The Development of Buyer Supplier Relationships in an Increasingly Competitive Environment - Example

The Development of Buyer Supplier Relationships in an Increasingly Competitive and Sophisticated Commercial Environment Name: Grade Course: Tutor’s Name: 5th February, 2011 Introduction A relationship will always exist between a buyer and a supplier irrespective of the type. The case here is to discuss the relationships formed currently and those that may be formed on the future due to certain changes or society trends. The current commercial environment has characteristics that affect the relationship between the buyer and supplier. It has been recognized because of the type of relationships these two parties had before the factors of the current commercial environment influenced it. The old buyer/supplier relationship was characterized by a win/lose situation in which either the buyer lost or the supplier lost. In either case, one party had to win. Wisner, Tan and Leong indicate that the old buyer/supplier relationship was characterized by the two parties always working in conflict, the buyers always considered right (that means that the suppliers were always wrong) and the buyers always favoured. The later means that it is the supplier who always asked the question of how the company could get the business (2008). This is changing with time. Globalization, total quality management, the Just in Time strategy, integration and other factors that have changed the commercial environment have effect on the formation of the relationship. The aim of this discussion is to show how these factors affect the business/commercial environment and in turn affect the relationships that buyers and suppliers develop. A large section of the paper however will be a critical review of contracting/tendering framework and key aspects of the negotiating process in selected organizations. This review will show how companies have changed and how they develop relationships which are influenced by several factors but the main one being globalization. Development of Buyer Supplier Relationships One important factor in business success is giving the customer what he or she wants. This will influence the buying capacity of the customer and the market share of the company. Because of that, industries have to work towards satisfying the customer. Customers are value maximizes are they are the determining factors of the changes that occur in management strategies. New technologies emerge because the customer has to be served efficiently. Globalization occurs because the consumer has to be served efficiently. Globalisation, integration and business management strategies indirectly contribute to customer satisfaction. Globalisation for example enables production at reduced or lower costs in certain countries and reduces transport costs. This helps the company provide prices affordable to the consumer or even different products of different prices with different values for different consumers (Radhakrishnan, 2001). By being value maximizers, it means that they consume products and services that give them the most value considering the image, performance, personalized service and the economy. To provide such value and even to improve it, organizations have to develop innovative ways that will enable them make profit, remain competitive and be sustainable. Providing consumer value means providing the right people with the right product or service, at the right time, place and price. From this information it is clear that business management strategies have to aim at satisfying and improving consumer value (Radhakrishnan, 2001). For such business strategies to accomplish their missions, they have to be effective. One of such strategies is supply chain management which also has several factors affecting its effectiveness. Supply chain management is a means through which organizations create and sustain competitive advantage. It ensures shorter product development cycles, improved delivery service and inventory reduction (Fawcett, Magnan, & McCarter, 2008). Effective supply chain management requires effective management of the business relationships involved one of which is buyer/supplier relationship. Management of this relationship however depends on the business environment or market conditions and the product. The relationship has to be suitable for the product and the market conditions (Monczka, Handfield & Giunipero, 2008 & Harrison, Leung Lee & Neale, 2005). This is where the effect of globalization, JIT, integration and total quality management, come in. Globalization is the process of integration and interaction of people, economies and companies globally. This process is characterised by removal of foreign trade restrictions, removal of restrictions on investments, transport systems and innovations in communications. It has therefore encouraged international trading with increased adoption of policies that liberalise different countries’ economies in order to increase the volume of their trade. Over the years globalization has increased and this has led to increased international trade and foreign investments. Many companies go global to get new customers and to explore new markets, to strengthen their brands and to continue operating in case there is saturation point in the domestic market (Paul, 2006). Globalization as stated above enables investment in foreign countries. Companies expanding to foreign countries can take advantage of reduced production costs in certain countries which help improve their profitability and also market share gain. When productions are shifted to domestic countries of operation, there are reduced transport costs or total avoidance of transport costs. The type of production strategy and the availability of suppliers still affect the kind of relationships the buyer and the supplier will have. In the current business world, long term relationships are advisable especially for international companies because of the complexity of the globalised business environment and the many changes that occur over time (Tutor2U, 2011). Globalization is the reason why there is integration; it provides an environment suitable for total quality management and JIT strategy use and/or pressures companies to use such strategies. JIT strategy is meant to improve the efficiency of supply chain management by reducing inventories (OECD, 2008) while total quality management aims at improving the quality of the product or services to the consumer and in turn helps achieve the aim of improving consumer value. Integration processes are those that lead to globalization although some of the processes are aimed at improving consumer value (Ireland, Hoskisson & Hitt, 2008). JIT and total quality management however, are strategies adapted by companies to remain competitive in the ever changing complex and globalised business environment. This change in the business environment determines what relationship the buyer should build with the supplier. Because of such changes, different companies develop different relationships with the suppliers. According to Bensaou as cited in (Radhakrishnan, 2001), there are four types of relationships which are; captive supplier, strategic partnership, captive buyer and market exchange relationship. These are relationships formed based on the market conditions and considering the product (Radhakrishnan, 2001). Market exchange relationship is where both the buyer and the supplier have low specific investments, it is characterised by well established manufacturing techniques, standardised products and a mature technology. This kind of relationship is adapted when there are so many competitive suppliers and it is the suppliers that offer such products. Captive supplier is characterised by high supplier specific investments to retain the supplier’s buyers. In this case, the buyers may have their own technology or access to market making them have monopolistic positions to the products the suppliers have. The case may also be characterised by competitive suppliers. Mostly, the products are highly complex derived from proprietary technology (Skjott-Larsen & Schary, 2007). Captive Buyer relationship is characterised by modification of stable technologies in which the supplier adds a proprietary technology giving him/her or the organization the monopoly. The market is characterised by a few but large and well established suppliers. It is like it is the buyer in need of the products irrespective of the number of suppliers available with the product. The product may be on high demand because of the specific technology that the suppliers have. If a buyer terminates a contract with one, getting another is not easy. The buyer has therefore to invest a lot more than the supplier in this case (Skjott-Larsen & Schary, 2007). Under strategic partnership, the buyer has several complex requirements or highly modified requirements for the products. The supplier also has highly modified components and is involved in the design and development stages of the product. This leads to a long term relationship based on trust (Skjott-Larsen & Schary, 2007). Among all these relationships, the best found appropriate for the current global environment is the strategic partnership. According to Aurifeille, Svizzero & Tisdell (2007) and Moser (2007) in the current competitive market, for businesses to win and retain business, they have to form a partnership with the suppliers. Benefits of such partnerships include long term profitability and growth for both partners, improved efficiency in the whole supply chain, improved delivery performance and reduced cycle time (Burnett, 2004). A Critical Review of Contracting/Tendering Framework and Key Aspects of the Negotiating Process In Toyota Car Company Toyota Car Company’s Contract/Tendering Framework Toyota is an international company that operates globally. The following is a tendering strategy used in Europe but based on its international operations and evidence from other sources (The Japan Journal, 2005) this strategy applies to all tendering or contracts that the car company engages in regarding supplies. Tendering Strategy The tendering strategy is considered three years before a new production model is developed. It means that the three years are used to conduct research on the availability of the resources necessary for the new production model and its potential effects. Any new technologies and their suppliers are identified and requested to bid. Production of the cars or other automobile products can occur in any country provided the materials, right technology, the suppliers and other important resources are available. The company makes use of local (that is, the country in which specific productions will take place) engineers as well as Japanese engineers to assess the technology (expected to be used) and the suppliers. This will be followed by an assessment of the availability of relevant infrastructure in the supplier country. It has to ensure the infrastructure’s availability. With all these set, the company has to determine the product specifications. The product will not be used until three years when the new developed model will be used by this is conducted to reduce the cost of growth. It is at this stage that the unit costs are fixed with the suppliers. The company conducts a market research later to find out if there are other suppliers. The suppliers if found will be assessed including the already invited, based on their performances (CertPoint Systems, (n.d). Supply Chain Management Toyota Car Company does not discriminate any supplier. All suppliers are allowed to place bids on tenders so long as they have what the company requires irrespective of their earlier period performance The company assesses the capability of the suppliers’ in producing the products they need considering the prices and sustainability in production. The bids therefore have to be realistic (The supplier has to offer a price that will enable him survive for a long time, that is, both of the parties should benefit). The company is prepared to walk away from any unrealistic costs (CertPoint Systems, (n.d). The contract takes around five years The company carries out a quality evaluation which requires visiting of potential suppliers before they are given any contracts. Everything has to be assesses from goods coming into the supplier company to the final products. This is done by specialists such as logistic specialists, production, quality and tooling engineers (CertPoint Systems, n.d). The suppliers are then classified as Unacceptable which means they are not invited to bid, some concern which means they are invited to bid but there are issues that should be cleared and Acceptable represents those invited to bid. The selection process This involves pre-sourcing selection meeting where the supplier (s) company’s culture is assessed in comparison with Toyota’s. The supplier company has to have strategies compatible with Toyota’s strategies or else no relationship will be developed. The cost of tendering is covered by the suppliers. Suppliers have to abide by the guidelines specified in the bill of quantities. This bill of quantities is a way of accomplishing what the company prefers which is a fixed price of a big amount of products which if changed, will be at the supplier’s risk (CertPoint Systems, n.d). The procurement and supply management strategies support long term relationship with the supplier. From the above information, the company only invites suppliers when a new model is supposed to be implemented. This is done three years before the implementation. It means that the company has its well established suppliers which remain suppliers for a long time (5 years). Key Aspects of the Negotiation Process When the company is looking for suppliers, apart from the basic requirements of having the right technology, product, performance and so on, one important factor being assessed is trust. Cleary in its performance management which is part of managing the relationship with the suppliers, the company assesses the prices set by suppliers. Very unrealistically low prices are rejected and the company pulls when they wish to. The negotiation process includes a contract that takes five years with certain rules guiding the behaviour of the supplier and how the two parties will do business. There is one important reason (there are others) why Toyota makes use of long term relationships and even in some cases helps improve the efficiency of the suppliers. The company in its production system uses the JIT strategy. This strategy meant for productivity improvement, only uses “what is needed, when is needed and in the amount needed” (Toyota Company, 2011). Without reliable suppliers with all the products needed at the right time and in right amounts, where will the company get the products for its production and record any efficiency? This is why the company even assesses the sustainability of the supplier. It is also the reason why realistic costs/prices are important. One good idea developed by the company was how to improve efficiency, which it does by its JIT strategy and production in countries with necessary resources. The idea then has influenced the relationship they should have with the suppliers. The best considering the strategy that the company has implemented in ensuring effective production is just strategic partnership. This idea is characteristic of the changes in the current global world; a world very competitive and requires new ideas that can ensure sustainable business operations. Ideas that can make the company achieve its aims. This idea has enabled Toyota produce cars that customers desire (what they want and value) and has improved the company’s profitability and growth (Toyota moved 10 places to 4th place in 2006 and improved its reputation when it earned the respect of many as one of the best product innovators (McGregor et al, 2006). Analysis Establishing a Successful Partner: Characteristics of Good Relationships A good partner should be both to the buyer and the supplier. It means therefore that the analysis will consider Toyota Company as a good partner to its suppliers and the suppliers being good partners as well. According to Cheng, a good partner should be one that is ready to form a partnership with mutual economic gain, with a clear understanding of each party’s roles, with mutual respect and that which is sustainable (2009). The partnership should be long term and one partner should be able to rely on the other based on the terms of agreement. The partners should work together towards common goals such as success of the businesses that are profitable to both. It is also important to know ones partner or a company’s partner. Knowledge of a partner means knowledge of the business, the services each partner requires, any limitations and needs. Another important element is communication. Setting up a long term relationship does not mean that it should not be effective. Furthermore, an ineffective long term relationship is as good as nothing since it will help achieve no aim that the relationship was set to achieve. Effective communication makes an effective relationship (Cheng, 2009). The framework above reveals the kind of relationship that Toyota has with its suppliers. It is that based on what the suppliers have to offer the company although the sustainability of the supplier is also considered. It is a win-win relationship which according to Bensaou is a strategic partnership. It is strategic because it is compatible with the strategies that the company adopts. From the above information, the suppliers’ cultures are assesses for compatibility with the company’s strategies and no relationship is formed when the strategies are not compatible. It means therefore that such a relationship supports the organization in achieving its aims. There are three principles guiding the formation of relationships with the suppliers. These are; Fair competition: Toyota welcomes every potential supplier with no consideration to the supplier being a first timer, the size of the Supplier Company or race. Every supplier is given an opportunity. They just have to prove their capability in satisfying the company’s requirements (The Japan Journal, 2005). Mutual benefit and mutual trust: Toyota believes in developing relationships based on trust and mutual benefits. This kind of relationship is part of the company’s production system (Kondrat, 2009). Contribution to local economic development: Since globalization has provided the opportunity for companies to invest and operate in foreign country, Toyota has been investing in foreign countries. It however does not invest without contribution to the economic development of the country which it does through establishing its production in the foreign country. The company believes that its presence should be able to boost the economic development of the host country and so ensure one of its objectives is that. The economy of a nation supports the growth of a company and influences the opportunities the company may have. It indirectly benefits the company and other companies (The Japan Journal, 2005). Considering the knowledge of the needs of partner, Toyota needs reliable suppliers with the capability of providing quality products. The suppliers’ needs are catered for and that is why they have to be assessed before they are selected for involvement in any contractual business. Assessment gives the company the knowledge about what the suppliers have to offer (their services) their needs, their limitations which sometimes the company assists to eliminate or control and the business itself (that is by assessing the strategy). Effective communication strategies by Toyota to its suppliers has not been revealed by the framework, but the company has an effective communication system that enables such relationships to be effective in helping the company produce their goods according to the developed strategy (JIT that is) (Toyota Company, 2011). The Current Trends Influence The question is, has Globalization, JIT, integration and total quality management played a role in the development of Toyota’s buyer-supplier relationship, and will they influence Toyota’s future relationship? Globalization has played a major role and as demonstrated above it has influenced other factors. Because of globalization, Toyota expanded its market to other areas like china, Thailand and other countries. It also has a global purchasing framework which would not be possible had there be no globalization. This framework enables selection of competitive suppliers which in turn ensure purchase of most competitive inputs. The framework has three important elements (The Japan Journal, 2005). These are; The cost comparison system that enables comparison of the competitive inputs in different regions hence determining the best place to purchase such inputs at lower costs Technology and new suppliers recruitment programme and Current suppliers’ reinforcement programme (The Japan Journal, 2005). Any company aims at producing quality products even though some of them do not get the right strategies. Toyota also aims at producing quality products and because of this it implemented the JIT among other strategies that ensures production of quality products. There is no direct link of Toyota’s buyer supplier relationship to Globalization, JIT, integration and total quality management but based on the current trends of globalization, the company has been able to profit from the newly created business environment. The competitive environment also calls for creativity and innovation which help companies move forward with the complexities and opportunities that come with it. This Toyota recognised very well when it invested in research of “cleaner-burning automobiles that combine gas engines with an electric motor” (Kondrat, 2009). Conclusion Building a business relationship with stakeholders is very important in business management. Management of any type of relationship in business has a specific role to play for example, management of consumer-seller relationship or consumer producer relationship. If a company aims at developing trust between itself and the consumers, the probability of retaining and attracting more customers is high. Buyer-supplier relationships are also important and as indicated above, such a relationship plays a very important role in supply chain management. Without and effective relationship, there will be no effective supply chain management. The type of relationship however is determined by the managers of an organization. With knowledge of how a company can prosper based on different types of relationships, the market conditions and the product a manager of a company’s responsible managers should be able to select the best type of relationship that is compatible with the strategies and the aims of the organization. A good example of such an accomplishment is evident in Toyota and is discussed above. Though evidence of the use of other types of relationships has not been shown, other companies may prefer to use them. The best type of relationship however has been found to be the strategic partnership type which also helps the companies adapt to changing global business environment. 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