Executive summary and implications for managers and executives

Citation

(2009), "Executive summary and implications for managers and executives", Journal of Business & Industrial Marketing, Vol. 24 No. 3/4. https://doi.org/10.1108/jbim.2009.08024cab.001

Executive summary and implications for managers and executives

Article Type: Executive summary and implications for managers and executives From: Journal of Business & Industrial Marketing, Volume 24, Issue 3/4

This summary has been provided to allow managers and executives a rapid appreciation of the content of the issue. Those with a particular interest in the topics covered may then read the issue in toto to take advantage of the more comprehensive description of the research undertaken and its results to get the full benefit of the material present.When you are a supplier, it is invariably considered a worthy strategy to go after and grab a greater share of a customer’s business. Why wouldn’t it be? It is marketing of the straightforward, common-sense variety – the sort we are usually comfortable with. No paradoxes and puzzles; few hidden traps to fall into.

It is a bit more complicated, however, when it is looked at from a customer’s point of view. While it is true that, in order to consolidate their supply bases, many firms have been progressively shifting from a focus on competitive multiple sourcing to more sophisticated strategies (such as cross-sourcing, dual sourcing or single sourcing) with selected key suppliers, there are potential downsides of such arrangements which managements need to be aware of.

In “Benchmarking the impact of customer share in key-supplier relationships” Andreas Eggert, Wolfgang Ulaga and Sabine Hollmann warn of those downsides, following a nationwide survey of US purchasing managers, and introduce the concept of “attractiveness” of a supplier relationship from the customer firm’s point of view as a metric for helping managers in their decision-making.

They conclude that the perceived level of sourcing attractiveness improves until a local maximum is reached and declines beyond a relative customer share. In other words, pushing that share will have negative consequences for the customer-perceived attractiveness of the sourcing relationship. However, the research reminds managers that the vast majority of supplier relationships still offer opportunities for further improving existing supply bases, but recommends that they adopt a fine-grained and non-linear approach when selectively pursuing more of their customers’ business.

This “customer-perceived attractiveness” of a supplier relationship is the trade-off between the value received and the dependence accepted. Value captures the customer-perceived benefits and costs in a supplier relationship whereas dependence represents the perceived difficulty involved in replacing the incumbent supplier. Instead of comparing supplier relationships across the board, the authors’ approach allows comparison of relationships against their best-in-class benchmark.

By calculating an efficiency score between 0 and 100 per cent, their measure allows managers to evaluate the potential for improvement of any given supplier relationship. Findings of the study – which included satisfaction, trust, and commitment as control variables – suggest that many of these relationships display a potential for increasing efficiency: fewer than 10 percent of the supplier relationships investigated were fully efficient.

A contemporary study in the US manufacturing industry found that main suppliers secured on average slightly more than 70 percent of customers’ order volumes. In turn, second suppliers captured less than 20 percent of customers’ needs while all other suppliers shared the rest. Hence the need to know the possible consequences of raising customer share in key-supplier relationships. Purchasing managers must strike the right balance between the value they receive and the dependence they are willing to accept. That means they have to manage that dependence.

The ultimate goal of reducing a customer’s supplier base is to gain competitive advantage by managing suppliers throughout the supply chain. Through cost reductions and quality improvements, a firm’s supply chain may indeed become one of the strongest barriers of entry for competitors. The advantages of working with fewer suppliers are well documented. From a cost perspective, placing a greater emphasis on fewer suppliers allows a customer to concentrate order volumes and gain more influence over vendors.

Beyond price concessions, a focus on selected suppliers allows a firm to reduce total cost of ownership. For example, through better coordination and exchange of information, order processing and inventory management may be dramatically improved. Similarly, by adopting flexible manufacturing strategies and design-to-cost approaches, key suppliers can help customers to take additional costs out of production processes. From a quality perspective, a limited supply base allows customers to invest in supplier development. In addition to improving quality of existing products, it allows customers to motivate vendors to engage in efforts of joint product development.

Those are the “upsides”. Potential downsides of a reduced supplier base include higher risks of supply disruption. Suppliers may be tempted to raise prices to take advantage of a customer’s increased level of dependence, and favoring one supplier over others typically comes at the cost of reduced flexibility. For example, in industries where technology changes are frequent, the commitment to a particular supplier typically results in locking customers in on a specific technology.

Given that buyer-seller relationships are of strategic importance, it is essential to understand the link that exists between strategic purchasing and supplier development and how it can create value for the buying firm.

Strategic purchasing is a critical antecedent of supplier involvement in the buyer’s new product development process and the implementation of effective communication and evaluation practices with suppliers. This makes it an integral part of building successful buyer-supplier relationships. Similarly, supplier development has also been acknowledged to be a critical element of collaborative buyer-supplier relationships and has been identified as playing a critical role in improving a supplier’s capabilities and performance.

However, to date there has been no direct effort to analyze the relationship between strategic purchasing and supplier development practices. In the article “Effect of strategic purchasing on supplier development and performance: a structural model” Cristóbal Sánchez-Rodríguez uses the relational view of the firm to gain a better understanding of this issue by empirically examining the implementation of a buyer’s strategic purchasing and supplier development activities, and relating them to the buyer’s purchasing performance.

Since long-term value creation is one of the key organizational goals of businesses, and strategic purchasing and supplier development leads to improved performance in the buying firm (customer), it is advisable for supplying firms and industrial marketers in particular, to understand strategic purchasing and supplier development, and how they are related.

This study, based on manufacturing companies in Spain, highlights the importance of strategic purchasing and supplier development in improving customer value (purchasing performance) and as a result merits management consideration and resources from both suppliers and buyers when developing an integrated supply chain strategy.

The study provides support for the relationship between strategic purchasing and supplier development. This is very important for industrial marketers given the importance and interactive character of relationship marketing efforts. Industrial marketers could benefit from a buyer’s efforts towards supplier development by integrating them with their own relationship marketing efforts. The research also showed that strategically oriented-supplier development practices render positive results for the buying firm. Firms that focus on strategic supplier development reap greater long-term benefits from their efforts than firms using the non-strategic approach.

The findings suggest that a buying firm’s supplier development practices that are strategically-oriented through a buyer’s implementation of strategic purchasing generate “relational rents” that lead to superior performance. More specifically, the study finds that the implementation of strategically-oriented supplier development activities allows buyer and supplier to synergistically combine, exchange, or invest in idiosyncratic assets, knowledge, and resources/capabilities that permit the realization of rents increasing performance.

“Supplier development” broadly refers to “any effort by a buying firm to improve a supplier’s performance and/or capabilities to meet the buying firm’s short-and/or long-term supply needs”. A buying firm can make use of a wide range of supplier development practices to improve a supplier’s performance and/or capabilities. Typical activities of a supplier development program include visits to suppliers’ plants to assess their processes, reward and recognition of a supplier’s achievements, collaboration with suppliers to improve existing materials and components or develop new ones, providing training to suppliers, and involvement of the supplier in the buyer’s new product design process.

Effective communication between buyer and supplier constitutes another important factor in supplier development and it can be attained by intensive information sharing between buyer and supplier (e.g. information about costs, quality levels, accounting, and financial data).

“Purchasing performance” refers to the effectiveness in procuring materials at the lower total cost of acquisition, on-time, of the right quality, and in the right quantities. From the supplier firm’s perspective, these purchasing performance dimensions can be viewed as areas where the supplier could create value for the buying firm. Similarly, internal customer satisfaction has been identified as the most important element of purchasing performance and has been used as a purchasing performance outcome in several studies.

For the purchasing function, the customer is the company department for whom the material or service is purchased and therefore defined as an internal customer. Thus, the purchasing performance construct includes measures of quality of materials purchased, on-time delivery, cost of materials, inventory performance, and internal customer satisfaction.

Through supplier development, buyer and supplier can enable the four rent-generating mechanisms identified in 1998 by Dyer and Singh: combining, exchanging, or investing in relational-specific assets (e.g. through buyer involvement in a supplier’s new product development, and supplier involvement in the buyer’s product development process); exchanging knowledge (e.g. through suppliers being trained by the buying firm, sharing of cost and quality information with supplier, and buyer’s visits to suppliers’ facilities); combining complementary resources and capabilities (e.g. through buyer involvement in supplier’s new product development, and supplier involvement in the buyer’s product development process); and deploying more effective governance mechanisms (e.g. through supplier reward and recognition).

There is little doubt that the strategic importance of companies’ purchasing function has increased dramatically, which leads to questions about who to collaborate with in supply activities and how to choose the optimal purchasing strategy.

What is the relationship between purchasing and the type of supplier relationship? What purchasing strategies should a firm adopt? How do such strategies differ according to the complexity of the buyer-seller relationship and the firm’s purchasing goal?

Purchasing has two primary functions with regard to buyers’ business strategy – operational efficiency and effectiveness. Efficiency is concerned with price-orientation and cost-reduction, while effectiveness is liked with improvement and value-orientation. From the efficiency perspective, purchasing adds value to the organization by providing the lowest cost to the firm as well as by managing the supplier relationships.

The specific way of seeking operational effectiveness is the business development activity through supplier relations. In this situation, the added-value of purchasing supports the generation of innovation through a network of actors. From the purchasing perspective, the buyer’s expectations relate to the ability to create novel packages of products and services for internal and external partners. Seeking effectiveness through supplier relationships provides customers with opportunities for rationalization and for development activities. However, such effects do not follow automatically from a concentration on fewer suppliers. Suppliers’ resources and the quality of relationships become dominant aspects in the success of concentration.

In this respect, say Senja Svahn and Mika Westerlund in their article “Purchasing strategies in supply relationships”, the key decisions to consider must involve optimizing the size and number of actors who belong to the supply network, and choosing the appropriate partners.

In developing a conceptual framework to categorize different purchasing strategies, they maintain that, when the buyer seeks efficiency, a specific actor often has more power than another, thus enabling it to control the supply relationship or network. In effectiveness-oriented supply relationships, the control may be more widely distributed among the parties, as the knowledge required to produce an offer is distributed among different actors. This can be crucial in supply networks, which typically aim at effective distribution of resources among the actors in order to gain superior performance and competitive advantage. Although firms may want to balance these two orientations, efficiency and effectiveness are two extremes that should be clearly distinguished from each other.

Six types of purchasing strategies are described:

1. 1.

   The “price minimizer” refers to buyer’s efficiency-oriented single purchasing behavior in which the main objective of purchasing is to seek the lowest price. The main characteristics are: focus on price, promotion of competition among potential suppliers, and one-time purchasing.

2. 2.

   The “bargainer” focuses on a dyadic buyer-seller relationship. In this strategy, the buyer aims to achieve efficiency of operation through long-term collaboration with a selected supplier. The main characteristics of the “bargainer” are a long-term oriented buyer-seller relationship, where both parties benefit through fixed contracts, and the gradually decreasing price tied with the period of operating in that specific business relationship. The use of “bargainer” strategy is especially popular in the computer and car industries, where some components are required on a continuous basis.

3. 3.

   The “clockwiser” strategy describes network relationships that perform like clockwork, the main objective being strict efficiency, which can be achieved through the careful integration of the logistics of integrated control systems and IT in production, and the coordination of value activities of each supply network partner. The “clockwiser” focuses on specific partners in an intentionally created network, efficiency benefits though limiting the amount of suppliers in the net, and on enhanced learning in the relationships with chosen suppliers. Toyota is a good example of this strategy.

4. 4.

   The “adaptator” is on the effectiveness-oriented side of purchasing strategy and focuses on adapting in manufacturing processes between the exchange parties. This situation describes one major purchase of product or service component with few customized elements. The seller is often required to accommodate its product to the needs of the buyer. This often occurs in the case of large purchases related to the industrial production system or manufacturing line of a factory. These investments are typically acquired at an interval of 10-15 years, and their purchase is characteristically a one-time occasion.

5. 5.

   The “projector” is a dyadic relationship between two companies in which both the buyer and seller are development partners (typically the case of collaborative R&D projects). An example is the collaboration between Nokia and Skype who joined their development efforts to create a radically novel type of mobile phone that utilizes the voice-over-internet.

6. 6.

   The “updator” is based on collaboration in research and development. In this sense it resembles the previous type of strategy. However, the key difference is that here the collaboration between partners is continuous and the nature of relationship is the supply network instead of dyad. Its characteristics are its long-term research and development work in intentional supply networks, and updates in product versions. A good example is the collaboration between Intel and PC manufacturers to produce updated versions of personal computers by means of constant co-development.

Managers of companies should recognize their goal, whether they seek efficiency of operation and cost leadership, or effectiveness and new business innovations through their purchasing behavior. Moreover, managers should identify and categorize their supply relationships, and consider which materials and services to purchase through which supply relationships. Whereas the conventional items can be purchased through transactional exchange relationships, the strategically important items should be purchased through collaborative networks.

One type purchase which definitely deserves a “strategically important” rather than a “conventional” description is that of high-cost, high-tech, and highly-innovative medical systems – for instance, a magnetic resonance imaging scanner which provides surgeons with vital information about their patients’ condition. Business customers for such products include university, teaching, and community hospitals and also private clinics and specialized imaging centers.

Not surprisingly, the purchase decision depends on an opinion of value formed by a range of decision-influencers including clinicians and managers. Also unsurprising is the fact that business and operational decision influencers will have different value judgments. Patients also have distinct preferences with regard to medical examination procedures and, in situations where the patient is billed, may be prepared to pay more for choice – especially if it is a choice between equipment which is uncomfortable and/or intimidating and an alternative which has considered their sensitivities and anxieties in its design.

While equipment so critical to people’s health and even survival may not be appropriately subjected to the “price minimizer” purchasing strategy outlined above, price is, of course, an important factor. Competition is intense with rationalization occurring within the industry. The continuing upward trend in healthcare costs in developed countries – the US now spends 15 percent of its GDP on healthcare – is increasing pressure on product prices and leading to changes in buyer segmentation with differences in the balance between private and public healthcare, age and disease profiles, and the level of private health insurance that is carried.

In “High-tech, innovative products: identifying and meeting business customers’ value needs”, Adam Lindgreen, Michael Antioco, Roger Palmer and Tim van Heesch use a case study of the medical systems division of one of the world’s largest electronics manufacturers to develop a framework to guide manufacturers of high-tech, innovative products to market and to customize their offer throughout the different stages of prospective business customers’ purchasing process.

Decision influencers are critical to the purchasing process and successful sales. While the headline price will attract considerable focus due to its magnitude, decision-influencers will also consider a wide range of other criteria that impinge on the value-in-use of the equipment. This will include such issues as the ability to upgrade and extend its lifecycle, the range of diagnostic procedures it is capable of undertaking, and the opportunity to integrate with current equipment to provide seamless and efficient diagnostic services.

Markets are increasingly dynamic and global in scope. If the medical diagnostics sector is taken as an example it demonstrates that western markets are becoming increasingly saturated and segmented, with much of the growth coming from new and emerging economies. Although mature markets do demonstrate some drivers for possible growth, such as increasing longevity accompanied by higher incidence of chronic diseases requiring diagnostic intervention, competitive pressures are increasing as a result of advances in technology and the frequent segmented use of different technologies for diagnostic procedures.

There are also changes in the healthcare business environment. In major markets, healthcare providers are now much more subject to market pressures and increasingly seek better value for money and lower overall operating costs, while at the same time using equipment and procedures that do not cause concern or anxiety to patients who increasingly have and exercise a choice.

Manufacturers of high-tech, innovative products should initially focus on convincing business decision-influencers – the principle decision-influencers. In order to deliver the necessary tangible value elements (in order of importance: product price, patient throughput, product application availabilities, and patient comfort) to industrial purchasers, manufacturers must especially focus on product design issues during product development.

Since product design determines the large majority of manufacturing costs, design considerations will consequently influence the product’s price, which also appears crucial at this stage of the purchasing process. Manufacturers should not focus on its clinical performance during the first stage of the purchasing process. Indeed, it would be a waste of time and resources since business people appear to rely on clinical decision-influencers to assess the latter. Instead, they should build and emphasize their reputation by focusing on elements such as service response time, service innovativeness, and their brand name as a testimony of good buyer-seller relationships. In other words, buying their brand needs to be associated with the perspectives of good future bilateral relationships.

The same value elements should be demonstrated to clinical and operational decision-makers – except for pricing, which appears less important for these decision-influencers. They should provide greater attention to the scan procedure duration and to developing a state-of-art system. They should also address the issues of good clinical support and adjustability and – of critical concern for operational decision-influencers – making sure that the product permits easy patient handling.

It is also important to note that personal experience of the brand influences perceptions of the value of the offering.

The complexity of firms’ relationships with one another has, perhaps inevitably, blurred the definitions of what were once distinct and unequivocal buyer and seller roles in such interactions. Whereas an emphasis has long been placed on sellers’ initiatives to obtain and retain long-term relationships with buying firms, evolving initiatives are now casting buyers in new roles in order to position buying firms as attractive, long-term relational partners with important suppliers.

As purchasing takes on a more strategic and proactive role in buyer-supplier relationships, it is important that buyers understand and satisfy the needs of targeted suppliers, position the buying firm as a preferred customer, and foster relationships. The concept of such “reverse marketing” sees the buying firm actively marketing itself to the most attractive and important supply partner. The buyer is no longer simply the supplier’s exchange target. Instead, the buyer and seller interact as active partners in the exchange process, collaborating to produce enhanced levels of valued outcomes.

This “supplier oriented strategic purchasing” (SOP) is different from other current relationship-oriented purchasing initiatives, such as strategic sourcing and strategic supply management, in that it focuses on and extends the conceptualization of interpersonal, relationship-oriented dimensions of purchasing, often termed “soft” or “people” skills, which are increasingly recognized as being critical to the success of inter-firm relationships.

Research on SOP in buyer-supplier relationships offers an opportunity to enhance understanding of how purchasing professionals can directly impact key interpersonal dimensions of inter-firm relationships, such as trust, commitment, and relationship satisfaction.

In their paper “The mediating effect of supplier oriented purchasing on conflict in inter-firm relationships” Michael A. Humphreys, Michael R. Williams and Daniel J. Goebel point out that SOP also provides an opportunity to find out how purchasing professionals can mitigate the negative effects of conflict within inter-firm relationships.

Practitioners need to be aware of different forms of conflict, each having potentially different influences on business-to-business relationships, and in turn requiring different strategies and actions for mitigation and management. When conflict is worked out amicably between exchange partners, it can serve as a process that fosters communication and creativity and can even result in increased productivity and a strengthening of the relationship.

Interpersonal skills are those needed to proactively manage relationship quality, which leads to the trust, cooperation, and interdependence necessary to sustain successful relationships, yet many professionals on both the supplier and buyer side have had little or no training in them. SOP is a multi-dimensional construct reflecting five facets of individual and organizational-level interactions with key suppliers, including:

1. 1.

   Communication. Open information sharing and substantive communication.

2. 2.

   Buying and decision making processes. Adopting and sharing clear and consistent purchasing policies and procedures.

3. 3.

   Professionalism. Respectfulness and genuineness in interacting with supplier personnel.

4. 4.

   Assistance. Providing assistance, training and support for the supplier within the buying firm.

5. 5.

   Responsiveness. Being flexible and responsive to the needs of the supplier.

Practitioners need to encourage and motivate the individuals involved in selling and buying to focus less on the products, services, and costs and more on the interactive, co-production activities and processes that enhance the mutual benefits and values produced through the exchange partnership. For some practitioners, this may indeed be a paradigm shift requiring training and development, not to mention encouragement and motivation. For scholars, the idea of buyers becoming more active in the exchange process – by assuming a shared responsibility and initiating supplier oriented activities and behaviors that reduce conflict while enhancing relational outcomes – requires an extended model of relationship marketing.

Most research investigating the theory and practice of inter-firm relational exchange has been from the perspective of the marketing and selling side of the exchange relationship (e.g. customer orientation). Much remains to be discovered regarding possible impacts that supplier oriented activities and behaviors undertaken by buyers could have on exchange outcomes and development of satisfactory inter-firm relationships.

The study findings with regard to conflict mediation underscore the importance of buyer and seller working together, both parties undertaking responsibilities and actions that will enhance inter-firm relationships. Either side to the exchange working alone will have only a partial impact on the reduction of conflict as certain elements of inter-firm conflict lie outside the domain of one partner or the other. Practitioners must realize that to maximize the reduction of conflict and enhancement of relationships, both sides must work towards a shared focus and collaborative interaction.

Three of the five dimensions of SOP have a significant and positive association with relationship satisfaction. The largest is from communication, emphasizing the importance of establishing open communications and sharing expectations regarding what is expected. Buying process – maintaining a good credit rating and being consistent with purchasing policies and procedures – highlights the importance that such factors have on relationship development and maintenance. The final significant dimension of responsiveness indicates the importance of being flexible and responsive to the needs of the supplier when the situation requires.

The lack of training of both buyer and seller professionals in interpersonal skills, highlighted above, has resonance in the findings of Maud Dampérat and Alain Jolibert in their article “A dialectical model of buyer-seller relationships”. They say that, while the necessity to train salespeople is obvious, the usefulness of training buyers is not as well documented.

Their study among professional buyers and sellers in various French industrial sectors demonstrates that, at the individual level, buyer relational orientation and seller expertise influence the course of business relationships. As individual differences become more important as the relationship develops, it is appropriate to select buyers with good relational abilities and to train them to develop their potential for projects based on partnership.

The study, based on a buyer’s perspective and focusing on long-term relationships, demonstrates:

• •

  the direct effect of seller expertise on solidarity and cordiality;

• •

  the direct effect of buyer relational orientation on cordiality;

• •

  the direct effect of both solidarity and cordiality on buyer interpersonal satisfaction;

• •

  the direct non-linear effect of frequency on buyer interpersonal satisfaction;

• •

  the direct effect of buyer interpersonal satisfaction on interorganizational long-term orientation; and

• •

  the mediating effect of satisfaction between solidarity and long-term orientation.

Interpersonal satisfaction results from the appraisal of all aspects of a working relationship and reflects the buyer’s overall evaluation towards his or her relationship with a seller. Proximity, by contrast, is a set of bonds between buyers and sellers during their interactions. It results in buyer and seller acting in a unified manner toward a desired goal and includes frequency, solidarity, and cordiality of interactions.

Frequency of interactions corresponds to the intensity of professional and social contacts between buyers and sellers. However, there may be an optimal level of frequency of contacts – too much, as well as not enough contacts, may deteriorate buyer satisfaction if “too many” contacts are perceived as intrusive or time-wasting.

Solidarity refers to the actions that a seller undertakes to help a buyer encountering difficulties. For example, if a buyer asks for a postponement of payment due to temporarily limited liquidity, the seller may show his solidarity by not asking for immediate payment.

Cordiality refers to a buyer’s assessment that interactions with the seller are friendly and pleasant. Pleasant interactions are important for the development of business relationships, leading to better understanding, and reducing the risk of conflicts.

The results emphasize the importance of seller expertise in stimulating buyer interpersonal satisfaction through cordiality and solidarity. Thus, a well-trained seller could increase buyer satisfaction if he is able to adequately manage proximity during interactions. Buyer relational orientation also directly influences cordiality and indirectly influences satisfaction. Therefore buyer relational orientation must not be neglected by managers.

Buyer-seller proximity (frequency, solidarity and cordiality) directly influences buyer interpersonal satisfaction. Solidarity is the most important determinant of buyer interpersonal satisfaction followed by cordiality and then frequency. These determinants should be emphasized in sales training according to the nature of their influence on buyer satisfaction.

Solidarity and cordiality have a linear effect whereas frequency has a non-linear quadratic effect on buyer satisfaction. Thus training could highlight that the more a seller shows solidarity and cordiality, the more satisfied is the buyer. The frequency of interaction has to be monitored carefully. Too few and too many interactions have to be avoided. Contrary to previous research, this study shows that interactions that are too frequent can also have a detrimental effect on buyer interpersonal satisfaction.

Buyer interpersonal satisfaction has a strong influence on long-term interorganizational orientation. However, companies often neglect the evaluation and management of buyer interpersonal satisfaction. They prefer investing more in advertising than in maintaining or developing relationships with their customers.

Such neglect could be terminal for some organizations. Supporting Dampérat’s and Jolibert’s view that pleasant interactions lead to better understanding and reduction in the risk of conflict, Ioanna-Maria Gedeon, Andrew Fearne and Nigel Poole, in their article “The role of inter-personal relationships in the dissolution of business relationships”, examine the role that personal relationships might play in maintaining business relationships – or precipitating their demise.

Paradoxically, their study provides evidence to support the views of both those who believe emotional aspects of relationships can prevent relationship dissolution and those who argue to the contrary. Personal relations are very important as inter-firm interaction is always mediated through people. However, in the final analysis, personal relationships may count for little if the supplier fails to deliver commercial value for the customer.

Personal relations are clearly factors responsible for change in business relationships along with other factors. The interplay between business and people is complex and multi-faceted. Negative feelings arise from business issues and people can behave irrationally on the basis of those feelings with dire consequences for suppliers.

In a study based on reasons why business relationships of suppliers within the UK produce, meat and diary sectors failed, there were occasions when suppliers perceived that certain individuals on the buyer’s side took or could take action to prevent the dissolution of the relationship because of the strong personal relationships that existed between particular individuals in the respective organizations.

One supplier acknowledged that if they had developed a better personal relationship with the retailer’s senior management they could have resorted to that good personal contact to prevent or at least slow down the negative evolution of the business relationship. They also believed they could have benefited from preferential treatment which could have reversed the situation.

Another supplier acknowledged, in hindsight, that if they had changed the person who was handling the relationship with the customer then a better personal relationship could have existed between the two respective managers, which may have resulted in the buyer giving them advance warning of perceived non-compliance issues which threatened the long-term continuation of the business relationship.

Another argued that when the retailer decided to rationalize, new people had started working for the retailer and therefore all the people that they historically dealt with who knew about them and with whom they had developed good personal relationships were no longer there to offer assistance.

These examples demonstrate the way good personal contact can play the crisis insurance role and is in line with those who have argued that good personal contacts are sometimes cultivated so that they can be resorted to and solve crisis situations.

In another instance, the personal loyalty of people from the customer side towards people from the supplier side worked to counteract the influence of a competitive offer, even though the focal relationship was eventually broken.

However, there were occasions when the supplier suggested that, while the good personal relationship that existed between the senior management on the supplier’s side and the retailer’s senior management made it difficult for the latter to end the relationship, and maybe bought them some time, it was not enough to save the business relationship in the end (it was observed: “You might have a good relationship with all of them in which case the director has got a hard choice to make but it will come down to performance and price at the end of the day”).

Similarly, another supplier argued that they can have a good relationship with individuals from the customer side but this, by itself, is not enough to stand in the way of commercial decisions (“we can have great relationships with people but they absolutely screw us in the ground because that’s what their job is”).

In another example, the supplier argued that when the retailer restructured, the buyer wanted to retain his favorite suppliers. However, they subsequently acknowledged that an honest relationship is very difficult to develop between a buyer and a commodity supplier when the only thing that matters is price. Again it appears that the good personal relationship cannot overcome business criteria.

In a similar situation, the supplier suggested that “even though they (the retailer) were loyal to us, they felt that we were not offering exactly what they wanted” which shows that the retailer’s loyalty towards them could not counteract the fact that the supplier was not able to provide what they wanted. This example indicates that the retailer’s loyalty was an emotional attachment beyond the economic value of the relationship but that the supplier failed to recognize the importance of delivering value to the customer – being “nice” people is never enough.

Finally, there were several instances where good personal relationships that had been developed were severely disrupted by flashpoints and crises, where emotions got the better of certain individuals.

When considering the merits of buyer-seller relationships, both from an organizational perspective and also from the point of view of decision-makers on the ground, and assessing the move from adversarial, transactional relationships towards cooperative, service centered ones, checking out the world’s largest retailer – Wal-Mart – is a worthwhile exercise.

That is what Jared M. Hansen does in his article “The evolution of buyer-supplier relationships: an historical industry approach”. He says that, while advocates and critics of Wal-Mart may disagree about the net benefits of the global retailer on a society, they inherently agree that it has had a tremendous impact. Part of that impact has been the widespread diffusion and adoption of an increasingly service-dominant (S-D) logic across retailing, business, and industrial markets as its information sharing philosophy has evolved into integrated supply chains.

A few marketers may ask how, if they never plan on doing business with Wal-Mart, this applies to them. However, retail buying is a particular form of industrial buying with complex customer and supplier relationships. As manufacturer and industrial marketers attempt to develop and participate in more service-centered models of exchange, they will be subject to the same relationship complexities, increasing the amount of required organizational resources.

Therefore, the transition towards an S-D logic for business-to-business and industrial markets has broader organizational implications, regardless of whether a particular organization does direct business with Wal-Mart.

For instance, other retail organizations have begun adopting the Wal-Mart philosophy towards information sharing and systems. Wal-Mart – one of the first retailers to use computers to track inventory and one of the first to use bar codes – manages the merchandise process by sharing point of sale demand, inventory levels, supply chain costs, promotion plans, and strategic goals with its suppliers through its proprietary Retail Link database system.

Now a manufacturer will be required to use Target’s “PartnersOnline,” J.C. Penny’s “Supplier Internet Site,” Tesco’s “Store Control Centre,” and METRO Group’s “Future Store Initiative” in a similar manner to Wal-Mart’s Retail Link. This includes supplier summits, EDI transmissions, vendor-managed inventory, and RFID initiatives, among other processes to integrate the supply chains.

Consistent with the Wal-Mart philosophy of sharing information, all suppliers are granted free access to all of the Retail Link database reports, all suppliers are mentored by Wal-Mart replenishment managers, and all suppliers are required by Wal-Mart to use the Retail Link system to co-manage their joint business with the retailer. As a result, the suppliers’ forecasts are based on the Retail Link database reports of prior sales to consumers at the registers, and (supporting the Wal-Mart philosophy) suppliers sell to the consumer, not to the retailer. These practices can reduce intra-channel conflict, leading to a more integrated value chain.

Wal-Mart even “encourages” larger, more experienced suppliers to work with newer suppliers (sometimes competitors) to improve utilization of the Retail Link system. Additionally, Wal-Mart has begun using standardized online quick reports called Store Within a Store (SWAS) reports nested within the Retail Link system that update daily on suppliers’ and buyers’ computer screens. Buyers can email the quick reports to suppliers with comments or questions, accelerating the collaborative responsiveness to business needs.

More recently used by Wal-Mart, the “Collaborate, Planning, Forecasting, and Replenishment” (CPFR) system allows suppliers to review and make comments on sales forecasts for their items. Collaboration occurs constantly as suppliers propose changes in the system and Wal-Mart replenishment managers or buyers respond with approvals or reasons why changes should not be made. Thus, merchandise forecasts become co-produced, integrating knowledge from both the buyer and the supplier.

Even more contrary to a product-centered philosophy containing adversarial relationships, several manufacturers have indicated that Wal-Mart has placed them on a co-managed inventory system where the manufacturers themselves write purchase orders without any Wal-Mart signatures or approvals. An invitation to participate indicates complete trust in the relationship, as there are no order restraints beyond occasional buyer observation.

Knowing where value resides from the standpoint of the customer has become critical for suppliers. For the 61,000 worldwide manufacturers selling to Wal-Mart and the much larger group hoping to sell to it or to other retailers, competitive pricing and innovation are still necessary, but no longer sufficient. Using the combination of its buyer-supplier relational power and its shared integrated information tracking system, Wal-Mart buyers expect the suppliers’ sales representatives to jointly manage the retailer’s consumer business. The evaluation of the evolving supplier salesforce role from a buyer’s perspective in a service-centered logic is divisible between three objective measures (i.e. volume, profitability, and inventory) and four subjective measures (i.e. responsiveness, decision maker empowerment, information sharing, and trust).

Trust is a much-used word, with a whole range of meaning, in the world of business-to-business purchasing decisions. And with trust, there is inevitably risk. A buyer can trust a supplier to deliver the goods, complete a project, and fulfill whatever the contract demands – but can never be sure. There is always a risk that something might go wrong. The same goes for the supplier who can trust a buyer that they know what they want, they are sure what they are asking for, and will not find excuses not to pay. But they cannot be sure, and that is a risk they take.

Understanding buyers’ risk perception can improve the management of purchasing activity and exploring the risk behavior of the supplier can help to harmonize selling/procuring activities. From the point of view of service technology, the perceived risk connected to attaining a result is competence-related – competence meaning qualification, power, skill and knowledge. In his paper “Competence-based risk perception in the project business” Zoltán Veres includes construction project engineers, market researchers, advertising agencies, business event planners and their clients to study the perceived risks of something going wrong with a project, and how it can be better managed by interactive communication.

Interactive communication can be a tool of risk management provided that the parties in the transaction are able to take advantage of it. Risk communication is a communication process that is determined by different risk perception and estimation. The information and the message relative to risk need to be formulated by taking the needs, questions and comprehension of the partners into consideration and linking them to their attitude to risk. The timing of risk communication is of particular importance, especially in the case of protracted transactions. Different actors of risk communication have different attitudes and interests, and the dialogue between them cannot be fully controlled from either side, yet it can be altered.

The actors of the project transactions can obtain strategic and operative ammunition if they manage to understand the nature of the performance risk, perceived during a business service, better. Understanding the risk perception of buyers can improve the management of purchasing behavior and the purchasing process as well as the proactive approach of the supplier. Exploring the risk behavior of the supplier can help the supplier’s self-management and to harmonize the selling/procuring activities of the supplier/buyer.

One of the main characteristics of competence-based perceived performance risk is in the interpretation of project success when the buyer and the supplier are not on the same wavelength. Buyers – contrary to suppliers – are better at perceiving the long-term effects. When describing a “good supplier”, a buyer prefers flexibility in fulfilling the contractual terms while buyers are expected to know exactly what result they would like to achieve with an investment and to be capable of expressing their needs. Buyers’ perceived performance risk can be linked to the presumed weaknesses of the supplier in professional background, personnel, size or technology, and to certain external factors as for example subcontractors and negative word-of-mouth. Risk perception coming from competence asymmetry can be reduced by interactive communication but it must be adjusted to the buyer’s comprehension level.

When describing a “good supplier”, buyers value the fact that even though the supplier can read the investor’s mind, it still does not fulfill the buyer’s expectations slavishly, but has some “ideas for improvement” much more than just performing the job as laid down in the contract. As a result the supplier helps the buyer in a number of ways.

The majority of interviewees in the study thought it possible that some suppliers overestimate their own competences. By overvaluing its skills and capacity, a supplier may take on too many jobs, consequently losing control of individual jobs that under normal conditions it would be able to perform with success. Overloading may result from the supplier tendering for an excessive number of potential clients and unexpectedly winning them all.

Participants agreed that it is important to define the “good buyer” because buyers play an increasingly important role in large and complex projects based on a coordinated value creation process. Fundamentally, buyers are expected to know exactly what result they would like to achieve with an investment and to be capable of expressing their needs. For most suppliers, it is also of great importance whether a buyer accepts a supplier’s opinion and proficiency.

The buyer should be able to see all the consequences and the incurring costs as well as to judge that expectations can be met and which cannot. Therefore, competence helps the buyer to consider what to expect from a supplier and what consequences the fulfillment of particular expectations may have.

Having a relationship with just one, or maybe two suppliers might seem quite enough to occupy purchasing managers’ time and energies yet many of them, of course, have purchasing strategies based on multiple suppliers.

Selecting the appropriate number of suppliers for each product purchased is one of the most important strategic problems facing purchasing managers. The range of solutions – from single sourcing via dual and parallel sourcing to multiple sourcing – all have their advantages and drawbacks. So what causes a company to change from one sourcing strategy to another and what outcome effects are intended?

In the article “Insights into the process of changing sourcing strategies”, Wouter Faes and Paul Matthyssens study ten case situations in which a transfer from one sourcing strategy to another occurred, in order to find the underlying reasons and intended effects, and to link the moments of strategy change to both the market situation in which they seem to occur and the kind of strategic situation in the purchasing portfolio. Three cases were a change from single sourcing to multiple, with seven of them taking the reverse approach.

All cases where a strategy change from single towards multiple sourcing took place were considered by the buying companies’ respondents to be cases of products of a strategic nature (with a high supply risk and involving a substantial budget). Moreover they took place in markets tending to maturity, but still showing some product improvements. The motives for changing the sourcing strategy ranged from the need for quality improvement and cost pressure to the need for cost-efficient deliveries, uncertainty of future supply, and the need to standardize. It seems that specifically in more innovative and faster-changing markets the uncertainty about the still rapidly-changing environment and specifications makes quality a more prominent factor, whereas standardization and cost pressure play a more important role in more mature markets.

The cases in which the inverse sourcing switch took place can be considered as mature markets and four out of seven as dealing with a “leverage product”, posing little supply risk and involving an important amount of money. In only one case was the product considered to bear a high supply risk. In all cases cost pressure or the need to improve the total cost of purchasing was cited as the main reason for changing strategies. Other expected positive outcomes varied from improved quality to increased reliability of deliveries.

The expected ”improved supplier relationship” confirms the common belief that, in spite of increased cost pressure and lower purchase prices, not splitting the purchased volume over more than one supplier, or splitting it over fewer suppliers than previously, leads to more trust among partners. Most purchasing managers consider such a relationship, based on hard facts and strict market (price and performance) comparison, to be “simpler”, “better” and “more stable” than a relationship based on continuous negotiations.

Wouter Faes and Paul Matthyssens recommend that purchasing managers and their staff question their present sourcing strategy. More specifically, when strategy changes (from single to multiple or vice versa) are proposed, a clear strategy discussion should take place on the pros and cons as well as on the expected performance impact. The “fit” of this decision with the overall purchasing strategy and with the changing market conditions (drivers) must be evaluated. Secondly, the annual purchasing audit should include an overview of the sourcing moves and their attributed benefits. In fact more insight is needed into this type of strategy changes. Companies cannot accept such changes to be undertaken driven by “fashion” or because the “reverse” strategy did not pay off. A sourcing change might have quality and intellectual property implications, and hence needs to be managed hands-on.

Although the case research did not come up with any new factor of influence on whether to choose a single or a multiple supply strategy, it did discover that the importance of the different motives for strategy change clearly varies with varying market situations. As such, when companies change from single to multiple sourcing, uncertainties about the still rapidly-changing environment and about the specifications is put forward as a determining factor of influence in the more innovative and faster changing markets, whereas standardization and cost pressure apparently play a more important role in more mature markets. Also, when a supplier base reduction strategy is implemented, cost pressures dominate in mature markets, whereas quality is a more determining factor on markets that are not yet fully mature or global.

Also apparent was the dynamic nature of the process, confirming that purchasing strategy changes take place very erratically over time and in both directions. Managers could do a better job in planning these moves. Cost pressure, for instance, may lead to both reducing the number of suppliers and to increasing it, whereas more qualitative and logistical concerns mostly lead to a need for reducing risks by going to fewer sources of supply. The difference may lie in the strategic intentions of buyers but also in the changing nature of the markets from which companies buy. The authors propose a model of change linking the portfolio matrix and buyers’ intentions for specific types of products to the lifecycle of a product on the supply market.

If the challenge your are facing is less that of choosing between multiple versus single partnerships and more that of outsourcing offshore services, recognizing the strategic nature of selecting and managing those suppliers is essential in order to reduce complexity and associated risk.

While reduced communication costs and standardized software packages have made it attractive for US and Europe-based organizations to outsource to countries where labor costs are lower, lack of proper attention to the relationship and development of a proper system of controls can create a high level of risk and diminish performance. Careful attention to the relationship in supplier selection, contract development and ongoing supplier performance will help reduce the risk, thereby making offshore outsourcing a manageable proposition.

In all their six case studies of Fortune 500 firms purchasing services from suppliers in India, Wendy L. Tate and Lisa M. Ellram note there had been lessons to be learned – some the hard way. In their article “A managerial framework for the purchase of offshore outsourced services”, they say that treating offshored services suppliers as arms-length or non-strategic, especially in the selection and establishment of the relationship, leads to poor performance and increased costs. Experiences in the vagaries of the offshore environment influenced each of the case companies to develop a standardized process for their supplier selection and management.

All of them share the came common steps, with each step in the process having objectively measured criteria that must be met before progressing to the next step:

1. 1.

   Identification of need. Recruit interest and determine if there is a need. Verify if this is a cost-saving opportunity.

2. 2.

   Determination of responsibility. Determine and assign sourcing responsibility.

3. 3.

   Analysis. Conduct opportunity assessment. Develop sourcing plan and commodity profile. Assess impact value and risk.

4. 4.

   Source. Select potential suppliers. Determine sourcing approach. Develop evaluation criteria. Conduct evaluations and perform due diligence.

5. 5.

   Negotiate and contract. Conduct negotiations. Select final suppliers. Create order.

6. 6.

   Implement. Develop statement of work. Perform all other necessary functions to bring supplier on-line and move process offshore.

7. 7.

   Measure. Use objective and subjective measures of performance to ensure contractual agreements are being met.

8. 8.

   Manage. Ongoing supplier relationship management.

A significant barrier to customer satisfaction discussed by all of the case study firms is the difference in culture and language between India and the US. To overcome this barrier, the case study firms use accent neutralization courses, cultural training, and other methods.

Two companies had to segment customers and in-source certain services to remedy service dissatisfaction issues from their offshore service providers. Throughout the case study analysis, many examples of misunderstandings and other cultural nuances around holidays, sports, and colloquialisms were cited. For example, one company’s customers who asked about “bereavement” fares (reduced prices for people traveling to attend a funeral) or wanted to ship human remains, were not offered condolences as is customary in the US because in India condolences are considered inappropriate. The company is now taking a stronger lead in training the agents on interpersonal nuances. Customers at another company said they were “fixin’ to do something,” making the Indian agent believe that something was broken. The inability to communicate effectively generates frustration for the customer, creates delays and often leads to call escalation.

Leveraging the core competence of the offshore supplier to improve productivity, and increase efficiency takes the right balance of expectation, measurement and communication.

Offshoring of business processes and services require strong leadership, operational experts, and constant environmental scanning. The group leaders should clearly define the roles and expectations for each of its members. The focus for companies when purchasing services from offshore providers should be on the overall, end-to-end, customer experience. Selecting the right service to offshore and the appropriate location is only the starting point for success. The companies must understand supplier capabilities, and match those with organizational needs. Companies should give careful thought to the types of services that are being moved to offshore locations.

In addition, success requires diligence and an awareness of the potential risks. In addition to ongoing top management support, it takes the right team with appropriate internal and external subject matter experts to handle the outsourcing and the outsourcers. It also requires collaborating with, and developing alliances with, the offshore providers.

Transaction cost economics (TCE) has a number of important premises as it relates to the offshore outsourcing decision, including asset specificity and uncertainty. Offshore outsourcing of services increases uncertainty because the transactions occur in an opportunistic environment where players are limited by their own bounded rationality.

In particular, TCE warns of the risks associated with overdependence on a supplier. In this research, it was found that there is significant underperformance risk associated with not properly training and acculturating the supplier. However, in the process of reducing this performance risk through training firms increase the risk of dependence on the supplier. Yet, the research indicates that such investments increases employee loyalty to the buying firm, further enhancing performance.

Training as a means to alter behavior is also an issue in the subject tackled by Lillian Schumacher, Jane V. Wheeler and Amelia S. Carr in their research on “The relationship between emotional intelligence and buyer’s performance”.

But can behavior be learned or is it something you have to be born with? The belief here is that behavior can indeed be developed, learned or copied and it is, therefore, beneficial for buyers to attend activities and training to learn how to interact with others to develop what are often considered interpersonal skills.

For many years, buyers have participated in negotiation training to learn how to modify their behavior and perform better at negotiations with suppliers. This study identifies that certain behavior traits may be more beneficial for buyers to learn than others. Buyers can use their emotional intelligence during their interactions with suppliers for negotiations, supplier development activities, product process discussions, supplier evaluations and other activities. From the supplier’s perspective, it appears that those who perceive their buyers as having a higher level of emotional intelligence also believe that buyers have a higher level of relationship performance.

Emotional intelligence (EI) has been defined as having the “abilities to perceive, appraise, and express emotion; to access and/or generate feelings when they facilitate thought; to understand emotion and emotional knowledge; and to regulate emotions to promote educational and intellectual growth” – and, more simply, as the ability to understand people. It focuses on the relationship between two individuals in terms of how they use intentional and conscious emotional and intellectual knowledge to result in desired behaviors and is, therefore, a trait that may help to better understand the buyer-seller relationship. A study of EI in the buyer-seller relationship can increase knowledge of the buyer’s behavioral skills that are used to interact with suppliers.

It is important for suppliers to understand the buyer’s EI and how to identify which buyers exhibit higher levels of EI behavior. Often suppliers have a choice of which buyers to work with for strategic partnerships and other types of alliance relationships. Suppliers may use the results of this study to better identify those buyers that would be most beneficial for them to pursue long-term relationships. It is important for most suppliers to be in a cooperative buyer-supplier relationship. The true benefit comes when the supplier establishes relationships with buyers that demonstrate a higher level of emotional intelligence.

The study, based on buyers from US manufacturing and service companies, found several significant correlations between the buyers’ emotional intelligence and their relationship performance – and a stronger correlation between EI and relationship performance existed when buyers were assessed by their suppliers than when they assessed themselves.

A statistically significant correlation was found between how suppliers rated their buyers’ overall emotional intelligence and their buyers’ overall and financial relationship performance. From the supplier’s perspective, increases in the buyer’s EI corresponded with increases in the buyer’s financial relationship performance.

Second, a statistically significant correlation was found between how suppliers rated their buyer’s self-management competencies and how suppliers rated both overall and financial relationship performance. From the supplier’s perspective, a higher self-management skill level for the buyer corresponded with higher levels of financial relationship performance.

Third, a statistically significant correlation was found between how suppliers rated their buyers’ social awareness competencies and how they rated their buyers’ overall and financial relationship performance. From the supplier’s perspective, a higher degree of social awareness for the buyer corresponded with higher levels of overall and financial relationship performance.

Lastly, a statistically significant correlation was found between relationship management competencies and relationship performance. Again, from the supplier’s perspective, increased ability of the buyer to manage their supplier relationships corresponded with higher levels of overall and financial relationship performance.

This study showed that EI provides a method for buyers and suppliers to more effectively manage their relationships. Using EI, the buyer can more effectively think through options that could create a positive outcome for both the buyer’s and supplier’s firms.

As Wouter Faes and Paul Matthyssens pointed out in their article referred to earlier, selecting the appropriate number of suppliers for each product purchased is one of the most important strategic problems facing purchasing managers. The point is taken up by Nicola Costantino, Mariagrazia Dotoli, Marco Falagario, Maria Pia Fanti and Giorgio Iacobellis who propose “A decision support system framework for purchasing management in supply chains” designed to help practitioners and consultants of organizations at any level in the supply chain in the difficult task of selecting a suitable supplier among the numerous possible vendors, and of deciding the number of potential suppliers to invite to bid.

Supply chain (SC) network design is a complex decision process for many reasons, including the large-scale nature of such networks, hierarchical structure of decisions, randomness of various inputs and operations, and the dynamic nature of interactions among SC elements.

Purchasing, procurement, manufacturing and logistics are among the major decision areas of SC management. In particular, in the new global business environment purchasing is becoming one of the most significant and strategic decision areas of the physical SC, because external suppliers now exert a major influence on a company’s success or failure. Indeed, incorrect decisions about supplier selections may lead to serious profit losses up to the exit from a product’s market, as shown by numerous examples of problems suffered by the SC of leading world enterprises.

Suppliers are typically chosen by buyers taking into account price as a major factor. However, a serious limitation of existing approaches is that they disregard costs due to key transaction processes – such as singling out the purchase objective, researching the supplier, negotiating the contract etc. The omission of these additional costs (AC) of purchasing significantly influences the cost of a buyer-seller transaction, being a part of the broader category of transaction costs.

The total cost of the purchase is evaluated in the proposed framework, which performs a simulation of the generic exchange of a new product/service between a buyer and a set of potential sellers.

It includes a statistical module and the decision support system (DSS) core. The statistical module performs the analysis and elaboration of the data relative to the transaction and uses appropriate statistical models determining the AC connected to the supply of the requested product and the total cost of purchasing (TC, sum of the purchasing price P and of the related AC). The DSS core mimics the dynamical behavior of the generic exchange by a simulation model of the buyer choices and of the buyer/supplier relationship. Indeed, simulation can represent an efficient instrument to capture the operational behavior of a transaction, while evaluating and validating alternative choices (e.g. supplier selection) through suitable performance indices (e.g. the AC, P and the TC). As a result, the approach employed by the statistical module enables the DSS to formalize these indices, that are (at least partially) probabilistic in nature (depending on the different purchases), while the idea of evaluating the generic transaction simulation via independent replications, employed by the DSS core, gives statistical significance to the model.

The designed DSS helps the supply chain buyer in taking decisions with respect to the transaction. In particular, the DSS is able to evaluate (in a statistical and probabilistic way) the total cost of purchasing before the transaction actually takes place and may be employed by the buyer to forecast the cost of a purchase and take decisions accordingly. For instance, in case the evaluation is not satisfactory (e.g. the foreseen total cost is excessive), then alternative decisions may be taken (e.g. the number of consulted suppliers may be changed).

The proposed DSS is able to deal with three categories of problems that may be addressed by the buyer before carrying out an exchange:

1. 1.

   providing an estimate of the total cost of purchasing;

2. 2.

   determining the suppliers to consult; and

3. 3.

   forecasting a possible result of the vendor selection process.

The authors feel it is a tool that the buyer may efficiently and effortlessly employ to evaluate alternative scenarios for the same transaction, so as to take effective purchasing management decisions accordingly.

There is, as is evident from the contributions mentioned here, plenty to occupy the minds of purchasing and procurement professionals. But what of the small companies where the business owner is responsible for all company management and administration matters, including purchasing? A company in which the focus has to be on the overall operation of the business, with no specific organizational functions such as purchasing? One in which the purchasing method is informal, organic and often more or less unconscious or instinctive? On in which the prices paid are usually what the supplier asks, simply because there is not the time for lengthy price negotiations? How do the owners of these small companies perceive purchasing?

These are among the issues raised by Chris Ellegaard in his article “The purchasing orientation of small company owners” which focuses on owner-managed manufacturing firms with fewer than 20 employees. Interestingly, during the many hours of interview for the study the term “purchasing” was rarely mentioned and only when informants were asked directly. One small company owner (SCO) asked: “Do you think we started our own company to become purchasers?” – a remark which, although said with a laugh, found broad support among participants.

The fact that they did not have formal purchasing education and did not take part in professional purchasing networks did not mean they did not spend time on purchasing activities, however. On the contrary, they spent considerable time on them, even if the tasks were of an operational nature. This was necessary because supplies were required to keep manufacturing running.

Minimum use of time and resources is vital to the SCO. Every activity which is not considered important will in all likelihood be deemed irrelevant and potentially provoke annoyance. Selling organizations should be very careful in their demands to SCO customers. Respecting the limited resources and time of SCOs will help sales professionals maintain their relationships with them.

Sales/marketing people, who want to expand their portfolio with industrial SCO customers or maintain present industrial SCO accounts, should take the following points into account in their selling behavior:

• •

  The main focus of the SCO is to keep production running. Hence, quality and delivery performance, and more importantly service, responsiveness, and flexibility are key performance criteria. Companies that deliver to SCOs should be able to send out rush orders – because the standard SCO order is frequently a rush order. This includes flexible manufacturing planning and flexible logistics service. Sales personnel should have some technical knowledge or be ready to provide fast access to technicians. Quality systems and procedures should be in place and logistics planning should be in focus. Significant resources are required to maintain operations security for the SCO. On the positive side, SCOs probably wouldn’t mind paying a little more for the products. Resources normally used for lengthy negotiations and the endless pursuit of price reductions that large companies tend to demand can consequently be saved.

• •

  Problem solving is a requirement – selling actors have to react fast and take care of SCO difficulties. SCOs experience problems often, partly as a consequence of their lack of planning. Their reactive nature means that sales people should also be ready to react fast. The problem-solving capabilities of sales people need to be well developed. The selling organization should be set up for problem-solving – meaning fast reactions, effective internal communication, empowered sales people etc. In fact, traditional industrial sales/marketing capabilities such as negotiation and sales economics should be replaced by more service-oriented capabilities.

• •

  SCO lack of purchasing education, experience, and knowledge, as well as their informal attitude should be accommodated. Sales people should meet SCOs on their level. This includes a relaxed, down-to-earth attitude. Sales people should be able to avoid the sales/marketing lingo that is used with large customers. It would be wise to keep formal exchange rules and procedures to a minimum – demanding a 60-page contract is a sure way to repel SCO customers.

• •

  Expect loyalty. SCOs will stay with suppliers if the above points are respected. On the other hand, it also means that it is difficult to get new SCOs who tend to spend little time looking for suppliers and generally have a limited overview of supply markets. It can therefore be difficult to establish contact with these customers. Sales professionals should initially think about SCO visits more as network-building than business encounters. Since SCOs will not shift unless they experience severe problems with existing suppliers, the key task is to establish and maintain contact by placing a cue in the mind of the SCO, instead of trying to immediately capture the account.

• •

  Demonstrate reliability. This can be done by consistently striving to live up to the operational demands of the SCO. SCO customers require fast access to problem-solvers and decision-makers, precise information, readiness, visibility and honest information. Continuous assistance in solving these problems demonstrates reliability. Violation of reliability, or indeed any other exchange norm, will be perceived as a personal matter, since running a business is personal to these customers.

(A précis of the special issue “Purchasing orientation”. Supplied by Marketing Consultants for Emerald.)