responsibility, owes a standard of care to the other members, and has the duty to act in Good Faith in matters that concern the common interest or the enterprise. A fiduciary responsibility is a duty to act for someone else's benefit while subordinating one's personal interests to those of the other person. A joint venture can terminate at a time specified in the contract, upon the accomplishment of its purpose, upon the death of an active member, or if a court decides that serious disagreements between the members make its continuation impractical.

Joint ventures have existed for centuries. In the United States, their use began with the railroads in the late 1800s. Throughout the middle part of the twentieth century they were common in the manufacturing sector. By the late 1980s, joint ventures increasingly appeared in the service industries as businesses looked for new, competitive strategies. This expansion of joint ventures was particularly interesting to regulators and lawmakers.

The chief concern with joint ventures is that they can restrict competition, especially when they are formed by businesses that are otherwise competitors or potential competitors. Another concern is that joint ventures can reduce the entry of others into a given market. Regulators in the Justice Department and the Federal Trade Commission routinely evaluate joint ventures for violations of Antitrust Law; in addition, injured private parties may bring antitrust suits.

In 1982 Congress amended the sherman anti-trust act of 1890 (15 U.S.C.A. § 6a)—the statutory basis of antitrust law—to ease restrictions on joint ventures that involve exports. At the same time, it passed the Export Trading Company Act (U.S.C.A. § 4013) to grant exporters limited Immunity to antitrust prosecution. Two years later the National Cooperative Research Act of 1984 (Pub. L. No. 98-462) permitted venturers involved in joint research and development to notify the government of their joint venture and thus limit their liability in the event of prosecution for antitrust violations. This protection against liability was expanded in 1993 to include some joint ventures involving production (Pub. L. No. 103-42).

Supplier Selection Strategies and Criteria

Supplier selection criteria for a particular product or service category should be defined by a “cross-functional” team of representatives from different sectors of your organization. In a manufacturing company, for example, members of the team typically would include representatives from purchasing, quality, engineering and production. Team members should include personnel with technical/applications knowledge of the product or service to be purchased, as well as members of the department that uses the purchased item.

Common supplier selection criteria:

• Previous experience and past performance with the product/service to be purchased.

• Relative level of sophistication of the quality system, including meeting regulatory requirements or mandated quality system registration (for example, ISO 9001, QS-9000).

• Ability to meet current and potential capacity requirements, and do so on the desired delivery schedule.

• Financial stability.

• Technical support availability and willingness to participate as a partner in developing and optimizing design and a long-term relationship.

• Total cost of dealing with the supplier (including material cost, communications methods, inventory requirements and incoming verification required).

• The supplier's track record for business-performance improvement.

• Total cost assessment.

Methods for determining how well a potential supplier fits the criteria:

• Obtaining a Dun & Bradstreet or other publicly available financial report.

• Requesting a formal quote, which includes providing the supplier with specifications and other requirements (for example, testing).

• Visits to the supplier by management and/or the selection team.

• Confirmation of quality system status either by on-site assessment, a written survey or request for a certificate of quality system registration.

• Discussions with other customers served by the supplier.

• Review of databases or industry sources for the product line and supplier.

• Evaluation (SUCH AS prototyping, lab tests, OR validation testing) of samples obtained from the supplier.

The Supplier Selection Decision in Strategic Partnerships

The Supplier Selection Decision in Strategic Partnerships

The concept of partnerships between buyers and suppliers is receiving increasing attention in American industry. This article examines the issue of supplier selection in situations where the firm is considering a partnership type of relationship with potential suppliers. The argument is made that partnerships are different in nature than traditional buyer-supplier relationships, and thus require the consideration of additional factors in supplier selection.

This study combines a literature review with the use of case studies of firms involved in buyer-supplier partnerships to develop additional factors that should be considered in the selection of supply partners. Four categories of additional factors are developed:
(1) financial issues,
(2) organizational culture and strategy,
(3) technology, and
(4) a group of miscellaneous factors.
The issues included in these categories tend to be longer term and more qualitative than factors included in traditional supplier selection models.

The article suggests that these additional factors supplement, rather than replace, the more traditional factors in developing strategic partnerships with suppliers.

BACKGROUND

Most of the research in the area of supplier selection focuses on the quantifiable aspects of the supplier selection decision - issues such as cost, quality, delivery reliability, and other similar factors. These are important criteria that should be considered in virtually any supplier selection decision. However, firms are becoming increasingly involved in "evergreen" or "strategic partnership" type relationships with suppliers. The purchasing literature suggests that this trend toward partnership activity can benefit the firm and, in many cases, should be pursued. A strategic partnership between a buying and a supplying firm is defined here as a mutual, ongoing relationship involving a commitment over an extended time period, and a sharing of information and the risks and rewards of the relationship.

As firms become involved in strategic partnerships with their suppliers, a new set of supplier selection criteria comes into consideration, equally as important as the more traditional criteria mentioned above. This new set of criteria considers "soft" factors that are difficult to quantify. These soft factors include issues such as management compatibility, goal congruence, and strategic direction of the supplier firm.

With these issues in mind, the objective of this article is threefold. First, the article provides a brief review of the relevant literature and research in the area of supplier selection. Second, it discusses the difference in emphasis required in seeking a partnership type of buyer-supplier relationship, rather than a traditional, arms-length relationship. Third, through the use of an empirical case study of five manufacturing firms, the article explores the new, additional set of issues that becomes relevant to supplier selection when the firm seeks a "partnership" type of relationship with a supplier.

MANAGING SUPPLIER RELATIONSHIPS

1. Maintaining good relations with a supplier should be as important to a contract administrator/end user as getting the best price. A good buyer-seller relationship is a partnership, a win-win situation over the long run. A supplier who is treated with courtesy, honesty, and fairness will deliver a quality product at the best price, will provide good service, and will be responsive to emergency situations and special requests. A responsive supplier is an asset for the University community.


2. There is also a public relations aspect to purchasing that should not be overlooked. An organization’s public image can be a valuable asset. A supplier who is treated equitably and professionally is likely to communicate his positive experiences with your organization to his associates.


3. Guidelines for Successful supplier Relationships:

• Use established supplier partnerships to best leverage the collective University volume, to consolidate orders, and to reduce administrative processing costs. You will receive outstanding prices and excellent service.

• Be fair. Give all qualified suppliers an equal opportunity to compete for business.

• Maintain integrity. A supplier’s pricing is confidential and should never be shared with another supplier for any reason.

• Be honest. Never inflate requirements to obtain better pricing. Negotiate in good faith. Don’t change the requirements and expect the supplier to hold his pricing.

• Be ethical. Procurement decisions should be made objectively, free from any personal considerations or benefits.

• Be courteous. A contract administrator/end user should make an effort to receive sales persons to the extent that his or her work schedule permits.

• Be reasonable. A supplier is entitled to a fair profit.

• Pay promptly. The purchase order you issue to the supplier is your promise to pay for the goods and services you buy in a timely manner (usually within 30 days).

RECEIVING PURCHASES

Deliveries can be made directly to the end user’s office, lab, receiving dock, or any other location specified on the purchase order. All packaging should be carefully examined for any visible evidence of damage, particularly if the purchase is fragile or costly. The person ‘receiving’ the purchase should make a note of the date the order was received, the name of the supplier, the quantity received, and the purchase order number. The receiving and purchase order information can be checked against the invoice to make sure that the quantities received are the same as the quantities being invoiced.

1. Damaged Shipments and Shortages

Under Interstate Commerce Commission regulations, damaged shipments cannot be refused unless totally destroyed or unless the broken contents would cause contamination. If the shipment is refused, the supplier or shipper could dispose of the shipment, making it very difficult for the buyer or end user to initiate a successful claim. Any damage to the package, no matter how slight, should be noted on the carrier’s and receiver’s delivery receipt. If the shipper is unwilling to wait while the contents of the package are inspected, the receiver should note on the delivery receipt that the condition of the contents is unknown. If concealed damage is discovered during unpacking, stop unpacking, notify the shipper, and request an immediate inspection. Save damaged packaging and cartons for the shipper’s claims inspector and, if possible, photograph the damaged shipment.

2. Initiating a Claim

The shipper’s main office should be notified in writing within 15 days of receipt of the damaged merchandise. The formal claim letter should :

• describe the damage

• give the date the shipment was received

• include a copy of the delivery receipt with the shipper’s signature and the receiver’s description of the damage

• provide the name of the supplier

• include a written estimate from the supplier of the costs to replace or repair the damaged items

• provide a copy of the supplier’s original invoice

• provide copies of all correspondence pertaining to the claim

The Interstate Commerce Commission requires the shipper to acknowledge the claim within 30 days and to offer a settlement within 120 days. When terms are F.O.B. Destination, the buyer or end user should notify the supplier immediately so that the supplier can file a claim.

3. Returning Goods to the supplier

Goods should not be returned without first notifying the supplier. Some suppliers require the buyer to obtain a return authorization number and have procedures as to how and when a return shipment should be made. Some suppliers may also charge a restocking fee to offset the cost of returning the item to inventory. The individual returning the goods should keep a record of the name of the individual authorizing the return, the authorization number and date, notes of any conversations with the supplier authorizing the return, the date the shipment was returned, the name of the carrier, and the supplier’s complete address and the name of the individual receiving the returned goods. If the item being returned is expensive or fragile, it should be insured.

Concept And Meaning Of Purchasing And Purchase Control

Concept And Meaning Of Purchasing

Purchasing involves acquiring materials of right quality, at the right quantity, at right time from a right source and at a reasonable price. A separate purchase department should be established to perform purchasing activities. The size of purchasing department depends upon the quantity to be purchased by the company. The purchase department determine the quality, quantity, items,price and time of purchase of materials. The function of purchase department is to purchase materials , supplies , machines and tools at the most favorable terms and conditions in a way that helps maintain the quality. It is an important function of material management and control .

Concept And Meaning Of Purchase Control

A manufacturing company is required to invest a huge amount of money in purchasing materials. It is, therefore, essential to exercise a proper material and purchase control. Purchase control refers to the purchase of materials of right quality in a right quantity at a reasonable price and at a right time. It requires a good amount of attention to the purchasing procedures of materials relating to cost, quality, volume, time, and delivery of materials. Purchase control starts with the issue of materials requisition and ends with the receipt of materials and payment of the cost of the materials.

All you ever needed to know about Purchasing !

Pur­chas­ing as a Function


Pur­chas­ing within a busi­ness can be seen as a spe­cial­ized task per­formed by indi­vid­u­als with a par­tic­u­lar role. The pur­chas­ing func­tion within a busi­ness is intended to acquire sup­plies, nec­es­sary wid­gets, ser­vices or other busi­ness related items. The more effi­cient this process becomes the eas­ier it is for a com­pany to obtain the parts, includ­ing ser­vices and labor, nec­es­sary to carry out their oper­a­tions. You might be able to get away with­out pick­les but you can’t make a ham­burger with­out the bread and meat.


Some­one with the title of pur­chaser, pro­cure­ment offi­cer, buyer or even a pur­chas­ing depart­ment would be respon­si­ble for car­ry­ing out pur­chas­ing within a com­pany. Depend­ing on the size of the com­pany it might even be the owner. The main chal­lenge that orga­ni­za­tions face is under­stand­ing and prop­erly inte­grat­ing pur­chas­ing with the sup­ply chain man­age­ment or logis­tics func­tions of the busi­ness. Suc­cess­fully inte­grat­ing and mea­sur­ing pur­chas­ing within a com­pany will allow for more insight into com­pany spend­ing. You’ll be able to have a bet­ter under­stand­ing how many pick­les you need, or bet­ter yet, how much bread and meat you should have stocked up.






Pur­chas­ing as a whole can be boiled down to answer two main questions.


Ques­tion 1) What do we need to obtain ?


Depend­ing on how effec­tively you can prop­erly answer this ques­tion you can move onto answer ques­tion 2. Many com­pa­nies have major prob­lems in Ques­tion 1. Do you really need the pickle? What kind of bread should you be buy­ing? What about meat?


Ques­tion 2) How and who should we go to obtain what we need?


This ques­tion is a lot more dynamic because it has a lot more mov­ing parts. If you choose to buy a pickle do you go direct to a farm and make the pick­les? Do you buy from a store? Direct to man­u­fac­turer? How will the pick­les get to you?



A major con­cern with the sup­ply chain is actu­ally com­mu­ni­ca­tion between each of the links on the chain. Get­ting infor­ma­tion from one link to the other with­out a prop­erly inte­grated sys­tem usu­ally requires a cost of time or money. Pos­si­bly both.


The impos­si­ble tri­an­gle sug­gests you can only exist at one point within the tri­an­gle. You can have fast and cheap but it won’t be good. Fast and good but it won’t be cheap. Good and cheap but it won’t be fast. Or a com­bi­na­tion of medi­oc­rity between all three.



What is your solu­tion to a prob­lem like this?






The trick to solv­ing the tri­an­gle is not to actu­ally solve the tri­an­gle. The trick is actu­ally to find a new tri­an­gle or cre­ate a new shape or way of doing things entirely. (Star Trek fans this is called the Kobayashi Maru)


How does this apply to purchasing?


Typ­i­cally some­one in a com­pany will real­ize that they need to order some­thing. Or even expense some­thing. They’ll make a request to order or go through a req­ui­si­tion process. If an order is approved, the pur­chaser will nor­mally have a sup­plier in mind and will need to obtain a quote. This takes time. Then there might be a period of nego­ti­a­tion. This takes time. The order then needs to be placed and even­tu­ally received. This takes time and com­mu­ni­ca­tion. Finally a pay­ment needs to be made. This takes com­mu­ni­ca­tion and pos­si­bly time.


Delays in this process will eat at effi­ciency and cre­ate bot­tle­necks. It might even cost you very real dol­lars. You can’t have upper man­age­ment just sit­ting around wait­ing for requests and you shouldn’t really skip steps or it’ll cre­ate mon­ster prob­lems later. The solu­tion will be to find a solu­tion that suits your organization’s requirements.


You wouldn’t get a Fer­rari to drag a trailer. If you need to move that trailer you can’t really ignore it either. It’s really just comes down to find­ing out your options.







Pur­chas­ing as a busi­ness func­tion can be a com­pet­i­tive advan­tage for your orga­ni­za­tion. In fact every busi­ness will have expenses, pur­chases or orders they need to make so in the grand scheme of things if your com­pany doesn’t have proper con­trol of it’s pur­chas­ing it is most likely hurt­ing your orga­ni­za­tion.

Supply Chain Has Larger Choice

I like to write about corporate social responsibility issues and on more than one occasion I have signaled out UPS for the work they are doing in greening their fleet. Operationally they are a continuous case study in efficiency and process improvement. Locally, our neighborhood UPS driver is as nice as they get and my wife often exchanges a cookie or a cold can of seltzer when he delivers our seemingly endless flow of Web-purchased dog food.

That is why it pained me to see that this same company is forcing spouses of its non-union employees to obtain healthcare from their own companies if available, as UPS is worried about the impending changes of the Affordable Care Act. While I can certainly make the business case for this policy shift, I think it will no doubt impact the healthcare of children and families. I don’t think this has anything to do with protecting customers. I think it all has to do with protecting profits.

As a consumer, I sometimes have a choice of how my packages are shipped and I think I might think twice before I check the UPS radio button. As supply chain professionals we have a larger choice and perhaps you might express your dismay to the UPS rep the next time they knock on your door.

But, don’t be too angry. Those are the very ones who have had their benefits impacted.

Supplier Relationship Management : Where are we now ? Where are we going ?

By Jonathan Hughes, Partner; Jessica Wadd, Senior Consultant and Ashley Hatcher, Senior Consultant, Vantage Partners  - See more at: http://www.mypurchasingcenter.com/office-products/articles/supplier-relationship-management-where-are-we-now-where-are-we-going/#sthash.BkoJ2JOh.dpuf

Supplier relationship management (SRM) continues to be a major focus within the procurement and supply chain community and on the strategic agenda of many C-suite executives. As companies refine their plans for 2014 (and beyond), many are grappling with whether to expand SRM efforts and investment, and, if so, how. To provide further clarity regarding which specific SRM practices deliver the greatest value and enable organizations to benchmark themselves against peers and cross-industry leaders, this article shares preliminary results from an ongoing global study conducted by Vantage Partners (comprising 669 responses from more than 330 companies to date)

SRM will be critical over the next 3-5 years, and many companies have significant room for improvement

While 78% of respondents indicate that their company has some form of SRM program, fewer than 10% of these individuals rate their company’s approach to SRM as “mature and highly effective”. At the same time, the survey results highlight an overwhelming belief that SRM will be important or very important to a company’s success over the next 3-5 years, suggesting that many companies should make considerable investments in SRM in the near future (figure 1).



When asked to estimate the percentage of the potential value of supplier relationships that is actually realized today, respondents indicate that, on average, they are only realizing 44% of the potential available value, which means they could be realizing 1.5 times more value from their supplier relationships (figure 2).

 






Companies who realize the most value from SRM make considerable investments – particularly in focus, governance and business processes, and skill building

Not surprisingly, the data indicate a direct causal relationship between the investment made in SRM (e.g., dedicated headcount, staff time, software tools) and results achieved. While companies who have made only minor investments in SRM (e.g., implementing only a few SRM processes or tools, defining SRM activities and adding them to existing roles rather than increasing headcount or reallocating responsibilities to enable a significant degree of focus) often realize limited value from their SRM efforts, organizations that invest heavily in SRM report realizing considerable, measurable benefits (figure 3). On average, study participants estimate the value generated by their SRM programs total approximately $40.7M per year.






Which investments will yield the highest returns depends in part on the current maturity level of a company’s approach to SRM. Still, a few options stand out a most likely to deliver results:

Time: The amount of time individuals spend focused on SRM activities matters far more than the number of tools available to them. If the people responsible for managing critical supplier relationships cannot focus at least one third of their time on SRM, they will struggle to gain traction.

Skill building: While today, companies allocate less money toward individual SRM skill development (training, coaching) for staff who have significant interactions with suppliers than any other form of investment in SRM, study participants note such investments are critical and recommend increasing investment in skill development more so than any other area.

Governance and business processes: Investments in formal SRM governance mechanisms and business processes (including joint strategic planning, performance reviews, etc.) yield large payoffs – on average, more than $1M of return on even minimal incremental investment, holding all other investments constant.

Many SRM practices generate returns, though some stand out as being most crucial

Looking more closely at the investments organizations have made in governance and business processes, nearly every practice tested in the study is correlated with realizing more value from supplier relationships. That said, comparing top performers (both in terms of SRM maturity and value realized from SRM) to those in the bottom quartile, there are a number of practices that stand out as most likely to yield positive, measureable results. However, these practices are among the least likely to be employed by companies with less mature SRM programs. 

• Aligning and integrating SRM with strategic account management (SAM) programs at key suppliers

• Tracking and measuring the total financial & strategic value delivered by SRM

• Aligning and integrating strategic sourcing, category management, contracting and contract management, and SRM

• Focusing on both individual relationships with suppliers, as well as systematic engagement with multiple suppliers

• Developing multi-year strategic plans with the most important suppliers

Some of these practices may be difficult to implement in the early stages of SRM (e.g., systematic engagement with multiple suppliers). Our experience suggests, however, that many could be adopted by companies with the least mature programs, if they underwent a shift in organizational mindset.

Each of the practices listed requires a strategic, rather than tactical approach to managing critical suppliers. To implement these practices effectively, companies must think about suppliers not just in terms of spend, but also in terms of the degree and specific nature of opportunities (potential for new value) and risk (potential for loss of value). And, the organization would have to empower those responsible for managing supplier relationships to sit side-by-side with stakeholders in the business to set and execute strategies, rather than acting as an order-taker from the business, which, in our experience, is often the most difficult shift for many companies.

Conclusion
Given the scope of opportunity for SRM indicated by the data, it is not surprising that the vast majority of study participants report their company would need to undergo significant changes to realize the full potential of their relationships with suppliers (52% call for a major change or total transformation, and another 38% suggest moderate change is required). Despite this challenge, many responses indicate that with the continued focus on SRM and the value it generates, additional investment will be made over the next 3-5 years – and that both customers and their suppliers can expect to continue to realize significantly more value from their relationships over time as they increase their SRM maturity.



 

Supplier relationship management (SRM) continues to be a major focus within the procurement and supply chain community and on the strategic agenda of many C-suite executives. As companies refine their plans for 2014 (and beyond), many are grappling with whether to expand SRM efforts and investment, and, if so, how. To provide further clarity regarding which specific SRM practices deliver the greatest value and enable organizations to benchmark themselves against peers and cross-industry leaders, this article shares preliminary results from an ongoing global study conducted by Vantage Partners (comprising 669 responses from more than 330 companies to date). - See more at: http://www.mypurchasingcenter.com/office-products/articles/supplier-relationship-management-where-are-we-now-where-are-we-going/#sthash.BkoJ2JOh.dpuf

By Jonathan Hughes, Partner; Jessica Wadd, Senior Consultant and Ashley Hatcher, Senior Consultant, Vantage Partners  - See more at: http://www.mypurchasingcenter.com/office-products/articles/supplier-relationship-management-where-are-we-now-where-are-we-going/#sthash.BkoJ2JOh.dpuf

njgghjjBy Jonathan Hughes, Partner; Jessica Wadd, Senior Consultant and Ashley Hatcher, Senior Consultant, Vantage Partners  - See more at: http://www.mypurchasingcenter.com/office-products/articles/supplier-relationship-management-where-are-we-now-where-are-we-going/#sthash.BkoJ2JOh.dpuf