Buyer/Supplier Relationships - Literature review Example

Buyer/Supplier Relationships Student’s Name: Grade Course: Tutor’s Name: Date: Introduction In the fast-changing business environment, any entrepreneur knows that his or her success depends mainly on how relevant his or her products are to the consumer market. With increased competition, the consumer has a wider choice of shopping outlets and stores than was the case 20 years ago. The situation worsened by the rapid shifts in trade, technology and consumer preferences. As such, entrepreneurs have to employ every incentive necessary in attracting and retaining customers. Often, this calls for a good relationship between the entrepreneur and his or her suppliers. For the entrepreneur to remain competitive, he or she must be able to update the features, value and functionality of his products or services to match consumer requirements. Often times, this requires the input of the suppliers who have to respond to shifting markets and consumer requirements through their delivery capabilities. In the contemporary business environment, the relationships between suppliers and buyers have been influenced not only by increased competition, but also by changes in regulations of the industry. As has been observed by Cummings (2010, p. 137) standards that suppliers are required to observe have been rising, while expectations placed on them by the buyers regarding the speed of adopting change is aggressive. Simply put, the old buyer/supplier relationship, which was mainly based on “trust, common understanding, and reputation,” is losing meaning in today’s world. In its place, contracts between the buyers and suppliers are taking centre stage. Mainly, the contracts are used to bring certainty between the two parties by ensuring that both the buyer and supplier understand each other’s interpretation of the contract terms. The need for proper understanding is especially essential in the contemporary environment because as Cummings (2010, p. 138) observes, globalisation has enabled people from different cultures and geographical regions to conduct business. Proper understanding of the contractual terms therefore ensures that there is a common interpretation of the terms stipulated in a contract regardless of the differences that may exist between the suppliers and the buyers. In a technical brief submitted by Weidemann Associates to the USAID in 2007, it is rather obvious that fostering mutual understanding between buyers and suppliers requires a clear articulation of standards and expectations from the two parties, which is ideally attainable through open communication. Contracts and their role in the buyer/supplier relationship A contract has been defined by Cummings (2010, p. 142) as a “series of commitments and promises that reflect the relationship and obligations between two or more parties”. In the past, a contract was a document (usually printed), which required the physical signatures of the involved parties as proof of their acceptance of terms stated therein. In the sophisticated business environment we live in today, the physical nature of contracts has changed tremendously. Courtesy of the electronic era, the contract does not have to be printed on paper. However, just like was the case in the past, contracts transmitted via electronic means are also meant to ensure that the contracting parties adhere to standards, structures and agreements stipulated in the contract document. According to Kumar, Hong and Haggerty (2011, p. 242), contracts in the contemporary buyer/supplier relationship set the stage for procurement and acquisition. The contracts are legally binding although there is always room for flexibility. The contracts usually contain ‘terms and conditions’ that both parties must adhere to during their working relationship. For example, the contract spells out the agreement between the two parties, terms of terminating or modifying the contract, terms of payments, delivery, risk and warranty among other issues. The contract as implied by Kramer (2003, p. 180) is subject to negotiations between the buyer and the supplier. From the negotiations, both parties agree on conditions such as the degree and extent of warranty, and the assumption of the risk should the products be destroyed during transport and delivery. During negotiations, the buyer and supplier also agree on an estimated delivery period, usually stipulating the period that the supplier should take to deliver the product when the buyer places his or her order. Setting the ‘terms of payment’ is also an essential component of the contract between the buyer and supplier. Depending on the negotiations that take place between the two parties, and the trust that may exist between them, Kramer (2003, p. 179) argues that the payment terms can be either rigid or flexible. Among the rigid terms of payment include the supplier demanding cash on delivery or the supplier demanding for advance payments on any order placed by the buyer. To encourage a good working relationship however, most buyers negotiate for flexible payment terms. Such may include paying a specific percentage on placing an order, and settling the deficit on delivery. Some suppliers also allow buyers a payment period during which they are required to settle any outstanding payments. Of special significance to the negotiation process is what Cummings (2010, p. 133) refers to as “cross-talk”. The author uses the term cross-talk to define negotiation tactics that buyers and suppliers use to ensure “the balance of interests and relative power of contributing parties is well understood”. Interestingly, cross-talk does not have to be a direct conversation between representatives of the buyer and suppliers. Rather, Cummings (2010, p. 133) argues that cross talk can occur electronically, via exchange of documents or through direct discussions. Any given party in the negotiating table in the buyer/supplier relationship chooses the type of cross-talk it engage in based on their clarity, complexity or preference by the parties involved. In an example of how cross-talk has changed from mere face-to-face or telephone conversations to virtual communication, Cummings (2010, p. 133) notes that a study in the United States revealed that 85 percent of all business-to-business negotiations take place on a virtual environment. Cummings further observes that cross-talk in the contemporary business environment allows players in the supply chain to discuss and reconcile their different positions, thereby meaning that the rigidity that was previously witnessed in buyer/supplier relationships is no longer existent Any legally binding information should be contained in the contract document signed by both parties. As Kramer (2003, p. 180) observes, pre-contract negotiations are only legally admissible if at all they all incorporated in the contract document during its drafting. Without this, the author observes, “there is a legal rule that prohibits the admission of evidence in pre-contractual negotiation” (p. 180). Arguably, this rule denies meaning to any oral and non-verifiable agreements that the buyer and supplier may have attained during the negotiation phase. To uphold the interests of both parties in a contract, Holmes (2000, cited in Kramer, 2003, p. 194) argues that a contractual agreement only expresses the wishes of the two negotiating sides. However, in the buyer/supplier relationship, there are exceptions to the negotiation process whereby one party drafts and offers a contract to the other party. In such cases, the drafter sets the conditions and standards, and the other party accepts or rejects the contract based on its ability to meet the conditions or standards set therein. Considering that the buyer/supplier relationships have become global, different challenges are evident in how contracts are interpreted by different players especially across cultures. As has been noted by DeMatteo (2002, p. 2) legal experts have admitted there is a need to internationalise legal regimes in order to come up with principles that have the similar meanings across the cultural divide. This is especially important in view of the recent outsourcing trends where domestic companies are contracting offshore companies for the provision of supplies. Examples of such efforts by the legal fraternity are the UNIDROIT Principles of Commercial Contracts, Convention for the International Sale of Goods (CISG) and the European Principles, which were formulated as a means of lessening contractual obstacles that hinder international trade (DeMatteo, 2002, p.2). Of the three documents, CIGS is of particular relevance to buyers and suppliers since it contains a commercial code that governs transactions that involve the sale of goods across international borders. Such laws should be of particular importance to suppliers because as DeMatteo (2002, p. 3) notes, courts and international arbitral panels often consider such laws as more superior to national or domestic contract laws especially when resolving cross-regional, cross-cultural or international cases. The main areas addressed by the contracts between buyers and suppliers have been identified by DeMatteo (2002, p. 4) as “formation, performance, non-performance (breach), and remedies”. In cases where any of the contracting parties fail to adhere to stated standards or terms, the contract document acts as an invaluable resource for people in the legal systems (such as judges and arbitrators) to base their judgement on. Supply Chain Management Supply Chain Management (SCM) is often confused with business logistics usually incorporating suppliers and customers or with purchasing and operations (Lambert, 2008, p. 5). A more accurate definition of SCM as given by Fawcett, Ellran and Ogden (2007, p. 8) however reveals that it refers to how people involved in the supply chain manage their relationships. According to these authors’ definition, SCM is the “design and management of seamless, value-added processes across organisational boundaries to meet the real needs of the end consumer” (p. 8). Based on this definition Lambert (2008, p. 255) argues that SCM can only be a source of competitive advantage if buyers and suppliers recognise the importance of building effective relationships, which ultimately reward the consumer. As Claro et al. (2004, p. 9) clearly note, players in the supply chain need to recognise that the products or services resulting from their relationship must meet consumer expectations and needs. Notably, the competitive business environment witnessed in the contemporary society requires industries to provide consumers with the very high quality products, fast delivery of items, and quick response to their concerns. For this to happen, discordant relationships between buyers and suppliers have to be done away with. As has been noted by Lambert (2008, p. 15) SCM is the new frontier that companies are using in order to gain a competitive edge. Notably, a good buyer/supplier relationship enables the two parties to work together toward improved quality, enhanced delivery, performance, and fast response towards the market needs. Consequently, such a relationship satisfies the consumers and reduces costs. According to Claro et al. (2004, p. 9), only the discerning players in the supply chain are prudent enough to realise that developing good relationships between the buyers and suppliers is rewarding. Notably cultivating and maintaining good relationships in the supply chain is not a simple thing (Claro et al., 2004, p.11). As such, it takes a deliberate effort from both the buyers and suppliers to establish strategic relationships that will position the firms involved in a competitive position in their chosen industry. According to Matanda and Shroeder (2002, p. 48), the development of buyer/supplier relationships through SCM, especially in the highly sophisticated and competitive environment seeks to enhance information sharing and the exchange of technical expertise between the buyers and suppliers. As a result, Matanda and Schroeder (2002, p. 49) observe that buyers and suppliers who use SCM hold the potential of enjoying benefits that accrue from vertical integration. Specifically, the potential of lowering costs and adding value to products throughout the supply chain has the potential of enhancing the competitiveness of products handled in the course of the buyer/supplier relationship. Elements of management also emerge in the procurement and acquisition processes. Hines (2004, p.76) for example notes that through proper management practices, players in the supply chain can enhance the efficiency in product delivery by removing bottlenecks that may exist in the chain, and by rewarding fast, efficient, and quality services. Through effective management processes, players in the buyer/supplier relationship are able to configure the distribution networks and strategies much more easily. Proper management processes also enable buyers and suppliers to coordinate logistical activities in a manner that lowers the logistical costs (Hines, 2004, p. 104). Proper management of logistic activities allows the supplier to incur fewer costs, benefits that he or she passes to the buyer. The buyer on the other hand passes the same benefits to the end consumer through low product prices. The development of buyer/supplier relationships in the contemporary sophisticated and highly competitive business environment has also enhanced information sharing. Notably, buyers and suppliers realise that sharing information regarding demand signals, inventory, potential future collaboration, and transportation among other things can increase the competitiveness of their supply chain. Lambert (2008, p .56) specifically identifies various components that managerial attention developed between the buyer and supplier focuses on. The components include planning and control; work structure; organisation structure, management methods, product flow arrangements, information flow arrangements, risk and reward arrangements and power and leadership arrangements. The need to have synergy between the identified components is identified as an essential part of ensuring that the players in the supply chain attain the right synergy necessary to realize joint achievement. Relationships have a special focus on the social aspect that binds the buyer and supplier together. In view of changes brought about by global competition, short life cycles as seen in different products, price fluctuations, specialisation, off shoring and unstable oil prices, it is inevitable that SCM will change in order to cope with the complexities that arise with the changing times. Notably, the different players in the SCM will need to re-think how they manage individual functions such as the integration of activities and processes into the supply chain. What exactly does the buyer/supplier relationship look like? One may ask. Hines (2004, p. 104) describes the relationship as either adversarial or collaborative. The author observes that adversarial relationships are characterised by elements of arms-length deliberations, contractual negotiations, and transactional habits. When initiated by the buyer, adversarial relationships seek to create a fair competing ground for the different suppliers. As a result, the buyer only awards short-term contracts to any supplier who wins a bid to bring in supplies. According to Humphreys et al. (2001), buyers also initiate adversarial relationships in order to attain the least cost in supplies. This happens as the suppliers try to outdo each other in order to catch the buyer’s attention. Collaborative relationships are closer, mutual and relational (Humphreys et al., 2001). In such buyer/supplier relationships, it is obvious that the parties concerned strive to create long-term associations with each other. As Humphreys and others (2001) observe, buyers who initiate collaborative relationships do so with the intention of forming affiliations or subsidiaries with suppliers. Commenting on the results of collaborative relationships, Petison and Johri (2007, p. 3) note that such association prepares a fertile ground for flexibility, joint action, trust, and commitment among the stakeholders. As a result, the buyers and suppliers communicate more effectively, and this inevitably improves the quality and reliability of supplies delivery. Notably, the buyer/supplier relationship is not always rosy. According to Choi and Wu (2009) for example, the fact that there is an increased number of suppliers seeking to serve buyers means that the buyers have an upper hand in the negotiations. Specifically, the buyer has a purchasing advantage that gives him the powers to demand price reductions. If the reductions result in unfair compensation to the supplier, he or she may reject the buyer’s demands. However, in cases where the supplier feels that rejecting the offer would cause losses, he or she may opt to sell the products to the buyer, albeit with reservations. The situation can worsen to the point of animosity if the communication between the buyer and supplier is not open enough to necessitate dialogue and conflict resolution. In the fast changing and competitive business environment, supply chains are always on the lookout for effective ways to create lasting and effective relationships. In an example given by Claro et al. (2004, p. 9), buyers and suppliers are creating working networks that resemble semi- trade agreements. In the agreements, the two parties agree on issues such us profit sharing, mutual exchange of technology and property rights among other things. Not all buyer/supplier relationships are adversarial or collaborative. According to Szwejczewski, Lemke and Goffin (2005), there are also captive relationships, where one party has made a higher investment in the supply chain. In such cases, the party with the higher investment is more domineering. On the reverse, the party with the lesser investment realises that the party with a higher investment stands an increased risk of loss if the relationship between them fails. Drake and Schlachter (2008) also observe that there exists dictatorial buyer/supplier relationships, especially in cases where the supplier enjoys supply chain control due to market dominance, size and attained strategic importance in the industry. This underlines the importance of a detailed contract in order to guard against any party jeopardising their relationship. In view of recent changes in the business environment, Petison and Johri (2007, p. 4) notes that captive and dictatorial buyer/supplier relationships are not popular in the contemporary world. With both buyers and suppliers realising that cooperation and inter-dependence makes their relationship more competitive, more are willing to drop off the confrontation relationships that jeopardise a supply chain’s success. As such, Petison and Johri (2007, p. 4) observe that more buyers and suppliers are forming partnerships, extended enterprises and well as corporative relationships in order to form a more accommodating supply chain assemblage. Gauging by the details that emerge in literature, the assertion by Claro and others (2004, p. 20) seems true. In a study conducted by the authors, they found out that the buyer/supplier relationship is not only based on transactions and economic logic, but on social structures that cement the buyer/supplier relationships also. Why is the development of buyer/supplier relationships such an explored subject in literature? Well, a good guess would be that the interest of scholars in the subject is a reflection that such relations have significant effect on the contemporary business environment. As Burnett (2004, p.28) notes, the buyer/supplier relationship has moved from the position where each party was trying to earn as much as possible from the relationship without considering the welfare of the other party, to a position where mutual advantage born from co-operation is desirable. Although one would assume that both buyers and suppliers would take equal initiative in developing desirable relationships, Burnett (2004, p. 28) argues that the greater prerogative lies with the buyer. The author justifies his assertion by stating that contemporary companies stand to gain more benefits from good buyer/supplier relationships. Some of the identified benefits include “shared product development costs, reduced cycle time and improved delivery performance” (Burnett, 2004, p. 28). Having suggested that the greater responsibility of enhancing buyer/supplier relationships lies with the buyers, Burnett gives a few pointers on how companies can improve their relationships with suppliers. The author suggests that companies should invest in suppliers’ operations; advise suppliers on how to improve performance; award increased business to suppliers as an incentive for improved performance; give regular feedback to the suppliers; implement information sharing programmes; and assist suppliers to develop their staff capacity among other relationship enhancing activities. Conclusion Supply chains are going to be part of the business environment for as long as people continue trading. With the world changing fast, buyers and suppliers realise that there is need to enhance their operations in order to remain competitive. This means that before entering into any agreement, the buyers and suppliers now have to examine their mutual interests, issues and challenges. Only after ensuring that they can work together in order to attain mutual benefits can they agree to work together. Regardless of the relationship building efforts, it is futile to assume that the typical traditional buyer/supplier relationship will cease from being all at once. This then raises the need for legal intervention whenever disputes between the two parties occur. As discussed herein, contracts between the buyer and supplier contain terms, which gives legality to agreements between the two parties. However, the contracts do not make the buyer/supplier relationships less meaningful. If the essential contract theory is anything to go by, contracts should be seen as terms governing relationships between parties rather than discreet events that are rigid and demeaning to one party. References Burnett, K 2004, ‘Supplier relations, Business Briefing: Global Purchasing & Supply Chain Strategies,’ pp.28-30. Choi, T.Y. and Wu, Z. 2009. ‘Triads in supply networks: Theorizing buyer-supplier relationships,’ Journal of Supply Chain Management, vol. 45, no. 1, p. 8. Claro, D.P., Zylbersztajn, D. & Omta, O.S.W.F 2004, ‘How to manage a long-term buyer-supplier relationship successfully? The impact of network information on long-term buyer-supplier relationships in the Dutch potted plant and flower industry,’ Journal on Chain and network science, vol. 4, no. 1, pp. 7-24. Cummings, T 2010, ‘Best practices in commercial contracting,’ Stockholm Institute for Scandianvian Law, 1957-2010132, pp.132-146. DeMatteo, L.A 2002, ‘Contract Talk –Reviewing the historical and practical significance of the principles of European contract law,’ Harvard International Law Journal, vol.43 (Summer), pp. 569-581. Drake, M.J. and Schlachter, J.T. 2008, ‘A Virtue-Ethics Analysis of Supply Chain Collaboration’, Journal of Business Ethics, vol. 82, no. 4, pp. 851–864. Fawcett, S.E., Ellram, L.M. & Ogden, J.A. 2007, Supply Chain Management: From Vision to Implementation, New Jersey: Pearson Prentice Hall. Hines, T 2004, Supply chain strategies: customer –driven and customer-focused, Butterworth-Heinemann, London. Humphreys, P.K., Shiu, W.K. & Chan, F.T.S. 2001 ‘Collaborative buyer–supplier relationships in Hong Kong manufacturing firms’, Supply Chain Management, vol. 6, no. 4, pp. 152-62. Kramer, A 2003, Common sense principles of contract interpretation (and how we’ve been using them all along), Oxford Journal of Legal Studies, vol. 23, No. 2, pp. 173-196. Kumar, S., Hong, Q. S., &Haggerty, L.N 2011, ‘A global supplier selection process for food packaging,’ Journal of Manufacturing Technology Management, vol. 22, no. 2, pp.241-260. Lambert, D.M 2008, Supply chain management: processes, partnerships, performance, Supply Chain Management Institute, Jacksonville, FL. Matanda, M. & Schroder, B 2002, ‘Environmental factors, supply chain capabilities and business performance in horticultural marketing channels,’ Journal of Chain and Network Science, vol. 2, no. 1, pp. 47-60. Petison, P. & Johri, L 2007, ‘Driving harmony: philosophy of Toyota Motor Thailand,’ Strategic Direction, vol. 22, no. 11, pp. 3-5. Szwejczewski, M., Lemke, F. & Goffin, K. 2005. ‘Manufacturer-supplier relationships: an empirical study of German manufacturing companies’, International Journal of Operations & Production Management, 25(9): 875-897. Read More