Supplier Relationships and Negotiations - Term Paper Example

Supplier Relationships and Negotiations Analysis of relationships between suppliers and customers shows that it is wrong to confine these relationships only by the value chain. Each company takes many kinds of relationships. The company may have one supplier to buy raw materials, another supplier - equipment, the third - consulting and so on. It is true that the role of the procurement process increases in industrial activities in today's economy. The narrow specialization of production for specific applications has been replaced by a cross-functional coordination within the existing supply chain, providing a significant contribution to the economic effect of the enterprise. Thus, these processes determined the changes which take their place in the principles of building relationships with suppliers, involving the special art of negotiation in the essence of the process, and we are going to examine them with all necessary details in the body of this paper. The basis of procurement activities of an industrial enterprise is an interaction with the suppliers of inventory holdings. It is well-known that every transaction is determined by the totality of the circumstances of different types that affect the behavior of the two sides. Being informed that these conditions tend to be constantly changing, information on past and expected changes in the parties’ transaction is not always symmetric, and it is possible to confidently assert that the market interaction between suppliers and consumers is extremely complex and multifaceted process. In everyday life, there are factors that can influence the conduct of the parties, as well as their decisions in a way that potential contractors who have (in principle) the desire to establish business relations, will never take such a step. This may be due, in particular, that the proposed terms of cooperation would be unprofitable to the opposite side, and in a case when negotiations could not allow to work out a compromise. It is also clear that each firm has a particular internal environment, including practices and corporate culture, often with a long history. And, besides, we might to add that steps that were useful and important yesterday may radically change their essence tomorrow, making the next steps meaningless or non-viable due to the high dynamism of the environment conditions and evaluation, on the one hand. On the other hand, the market increases competition by acquiring a global character, which gives an additional impetus to the company to address issues of resource conservation, cost reduction, stable and long-term relationships with suppliers of material resources. These circumstances determined the evolution of the procurement process in general and, in particular, develop the main approaches in relations with suppliers. Being under constant stimulating effect of market environment, procurement has evolved significantly over the past few decades. In this regard, the researcher of the problem, Evans, states that supply (purchase) of a simply supply function (order-oriented fulfillment), has become a feature that has a significant impact on business success (Evans, 1998). In today’s society, it is greatly increased the role of the modern enterprise and its hierarchical structure in the procurement process. In particular, Volkema note that if supply problems confined to a single functional area until recently, exactly now they acting as procurement of cross-functional mediator, which supplies not only individual products, but also know-how system, while the communication occurs at all levels of the hierarchy. This requires that the procurement professionals should have extensive knowledge and practical skills, ability to work effectively in a team (Volkema, 2006). The above stated situation needs an involvement of supplier relationship management, because according to O'Loughlin and Szmigin “Supplier Relationship Management is an all-inclusive approach to managing the affairs and interactions with the organizations that supply your company with goods and services” (O'Loughlin and Szmigin, 2007). This kind of management includes different areas such as communications, business practices, the area of negotiations, different methodologies and software, taking into account the fact that all of these areas are used to establish and maintain a relationship with a supplier. Donaldson and O'Toole stated that “benefits include lower costs, higher quality, better forecasting and less tension between the two entities that result in a win-win relationship” (Donaldson and O'Toole, 2002). Another important consequence of the evolution is the gradual transformation of relations ‘buyer-seller’ into relationship ‘supplier-consumer’. This means moving from local acts of sale between the contracting parties to build long term relationships where mutual responsibility is not limited to civil law relations in a single transaction. In addition to this, we can note that this trend is justified and the provisions of the modern institutional theory that the relationships ‘sellers – buyers’ are replacing by the ‘suppliers – consumers’, as there relationship between the parties may not be limited to single acts of sale. Otherwise, they should be equated to the work of individuals who are not consistent with the actions of the enterprise as a subject, basing the work on the principles of strategic planning and based on long production runs. Therefore, the sale, as the real deal, is only important point for the marketing process in this sector, which is preceded by a long phase of negotiations, an important regulator of relations between the parties. Based on the fact that the relationship becomes long term, emphasis should focus on issues of selection, evaluation and building relationships with partners. The issue of supplier selection is critical; we can say that it is crucial to the procurement process to a certain extent. The success of the acquiring company to provide customers with quality products or services depends on how well the selected suppliers serve. The modern view of supplier relationships involves active management of an array of suppliers (there are used concepts such as education of suppliers, the integration of suppliers, etc.), development of mutually beneficial partnership based on a systematic approach and thorough analysis of market situation. The basic idea of relationships is that the supplier must become a reliable partner in the enterprise. Such an approach that engages partners in the definition of requirements in the procurement, development of company strategy, evaluating, recognizing and rewarding the efforts of suppliers and partners is assigned to certain requirements. Work with suppliers in this area is objectively important in the context of global environmental problems, since the industry has a significant impact on the environment. Specifically, the cooperation of suppliers and customers in this area can be expressed in the joint management of material flows, harmonization of new product development, standardization and economies of shared packaging (or in a consistent refusal to use them), use of common standards quality, etc. It is clearly that this requires a close relationship between counterparts who became partners. This form of partnership is called ‘vertical cooperation’ in the world today, and it means co-operation along the supply chain, giving the parties, besides that, benefits such as reduction of uncertainty relations and reducing transaction costs for all participants. Possible evolution of the model of interaction between the parties on one-off contacts (or contracts) to a mutually beneficial partnership is largely determined by the time factor, because the relationship can have both short-and long-term orientation. Thus, the relationship between suppliers and consumers of individual transactions become conducive to the stage of relationship under certain circumstances, involving some interdependence of the parties, subsequently moving to the next level that is called strategic alliance. The above mentioned transition can be characterized by three evidences. First, the shift in the relations of ordinary transactions to a strategic alliance is intended to lower prices and reduced costs. Second, as a result of the evolution of the relationship the buyer has to incur additional administrative costs, as well as to commit and become dependent on the supplier, in return for a number of benefits associated with quality, reliability and service. And finally, thirdly, this trend marks a transition from intention to ‘buy’ to decision to ‘create’ a product of joint efforts. We can say that, moving forward on this scale, the relationship of the parties is the way of competition to partnership. The final stage of the process is still referred to ‘the integration of suppliers’. The concept of integration at suppliers is aimed to consumers and they need suppliers of raw materials, components and packaging in a joint operation would be able to better evaluate the cost, quantity and delivery terms. This process is also reflected in the new institutional economics. There is a concept that the market is the mechanism that regulates a simple contract, and the firm - the complex, so-called relational contracts. Transactions that occur with a high degree of regularity, as well as increased demand guarantees of stability, gradually become intra-domain links, i.e. moving from the area of market regulation in the area of administrative regulation. The market motivation is more important incentive to increase production efficiency, rather than the motivation that is used within the firm. This explains the existence of relational contract in any transaction elements of uncertainty, since it is impossible to take into account the text of the agreement and display all the options to change the situation. Relational contract specifies not only the parties of the commission and execution of the transaction, but also relations between partners, which will govern their actions in the process of adapting the contract to any changes. It is known that cyclic variations are an integral part of economic life, so the interaction with suppliers is important to timely and adequately respond to change and adjust relations accordingly. Thinking about the process of negotiation in this context it is obvious that, in particular, at the stage of recovery requirements of the customer to the suppliers may be tightened and, conversely, to soften during the economic recession or deficit of the resource. In addition, it is recommended to rethink work with suppliers during the crisis, providing a series of actions aimed at protecting the interests of enterprises. For instance, to refuse of contractors, providing the resources at inflated prices; to conduct negotiations with suppliers, agreeing with them the possibility of temporary supplies at discount prices, deferment of payment for the goods, based on the fact that the development of the crisis will hit suppliers in the next step; to centralize independent economic units in large companies, holdings, for the purpose of to reduce the cost of the same type of purchases; to consider the possibility of horizontal integration of purchasing with other companies (sometimes even with competitors), to increase order and reduce the cost of procurement. Thus, the economic environment has a significant impact on the relations of an industrial enterprise with its suppliers, as well as on their quantity. Observing supplier relationships and negotiations we can mention that negotiations - are the daily reality of people working in sales, moreover, negotiations are their main job. And not always these negotiations happen in a formal setting, and at the highest level, or at the negotiating table. Almost every phone contact with the customer, supplier, or partner - is a mini-negotiation. The diversity of goals and types of negotiations is rather large: • negotiations aimed at the continuation of existing agreements, the extension of earlier agreements (for example, negotiations about extending of the contract for delivery); • negotiations to normalize relations, suggesting the transition from conflict to other types of relationships (e.g., negotiations between the supplier and customer to resolve the conflict that appears in connection with the breakdown of the timing of delivery); • negotiations to achieve redistributive agreement, meaning of such negotiations is that one party requires a change in its favor at the expense of other parties (for example, negotiations with the directors of branches of regional redistribution of Service); • negotiations to develop a new agreement aimed at establishing new relationships and obligations between the parties involved in the process (for example, negotiations with a new supplier to supply its goods to the conditions of regional exclusives); • negotiations aimed at obtaining the indirect results which are not reflected in the agreements (for example, the result of such negotiations may be the establishment of contacts, finding points of view of partners, influence on public opinion) (Volkema, 2006). It is not surprisingly, the ability to negotiate effectively is considered essential job skills for sales managers, and, moreover, good negotiators are as good as gold. Highly effective negotiation strategy assumes a role flexibility and focus on achieving goals rather than defending a certain position. In order to develop the role flexibility, a negotiator need a good understanding of what general roles and behaviors are possible in the negotiations and what role in what situations is the most effective. Analysis of the behavior of effective negotiators shows that they do not always choose the strategy of cooperation, but they are always very sensitive to the behavior of the other side, they know how to listen, have a good interaction and feel the situation, understanding when they need flexibly change their style of behavior according to changes in the situation, skillfully manage the conversation with through questions and different methods of communication (pauses, rephrasing, and unexpected actions, etc.), and use a wide range of negotiating techniques. According to Tangpong and Young, “Relationship continuance in the buyer-supplier dyad can be described as the intention of both firms to keep the relationship ongoing, in spite of the presence of stressors in the relationship. For example, if a buyer is not greatly dependent on a particular supplier to continue providing parts, the likelihood of continuing a working relationship with that supplier is less than the case when the buyer is desperately in need of the supplier's product or service. If the buying firm has legitimate alternatives in the supply base to do business with, but opts to keep doing business with its incumbent supplier, then the intention to continue the relationship is very likely” (Tangpong and Young, 2009). Thus, negotiation is the way of achieving a result that is acceptable by all parties of the negotiations. To reach a compromise that benefits the company, it is necessary to correctly identify the true needs of the supplier to prepare the necessary analytical information to develop a reasoned position on key issues of negotiation and many other things that will tilt the balance to own advantage. In conclusion, we have discussed many aspects connected with supplier relationships and negotiations, dwelling on specific issues of both processes with all necessary details. We have proved again that negotiation is also a process; and as each process it is divided into logical steps. It is always necessary to remember that negotiations have the exact structure of their implementation: preparing to negotiate, enter into contact, information exchange, agreement, closing, end of contact, and the analysis of the negotiations. The progress in achieving of a high, perhaps the most effective result, is possible in a case of the strict implementation of the algorithm of negotiation. A person (buyer, supplier, customer or someone else) may not start negotiations without preparation, it is impossible to sign up a mutually beneficial contract without clarifying all the parties. In such a way, people who want to develop good supplier relationships should be very professional negotiators. Works cited: Donaldson, B. and O'Toole, T. Strategic Market Relationships: From Strategy to Implementation. John Wiley & Sons, 2002. Evans, E. Mastering Negotiations: Key Skills in Ensuring Profitable and Successful Negotiations. Thorogood, 1998. O'Loughlin, D. and Szmigin, I. The Challenge of Sustaining the Relationship Approach: Financial Supplier Perspectives. Australasian Marketing Journal, Vol. 15, 2007. Tangpong, C. and Young, K. The Role of Agent Negotiation Behaviors in Buyer-Supplier Relationships. Journal of Managerial Issues, Vol. 21, 2009. Volkema, R. Leverage: How to Get It and How to Keep It in Any Negotiation. AMACOM, 2006. Read More