Why is the purchasing function important? A brief history lesson in supply chains…

Thousands of years ago, communities were mostly self-sustaining, and trade with other communities was limited. Transporting goods or food required much time and effort and modes of transportation were mostly limited to what a person could carry on themselves, on an animal, or on a simple water vessel. Moving wheat, for example, across large distances wasn’t viable since it was so heavy and would be difficult to transport long distances. Instead, communities mostly provided for their own food demand with local supply.

Fast forward to the Roman Empire, who established better roads, shipping routes and water vessels, therefore ushering in an era of increased regional trade. Even with improved Roman infrastructure, imported wheat prices were still relatively expensive given the high amount of time and human resources it took to transport, resulting in the majority of the price of wheat coming from supply chain costs.

Fast forward another 1500 years and the advent of steam shipping and motorized transport further changed the economics of trade where the relative percentage of the total price dedicated to supply chain costs plummeted. Introducing the ocean shipping container in the 1950’s enabled a shipment to be loaded into a 20’ or 40’ container once, and then moved via a combination of truck, rail, and/or ocean vessel to its final destination without ever needing to be opened and moved from one container to another. This invention further facilitated global trade and the reduction of supply chain costs. Today, wheat is easily traded across the globe where supply chain costs are a small portion of the total price.

The increased speed and efficiencies of global transport changed forever the global economic landscape. These trends and forces have enabled new business models where supply chains can be easily fragmented and companies can specialize in very specific parts or processes rather than needing to produce products from start to finish. Never in the history of mankind have supply chains been more fragmented than they are today. Rarely does one find a company that produces any product from raw material to finished product. While the recent upswing in nationalism and increased tariff wars threats to dampen this growth in global trade, our current economy continues to be highly global and interconnected.

The impact of corporate buyers

In this environment of globally fragmented supply chains, the role of the buyer plays a critical role in designing and shaping a company’s fragmented supply chain. Buyers find suppliers, negotiate contracts with them and maintain business relationships that allows firms to maintain a continuity of supply. A large portion of the outbound cash flow of a company is directly influenced by purchasing activities. The outcomes of these purchasing activities have a direct and significant impact on the bottom-line financial performance of a company and impact the company’s ability to execute its business strategy. Since purchasing organizations have such a critical impact on both the timing and amount of outbound cash flows, most CFOs (chief financial officers) use year-over-year savings as the primary measure of purchasing performance.

While the financial impact of purchasing performance is undisputed and should be measured with year-over-year savings, the impact of purchasing activities on a firm are much more broad than this. Saving money is not the only way that purchasing can impact how well a firm performs. Innovation is another critical outcome that buyers can directly influence.

Let us consider, for example, the automotive industry. In Ford’s 2024 annual report, it is reported that the prior three years from 2021 to 2023 the company spent US$7.6 Billion, US$7.8 Billion and US$8.4 Billion, respectively in engineering and research and development (R&D). In those same three years, the company achieved revenues of US$126.3 Billion, US$149.1 Billion, and US$165.9 Billion. If we divide the amount spent on R&D by that years’ revenues, we get a metric called R&D intensity; for those three years, Ford had an R&D intensity of 6.0%, 5.2%, and 5.1%.  The cost of sales of each of those three years (US$114.7 Billion, US$134.4 Billion, US$150.6 Billion) is mostly comprised of the cost of purchasing materials and components need to build the vehicles they sold – this is what purchasing controls. The cost of sales doesn’t only provide Ford physical products from its suppliers, it also helps fund the suppliers’ own research and development efforts.  Collectively, the US$114.7 Billion that Ford spent in 2021 in cost of sales, generated approximately 5% or $5.7 Billion in research and development dollars for their suppliers – this amount almost doubles what Ford spent themselves in R&D! Very few finance organizations look at the cost of sales as an investment in future innovation, but this will be the way of the future where buyers are held accountable not only for managing their current budget, but also will be held accountable to ensure that there is a return on the investment in providing business to a supplier. In short, a buyer can have a direct influence on the flow of innovation from suppliers to the OEM in a globally fragmented supply chain.

Beyond being a source of innovation, a company’s suppliers can also provide upstream visibility to new trends and disruptions that a company may not yet be aware of. Buyers that have good relationships with their suppliers will have access to timely information that can help them adjust to an ever-changing world. Since suppliers are more closely situated to the original sources of raw materials and sub components that flow in a supply chain, those suppliers can also help assure that sustainable and responsible business practices are taking place among them. Any buyer who wants increased visibility to the complete supply chain will need the trusting cooperation of their tier 1 suppliers.

Finally, when supply chain issues arise, a cooperative tier 1 supplier also can provide the collective resources at their company to help in the problem solving of the issue at hand. Leveraging the business and engineering know-how of a supplier can be a critical resource but one that can only be accessed where the business relationships has been properly nurtured. This chapter focuses on the critical work that buyers do in a company to select, manage and nurture supplier relationships in a manner that helps the short-term financial and long-term strategic objectives of a firm.

Multi-criteria decision making

Not all firms compete in the same way. Some firms compete based on cost (think Walmart), while other firms compete based on design and innovation (think Apple), while yet others compete based on speed and convenience (think Amazon). Understanding the value proposition of the firm and how it competes in the marketplace is the first priority for any buyer.  It does not help a firm to conduct purchasing activities that are not aligned with the business priority. If a firm competes on innovation, then that firm should not prioritize the cheapest price when choosing suppliers; rather, that firm should prioritize the innovative capabilities of the competing suppliers. This is not to say that price should not influence the decision at all, but a buyer needs to prioritize innovation over price, provided that this is what aligns to corporate strategy.

If a firm competes on flexibility or speed, then a buyer may consider duplicating supply options so that any supply disruption with one supplier can be compensated by a competing supplier in a different location. The finances to justify duplicating supply options need to be considered – for example, will having duplicate options require additional fixed cost investments, or will the smaller volume with each option result in an increased price since no single supplier will hold all the business?

If a company competes on innovation and access to a new and emerging technology from a supplier is a source of competitive advantage, then the company may want to consider a single-source agreement where all its business is committed to that single supplier. Another version of this can be an exclusivity agreement where the supplier agrees to only sell to the company and not its competitors and the company commits to only purchase from that supplier. This can benefit both companies where the buying company locks out the technology from their competitors while the supplier can lock out its competition from that single customer. The risks with an exclusivity agreement come when the technology no longer provides a strategic advantage or when the business relationship encounters a misunderstanding and conflict ensues where either party has little leverage to achieve its means if a resolution is not found.

If a company competes on cost, then having the lowest cost structure and using competition among multiple suppliers to help drive costs lower can be an effective strategy. Depending on the economic viability of lower volumes, a company that competes on cost may want to split their business for specific component among two to three suppliers and allow those companies to compete with each other on a regular basis. The power of competition is one of the strongest tools that a buyer has to ensure a competitive price for the product being purchased.

If a company has multiple objectives, then a purchasing strategy can also be developed to help deliver the desired outcomes. For example, let’s say a buyer in the auto industry is tasked with managing the OEM’s portfolio of radio suppliers for its global vehicles. The buyer may decide to use three key suppliers, splitting the business with 60% going to  supplier A, who has a price competitive global footprint while providing consistent and proven quality. The second, supplier B, may be targeted for 30% of the global business and is the supplier that while not the cheapest, is a consistent technological leader in the radio business. Finally, supplier C may be awarded the final 10% of the business and may serve as the rabbit for price competitiveness that keeps suppliers A and B on their toes. In this case, supplier C may be a relatively new supplier that brings new ideas but is aggressively trying to grow with competitive pricing that keeps suppliers A and B honest in their pricing.

While the radios buyer may develop a purchasing strategy such as this described in the previous paragraph, the buyer of horns for the same company may not have the same purchasing priorities since the horn provides a different value proposition to the end product as compared to the radio on a vehicle. In short, each buyer needs to assess the product they are tasked with buying and understand how their work and their supplier(s) contribute to the overall business so that their purchasing activities can be aligned with those business priorities.

Multi-criteria decision-making tools are needed to make purchasing decisions that span more than one criteria. While there are numerous tools available to buyers, we introduce in this chapter the more simple concept of weighted criteria decision making. There are four  key steps to this process of decision making

1. Identify the criteria that will drive the decision and assign relative weights to each criteria. The respective weights should total to 100%.
2. List the options being considered and rate each option against each criteria. Make sure all ratings are on the same scale.
3. For each option being considered multiply each of those ratings from step 2 by the respective weights identified in step 1.
4. Then sum up the total of these calculations for each option so that you have a total weighted score for each option.

Here is a simple example that we will use to illustrate the concept of weighted criteria decision-making. Let’s apply this tool for deciding where the family should go on vacation during the next winter break.

Step 1: Identify criteria

After holding a family meeting, the family decides that it wants a relaxing beach vacation that will help them escape the frigid winter of their home location during the second week of January. The priorities for the vacation are: 1) relaxing ambiance, 2) warmth of location and 3) cost of the trip. Further the family agrees on the following weights for each of these criteria:

• 1) Ambiance 45%
• 2) Weather (warmth) 35%
• 3) Cost 20%

Step 2: List all options and rate each option for each criterion

Option A: Miami Beach

Option B: Grand Cayman Islands

Option C: Fiji

Now we focus on just Miami Beach and provide it a rating for ambiance, another rating for warmth and a rating for cost.  It is important that when we conduct this rating, that the same scale is used across the board. For sake of simplicity, we will score each option using a scale of 1-100 where 1 is the worst and 100 is the best.

Miami Beach:

• Ambiance – 40 out of 100 (meh… nice in some spots, but just another big city)
• Warmth – 55 out of 100 (not a warm paradise in January, can have some warm days but also risk of a few cool days)
• Cost – 90 out of 100 (can’t beat the price of staying on the mainland)

Next, we consider option B, Grand Cayman Islands:

• Ambiance – 60 out of 100 (a nice island retreat but a bit touristy)
• Warmth – 80 out of 100 (should provide a nice warm climate 75 to 80 degrees)
• Cost – 60 out of 100 (hotels will cost more than Miami and a bit more for the flight)

Finally, we consider option C, Fiji:

• Ambiance – 90 out of 100 (white sand, turquoise water, and private chalet on the water)
• Warmth – 90 out of 100 (guaranteed consistent 80-85 degree weather, hot but not unbearable)
• Cost – 20 out of 100 (it’s not cheap to go to Fiji)

We can summarize and visualize this data in a table:

RAW SCORE MATRIX

In this table above, we list the criteria (ambiance, warmth and cost), list the options (Miami, Grand Cayman, Fiji), and then list the score of each option against each criterion.

Step 3: Multiply each score by its weight

Having completed Step 2, we are now ready to proceed to Step 3, which is multiplying each individual score times the respective weight for its criteria. Miami’s ambiance score of 40 will get multiplied by the weight of ambiance 45%, yielding 18.00, Miami’s warmth score of 55 will get multiplied by the weight of warmth 35%, yielding 19.25, and Miami’s cost score of 90 will get multiplied by the weight of cost 20%, yielding 18.00. We provide the table below showing the weighted score for each option against all the criteria following the same pattern explained for Miami.

WEIGHTED SCORE MATRIX

RAW SCORE MATRIX

Step 4: Calculate the Total Weighted Score for each option

Now that we have the weighted scores for each option for all criteria, one simply adds up the weighted scores for each option. Miami’s total weighted score is the sum of its three weighted scores of 18.00+19.25+18.00 = 55.25. The same process is used to calculate the Grand Cayman and Fiji total weighted scores. The total weighted score is shown for all three options in the matrix below. As can be seen, Fiji has the highest total weighted score of 76.00 and is therefore the winner!! Pack your bags, the family is going to Fiji next January!!

WEIGHTED SCORE MATRIX with TOTAL WEIGHTED SCORE

Obviously, if the weights for the criteria were different, we may derive a different recommendation. If cost, for example, were our top priority and we had given it a weight of 80% and then assigned 10% weight to each of the other two criteria, then our recommendation would not be Fiji, but would be Miami by a land slide! This illustrates the important nature of the weights. It is important that the right people/functions be involved in establishing the weights so that the entire company buys off on the process and that the purchasing process is aligned with company strategy.

While our example uses three criteria and three options, one can use any number of criteria and any number of options. This multi-criteria decision making model can be used to decide on where to go on vacation, what to major in college, what apartment or home to purchase and also which supplier should win the business. Since the latter is the focus of this chapter, we will provide an additional example that illustrates how to use this tool to make a sourcing decision.

Hypothetical Example – choosing a glass supplier for the next generation iPhone

Step 1: Identify criteria

After holding a company meeting with engineering, design, purchasing and finance, the Apple leadership team decides that it wants to achieve the following outcomes with sourcing the glass for the next generation iPhone: 1) technology of product, 2) launch timing readiness and 3) cost. Further the company agrees on the following weights for each of these criteria:

• 1) Technology 50%
• 2) Launch readiness 35%
• 3) Cost 15%

The most important criteria for choosing a supplier is the technology that the supplier offers. Apple competes on innovation and it is already behind in the folding glass arena of cell phones and needs to choose a supplier that can help them regain a market leading position. Leadership agrees that this carries 50% weight of the decision. Second is launch readiness. Launching the new iPhone at the time promised to customers and investors is non-negotiable and picking a supplier that can launch on time and have the capacity to support the launch will carry 35% weight in the decision. Finally, cost is important but not so much as technology and launch readiness; as such it carries the remaining 15% weight in the decision.

Step 2: List all options and rate each option for each criterion

Supplier A: Corning

Supplier B: Schott

Supplier C: Lens Technology

We score each supplier option against each criteria using a scale of 1-100 where 1 is the worst and 100 is the best. In the case of cost, a high score means the supplier quoted a lower competitive price. If a supplier quoted a high price, then their cost score will be lower. Just remember that 100 and other high scores is the most desired while 1 and other low scores is the least desired.

Corning:

• Technology – 85 out of 100 (engineering provided the tech ratings for each supplier)
• Launch – 75 out of 100 (supply readiness team provided the launch readiness ratings)
• Cost – 30 out of 100 (based on quoted prices)

Schott:

• Technology – 70 out of 100 (engineering provided the tech ratings for each supplier)
• Launch – 80 out of 100 supply readiness team provided the launch readiness ratings)
• Cost – 90 out of 100 (based on quoted prices)

Lens Technology:

• Technology – 75 out of 100 (engineering provided the tech ratings for each supplier)
• Launch – 90 out of 100 (supply readiness team provided the launch readiness ratings)
• Cost – 75 out of 100 (based on quoted prices)

We can summarize and visualize this data in a table:

RAW SCORE MATRIX

Step 3: Multiply each score by its weight

Having completed Step 2, we are now ready to proceed to Step 3, which is multiplying each individual score times the respective weight for its criteria.

WEIGHTED SCORE MATRIX

Step 4: Calculate the Total Weighted Score for each option

Now that we have the weighted scores for each option for all criteria, one simply adds up the weighted scores for each option. The total weighted score is shown for all three options in the matrix below. As can be seen, Lens Technology has the highest total weighted score of 80.25 and is therefore the winner!! Award the business contract to Lens Technology!!

WEIGHTED SCORE MATRIX with TOTAL WEIGHTED SCORE

Different types of buying activities

Let’s face it – being a buyer is perhaps one of the most exciting and empowering roles in a business. A buyer gets paid to spend the company’s money… it’s like getting paid to go out and use your parent’s credit card!! Pretty awesome. The work can vary from day to day and different buyer positions carry with it different tasks and responsibilities. Different companies use different terminologies to describe the function: some call it purchasing, others use the term procurement, while others yet use the term sourcing. Those that insist that these terms are different state that ‘purchasing’ is a term that reflects only the transactional process of making the actual purchase of a product or service, while ‘sourcing’ is the act of finding suppliers, while ‘procurement’ captures a broader, more strategic activity that includes not only the act of purchasing, but also strategic planning and sourcing of which suppliers should be a part of the supply chain. From an academic viewpoint, procurement is the umbrella term that includes sourcing and purchasing. In actual practice, however, there are many large companies that use the term ‘purchasing’ and those activities also include strategic planning and initiatives. So, we will let the academics have their narrow definitions, while allowing companies to choose whatever term works for them. Ultimately, however, companies are engaged in the work of designing their supply chains with the decisions they make as to who should be their suppliers, where those suppliers are located, what price to pay those suppliers and how to move products from suppliers to customer. Buyers and their leadership in a company are the agents that design that company’s upstream supply chain while logistics and operations execute the flow and transformation of goods within that designed supply chain.

There are two key categories of activities associated the work of a buyer: advanced purchasing and production purchasing. Advanced purchasing is making decisions of which suppliers to use for products and services that have not yet launched (gone into production). The purchasing decision has not yet been made and the product that they will supply is still in its planning phase. In some industries, like apparel, the time gap between business award to a supplier and launch of the product is very short, while in other industries such as automotive, suppliers are awarded business two to three years before start of production.

Production purchasing involves the transactional work of issuing shipping schedules, invoices and all the necessary paperwork to suppliers to ensure that they ship product on time. Production buyers often follow up to ensure that shipments have been dispatched on time and that issues in the transportation and logistics of a shipment are resolved in a timely manner.

Some companies divide the work of advanced purchasing and production purchasing between different buyers so that those buyers can specialize in the process of either sourcing new business or specialize in the day-to-day operations of purchasing production products and assuring the continuous flow of goods and services. Either of these two work flows can take up much time and focus and are unique enough to one another that some companies feel they should be handled by different people. Other companies, however, do not split the work between the buyers but rather assign buyers a specific product to purchase ‘from cradle to grave’. This term is used to explain that a buyer does both the advanced purchasing activity and the production purchasing activity for a given part until that part goes out of production. The benefit of this system is that a buyer must live with their decision and nuances of business award at time of planning are understood and maintained throughout the life of the product since the person who awarded the business is also the same person that deals with the production purchasing activities. While the work to handle purchasing ‘from cradle to grave’ is more broad, institutional know-how can be better preserved and business relationships with the supplier can be more consistently managed. The trade-off, however, is lack of work specialization and also the bandwidth of work hours that a buyer can dedicate may limit the breadth of products they can buy if they are tasked with ‘cradle to grave’ purchasing. Companies must decide which system works best for their situation.

Negotiations – the art and the science

Many buyers find negotiations to be an exciting and fulfilling part of their job. While negotiating pricing, concessions, terms and conditions and problem resolutions with suppliers are common applications of negotiation skills, buyers also find themselves negotiating with internal stakeholders in order to fulfill their job responsibilities. Buyers negotiate with engineering on a wide array of topics including which suppliers should be on a bid list, what the timing of the advanced purchasing process may be and when the business award date should be (early business award helps engineers plan for their products more easily than late business award). Internal negotiations may also arise when  engineering or another stakeholder may realize that an important criteria not previously considered should be taken into consideration for a new sourcing activity. For example, engineering may not be happy with a current supplier on their performance for another project and feel that they should not be given consideration for new business until the current issue is resolved. Engineering might also not be keen to start working with a new supplier from a far off region of the world that will make managing communications with them difficult when they are used to working with local suppliers.

Purchasing also may find itself not able to meet a price target for a product set up by the finance organization and may need to negotiate a new internal price target. From the finance organization’s standpoint, price targets are set up based on approved business cases and allowing one buyer to spend more than allowed may require them to reduce the price target for another product so that the profitability of the program at hand can be maintained. Such internal negotiations are an important part of a buyers job as they navigate the work of designing a company’s supply chain.

Negotiations have been a topic of study for millennia and are an important aspect of civilized society. In Mesopotamia the Code of Hammurabi (~1750 BCE) gives guidance on dispute resolution, commercial contracts, and restitution – all core components of negotiation. The code institutionalized the ideas of agreements, fairness, and terms, which are negotiation fundamentals. In ancient Egypt (ca. 2500–1000 BCE) records show examples of diplomatic negotiations, such as The Treaty of Kadesh (1259 BCE) between Egypt (Ramses II) and the Hittites. This is considered the first recorded peace treaty and involved concessions, alliances, and mutual obligations. In ancient India Kautilya wrote the Arthashastra (~300 BCE) which focused on statecraft, economics, military strategy, and offers detailed advice on diplomacy and negotiations. Kautilya (also known as Chanakya) outlined four negotiation strategies: Sama (conciliation), Dana (gifts), Bheda (division), and Danda (force). He emphasized preparation, understanding power dynamics, and building alliances, all critical aspects of negotiations in today’s supply chain management. In ancient China, Confucius and Sun Tzu (~500 BCE) also wrote about negotiation. Confucius stressed reciprocity, respect, and harmony, which are foundational to interest-based negotiation while Sun Tzu’s The Art of War discusses influence, timing, and alliances. In ancient Greece (ca. 500–300 BCE) the Sophists, especially Protagoras and Gorgias, taught rhetoric and persuasion, key tools in negotiation. Thucydides’ History of the Peloponnesian War documents numerous diplomatic negotiations. Aristotle’s Rhetoric (ca. 350 BCE) analyzed how ethos (credibility), pathos (emotion), and logos (logic) can persuade others—all concepts central to negotiation strategy today. Finally, Roman Law and Diplomacy (ca. 200 BCE – 400 CE) formalized contract negotiation and arbitration. The Romans used envoys (legati) and legal constructs to manage treaties, trade, and disputes across a vast empire.

Buyers in a company are today’s Roman ‘legati’ and act as agents of the firm to negotiate contracts and manage business relationships with a globally fractured supply chain. The increasing role of negotiations led Harvard to establish the Harvard Negotiation Project (HNP) in 1979 with Roger Fisher, William Ury and Bruce Patton leading the project. The project’s mission has been to enhance the knowledge and practice of negotiations and to widely disseminate that knowledge. The book, Getting to Yes (1981) is the result of that project and for decades has been required reading in most negotiation courses. The book emphasizes important concepts in negotiations such as 1) separate the people from the problem, 2) focus on interests rather than positions, 3) invent options for mutual gain, and 4) insist on using objective criteria. Additionally, the book introduces the concepts of the best alternative to a negotiated agreement (BATNA), in essence what is the best course of action in a negotiation if negotiations fall through.

Through the years, other authors have added to the litany of books on negotiations. More recently, Chris Voss who was an FBI hostage negotiator for many years and also studied negotiations at Harvard, brought together the Harvard concepts of negotiations and combined them with years of experience dealing with highly charged and emotional negotiations situations with the FBI and offers a blend of the tactical, technical and emotional sides of negotiations in his 2016 book titled Never Split the Difference. While Getting to Yes provides readers with a rational approach to negotiations, Never Split the Difference helps readers navigate the irrational side of negotiations and how to use tools such as inflection of voice, reflective listening and loss aversion to help achieve positive negotiation outcomes. A study of the negotiation literature available in the press is a must for any serious buyer. The best buyers ask for peer feedback on negotiations and make deliberate efforts to continuously improve their negotiation skills.

One of the challenges for a buyer is to be an effective agent for the company they work for while also bridging gaps of understanding with suppliers. Suppliers often seek for information from a buyer that could strengthen their negotiation position but which a buyer is not obligated to provide. For example, a supplier may want to know exactly which suppliers they are competing with for a certain book of business. If the supplier finds out that only one other company is competing and that the company is from a small country overseas that is new to the buying firm, they may decide to be less aggressive with pricing, knowing that they are likely to win the business. Providing the supplier with this critical piece of competitive information may appear to be an honest effort for the buyer to have an open and trusting relationship with the supplier but may actually hurt the company that they buyer represents. Buyers, when asked by suppliers to reveal the competitive landscape may opt to respond with the phrase “there is sufficient competition” and stop there.

Knowing what information to give and how to give it is both an art and a science. Buyers must maintain integrity by not lying to suppliers and being fair and truthful in the sourcing processes. Building trust between buyers and suppliers is a critical step in creating effective long-term supply chain relationships. At the same time, buyers must also understand how to create an environment of competition where suppliers are incentivized to offer the most competitive pricing. For example, let’s suppose that there is a sourcing process taking place for a product that has traditionally been supplied by North American and European suppliers. The buyer has worked hard to develop an new East Asian alternative supplier and wants to emphasize the viability of this options to the competing establishment. The buyer may schedule a series of face to face meetings and orchestrate the order of such meetings in a way to send a message: schedule the North American supplier could meet with the buying firm’s buyer and engineering staff at 8am, the East Asian supplier at 9am and then the European supplier at 10am. The order of these meetings would result in the East Asian supplier being ‘seen’ by both established suppliers in the lobby and all parties usually sign the guest book… something that does not escape the keen eye of sales professionals. This is one example of the small things a buyer can do to enhance the competitive landscape of the sourcing process.

Another strategy in this case could be to announce that final face to face negotiations are to be held in the home country of the East Asian supplier. The established suppliers may then wonder ‘why’ and can come up with their own theories. The buyer can give as little or as much information as they deem appropriate as the choice of location for negotiations. A potential response from the buyer could include a statement of the future importance of that region to the company’s supply chain – again, creating an appearance of legitimacy to the emerging competitive options. These and other strategies are part of the world of strategic thinking and planning that a successful buyer will employ in their job.

There are several technology options that a buyer can use to negotiate price for products and services. The most rudimentary option is to conduct face to face negotiations. These can be preceded by email submissions of initial quotes. A buyer can schedule suppliers to visit the buying company’s location one after another, or can schedule them to all come at the same time. If the suppliers come at the same time, the buyer can place them in separate conference rooms and then travel back and forth to the different rooms asking for improvements in pricing in order to make the final cut of competing suppliers. If there are six suppliers who initially participate in the negotiation, and the buyer announces that only two suppliers will remain after a specific time, then suppliers can work in their respective conference rooms to make calls to their companies and work on improving pricing so that they can make the final cut by the deadline. Having all suppliers show up at the same time and placing them in separate conference rooms is another tactic used to create a competitive environment. Pursuing this strategy, however, tips the hand of the buyer in revealing who the competing suppliers are for the business.

Another strategy is the use of online auction tools. There are a number of different configurations of these online tools but popular options for business to business negotiations include reverse auctions and reverse dutch auctions. A traditional auction has one seller and multiple buyers. A ‘reverse auction’, however, has multiple sellers and a single buyer.

In an online reverse auction, sellers (located remotely with computers) place their initial bid into the system. The auction system reveals the lowest of these bids with the name of the bidding supplier removed so that all can see the price, but not the supplier. The system then has a clock that will count down a pre-determined amount of time. If a supplier decides to beat that price with a lower price, they will input that lower bid into the system and after doing so, the low price will be updated for all showing that a new bid has been entered and what that new price is. This process will continue until the lowest price is no longer beat within the allotted time. At this point, the buyer will have the lowest system negotiated price without having had to talk to or meet directly with any supplier! One word of caution, however, is needed for those using such a system – online auctions are known to antagonize suppliers who feel that the process commoditizes the product they supply. If the purchase is for a product that requires significant relationship management, high tech engineering management and interaction from both sides, then the buyer needs to carefully consider the relational implications of using an online auction system.  Reverse auctions are well suited for situations with many competing suppliers and pre-auction bids appear to be close to each other.

A ‘reverse dutch auction’ again involves multiple potential suppliers and a single buyer, however, instead of starting a higher prices that gradually decreases (as with the reverse auction), the buyer sets a starting price that gradually increases over time. When the price increases to a level acceptable by one of the suppliers, that supplier will ‘hit the buzzer’ and accept the displayed price and the auction will be completed and awarded to that supplier who first accepted the price. The type of auction used depends upon the situation that the buyer firm finds itself in. A reverse dutch auction can be effective especially when the number of competing suppliers is low and the buyer has sufficient information to confidently establish a starting price that is not above the market price. Additionally, if the initial pre-auction bids are not close to one another, the reverse dutch auction is more likely to result in a better result as opposed to a traditional reverse auction since a large gap in pre-auction bids could result in no action taking place at all in a traditional reverse auction.

Supplier development initiatives

The work of a buyer isn’t constrained to only negotiations for new contracts. Effective supply chain relationships often involve suppliers and buying companies investing in each other to make the relationship work for both parties. Toyota is famous for their supplier development efforts that result in Toyota employees being assigned to work for month or even years at a supplier’s location to help them improve their own internal processes. Such improvements increase quality and reduce costs, allowing the supplier to offer better quality products to Toyota and at lower long-term prices.

Supplier relationships that include development efforts require trust by both parties. The supplier must trust that the development efforts will benefit them as well as the buying company. Some companies have tried to replicate Toyota’s supplier development program, send experts to work on improvements at a supplier, and then turn around and ask for price reductions so that the buying company can capture all of the savings generated by the initiative. Such actions erode trust and reduce the likelihood that future projects can take place. Effective supplier development efforts are more long-term focused and require both firms to focus on benefits beyond the current initiatives. While sharing cost-savings arrangements can be made for specific initiatives (such as 50/50 sharing), the greatest benefits of supplier development efforts can be an increased level of trust and effective operations between the two firms.

Relationships that are always focused on sharing the minutia of benefits generated will not be able to move as quickly as those relationships who understand and trust that in the long term both parties will benefit, even if one party benefits more on a given day than the other company.  Imagine a marriage where the two spouses don’t worry about who gets the biggest piece of dessert every time – they simply don’t care as long as they both get dessert and they understand that sometimes one will get a bigger piece and other times the other spouse will get the bigger piece. Taking time to weigh and measure each piece of pie or ball of ice cream would take too much time and fosters a feeling of mistrust. The couple can have a better relationship not getting into the minutia of dessert sharing but rather enjoying the dessert – then if one day arrives that one spouse really like cherry pie, then the other will happily give them a larger piece knowing that some other day when apple pie is on the docket, the other spouse will likely reciprocate the gesture. In supply chain management, issues inevitably will arise. Certain issues may require a supplier to invest significant resources to help resolve, whether or not they were at fault. If a supplier freezes their support until they can figure out who will pay for the resources to solve the issue, then urgent issues may grow into even larger issues and problem solving will be hindered. If, however, the supplier doesn’t question the issue of equity and simply throws themselves to solving the issue, then the problem can be quickly addressed. In the future, the tables may be turned and the buying company may be the one to throw their resources in helping the supplier. Either way, an environment of trust in the long-term viability of the business relationship will serve to generate a more effective supply chain where problems are quickly solved. Trust is truly the lubricant of supply chain relationships. Don’t weigh your dessert, just enjoy that you can eat it with another who will be with you for the long term!