Buyer-Supplier Relationships

Buyer-supplier relationships are essential in commercial operations as they support and facilitate the fulfillment of consumer needs by an organization. Delbufalo (2018) defines buyer-supplier relationships as commercial transactions that take place between organizations to facilitate the purchase and supply of goods or services. Although inter-organizational transactions play a key role in purchasing and marketing practices, the application of the concept has only gained interest recently owing to global changes in production methods. Maintaining good relations with suppliers should be as important to an organization as getting the best value for the goods or services. Evidence from research studies and company surveys indicate that buyer-supplier relationships are critical to decision-making supply chain management. Therefore, efficient management of buyer-supplier relationships through transparent and honest practices enable an organization to increase supply chain value by ensuring a sustainable supply of goods of consistent quality to satisfy changing consumer needs.  

Buyer-Supplier Relationships

            In today’s globalized economy, success in business is defined by the relationships that the business has with key stakeholders, among them the suppliers. Every successful business is situated in the middle of numerous supply chain relationships with customers and suppliers to ensure efficient sourcing of raw materials and distribution of finished products and services. According to Bedgwin (2017), these relationships help to generate value throughout the supply chain by improving lead time, minimizing waste, and enhancing throughput. Therefore, efficient management of the buyer-supplier relationship enhances value creation in the supply chain by ensuring a sustainable supply of raw materials. To effectively meet consumer needs, every successful business requires a sustainable supply of key materials to support production. Therefore, establishing and maintaining a robust buyer-supplier relationship enables an organization to adjust production requirements in accordance with changes in consumer and market demand.

            Fostering flexibility in the supply chain ties into Delbufalo (2018) definition of buyer-supplier relationships as commercial transactions that take place between organizations to facilitate the purchase and supply of goods or services. The commercial transactions in this context are collaborative in nature and are enabled by an open and effective two-way communication approach. Kim (2018) asserts that a business enterprise needs reliable suppliers of key materials to support the timely production of quality consumer products. Therefore, both parties involved in the relationship must commit to honest and fair business practices to foster trust. Trust is achieved through the accurate and timely communication of relevant information between the two parties. The organization communicates its mission and vision with the suppliers to support informed decision-making on their side. The practice should be uniform across the relationship spectrum to establish goodwill.

            The buyer-supplier relationship spectrum is a continuum of three distinct types of interactions namely adversarial/competitive, complementary/collaborative, and barometric. According to Buckley, Enderwick, and Cross (2018), the most ideal relationship between a buyer and supplier in supply chain management is the complementary relationship. It involves real integrative partnering to establish a mutually beneficial relationship between the parties. Only in this type of relationship can the values and visions of both parties be simultaneously achieved. Meanwhile, the barometric relationship is “edgy” in nature because each party keeps monitoring the actions of the other akin to “atmospheric pressure” (Buckley, Enderwick, & Cross, 2018). Both parties consistently gauge each other’s position and attitude leading to a lack of trust between the supplier and the buyer. Lastly, the most common type of relationship between buyer and supplier is the traditional adversarial pairing. In this type of relationship, the objective of the buyer is to get an upper hand over the supplier by negotiating for the lowest possible price as well as discounts. The cost of doing business is overshadowed by the buyer’s need to dictate the terms of the relationship. As a result, the relationship between the buyer and the supplier is strictly transactional and is informed primarily by the needs of the buyer.

            The competitive or adversarial relationship between the buyer and the supplier is antagonistic in nature because each party wants to get the better of the other. According to Mandt (2018), business relationships are often adversarial in nature because the objective is to maximize the profit margin. The supplier is interested in supplying/selling his/her goods at the highest possible market price while the buyer is focused on negotiating to get discounts as well as leverage economies of scale to get a lower price. As a result, the relationship is transactional in nature with the values of each party overshadowed by partisan interests. In concise, this relationship is devoid of collaboration to achieve a common goal.

            Unlike the adversarial relationship, the collaborative approach to buyer-supplier engagement yields the best outcome for both parties. Both parties enter into a relationship based on trust fostered through a deep understanding of each other’s values and visions. Zsidisin and Henke (2019) assert that a two-way communication strategy is at the heart of fostering trust between the two parties by encouraging the sharing of ideas and problems. Both the supplier and the buyer work together to develop a relationship that is oriented to achieve the visions of both parties. Both parties purposively collaborate to ensure each party achieves its goals and objectives. Cooperation is based on the understanding that the success of each party is dependent on a collaborative approach to problem-solving to develop solutions that are mutually beneficial. The diversity presented by the above buyer-supplier relationships has led scholars to propose different models of managing these relationships to yield the best outcomes for each party.

            There are three models or approaches to managing buyer-supplier relationships namely the partnership model, operational complexity and market sophistication, and supplier portfolio management. According to Simon and Fassnacht, (2019), the partnership model encourages either joint ventures, close partnerships, arm’s length partnership, or vertical integration. It is mostly applied in collaborative buyer-supplier relationships. Meanwhile, Delbufalo (2018) advocates for the operational complexity and market sophistication approach that focuses on the intricacy of the supply chain components and the factors that influence the sale and purchase of the components. The model is synonymous with the barometric approach because market factors influence how components of the supplier chain are sold and purchased. Lastly, the supplier portfolio management approach focuses on addressing the risks that undermine the creation of a vast network of suppliers to improve responsiveness and enhance flexibility (Kim, 2018). Organizations that prefer an adversarial approach to supplier relationships often establish a large network of suppliers to mitigate the risk of losing key suppliers due to strained engagements. Each model is uniquely positioned to enable the creation of value for customers by ensuring a sustainable supply of products of consistent quality.

            Customer value creation involves the efficient utilization of the available resources to develop products or services that fulfill the implicit needs of the customers. According to Simon and Fassnacht (2019), it entails leveraging supplier relationships to ensure a reliable supply of essential materials to support the production of products of consistent quality at an affordable cost to the customers. For instance, establishing better relationships with suppliers, streamlining the production process to minimize waste, and using technology to improve quality achieves greater value for the end-user.  

Supply Chain Value

            Supply chain value is the difference between the price of the final product sold to the customer and the cost incurred in the execution of supply chain operations to develop the product. Therefore, the objective is often to acquire essential raw materials at a low cost coupled with minimization of waste in the production and efficient distribution of the final product.  Verma (2019) notes that each component of the supply chain is optimized to achieve the highest value by minimizing costs and wastage. It is a purposive approach to ensuring the available resources are prudently used in the production of quality products at the lowest production cost to ensure a significant profit margin when the product gets to the market. Besides the minimization of operational cost and wastage, value is created throughout the supply chain through effective forecasting and planning to effectively respond to changes in consumer demand in the target market. A responsive supply chain efficiently responds to fluctuations in consumer demand driven by changes in consumer preferences without creating inventory management problems.

            Effective management of supplier relationships supports value creation in the supply chain by ensuring a reliable and sustainable flow of essential production resources and materials oriented to proactively respond to consumer demand fluctuations. Haksöz (2018) argues that suppliers hold the key to creating value in the supply chain by ensuring a reliable and sustainable supply of cheap materials and resources. The scarcity of resources or materials erodes value by increasing the production cost, which is reflected in the final product. The final product reaches the market at a significantly higher price, thus eroding the profit margin. The efficient management of supplier relations involves optimizing flows in the supply chain to ensure the efficient movement of goods from the supplier to the end-user.

            Flows in the supply chain characterize the systematic flow of materials goods and related information between an organization and its suppliers and consumers. Simon and Fassnacht (2019) define three main flows in a supply chain namely product, information, and financial. The product flow defines the movement of goods from a supplier to the end-user. It focuses on the efficient delivery of quality products from the supplier to the customer. It also articulates concerns related to consumer service needs as well as returns (Simon & Fassnacht, 2019). Meanwhile, the information flow involves the transmission of orders and consistent updating of the delivery status to ensure what is involved in the supply chain are well-informed. Lastly, the financial flow in supply chain management focuses on payment schedules, credit terms, and consignment. Collectively, the three flows transverses across supply chain components to guide the efficient utilization of resources and materials to fulfill consumer needs.

            A typical supply chain comprises eight key components namely planning, information, source, inventory, production, location, transportation, and return of goods (Verma, 2019). Planning entails developing supply chain management strategies and implementing appropriate infrastructure. This includes but is not limited to evaluating the demand for a product or service, checking the availability of labor, profit, and costing. The planning component is inexplicably linked to the second component because the information is essential to effective planning. Therefore, it is important to have access to the latest, relevant information related to various aspects of production (Kim, 2018). After planning, it is important to secure sources of essential materials and resources. Sourcing closely ties to inventory management to avoid overhead costs of handling excess goods. Inventory management informs production schedules to ensure sufficient products to meet the needs of the consumers. Location is also essential to ensure the easy flow of raw materials from suppliers and finished products to the market. The location selection influences the transportation efficiency of raw materials to the factories or finished materials to the market. Lastly, after-sales service is essential to handle returned goods, particularly faulty or malfunctioning goods. Effective management of the supply chain components is critical to value creation in the supply chain.

            Value creation in the supply chain entails combining the capabilities and resources of partners in the supply chain to enhance competitive advantage. According to Mandt (2018), value creation in supply chains occurs when supply chain partners do more than just perform their basic functions. At every stage of the supply chain, the supply chain partners help the organization to create more value for the customers as the product travels along the chain. The objective is to add more value than the competitors can add to their own products (Haksöz, 2018). For instance, enhancing the performance of the employees through reward-based performance appraisal and ensuring prudent utilization of raw materials adds value through increased production output and reduced costs. In addition, suppliers of critical resources and raw materials can relocate closer to the factories to improve the flow of materials to production. In both contexts, supply chain partners are doing more to create value for their customers. However, value creation in the supply chain is only possible if buyer-supplier relationship challenges are promptly addressed to avoid delays and other inconveniences.

            The main challenges that often undermine buyer-supplier relationships are shipment and delivery, timely billing and payment, quality assurance, and performance.  Buckley, Enderwick, and Cross (2018) asserts that timely billing and payment is one of the issues that undermine the buyer-supplier relationship, particularly regarding invoicing and payment. In most cases, the buyer wants to spread out payments to correspond with their cash flow. Buyers often leverage their position and size in the market to delay payments to smaller suppliers. On the other hand, the suppliers won’t prompt payment for goods delivered to the buyer. In case of delayed payment, the supplier is likely to halt or delay the supply of essential resources and raw materials. Besides billing and payment, shipment and delivery is also another issue that undermines buyer-supplier relationships. The friction in this context occurs when the buyer complains of the supplier’s inability to ship goods in a timely manner. On the other hand, the supplier complains of not receiving sufficient notice with purchase orders. Quality and accuracy is also an issue that undermines buyer-supplier relationships. Delivery of low-quality shipment is a challenge for both the buyer and the supplier. Finally, the performance of both the supplier and the buyer affects the operations of either party. It is essential to hold quarterly meetings to review the performance of both parties and address emerging issues.

Impact of Supply Chain Value

            Effective management of buyer-supplier relationships leads to increased supply chain performance. Zsidisin and Henke (2019) assert that treating the suppliers courteously, honestly, and fairly fosters deep trust that can be leveraged in times of abrupt changes in demand of products in the market. During festive seasons, demand for products is likely to spike and a business is dependent on suppliers to accommodate special requests at odd hours. Furthermore, a loyal supplier of a critical resource can help a company to establish a competitive advantage by exclusively supplying to the organization. In both contexts, both the supplier and the buyer are motivated to work together with the collective goal of improving profitability. As a result, increased supply chain performance leads to better quality and service for suppliers.

            The suppliers understand that the quality of the goods they supply to the buyer as well as the service experience contribute to the overall brand equity. Thus, establishing a deep understanding of each other’s vision and values fosters a commitment to quality. Lai and Cheng, (2016) argue that the supplier understands that supplying low-quality raw materials and resources adversely impacts the buyer by increasing waste in production and defects in the final product. Increasing brand equity for the buyer by ensuring a sustainable supply of products of consistent quality benefits the supplier through enhanced brand recognition. The trickle-down effects of association with the buyer increase brand recognition for the supplier because the other competitors are eager to enter into business arrangements.

             The efficient management of buyer-supplier relationships also helps to reduce cost in the supply chain by leveraging economies of scale and long-term contracts. Overtime, goodwill with suppliers is generated through consistent and transparent engagements with the buyer. According to Simon and Fassnacht (2019), the suppliers learn to trust the buyer and are willing to make special accommodations to enable the buyer to establish a competitive advantage. This leads to the negotiations over prices and costs of vital or critical resources and materials with the objectivity of long-term engagement. Both parties enter into a mutually beneficial relationship that will see the buyer reduce the cost of acquiring essential raw materials from the supplier while the supplier is guaranteed a long-term partnership with the buyer that will boost the overall profitability.

            Sustainable continuous improvement is also achieved through the efficient management of buyer-supplier relationships. Both the supplier and the buyer work collaboratively to develop strategies to ensure continuous improvement to enhance the performance of both parties. For instance, training the employees in the use of the latest inventory management technology will improve the flow of goods from the supplier to the buyer. In addition, working collaboratively to address challenges common to both parties often leads to the integration of approaches to continuous improvement. In this context, both parties agree on improvements that will boost collaboration and improve lead time, minimize waste, and improve throughput. For instance, the installation of an enterprise resource management system by both parties can help to improve forecasting production requirements based on prevailing consumer demand to streamline inventory management on both sides. Neither side will be holding more than it is required, therefore avoiding overhead cost and wastage.

            Collaboration between the buyer and supplier to improve lead time, minimize waste, and improve throughput enhances competitiveness. The buyer is able to proactively respond to changes in consumer demand by leveraging reliable relationships established with different suppliers of raw materials and resources. In today’s globalized economy, establishing a competitive advantage requires a prompt response to unmet consumer needs, which requires reliable suppliers of key raw materials and resources. In addition, establishing exclusive buyer-supplier relationships limits competition from rivals for key or critical raw materials and resources utilized in the production products in high demand.

            Exclusive buyer-supplier relationships throttle competition in the market and enhance market presence. In some industries, there are scarce resources that are utilized as base-components for similar products developed by different companies. Mandt (2018) supports establishing an exclusive relationship with the supplier of such scarce resources to enable an organization to expand its presence in the market through domination. Rival competitors are unable to developed products of similar quality, thus unable to erode the organization’s market share. Tesla is a good example of a company that has established exclusive buyer-supplier relationships to secure the source of lithium-ion batteries that has enabled it to dominate the electric car industry. As a result, rival automotive manufacturers are unable to match Tesla’s presence in the electric car industry segment

Conclusion

            Efficient management of buyer-supplier relationships through transparent and honest practices enable an organization to increase supply chain value by ensuring a sustainable supply of goods of consistent quality to satisfy changing consumer needs. It helps to create consumer value and value in the supply chain through reduced cost and enhanced competitiveness by enhancing the flow of goods and finished products across the components of the supply chain. A collaborative buyer-supplier relationship is the most ideal as it focuses on achieving the vision of both parties based on commonly agreed values. 

References

Bedgwin, H. (2017). Operations and service management: concepts, methodologies, tools, and applications. Hershey: Business Science Reference.

Buckley, P. J., Enderwick, P., & Cross, A. (2018). International business. New York, NY : Oxford University Press.

Delbufalo, E. (2018). Agency theory and sustainability in the global supply chain. Cham: Springer.

Haksöz, Ç. (2018). Risk Intelligent Supply Chains: How Leading Turkish Companies Thrive in the Age of Fragility. Boca Raton, Florida: CRC Press.

Kim, B. (2018). Supply Chain Management: A Learning Perspective. Cambridge: Cambridge University Press.

Lai, K.-h., & Cheng, T. (2016). Just-in-Time Logistics. Boca Raton, Florida: CRC Press.

Mandt, T. (2018). Dependence in Buyer-Supplier Relationships. Wiesbaden: Springer .

Simon, H., & Fassnacht, M. (2019). Price management: strategy, analysis, decision, implementation. Cham: Springer.

Verma, A. (2019). Supplier Matters. Chennai, India: Notion Press.

Zsidisin, G. A., & Henke, M. (2019). Revisiting supply chain risk. Cham: Palgrave Macmillan.