Commercial Management - Case Study Example

Running Head: Commercial Management Student’s Name: Instructor’s Name: Course Name and Code: University: Date of Submission: Commercial Management Introduction In a commercial environment that is increasingly competitive and sophisticated, the buyer/supplier relationship has evolved into a refined relationship where value creation is highly emphasized. The rise in globalization has not only led to the emergence of new trends in the business world but it is also associated with the rising need for buyers and suppliers to maintain mutual relationships in order to survive in the competitive business world. The buyer/supplier relationship is therefore bound to change significantly in order to accommodate the changes and trends in the market as identified in this paper. Development of the buyer/supplier relationship The buyer/seller relationship has changed significantly and it is apparent that this is bound to change even further as the business world undergoes rapid transformation. Among the most important aspect in the buyer/seller relationship is globalization. Globalization has turned the world into one global market, thus giving sellers and suppliers more autonomy (Smith, 2009). The rise in globalization has given buyers a high degree of choice such that suppliers must increasingly exert efforts directed towards ensuring that they provide value to their customers in order to retain them. This denotes the increase in buyer power as portrayed in Porter’s Five Forces Analysis (Redmond & Brennan, 2010). Globalization has led to the emergence of trade liberalization, which allows countries to export and import goods with limited restrictions. Accordingly, buyers can easily change their suppliers to enjoy more competitive offers from international suppliers due to the ease in the transfer of goods from abroad. At the same time, supplier power has risen due to increasing demand by customers for high quality products. This is because upon this realization, suppliers have invested in technological developments and effective production methods which make their end products better. Buyers are more likely to approach such suppliers, hence improving their supplier power. Increasing power for each of these parties however is likely to lead to unrewarding outcomes as each party attempts to get the best deals. It is for this reason that collaboration between buyers and suppliers have become increasingly common. Buyer/seller relationships The increasing global competition has led to a shift in buyer/seller relationships, such that they are increasingly shifting from transaction-based relationships to partnership kind of relationships. Buyers and suppliers are now working together to form supply alliances that are beneficial to both the buyers and suppliers (Huntzinger, 2007). The alliances involve working together towards achievement of a common goal unlike in the past where the buyer was only interested in getting the lowest price while the supplier intended to get the highest price to cover for expenses. Suppliers now even go to the extent of investing in equipment which will be effective in meeting customer needs. Buyers are also ready to work with suppliers in order to accomplish given objectives. An example is Nokia, which in the year 2000 offered to help in the rebuilding of a Phillip’s plant located in Albuquerque, New Mexico (Anonym, 2008). The plant supplies Nokia’s semi-conductors. Due to the firm buyer/supplier relationship between Nokia and Philips, Nokia did not just find another supplier but instead worked together with Phillips to revive the plant. This ensured that a steady supply of semi-conductors for Nokia was enhanced. Integration The increasing need for cooperation between buyers and suppliers has led to the rise in integration strategies which allow buyers and suppliers to gain more from their relationships. Integration refers to the process of joining the operations of two or more companies such that they are under the same management. Vertical integration is the type of integration undertaken in buyer/supplier relationships. It is a form of association that is formed through a merger or association, such that the supplier and the buyer work together as one (Pride et al, 2009). Vertical integration is further divided into two forms: forward and backward vertical integration. Forward vertical integration is witnessed where a company controls a business in which its products are sold while backward integration represents a situation where a company controls the suppliers of the goods it deals with. Buyers and suppliers who choose integration are expected to gain more control in the relationship and thereby gain significantly from the combination of processes (Pride et al, 2009). For example, the supplier is assured that all the produce will have a market while the buyer is assured that the supply of goods will be consistent. Just in time The buyer/seller relationship is highly influenced by the cost and time factors, hence the increased importance of the just in time inventory strategy. Just-in-time (JIT) allows a company to increase its return on investment through controlling the inventory in-process and linked carrying costs (Huntzinger, 2007). This means that instead of maintaining huge warehouses, the buyer designs a procurement system in which orders for goods are made at intervals that allow the buyer to limited inventory at any particular time. This calls for excellent buyer/supplier relationships because it would be inappropriate for a company to create shortage because it does not maintain inventory (Herzog, 2010). JIT also improves quality and efficiency to a large extent thus enhancing customer satisfaction. Benefits associated with JIT include improved flow of supplies, consistency in work hours and production scheduling and regular supplies intervals. Total Quality Management Total Quality Management (TQM) is an integral part of the buyer/seller relationship and which has gained popularity in the contemporary business world. This follows the need to keep improving the quality of goods in order to satisfy the customers. Accordingly, buyers are seeking suppliers who are willing to invest in continuous improvement that ensures that their manufacturing and quality procedures are of high quality (Joelson, 2010). This is a process that requires adequate cooperation between the buyer and the seller in order to ensure that the buyer gets the kind of quality that is desired. This is only possible if a close relationship exists between the buyer and the seller. Outsourcing Outsourcing is the process of delegating some of the company’s activities to another company or agency, mostly with superior experience in the specific field, such that more important activities can be given priority within the company (Costa & António, 2011). Outsourcing is increasingly becoming the preferred mode of doing business because it allows companies to focus on achieving their main objectives while saving costs. Companies are becoming aware of the need to focus on their core competencies while allowing others to undertake the rest of the activities on their behalf, thus improving the overall productivity. As noted by Herzog (2010), a company cannot be proficient in all areas, yet there are other companies who can provide the services in a better and cheaper manner. It is only by utilizing these companies’ areas of expertise that individual companies can create value. Supply chain outsourcing is a growing trend in the modern business world, which has become popular as the market becomes increasingly competitive. This form of outsourcing has in turn created new relationship dimensions between buyers and suppliers, where interactions are strictly through the contracted company. It is considered better to outsource the supply chain to experts whose main competencies include building an integrated and responsive supply chain that easily links the partners, suppliers and customers in such a way that the firm’s objectives are met (Redmond & Brennan, 2010). Managing the supply chain is a highly demanding endeavor, hence the reason why companies may prefer to outsource to supply chain experts. The company can then focus its core competencies and innovation, thus creating value for the company. An example of a supply chain outsourcing company is IBM, which through its well developed pool of experts aids businesses in optimizing business processes such as procurement, logistics, strategy and planning so as to increase the buying power and enhance productivity (IBM, 2011). IBM boasts of the world’s largest supply chain management consultancy, IBM Global Process Services, whose team of experts provides exceptional outsourcing services to companies. The agent is responsible for all the work regarding the supply chain management company; which off course helps the company through integrating its system and standardizing the company’s processes (Costa & António, 2011). The consultancy offers international service and is therefore ideal for companies that desire to develop their businesses in a significant way. The fact that more companies are now outsourcing their supply chains, insinuates that the buyer/supplier relationship is bound to change significantly since the suppliers have to deal with third parties as opposed to dealing with the company directly (Herzog, 2010). In the case of IBM for example, companies that have outsourced the supply chain management give all the responsibility to the IBM which then plays the role of managing the supply chain on their behalf. Accordingly, the suppliers have to go through IBM in order to provide their services to the specific company hence the creating a third-party relationship. While this may not affect the suppliers in a significant way because they only need to deliver, the buyers are affected in that their level of control over the procurement process is highly curtailed. On the other hand however, they are likely to gain more from the relationship because the procurement company is likely to add more value to the supply chain through establishing lasting relationships with suppliers in a more professional manner. Overall, the outsourcing of the supply chain reduces the contact between the buyer and the supplier such that the relationship is significantly detached; which may affect their ability to work together. Outsourcing has an advantage in that companies do not need to incur huge capital investments whenever they need to pursue a different product line or business since they can always outsource to other organizations which already have the knowledge and expertise to do the job for them (Herzog, 2010). This plays a significant role in cost cutting and thereby helps companies to sell such products at a much cheaper price than what the company would have sold itself, thus attracting more customers. In Nokia’s case for example, the Company uses a hybrid manufacturing system in which it combines outsourcing and in-house manufacturing in order to enhance manufacturing proficiency. Nokia has outsourced the production of different phone components to other companies such as Original Design Manufacturers (ODM) and Electronic Manufacturing Service (EMS). This eased the manufacturing job to a large extent and increased efficiency. As indicated by Costa and António (2011)outsourcing is likely to improve efficiency and increase productivity. The case of Nokia brings signifies the formation of new buyer/supplier relationships that result from outsourcing. Outsourcing is therefore a catalyst for buyer/seller relationships. Outsourcing however has its shortcoming s in that it leads to loss of control. Outsourcing companies have little control on the production process of the contracted companies and may not be able to monitor quality and other important factors in the supplier’s production process. This denotes that the company must choose very carefully in order to ensure that the right quality is delivered at the required time. Furthermore, any defects and irregularities will be blamed on the buyer as opposed to the supplier hence the need to ensure that the right supplier is chosen. An example of a failure in outsourcing was when Mattel, the largest company in the world, when it received toys that were coated with lead paint from China based Lee Der Industrial. According to Mattel, the Chinese company had lead-detecting equipment and it could not be established why the company had failed to detect the toxic chemical (Barboza, 2007). This example perfectly illustrates outsourcing’s disadvantage of lack of control on the company’s side which may lead to low quality production. The toys produced in this case would have harmed children, yet the blame would have been on Mattel for supplying the toys with toxic lead paint. Tendering framework The need to cut costs and improve efficiency has led to significant changes in the tendering framework for most companies, thus affecting the buyer/supplier relationship in a significant manner. The tendering process is now more thorough than a few years ago and suppliers are only chosen if they can deliver in accordance to the buyer’s expectations (Joelson, 2010). Innovative tender allocation systems are being developed and these enhance the tendering process in a significant way. The rising level of technology and the increasing use of the internet have given rise to a new tendering framework known as e-tendering. E-tendering is the most popular trend witnessed in contemporary organizations and which has changed the procurement process significantly (Smith, 2009). E-tendering denotes a procurement process that is done online, such that suppliers place their bids on the internet and receive notifications from the buyers online without necessarily meeting them physically. This approach has not only reduced the need for paperwork but it has also eliminated unnecessary costs in time and labor often used during physical selection of suppliers. E-tendering has become popular not only in the private but also in the public sector, with most governments adopting it as their way of allocating tenders. It is notable that most governments and counties now use the e-tendering strategy to allocate orders to suppliers. An example is the Australian government which uses e-tendering and procurement to a great extent. The website provides a page for the bidding of tenders for the supply of different items. The suppliers apply for the tenders and then upload their quotations. They then wait for the committee to make a selection of the most appropriate applications which are then used to determine who will be given the tender. This may involve physical presentation by the suppliers but at the very final stage. The e-procurement procedure is highly effective because it ensures that costs are saved and there is less need for manpower to do the tendering process. Furthermore, only a few people are needed to study the applications online, eliminate the non-qualifying ones and finally complete the selection. This is much easier than dealing with a pile of paperwork as in the past. According to Vydia, Sajeev and Callernder (2006), e-procurement is effective in the public sector and is of great importance in improving the economy. Despite the fact that e-procurement is increasingly being preferred due to its ability to save time and costs, this strategy is a threat to the buyer/supplier relationship. This is because it eliminates physical contact, a consideration that is especially important in the negotiation process. Accordingly, the parties may not be able to present their views in a clear way and this may affect the final outcome significantly. Joelson (2010) also notes that personal relationships established between the management and the suppliers could play a vital role in enhancing the firm’s efficiency. In order for companies to maintain contact where e-procurement is used, communication must be enhanced through emails and telephone calls or even face to face meetings. The tendering framework in most organizations has changed and buyers are more focused on ensuring that only suppliers delivering the highest quality products are given order contracts. As a result, buyers are more involved in the suppliers’ production process which leads to increased customization (Redmond & Brennan, 2010). Buyers want a situation in which they can influence the kind of product to receive from suppliers. Accordingly, these are factors that must be considered during the tendering process. Negotiation There is a notable change in the manner in which tenders are given in the modern business world. In the past, suppliers would give out their quotations and the buyer would choose the supplier with the lowest price and award them the tender. This trend is however diminishing slowly as negotiations take a central place in the buyer/supplier relationship. Instead of situations where the supplier sets the price, the buyer and supplier engage in a negotiation process whereby they reach a consensus regarding the cost and quality of the supplies. According to Fang (2006), this is a result of the increased need to satisfy customers such that the quality of goods is given a higher level of priority to the price of the goods. Once good quality goods have been identified, the negotiations for price can be done later. Sainsbury retail chain stores are known for conducting negotiation so as to ensure that only the highest quality products are purchased for sale at their stores. In order to enhance this, the retails store management has set aside a team from the procurement division who are responsible for negotiating the best deals for the retail shops (Zentes, Morschett and Schramm-Kein, 2007). The team must be keen on the quality of production and the price so as to ensure that the company makes a considerable level of profits. Negotiation is highly important for Sainsbury because it has always ensured that quality products are stocked at favorable prices. Consequently, the store has managed to be highly productive and to retain a significant number of customers. Negotiation is an undertaking that has led to the improvement of buyer/supplier relationships because it is apparent that companies want to develop strong and lasting relationships with specific suppliers as opposed to changing suppliers depending on the price. Negotiations often yield strong relationships between buyers and sellers and are therefore encouraged significantly. Fang (2006), notes that the existence of a good relationship is highly essential for negotiation to take place. This is because it facilitates all other processes that are involved in the process. Besides relationship Monczka, Handfield and Giunipero (2008) identify six more aspects in the negotiation process as follows: Communication: There has to be effective communication between the buyer and the supplier so as to enhance the negotiation process. This involves the presence of common language and the ability of the parties to listen and put their views across. Interests: Each party must have a need, goal, concern, hope or fear that acts as a motivation factor. In the buyer/supplier relationship, the buyer aims at getting the lowest possible price while gaining the best quality. Further, the buyer may fear that the supplier may not honor the contract hence the need to seek clarification during the negotiation period (Pride et al, 2009). On the other hand, the supplier’s aim is to get the maximum possible price for the supplies and to ensure that the buyer will be able to pay him on time for delivered supplies. At the end of the negotiation process, the buyer and seller should have made an agreement that is suits both parties. Standards: These represent the criteria to be used by the parties for legitimizing their perspectives. The buyer for example may require a certain level of quality while the supplier may seek a particular amount for the supply of goods. It is notable that with the constant changes in customer demands, buyers are increasingly seeking advanced products that will satisfy their customers’ needs. Suppliers must therefore be ready to invest highly in meeting these standards so as to go past the negotiation stage during tendering. Alternatives: Each party must have steps that it could take in order to satisfy their own interests beyond the current negotiation. Parties may not always get they wanted and therefore they must have alternatives. Globalization has increased the level of alternatives due to increased choice among many buyers and suppliers. Forming good relationships is therefore important in order to ensure that the parties involved gain optimally from their association. Commitment: Finally, there must be total commitment id the agreement has to be finalized. Each party must therefore make promises as to how the deal will be build in order for the negotiations to take effect. With the emergence of supply chain outsourcing, supplier companies now have to deal with agents in the negotiation process. An indirect relationship between the supplier and the seller is created; such that the supplier may not be able to get the best deal possible. Similarly, the buyer may not have absolute control of the negotiation process and therefore may not get the best deal. Lack of a direct link also impacts the possibility of a mutual relationship between the buyer and the supplier. For example, the buyer may not be able to ask the supplier for an extension of the payment period where an agent is being used as opposed to a direct link where the buyer may have established a good rapport with the supplier (Monczka, Handfield & Giunipero, 2008). The use of an agent is however convenient for buyers because they can focus on other activities and leave the procurement process to the agent or outsourcing firm. Conclusion This study incontestably concludes that there is a significant change in the buyer/supplier relationship due to different trends in the market. The effect of globalization, integration, outsourcing, tendering framework and negotiation among others emerge as strong determinants of the buyer/supplier relationship. It is notable that with time, the relationship between the buyer and supplier will be very close due to the need for mutual benefits from the supply chain. The growing use of outsourcing however creates a rift between the buyer and supplier because suppliers have to deal with the agent as opposed to the real buyer. References Anonym (2008). Nokia Case Study: How Can Nokia Maintain Its Market Position in the Mature European Market? Munich, Germany: GRIN, Verlag. Barboza, D. (2007). Scandal and suicide in China: A dark side of toys. 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(2010) International marketing and management, University of Technology Sydney. Sydney Australia. Trimarchi,M. Liesch, P. W. & Tamaschke, R. (2010). A study of compatibility variation across Chinese buyer-seller relationships. European Journal of Marketing, 44(1/2), 87-113. Smith, G. (2009). Logistics and supply chain management: Theory and practice. New York: Lulu Publishers, Vaidya, K., Sajeev, S. M. & Callender, G. (2006). Critical factors that influence e-rpocurement implementation success in the public sector. Journal of Public Procurement, 6(1&3), 70-99. Zentes, J., Morschett, D. & Schramm-Kein, H. (2007). Strategic Retail Management: Text and International Cases. Germany: Gabler Verlag. Appendix 1: Porters’ Five Forces Source: Smart Code.com < http://software--porter-five-forces.smartcode.com/screenshot.html> Read More