Buyer-Supplier Power in the Management of the Procurement Process

Introduction 

Porter’s Five Force model of analyzing an organization’s competitive environment highlights the power that both suppliers and buyers have in the same. Supplier power is defined as the pressure that suppliers can put on a business through the reduction of product availability, increased prices and lowering product quality. Thus, the said bargaining power of suppliers is one of the forces that shape competition in various industries as it affects the buyer’s competitive environment and their ability to attain their profitability goals. In contrast, buyer power refers to the pressure that buyers can exert on production institutions to elicit the manufacture of higher quality products, lower prices and enhanced consumer services. Like the bargaining power of suppliers, buyer power defines competition in industries, with the buyer possessing the ability to affect the profitability of the supplier (Dälken 2014, p. 3).

The mentioned power dynamic that exists between buyers and suppliers defines the supply chain. Resultantly, the need to manage the supply chain within organizations has increased as the latter is viewed as a strategic measure to enhance the effectiveness of organizations seeking to improve their capability to realize pre-determined goals like improving customer care, competitive ability and profitability. Therefore, the performance of the supply chain has become an area that has elicited attention from researchers as organizations in various industries seek to find new tools that can facilitate the enhancement of performance in the turbulent business market. Establishing effective measures to manage buyer-supplier power is crucial to the efficient execution of business activities and the realization of corporate goals (Lee & Johnsen 2012, p. 692-693).

Needs Assessment

Making a successful sale requires that a buyer and a supplier be present. Hence, ‘sale’ becomes a social situation because it results from the dyadic interaction of the supplier and the prospective buyer. So, the effectiveness of sales relies on the interaction of buyers and suppliers, making the behavior of the salesperson, their resources, the customer’s purchasing task and the buyer-supplier relationship crucial elements of the sale. Moreover, the buyer-supplier relationship plays the most vital role as the dyadic interaction is influenced by a variety of factors including conflict levels and relative power which affect not only the framework of the sale process but also the adaptive behavior acquired by both parties involved (Lozada & Mintu 2015, p. 51). Exchanges between suppliers and buyers are characterized by elements including costs of the supplier and the value of goods or services, and the gap between them becomes the surplus value.

Moreover, both buyers and suppliers must collaborate to add value. Regardless, the competition between both entities remains intact based on the division of total value. However, the surplus value can increase through the exploitation of the collaboration between a buyer and a supplier.

Figure 2, Hypothetical example of the value competition within dyadic exchange (Lonsdale 2017).

Power and Surplus Value Division 

The division of surplus value relies on the power relations that exist between buyers and suppliers. The said power dynamics are grouped as buyer or supplier dominance, buyer-supplier independence, and buyer-supplier interdependence. The dominance of a buyer dictates that the purchaser’s perspective will affect the nature of the buyer-supplier relationship in terms of the price paid for the product offered, the level of service provided by a supplier and the ability of an organization to develop its supply network. The converse applies in the case of supplier dominance, with the supplier dictating the flow of the buyer-supplier relationship. On the other hand, buyer-supplier independence results from low buyer and supplier dependency, whereas buyer-supplier interdependence is a result of high dependency rates from both buyers and suppliers (Boehme et al. 2008, p. 125).

Figure 3, Power and dependency dyadic relationship model (Boehme et al. 2008, p. 125)

Thus, an organization must create appropriate purchasing relationships that are based on its power and dependency needs. For example, if a buying organization is in a buyer dominance situation, it dictates most of the product marketability and determines prices and the quality of trade-offs. However, independence in the supplier and buyer relationships results in minimal managerial complications owing to their diminished strategic importance. So, if an organization deems products as non-critical to its operations, the number of suppliers of the said product, and its duplicates should be reduced through both purchase consolidation and standardization. Nonetheless, the independence of the buyer and supplier relations as wells as buyer dominance relationships strictly depend on price because of the implied non-critical nature of products. Moreover, interdependence relationships focus on the achievement of simultaneous objectives that seek to elicit continuous improvement, which result in the growth of market share, and better profits. Regardless, the mentioned relationships are resource intensive and cannot apply for every relationship or organization. Finally, in the case of supplier dominance, the situational effort is crucial to the modification of the association, therefore, requiring buying organizations to have proactive employees and leaders with excellent management skills (Boehme et al. 2008, p. 125-126).

Figure 4, Characteristics of the four dyadic relationship types (Boehme et al. 2008, p. 126).

A case study of Toyota Company indicates, that often the relationship between buyer organizations and suppliers may be misunderstood. The researchers suggest that they assumed that the relationship between Toyota and its suppliers was collaborative, otherwise termed as interdependent, meaning that there were no adversarial interactions between the two entities. On further investigation, the researchers discovered that despite the engagement of Toyota and its suppliers in many joint ventures, Toyota was obtaining most of the benefits derived from the said projects. The researchers observed that Toyota engaged suppliers to boost surplus value, but the organization was also appropriating most of it. Toyota’s ability to execute its activities in the said manner results from its dominance over the majority of its suppliers. The said case depicts that in the current market it is possible for buying organizations to have adversarial relations that can also be exploited to elicit collaborative value (Lonsdale, Cox & Sanderson 2019, p. 2).

Supplier Behavior 

The needs assessment process must also be characterized by the analysis of the behavior of suppliers within the market. Supplier-buyer negotiations are relevant and crucial parts of managerial tasks in buying organizations. The negotiation process is essential to both the buyer and the seller, and it is a critical tool for generating sustainable competitive advantage on both sides. Thus, when the buyer adopts a strategic approach towards purchasing, sellers should equally be in a position to take a strategic stance to facilitate the sale. Resultantly, effective buyer-seller negotiations are deemed to potentially impact the performance and relationship success, thereof, positively (Saorín-Iborra & Cubillo 2019, 54). Among the strategic approaches that suppliers can take in the negotiation process is servitization. Servitization allows supplier organizations to offer their products or services in packages that take over customer tasks like is the case with Rolls Royce. This organization manufactures engines and has also incorporated a service package that allows their customers to pay on an hourly basis depending on the duration the engine is in flight. Similar servitization models also characterize organizations like Caterpillar, Alstom and Xerox (Emeraldgrouppublishing.com 2019, para 5-7, 9).

Sourcing and Contract Management

When a buying organization needs to acquire suppliers, it solicits them through the procurement process. Procurement within buying organizations does not only involve assigned and specialized departments, but also the internal clients, thereof. The nature of the procurement process in a buying organization depends on the size of the organization, and its dependence on e-auction or re-buys. Hence, sourcing and contract management depends on organization buying behaviors as well as supplier selection and contracting processes.

Organization Buying Behaviors (OBB) 

The organization buying behavior (OBB) defines an organization’s decision-making process in cases of establishing the need to purchase services or products, the search for potential suppliers as well as the management of the order and performance. The purchase process in organizations involves various individuals who play different roles including influencer, user, gatekeeper, decision maker and buyer. Additionally, organizational buying differs from individual purchases because corporate buying involves more than one person and the organizational purchase is subject to both rational and emotional influencers of the buying decision. Moreover, corporate acquisitions are characterized by complex, unique, and time-consuming purchase processes. OBB defines the crucial components of the buying process and is subject to individual, environmental and organizational influencers (Liying 2013, p. 7-19).

The segmentation of the vendor base also characterizes OBB. The most appropriate matrix to effectively segment spending within a buying organization is the Kraljic Matrix, which proposes that supply items must be mapped based profitability and risk. Risk refers to the possibility of an unexpected event disrupting supply chain operations. For example, in an automotive company, crucial spend areas are tire suppliers because the disruption of the said supply would lead to critical problems. Profitability, on the other hand, establishes the impact that the supply item has on the bottom line. For instance, in the case of Apple, the ability of Foxconn to manufacture the required product scale with precision massively determines the organization’s profits. The dynamic between profitability and risks expressed in the Kraljic Matrix allows a buying organization to define its leverage, non-critical, bottleneck and strategic items (Padhi, Wagner & Aggarwal 2012, p. 2-4).

Figure 5, Kraljic Matrix (Webb 2017)

Supplier Selection 

The selection of suppliers by a buying organization is crucial because it establishes the progress of the supply chain and the organization’s competitive advantage. Owing to the importance of the said process, researchers propose the use of a variety selection criteria based on aspects like quality, price, technology, management and flexibility among others. Moreover, if an organization must use an overseas supplier, it is proposed that they also consider factors like trade restrictions and communication barriers during the selection process. Furthermore, in the case of business to business purchases, the selection of suppliers must rely upon professionalism to inform the said decision, a factor that makes it more rational compared to consumer purchases. Regardless, the latter does not mean that business to business purchase is entirely reasonable because the decision makers involved are human and their irrational and emotional input may contribute to the decision-making process (Chen & Chen 2017, p. 3).

Additionally, the process of choosing suppliers also encompasses on and offline supplier selection and negotiation. The exponential growth of information technology has led to the subsequent rise in the number of consumers that source for their products and services of choice on online platforms. The e-commerce model described above is called online to offline (O2O) e-commerce and its adoption across the board has resulted in heightened managerial and academic interests in the same. The result is the adoption of the vertical O2O e-commerce model, which is also deemed efficient as it comprises of an order allocation platform that accounts for the income that is allocated to suppliers. Nonetheless, the application of the O2O model in supplier selection within buying organizations is also accompanied by advantages like the reduction of the cost of manufacturing, lower transport costs, minimized delays in product delivery and the maximization of the process of evaluating supplier credit. Since the successful execution of the requirements of the O2O model results in a complex process, researchers have proposed the use of an algorithm that combines heuristic rules to reduce the large data amounts. Experimental applications of the said algorithms have indicated that its implementation can facilitate the determination of the parity of the costs associated with the supply chain and the income suppliers earn (Hu et al. 2017, p. 1359).

Supplier Contracts 

After a buying organization chooses a supplier, a contract is developed to govern the supplier-buyer relationship, regarding the delivery of a defined set of services and products. Supplier contracts are crucial in managing buyer-supplier power because they are legal agreements that can be used to measure the supplier’s performance. Also, apart from listing supply items, supply contracts highlight timeframes, pricing, payment clauses, and responsibilities, all of which are factors that facilitate effective governing of the supplier-buyer relationship. Thus, supplier contracts facilitate maximum exploitation of the supplier relationship and the power dynamics, thereof (Blankart & Stargardt 2017, p. 419-422). A typical supplier contract is exemplified in the Hewlett-Packard Queensferry case, where the said organization required to outsource manufacturing services but also sought to maintain dominance in sharing the surplus value. So, the selection process included power as a determining factor and despite the safeguards instituted Hewlett-Packard Queensferry highlighted that it was willing to work with suppliers to boost their capacity to improve and innovate (Lonsdale, 2017).

Managing Value Chains

The term value chains refer to the things an organization does to appraise customer valued including marketing, production and offering after-sale services. The manner through which value chain activities are executed determines the costs that an organization incurs and the effect the same has on organizational profits (Ponte & Sturgeon 2014, p. 197). Thus, within buying organizations, the goal is at least to hit specified profit targets, if not surpass them. The mentioned achievement is attained through a corporate’s positioning decision, sales and marketing decisions and practices as well as supply chain and procurement decisions. Porter proposes that value chains within organizations should focus on the operations of systems and the conversion of input into outputs rather than accounting for the types of costs. Hence, the proposed first activities are operations, inbound and outbound logistics, sales and marketing, and services. The supportive activities, thereof, include human resource management, infrastructure, procurement and technology development (Koc & Bozdag 2017, p. 560-561).

Figure 1, Porter’s Generic Value Chain (Mindtools.com, n.d.)

So, to understand an organization’s value chain, it is crucial that its management identifies the value-creating sub-activities under each primary activity. The three types of sub-activities are direct activities, which create value on their own. For instance, in the case of a publisher’s sales and marketing activity, the direct sub-activities are advertising and online selling. Secondly, indirect activities facilitate the smooth running direct activities as is the case of the management of sales of a publisher’s sales activity. Finally, quality assurance activities verify that direct and indirect activities comply with the pre-determined criteria like is the case with proofreading and editing, with regard to a publisher’s marketing and sales activity. Then, Porter proposes that it is also crucial to establish the sub-activities for each support activity, previously named, in the three categories described above. Finally, creating connections between all value activities identified is crucial as the said links are critical to enhancing an organization’s competitive advantage from the value chain framework (Koc & Bozdag 2017, p. 562-563).

Conclusion

Buying organization managers must incorporate buyer-supplier power in the management of the procurement process. The latter can be achieved through informed decision making based on the understanding of the power dynamics that exist between buyers and suppliers. Also, crucial to the process is needs assessment. The managers mentioned above can realize the same through the analysis of both supplier behavior and power as well as surplus value division. Moreover, the said managers must also familiarize themselves with the processes involved in the sourcing and contracting of suppliers, to facilitate maximum exploitation of the supplier relations. Then, they will be capable of managing value chains in buying organizations, leading to increased organizational profitability.

Reference List

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