The Relationship between Firms and their Suppliers - Essay Example

Running Head: Commercial Work - Work Based Learning Commercial Work - Work Based Learning Table ofContents Table of Contents 2 Introduction 3 Procurement and Acquisition Management Processes 4 Understanding procurement process 4 Contracts and Competitive Market 6 Issues of Customer/Supplier Relationship 11 Contract as Corporate Fragmentation 13 Conclusion 15 Reference: 16 Introduction 1'Contract' might stand for a legally legitimate agreement between two or more parties, which can be executed by means of court action. 'Contract' may also mean any form of agreement, explicit or implicit, between two or more parties, which contains promises unilateral or reciprocal ones but nothing more. Such agreements are not characteristically enforceable at all, as they state intents and not binding commitments. Normally, contracting in buyer/supplier correlation focuses upon the stipulation of goods and services, i.e. allocative contracts. One could see the whole system for the public condition of goods and services as a nexus of real contracts, running from top politicians through managers to service providers, right through all types of public organizations playing a role in the terms of goods and services. As contracting can be seen to take place not only concerning allocation or the provision of goods and services. Reorganization or income maintenance programmes might be selected 'contracts' between politicians on the one hand and the populace on the other hand. One could make a peculiarity between true contracts and symbolic contracts here, as talking about some things as 'contracts' is simply using a metaphor. Contracts as fiction are characteristically indefinite, as it is far from clear that the contracting parties are, when the contract was in fact made and how it is being observed or monitored. Fictional contracts cannot be implemented by a third party. Procurement and Acquisition Management Processes Classification of procurement is so diverse from the world of the models, and their consequent implications, used by economists in learning procurement contracting that two conclusions seem acceptable. The first is that there is substantial opportunity for optimal contract theory to contribute to better efficiency in defense procurement. The second is that the authenticities of defense procurement have significant implications for how economists must study contracting incentives and competence in defense procurement. Procurement comprises a wide variety of goods ranging from standard items such as uniforms and ammunition to major weapons systems whose acquisition might take ten to fifteen years to complete. Procurement of standard items is acquiescent to competitive bidding and fixed-price contracts, but competition and fixed-price contracts are less, and negotiated contracts more, proper for major weapons systems that are composite, involve yet-to-be-developed technologies, and have performance objectives that might be unattainable or impossible at reasonable cost. Particularly in the case of systems that entail research and development, the capability to anticipate future technological developments is limited, and even if the possibilities can be recognized, it may be impractical to offer contractual contingencies for all potential events. Understanding procurement process The complications of major weapons systems acquisition are replicated in the procurement process which comprises a series of stages commencing with defense preparedness planning, program outset, initial research and development, source selection, system development, production, and follow-ons (e.g., spares). The production and follow-on phases are the most acquiescent to economic modeling and analysis, but numerous of the determinants of program cost and weapons system performance have already been mostly decided by the time a production contract is negotiated. The subject of economic analysis thus must be on the larger procurement process, yet much of the recent research on contractual incentives in defense procurement has focused on the final stages of the procedure where the product is well defined, the technology determined, and costs comparatively well recognized. A call for a focus on the larger procurement process is not deliberated to be a criticism of the work of economists, on contract design but is instead planned to indicate that there is much enduring to be accomplished both in theoretical research and in its application to definite acquisition programs. That is, more is requisite to improve the efficiency of defense procurement than the design of more complicated incentive contracts for defense contractors. The distinctiveness of the product itself particularly, of major weapons systems inflict limitations on the theoretical and actual efficiency gains that can be attainned through the application of optimal contract theory. Additionally, the procurement process itself, the political process of agreement, appropriation, and oversight, and the bureaucratic procedures forced through the political process limit the extent and superiority of the incentive systems that can be employed. though much of the required work is beyond the traditional role of the economist, economists have much to contribute to these other dimensions of defense procurement as well. In competitive markets, researchers can look to the definite practices of firms for guidance in recognizing arrangements, or governance structures that have evolved or been designed to address compound incentive problems. Managerial incentive contracts, career path rewards and penalties, delegation of authority and accountability, and management control systems have arisen in response to competitive pressures and profit incentives. These features of the management process in the private sector are accountable in part for the efficient development of major commercial programs. Contracts and Competitive Market Contracts are taking place due to competitive pressures which leading companies to offer their customers higher-quality products at lower prices and to distribute these products more rapidly. These goals cannot be attained concurrently only by improving efficiencies in each organizational function. Instantaneous advances in these goals will need systemic changes in the way these functions relay to each other. Subsequently, technological infiltrates are increasingly becoming a major driver of competitive advantage in new as well as mature industries. Such infiltrates can lead to improved product performance. A main issue concerns how to introduce new technology into new products in a restricted and advantageously focused manner. It usually has been implicit that low price, high quality, and short lead time cannot be attained concurrently; that is, one goal has to be traded off against another. Current innovations in manufacturing practices, though, designate that the manufacturing process can be administered so that a trade off between these goals might not be necessary. For instance, total quality management programs have established that cost and quality can be achieved concurrently; Justin time management has established the same for cost and variety. Effective management of product as well as process design offers yet another prospective source of instantaneous development in cost, quality, lead time, and performance. These developments result from a better fit linking product and process design and from greater simultaneity in the design of the product and process. All these efforts need a significant change in the correlation between the design and manufacturing functions. Also, the type of technology that is initiated into new products and when and how it is initiated affect product performance and the capability of design and manufacturing to work together throughout the product development cycle. Manufacturing strategy "decisions will include investment in technology, expanding into new plants and adding capacity, strategic buyer/supplier relationships, the extent of joint ventures with other firms, the extent of vertical integration, and so on." (Brown, 1996) Contracting offers a vivid image of 'centralized decentralization' (Hoggett 1993). Centering upon the performance and costs of particular services has requisite greater local decision-making over service levels and delivery means. Diverse contractual arrangements have appeared, with disparity apparent within and between sectors. Local management preferences for direct condition by in-house employees have been marked and persistent. Yet restructuring has taken place within contraction parameters. Policy choices over competition and private sector stipulation have been shaped by direct ministerial sponsorship (the civil service) and tremendously prescriptive regulations (local government). In the framework of escalating financial restrictions, the shift to contracting has been characterized by expeditions for cost savings. In contradiction of the diversity of organizational responses, these universal pressures have promoted generally hardened approaches to the management of labor in contracted services. For instance, Companies like Marks & Spencer, have had similarly cooperative relationships with their suppliers for almost half a century. The disparity is that while a decade or two ago Marks & Spencer was believed idiosyncratic in its contractual approach, today, it appears, there is no better way to do business. Whether this is in fact so is a composite question and it is incredible that a single organizational form will suit each circumstance. It is remarkable to note that Marks and Spencer is in fact moving away from the network notion and coming closer to the classic type of market transaction, by commencing competitive tendering for some of its bought-in services. But what is beyond doubt is that the perpendicularly integrated, horizontally expanded organizations are not, generally, as competitive in the contemporary economic environment as they might have been before. In Britain, the 1988 Local Government Act made competitive tendering for local authority services compulsory, forming a market for service contracts worth around 2.5 billion yearly in 1994, from a trifling 50 million a decade earlier. In central government services, contracts worth 1.8 billion have been rewarded in the last few years. There is each indication that the market testing programme is set to persist and that contracting for services by local and central government will persist to grow. Fewer figures are offered in the private sector, but all suggestions are that both manufacturing and service industries are contracting for support services. Johnson Controls supplies IBM UK with amenities management services; BLS, a subsidiary of Federal Express, provides warehousing services to Laura Ashley, and Sainsbury, the food retailing chain, contracts out two-thirds of its distribution services. Major industrialized countries such as France and Germany the contracting pictures are rather blurred. In Germany, competitive pressures in the public sector are set to rise, and with them the use of competitive tendering and contracting. And France, which was one of the pioneers of contracting of municipal services in the nineteenth century, has a group of large, multinational suppliers of management services such as Lyonnaise des Eaux and Grale des Eaux, who now bid for contracts not only on their home ground but in markets as far flung as Asia and the Pacific Rim. Public authorities have always procured some goods and services from private sector providers but the series of reforms enacted through the eighties marked a step change. Fundamental extension of contracting programmes malformed large public bureaucracies into networks of inter- and intra-organizational relationships. Altering the values and style of public management has been an inner objective of transformation (Brown, 1996). The mainly comprehensive contracting regimes have been forced upon local authorities. Competitive tendering, where private contractors are encouraged to compete with in-house work forces for the right to offer specified services, was recognized first for highways and building maintenance functions by the Local Government Planning and Land Act 1980. A second round of legislation, the Local Government Act 1988, covered virtually all auxiliary services (e.g., building cleaning, grounds maintenance, refuse collection) and requisite authorities to expose them to competition frequently, therefore the acronym CCT (compulsory competitive tendering). Professional and technical services (including finance, legal and personnel functions) were integrated into the local government legislation in 1992. Local government's legitimate position requisite reform to be introduced through primary legislation, and it's obligatory and regulatory nature differentiated local government from other public service contracting environments. Tendering is administered by the legislation itself, statutory instruments (SIs) issued consequently, and 'guidance' from ministers and bodies such as the Audit Commission. Understanding of these rules is policed by District Auditors and by private companies competing for contracts, which are capable to complain to the Secretary of State or embark upon self-sufficient legal action. Martin Bailey, at the time a member of the Institute of Defense Analysis, wrote in 1967, "The principal formal device by which a measure of decentralized decision making is now accomplished is that of revolving funds, including buyer-seller arrangements internal to the defense establishment." Reform in health and the civil service recognized similar principles but relied upon ministerial pressure and directives. In health, catering, cleaning and laundry services were released to competition in 1983 and arrangements similar to these were introduced within the civil service (Whitbread and Hooper 1993). Other services were added on an extemporized basis all through the eighties. Over the past twenty years, the U.K. MoD have effectively integrated competitive contracting and market forces into the proviso of defense support services. The U.K. MoD has changed its thoughts and approach to greater private sector association in defense support services through three types of initiatives. These proposals involve: Selecting appropriate areas for outsourcing and privatization and emerging a strategy for proceeding; Changing public-sector organizations to impersonate private-sector market forces; and Varying the way, the government contracts for both goods and services with private-sector providers. Issues of Customer/Supplier Relationship The relationship between firms and their suppliers is perceptibly composite. In cases where a firm is a supplier of different products, there is a necessity to consider every consumer both with regard to each individual product line, and also the variety of products all together. Thus, a condition might arise whereby a customer's purchases from any one product line might be comparatively insignificant, no matter what the state of the supplying industry's capacity, but if the customer's purchases from all product lines are measured, then it formed as a large customer. At this moment if a customer is large in this sense, it would emerge that a supplier would be mostly responsive to that customer's needs. besides, surveillance of business practice signifies that several large customers are consistently sensitive to their ability to bring influence to bear upon their suppliers and thus to attain from them exceptional terms and conditions. A large customer implies that as if such a customer disinterested its business from a particular supplier, this would be a very serious rage to that supplier. Now the customer's capability to bring demands upon the supplier turns around the question of how likely it is that a customer would be capable to eliminate its business. It would appear that a large customer has a restricted number of alternatives open to it if it needs a particular product or service although wishes to transform its source of supply. It might: 1. Offer its business to another contractor within the country, 2. Offer its production to a foreign supplier, 3. Support a new supplier to come into the industry, 4. Set up its own manufacturing unit, or 5. Take over a present supplier. The difficulty which a supplier, faced with a threat from a large customer of taking out of its business, has to believe is the likelihood of the customer being in a place to perform one or other of these options. The supplier should obviously, consider both the short-range and the long-standing likelihood of a large customer being capable to practice one of these five options. It does mean that the first two options are open to most large customers in the long-standing but that the preceding three are only open to those large customers whose entire demand for the product in deliberation is enough to signify a very substantial proportion of the output requisite to attain the same kind of economies of scale as existing suppliers. Therefore, unless a supplier is in a situation to produce some other product with the extra capacity which would become available through the loss of a large customer, it will feel, for its own security, that it should treat the rations of its large customers in a concerned manner mainly those customers which are in a position to consider other options. Contract as Corporate Fragmentation Two characteristic features distinguish the process of corporate fragmentation. The first is a growing degree of specialization. The other is the increasingly multifaceted nature of the services being contracted out. This is partially the reason why such transactions need close strategic interaction between purchaser and provider, often linking long-term contractual relationships. These transactions emerge to have a host of natural enemies: concerns concerning loss of skills, about loss of expertise in tactically significant areas and the adverse consequences of prospective 'hold up' of the purchaser by the provider. The external bounds of contracting will be revealed wherever contracting experiments consistent fail. By constantly it is meant that contracts have not botched because of random errors of design or implementation, but as of systematic factors which make contractual solutions non-viable. As the proof on contracts is gathered, it is significant to identify appropriately the causes of failure; otherwise the substantiation is apt to be misleading. For instance, the contract failure at the Esmor correctional facility in New Jersey has been accredited to the intrinsic problems of contracting prison management services. Conversely, there is evidence which suggests that the client botched to monitor the contractor sufficiently, and that such monitoring was not beyond its capability. Placing this event into one or either category mistake or intrinsic non-contractibility is not a basic matter (Darlington, R. 1998). Ironically, at a time when organizations are constricting or downsizing, or both, some of the largest mergers in the corporate history are being proclaimed. This might indicate that the tide is turning and that organizations are reintegrating once more, looking for the advantages linked with large scale. But there is another, evenly reasonable explanation (Terry, 1996). The similar competitive forces that are prompting the contracting process might also be promoting merger activity. The key point is that the majority of these mergers are horizontal between firms in the similar output markets rather than between firms at diverse levels of a value chain leading to a single market. Horizontal mergers are anticipated to assuage the forces of competition. Their objective is escalating the market dominance of the merged entity, thus gaining several market powers. Conclusion Thus, we can say that the contracting and merger movements are not conflicting with one another, and may certainly be mutually encouraging. Firms which increase their supremacy in output markets and improve internal efficiency by purchasing goods and services in the markets for transitional inputs are getting the best of both worlds. And as long as competitive pressures persevere in output markets, and capital markets work capably in displacing managements which do not exploit shareholder value, both trends are estimated to continue. Positively, as cases of improper contracting come to light in the future and the confines become better defined, there might be a turning point in the contracting trend. But until such time there is no good cause to expect the modern patterns of contracting activity to show any momentous change. Reference: Brown S (1996), Strategic Manufacturing for Competitive Advantage, Prentice-Hall. Bailey.P (1967), Purchasing and Management 5th Edition. Lysons K and Gillingham, M (2003), Purchasing and Supply Chain Management, 6E, FT Management. Fisheu K, (1998) Private Finance Initiative: How can the procurement Process be Developed, IEE. Hoggett, P. (1993) 'New Modes of Control in the Public Service', paper to the Employment Research Unit annual conference ' The Contract State: the Future of Public Management', Cardiff Business School, September. Whitbread, C. and Hooper, N. (1993). 'NHS ancillary services' in A. Harrison (ed.) From Hierarchy to Contract, Oxford: Transaction Books. Terry, M. (1996) 'Negotiating the government of Unison: union government in theory and practice', British Journal of Industrial Relations 34 (1): 87-110. Darlington, R. (1998) 'Workplace union resilience in the Merseyside Fire Brigade', Industrial Relations Journal 29 (1): 58-73. Read More