Managing Buyer /Supplier Relationships - Example

Commercial Management Name Course Name and Code Instructor’s Name Date Table of Contents Table of Contents 2 Introduction 3 Procurement and acquisition management processes 5 Procurement planning 5 Solicitation planning 7 Solicitation 8 Source Selection 8 Contract administration 9 Contract close-out 10 Materials and resources management and strategy 11 Qualitative and quantitative data for procurement solutions 13 Contractual and legal issues with regard to customer/supplier relationship 13 Principles of contractual negotiations 14 Deals make contracts but contracts do not make deals 15 Good negotiations is knowing what you want and finding out what the other side want 15 Negotiations are won and lost before the parties sit down 15 Less negotiation can be more 16 Negotiation is reaching resolve and controlling the unresolved. 16 Believe in contracts as both a legal and management resource. 16 Conclusion 16 Bibliography 17 Introduction The description of non technical business disciplines within any business organization mainly with regard to administration of revenues and expenses in order to generate a financial return is termed as commercial management (Harold, 2009). Financial management is usually applied to both the transactional and policy levels; for instance, commercial policies that entails the rules and practices defining how the firm’s businesses will be conducted including the standard terms under which external relations ship will be managed. These policies are mainly reflected in the terms of any contract and procurement activities that the organization engages with. In the same line of thinking, at a transactional level, commercial management is employed through particularly the oversight trading relationships like the customer/supplier relationships to make sure that they are in line with business goals or policies while understanding or managing the financial risk and risk implications with regard to any variations (Kumar, 2005). In to days’ business environment, firms are persistently seeking for new methods and techniques to enhance their competitive advantage in the marketplace. Unlike the previous days, purchasing has become a strategic function and a fundamental factor in organization’s competitive positioning. In this regard, effective relationship between buyers and suppliers is shaping rather providing businesses with next generation competitive advantage; supplier relationships are continuously becoming more critical for now and in the future (Sheth & Arun, 2010). Many analysts have established that although purchasing has a strategic importance within the business organization, good and working relationships between customers and suppliers is vital; given this importance, firms are called upon to enhance supplier relationships (Kumar, 2005). Business professionals and researchers have established and suggested that next generational competitive advantage for business firms will be based on collaborative relationships with their suppliers (Wei, 2004). To justify this, they alluded that; marketers in particular, are fostering this change given the fact that firms are currently identifying and catering to the specific needs of specific customers hence good relationship with suppliers will enable them receive better services thus becoming more efficient in procurement. Further, business organizations have discovered that supplier relationships will automatically improve their effectiveness. Consequently, there are relevant and enabling technologies that have and still are facilitating firms to identify and select best customers and suppliers. Lastly, stiff competition in the marketplace and growth of alliances are forcing firms to create enhanced supplier relationships to maintain their competitive edge (Wei, 2004). With regard to the above commercial management description and buyer supplier relationships, and in order to understand the two in a broad spectrum, this paper will discuss procurement and acquisition management processes, demonstrate both practical and theoretical understanding of materials and resource management and strategy (Harold, 2009). Additionally, the paper will describe quantitative and qualitative data essential for devising procurement solutions. The contractual and legal issues regarding customer supplier relationship will also be discussed. Further, the principles of contractual negotiations will be described. Procurement and acquisition management processes This refers to the process required to obtain or acquire goods and services from outside the performing organization rather from outside firms or companies (Project Management Institute, 2008). Procurement and acquisition management entails the following processes: Procurement Planning, Solicitation Planning, Solicitation, Source Selection, Contract administration, and Contract Close-out. It is vital to note that these processes interact with each other as well as in other knowledge areas. In this section, these processes will be discussed accordingly. Procurement planning This refers to the process of identifying which business needs can be best met or achieved through procuring products or services outside the business organization. It entails considerations of whether to procure, how to procure, what to procure, how much to procure, and when to procure it. When the project acquires commodities outside the performing organization then the processes from solicitation planning through contract close out would be performed ones for each product or service item. In this regard, the project or business management team should seek expertise and support in contracting and procurement disciplines when required. It is vital for procurement planning to include the consideration of potential subcontracts, particularly in instances where the buyer wishes to influence or control over subcontracting decisions (Project Management Institute, 2008). The procurement planning has inputs, tools and techniques, and outputs. The inputs include: scope statement, which describes the current project boundaries including vital information about the project needs and strategies to be considered during procurement planning. Product description; this gives significant information about any technical issues and/or concerns that should be considered during procurement process. It is usually more detailed than the scope statement; it explains what the product (Project Management Institute, 2008). Procurement resources; in the event that the performing organization lacking a formal contracting group, then the project team will have to provide both the resources and the expertise to support procurement activities Market conditions: during procurement planning, products and services available on the market must be considered , from whom, and under what terms and conditions. Other output planning; in the event that other output planning are available, it is vital that they be considered; these may include preliminary costs and schedule estimates, quality management plans, cash flow projections, the work breakdown structure, identified risks, and planned staffing (David, 2007). Constraints for instance factors that limit the buyer’s option must also be considered during the procurement planning. Lastly, assumptions that are mainly factors that are considered true, real, or certain during the planning process (Wasti & Jeffrey, 2008). Tools and techniques for procurement planning includes: make-or-buy analysis; this is a general or overall management technique, which is used to determine whether a specific product can be produced cost-effectively by the performing organization. This analysis must reflect the position of the performing organization together with the immediate needs of the project. Expert judgment; this is specifically essential in assessing inputs to the process, experts may include consultants, professional and technical associations, industry groups, or other units within the performing organization. Contract type selection; there are different types of contracts, which are appropriate to different types of purchases. There are three types of contract categories; fixed price or lump sum contracts which entails a fixed or constant total price for a well-defined product. Cost reimbursable contracts; this involved payment to the seller for its actual costs. Unit price Contracts; here the seller is paid a preset amount per unit of service, and the total value of the contract is a function of the quantities needed to complete the work (Kumar, 2005). Outputs from procurement planning includes procurement management plan, which describes how the remaining procurement processes will be managed. The procurement management plan may be formal or informal, vastly detailed or framed with regard to the project needs. Statements of work (SOW); they provide sufficient description of the procurement item to allow the prospective suppliers or sellers to determine whether they will be able to supply the item. Solicitation planning This is the process of preparing documents required to support solicitation. The inputs to solicitation planning are procurement management plan, statements of work, and other planning outputs. The tools and Techniques for solicitation planning include standard forms which may comprise of standard contracts, standard description of procurement items, or organization of all or part of the needed bid documents. Expert judgment; this is specifically essential in assessing inputs to the process (Project Management Institute, 2008). Outputs from solicitation planning include: procurement documents; these are documents used to solicit proposals from prospective suppliers (Ellen et al, 2003). These documents must also be structured in a manner that facilitate accurate and complete responses from prospective suppliers; for instance they should include statements of work, an explanation of the desired for of response with other contractual provisions like a copy of model contract and non-disclosure provisions. The procurement statements must be rigorous thus ensuring consistency, comparable responses that are flexible to allow consideration of seller suggestions for improved ways to satisfy the requirements. Secondly, Evaluation criteria; this is useful especially in rating proposals. They may be objective or subjective. The evaluation criteria is sometimes included as part of the procurement documents (Project Management Institute, 2008). Lastly, statement of work updates; this entails modifications to one or more statement of work identified during solicitation planning. Solicitation This refers to acquiring information particularly with regard to bids and proposals from prospective suppliers especially on how the project needs can be accomplished. The inputs to solicitation are procurement documents and qualified seller lists. Qualified seller lists provide general information regarding relevant experiences together with other characteristics of prospective sellers. Tools and techniques for solicitation include bidder conferences sometimes called contractor/vendor/pre-bid conferences, which are meetings with prospective suppliers prior to the preparation of a proposal (Paul & Jeannette, 2010). These meetings allow prospective suppliers to have a clear rather common understanding of the procurement. Advertising, potential supplier lists can be expanded through advertisement through different media. The main output from solicitation are proposals, which are mainly supplier prepared documents, describing the supplier’s ability and willingness to supply the requested product. Source Selection A process involves the receipt of bids or proposals together with the application of the evaluation criteria to choose the supplier. Price in most cases may be the base determinant particularly for an off-the-shelf item. Proposals are usually categorized into technical or commercial classes where each will be evaluated independently. The inputs to source selection include: proposals, evaluation criteria, and organizational policies. The organizational policies in this case are any or all firms involved in the project may have formal or informal policies that might affect the evaluation of proposals (Paul & Jeannette, 2010). Tools and techniques for source selection are contract negotiations; this entails clarification and mutual understanding on the structure and requirements of the contract prior contract signing. Weighting system; this is the procedure for quantifying qualitative data with a primary aim of minimizing the effects of personal prejudice on source selection, this may include assigning numerical weight to every evaluation criteria, rating the prospective suppliers on each criterion, multiplying the weight by the rating, and totalling the resultant products to come up with the overall score (Sandip, 2008). Screening system involves establishing the base requirement for one or more of the evaluation criteria. Independent estimates; the procuring firm may prepare its own estimates as a check on proposed pricing. Output from source selection is the contract, which is a mutually binding agreement that obligates the supplier to supply the specified items while also obligating the buyer to pay for them. Contract administration This is the process ensuring that the supplier’s performance is in line with and meets contractual requirements. The legal nature regarding contractual relationships makes it imperative that project team be consistently aware of all the legal implications of actions taken when administering the contract (Kim, 2011). Contract administration involves application of relevant project management processes particularly to the contractual relationships and integration of outputs from these processes to entire project management. The inputs to contract administration are contracts, work results, change requests, and seller invoices. Work results in this case are which deliverables have been delivered and which ones are remaining and to what extent are quality standards being met, and costs that have been incurred. Change requests include the modifications to the terms of the contract, or to the product or service specifications. Seller invoices must be submitted form time to time requesting for payment for work performed. Tools and techniques for contract administration include; contract change control system that defines the process by which the contract may be modified. Performance reporting; this provides the management with information regarding how effective the supplier is accomplishing his contractual objectives (Kim, 2011). Payment system; any payments to the supplier are specifically handled by accounts payable system of the performing organization. Outputs from contract administration are: correspondence where terms and conditions requiring written documentations comprising of buyer/supplier communication like warnings of satisfactory performance and contract changes or clarifications. Contract changes; this entails changes approved or disqualified that are fed back through project planning and project procurement processes. Payment requests; this might be through invoices (Project Management Institute, 2008). Contract close-out This is the same as administrative closure, which entails product verification and updating of records in order to reflect the ultimate results and archiving of the information for future use (Joel et al, 2008). In most cases, the contract terms usually prescribe specific criteria for contract close-out. The input to contract close-out is contract documentation, that is, the contract itself together with supporting schedules, requests and approved contract modifications, seller-developed technical documentation, seller performance reports, financial documents including invoices and payment records, and outcomes of contract related modifications (Napolitano, 2004). Tools and techniques for contract close-out are usually procurement audits, which are structure reviews of the procurement process from procurement planning to contract administration. These audits identify the successes and failures that warrant transfer to other procurement items. Outputs from the contract close-out are mainly contract files, which are a complete set of indexed records (Project Management Institute, 2008). Formal acceptance and closure this is where the person or organization responsible for contract administration provides the supplier with a formal written notice that the contract has been terminated. Materials and resources management and strategy Materials or inventory for many business organizations are some of the tangible and visible aspects of doing business. The management of raw materials, goods in process and finished products defines the various forms of inventory and each of these stages represents the money locked up until the inventory leaves the firm as purchased products (Nezih & Lewis, 2011). Successful material and resource management entails balancing the benefits of inventory and its costs (John, 2000). One of the main significant aspects of inventory management is to have the items in stock as the moment when they are needed. For instance, this involves buying materials early enough thus ensuring delivery at appropriate time (Max, 2011). This requires advance planning thereby determining the inventory needs for specific time span and then making commitment without procrastination. Planning is crucial to any business organization as it allows them to offer new products for sale before the actual date for the start of the new season (Kim, 2011). Maintaining in-stock position of wanted materials and disposing of the unwanted ones is essential and necessary in coming up with proper controls over inventory on order and inventory in stock (John, 2000). There are several ways through which business firms can control their inventory including visual control, tickler control, click sheet control and stub control. It has been identified that as the business expands its technical form of inventory control becomes more complex and sophisticated. Currently, various computer application systems for inventory control have been employed (Floyd et al, 2007). These systems have been found to enhance the organization’s accounting and billing procedures. For example, the point of sale terminals and off-line point of sale systems are of much help to inventory managers particularly for small businesses. As business management continues to evolve, so is the inventory management. For instance, in the recent years Material Requirement Planning (MRP) and Just-In-Time inventory management techniques have extensively improved material management particularly in the manufacturing industry (Horst, 2006) Material Requirement Planning is primarily an information system where sales are converted directly into loads on the facility by sub-unit and time period. In essence, materials are scheduled closely thus reducing inventories while also reducing delivery times and making them more predictable. MRP techniques are more practical in small business organizations (Floyd et al, 2007). Just-In-Time inventory management approach is geared towards eliminating inventories rather than optimizing them. Under this system the raw materials and work-in-progress falls to that needed in a single day (Floyd et al, 2007). To achieve this, set-up times and lead times are significantly reduced in that small quantities or lots may be ordered. Further, suppliers under this system are obliged to make several deliveries in a day or move closer to the manufacturing plant to support the system. Qualitative and quantitative data for procurement solutions These are methods of acquiring information from buyers and suppliers in order to make informed decisions with regard to procurement. Data gathering in both cases involves observation of their organization, culture, and activities. They also entail in-depth study of activities and interactions in context, in-depth study of formal activities that you engage them in, written traces activities, extraction of information from them through interviews, and participatory observation. The qualitative data allows for deep understanding of suppliers or buyers and these may include: open-ended questions and written comments on questionnaires, testimonials, individual interviews, discussion groups or focus group interviews, logs, journals and diaries, observations, documents, reports and news articles, stories and case studies. These data sources are essential in making procurement decisions as they provide qualitative information with regard to suppliers and buyers. Quantitative data is that information that can be counted or expressed numerically; it is usually collected in experiments, manipulated and statistically analysed. With regard to this case, quantitative data that is helpful in making procurement decision include, the number of suppliers available, the rate of supplies, the quantity of each supply, and the consistency of supply. Contractual and legal issues with regard to customer/supplier relationship It has been established that no contract can cover all issues and disputes are likely to arise that were initially not anticipated. Traditionally, vendor-supplier associations were handled by a contract for service approach (Don Murray & Associates, 2007). Currently and probably in future business work doers not lend it to legal contracts as it is difficult to determine beforehand what the client will receive. Businesses are partnering between supplier vendors and client-customers. With regard to this, the following guidelines will ensure that your contractual relationships thrive (Don Murray & Associates, 2007). Begin with a partnering workshop; for instance, contract writers always think about writing the contract itself while not having time for either parties to build trust, confidence and mutual respect. Partnering workshops establishes goodwill while creating an understanding and trust. Create a parallel structure: this allow comparisons and establishes a foundation for equity from which parties can build trust through collaboration. Never elevate problems beyond the VP level; this usually unwritten rule people especially in procurement department never miss. Everyone gets to win; in this regard, parties explore alternatives after which they set parameters within which each part must operate. View issues as currency: this is essential in alleviating the ill will, blame and projection that accompany most contractual relationships (Don Murray & Associates, 2007). Beware of perception filters; people do not perceive reality but rather perceive their version of reality. Principles of contractual negotiations According to James River’s negotiating approach, there are various principles that are vital in making collaborative negotiations. These principles are as follows: Deals make contracts but contracts do not make deals In this case, business practitioners can put deals together. However, business people always try to avoid contract negotiations because they view contracts as legal documents, which might cause misunderstanding and animosity in business relationships. Following this, contract negotiations are given to lawyers or avoided all together. It was therefore established that contracts are wholly driven by deals making (James River's Consulting, 2009). Good negotiations is knowing what you want and finding out what the other side want On either side of the negotiating table negotiators only broker a contract when they reach an understanding; for instance arriving at a set of terms that elucidate business values without creating mistrust. Understanding the business opportunity under consideration, knowing what the business organizations’ interests in the opportunity really are, what risks the opportunity presents, and how this information is integrated into a negotiated agreement (James River's Consulting, 2009). Negotiations are won and lost before the parties sit down The success of the negotiation is determined even before the parties come at the negotiating table and not by any kinds of tricks and cleverness at the table. River’s also established that planning and frameworks are keys to successful negotiations. In essence, planning involves understanding the purposes for the transaction, identifying critical terms, formulating positions on terms while articulating the reasons behind them, identifying risks including their likelihood and treatment, and creating scenarios for making value trades among terms with other parties. On the other hand, frameworks are the formal process for the negotiating of terms that is specifically used as a tool for planning and at the negotiating table (James River's Consulting, 2009). Less negotiation can be more Declining to negotiate is dissimilar to employing good strategies to shape negotiation. A negotiating strategy is important in controlling transaction costs, introducing negotiating competency into business dealings, managing bargaining power, and expediting negotiations. Negotiation strategies involve using sourcing processes, standards contracts and the contract life cycle. Negotiation is reaching resolve and controlling the unresolved. Scholars in contract law regard contract negotiations as a process of presentation; for instance presenting what the parties will undertake in future if they are negotiating today. Parties engage in presentation when they negotiate contracts that define and that attempt to address every future outcome (James River's Consulting, 2009). Believe in contracts as both a legal and management resource. In current modern business, firms often negotiate contracts knowing that the terms will never be enforced, may be by doing so it would jeopardize business relationships at large or anger the executive management, or is expensive to take to arbitration or court. With regard, parties include language describing the adherence to benchmarks, industry certification, and financial reporting without an intention to follow up as it might be expensive to the relationship. Finally, if the parties negotiate contracts thinking that the terms are with no consequence, contracts loose their value and power as a management resource (James River's Consulting, 2009). Conclusion In a nutshell, from the discussion above managing buyer /supplier relationships is increasing becoming the trend for business firms that want to have a competitive edge in the marketplace. For instance, many business experts have pointed out that the next generational competitive advantage for business firms will be based on collaborative relationships with their suppliers. Bibliography Don Murray & Associates. 2007. Strategic Vendor Partnerships: Keys to Managing Customer-Supplier Relationships. Retrieved on 6th/02/12, from: http://www.teambased.com/images/pdf/Strategic%20Vendor%20Partnerships.pdf Ellen, TP., and Marcus, R. 2003. Analyzing Qualitative Data. Retrieved on 6th/02/12, from; http://learningstore.uwex.edu/assets/pdfs/g3658-12.pdf Floyd D H, Frank C. B. and Edward W. D. 2007. Inventory management. Available at http://archive.sba.gov/idc/groups/public/documents/sba_homepage/pub_mp22.pdf Harold, K. 2009. Project Management: A Systems Approach to Planning, Scheduling, and Controlling. New York: Willey Publishing Horst, T. 2006. Inventory management in supply networks: problems, models, solutions. New York: Books on Demand GmbH James River's Consulting. 2009. Contracts Negotiation. Retrieved on 6th/02/12, from; http://www.jamesriverllc.com/contracts-negotiation.html Joel D. W., Tan KC, and Keong G. L. 2008. Principles of Supply Chain Management: A Balanced Approach. London: Springer John W. T. 2000. Inventory management: principles, concepts and techniques. New York: Springer Kim H. 2011. PMP Project Management Professional Exam Study. New York: Guide Willey Publishing Paul C. D, Jeannette CB. 2010. The AMA Handbook of Project Management. New York: AMACOM Div American Mgmt Assn. Kumar, N. 2005. The power of Trust in Manufacturer-Retailer Relationships. Chicago: Harvard Business Review Max M. 2011. Essentials of Inventory Management. New York: AMACOM Div American Mgmt Assn David V. 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