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Maintaining the Partnership Essay

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Updated: Mar 1st, 2022

Introduction

The global COVID-19 pandemic has impacted many areas of life significantly, including business and economic sectors. Maintaining the previous regime of interaction with partners and suppliers has become impossible. On the agenda is the question of continuing business relations with the Chinese partner. To assess the issue, appropriate economic analytical tools will be applied. The supply chain mechanism will be reorganized to meet the modern conditions of remote interaction, and virtual communication will be maintained. The partnership with the supplier from China should continue in view of the value of this affiliation and the potential to change the operating regime.

Cost-Volume-Profit Analysis

The value of maintaining cooperation with the Chinese partner may be explained by using the CVP analysis as a tool that allows assessing the real profit. The key formula is that the costs are deducted from the revenue from the profit. In this case, the costs are required for reorganizing supply chains and establishing remote access with the partner. Given the value of this cooperation, the profit is unlikely to be minimal since the Chinese region is important for maintaining sustainable manufacturing. Therefore, continuing the partnership is justified from the perspective of the CVP analysis.

Contribution Margin: Investment Profits

In light of the COVID-19 pandemic, raising income is a priority. At the same time, investing in partnerships is a potentially important activity. Assessing the level of profit should take into account the contribution margin as a variable that reflects the share of investment. When cooperating with the Chinese partner, this indicator will grow, which will affect the company’s budget, but any mediation costs will be balanced by profits. Moreover, in case of the termination of cooperation, goodwill loss is a negative outcome, and interaction with suppliers from this region may be interrupted for a long time.

Cost Behavior: Expenditure Perspective

Cost behavior is a mechanism that allows assessing the main items of spending and the drivers that stimulate them. In the case in question, additional costs are inevitable since, if the organization stops interacting with the Chinese partner, new cooperation will need to be established with an unverified supplier. Today, remote interaction and maintaining supply chains are costly procedures, but there is no guarantee a new collaboration will be cheaper. Therefore, the indicator of cost behavior may help explain the relevance of maintaining the partnership.

Activity-Based Costing

As an auxiliary model, the ABS mechanism can be involved. Its main purpose is to determine how indirect costs can affect the overall budget, as well as distribute the items of expenditure according to their importance. When taking into account the value of the Chinese partner to the company, the main problem is continuing smooth communication, while the convenience of logistics is an indirect issue. Based on this information, one can calculate that maintaining business relationships solves a number of related tasks – building chain capacity, organizing logistics, and other important procedures, and maintaining the partnership is not a crucial driver of costs.

Conclusion

In view of the importance of reorganizing many operating procedures during the global pandemic, assessing the value of partnering with the Chinese supplier is an essential task. As the assessment tools, relevant cost and benefit calculation models are applied to prove that there is no need to interrupt the cooperation mode. Conversely, indirect costs are potentially lower than the budget that would need to be spent on setting up new logistics channels. Therefore, as relevant measures, establishing remote interaction with the partner and strengthening the supply chain through improved logistics are proposed.

Works Cited

Banker, Rajiv D., et al. “Cost Management Research.” Journal of Management Accounting Research, vol. 30, no. 3, 2018, pp. 187-209.

Sintha, Lis. “Importance of Break-Even Analysis for the Micro, Small and Medium Enterprises.” International Journal of Research – Granthaalayah, vol. 8, no. 6, 2020, pp. 212-218.

von Falkenhausen, Christian, et al. “How to Find the Right Supply Chain Strategy? An Analysis of Contingency Variables.” Decision Sciences, vol. 50, no. 4, 2019, pp. 726-755.

Xu, Sheng, et al. “Optimize Logistics Cost Model for Shared Logistics Platform Based on Time-Driven Activity-Based Costing.” Journal of Physics: Conference Series, vol. 1437, no. 1, 2020, p. 012115.

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IvyPanda. 2022. "Maintaining the Partnership." March 1, 2022. https://ivypanda.com/essays/maintaining-the-partnership/.

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