Introduction
Globalization has destroyed the foundations of modern business and made business processes more dynamic, competitive, and complex. Consequently, all organizations interact with suppliers to provide various goods and services to maximize business efficiency. Suppliers are integral to any business, so supplier management is critical. The management of the purchasing department, the management of bulk purchases, and the organization of negotiations with suppliers are complex processes that directly affect the enterprise’s success.
Value for Money from Suppliers
Value for money (VFM) is a concept whose meaning lies in getting the maximum benefit at the lowest cost. Authorities use this concept when allocating budgetary funds to investment projects. Value for money helps to allocate budget funds most profitably and efficiently (Penyalver et al., 2019). Value for money is used in relationships with suppliers as an essential criterion for evaluating various forms of project implementation (Achieving Value for Money, 2022). This concept allows one to determine the form of cooperation that will bring the most significant benefit at the lowest cost. The value-for-money test can be carried out at two stages of the project: the evaluation of structuring and the evaluation of competitive proposals.
- During evaluation and structuring, the value-for-money test assesses suppliers’ advantages over other contract models, including government orders.
- When evaluating bids, the value-for-money test allows one to compare the price-quality ratio of bids.
VFM must be considered during the procurement process, beginning with cost analysis, categorization, complexity assessment, and supply market analysis. It defines the key VFM factors that set the context for subsequent procurement steps. Considering VFM during the market analysis phase can identify opportunities to exploit competition and market dynamics, increase productivity, and leverage innovation in the market (Achieving Value for Money, 2022). It is also worth considering VFM at later stages of the procurement process, such as contract negotiations and management, to ensure continuous improvement over the contract’s duration.
Successful procurement requires extensive knowledge of the markets in which procurement takes place. Procurement market research consists of regularly collecting and evaluating detailed information to determine the market capacity and create prerequisites for optimizing procurement (Jahani et al., 2021). The information obtained should reflect such market categories as supply, demand, and market balance. As a rule, market research for purchasing raw materials and components is carried out in parallel with developing new products (Charro & Schaefer, 2018). For the timely purchase of materials, a sales forecast is compiled, based on which the size of stocks, readiness for deliveries, and the costs of manufacturing the product and its sale are determined.
Supplier Selection
Having studied the market and settled on any specific suppliers, the purchasing department must determine the needs of the enterprise for specific supplies. Determining needs means identifying products and services by quality and quantity, mainly by two methods: by determining needs based on orders and systematically determining needs based on costs (Peng et al., 2020). The first method involves decomposing specifications into separate components, considering existing stocks (finished products – into units, units – into parts), and determining the timing of satisfaction of subsequent needs based on purchasing previous ones (Peng et al., 2020). The predicted demand is determined using the most straightforward calculation and intuitive forecasting methods when using the second method.
In many companies, at least half of the problems associated with the quality of goods and services arise from the suppliers of the resources provided to the company. In this regard, an effective solution to the problem of choosing a supplier is the basis for the successful functioning of any enterprise. There are many suppliers in the modern market, so the main task is to choose a supplier who will be a reliable partner for a manufacturing or trading company. To accomplish this task, a company must develop specific requirements for suppliers and evaluation rules (Hastig & Sodhi, 2020). Under these conditions, buyers will be less likely to make a mistake when choosing a supplier.
The enterprise should systematically evaluate existing suppliers, including how fully they meet the requirements and whether work with them is effectively built. The selection of a supplier begins with the evaluation procedure. The system of indicators for evaluating suppliers depends on the strategy of a particular enterprise (Sukharev, 2020).
The selection criteria system should be reasonably stable and, conversely, dynamic, especially in an unstable economic situation (Sukharev, 2020). Requirements may change depending on the changing market situation. Thus, at the economic recovery stage, suppliers’ requirements can become tougher and soften during a decline in production or limited resources.
The expansion of the range of goods sold leads to an increase in the supplier’s inventory, which consequently increases the cost of maintenance and, ultimately, prices. The same applies to the speed of order fulfillment. It is obvious that, as in solving other logistics problems, the purchasing manager must achieve the optimal ratio of these three factors for his enterprise.
Standardization of Requirements and Classification of Suppliers
For all company buyers to apply the same principles arising from the strategy of this enterprise when evaluating and selecting suppliers, management is recommended to establish quantitative scales for each indicator. It simplifies the evaluation procedure and eliminates subjectivity. The rating scale can also be set for indicators that are impossible or inappropriate to quantify. In this case, a verbal gradation is used (for example, below the market level, at the industry level, with high interest, and more). At the same time, each gradation corresponds to a score, which makes it possible to quantify the supplier.
Building an Assortment Matrix
For the supplier assessment procedure to be cost-effective, it is recommended that the enterprise select no more than ten indicators based on the list above. As practice shows, a more exhaustive list entails unjustified costs for collecting and processing information.
Table 1. Supplier assessment scale
Agency “A” regularly conducts surveys and field observations of suppliers and buyers. That made it possible to form a detailed list of supplier evaluation indicators, which are grouped into five blocks:
- Product and price
- Terms of delivery
- The budget for promoting goods (advertising expenses, promotions, and others)
- Staff professionalism
- Emotional criteria
The supplier selection process culminates in the conclusion of a contract between the buyer and one or more suppliers. Still, before that, it is important to conduct profitable negotiations for both parties.
Negotiations with Suppliers
In modern entrepreneurial activity, most procurement efficiency (supply), that is, acquiring the necessary material and technical resources for production needs, is determined by negotiations with suppliers. This process begins after the company completes the procurement market analysis, examines the suppliers, and familiarizes itself with their proposals (Jahani et al., 2021). Taking into account its interests and objective limitations, it chooses the optimal supplier.
Negotiation is the process that purchasing professionals go through to create favorable terms under a new contract with a supplier. It may include negotiating various terms with an existing supplier in contract renewal or from scratch with an entirely new supplier (Schiele, 2018). Negotiations are commonly used to determine the fairest price and payment terms, delivery and production times, quality standards, and more (Schiele, 2018). It should consider the best option for both the supplier and the buyer rather than just trying to get the best price, as this will help strengthen relationships with long-term suppliers (Negotiating supplier contracts, n.d.).
To ensure that everything one intends to achieve is negotiated with suppliers, it is essential to set goals before negotiating. The purchase of a product or service is a complex process that requires the buyer to consider the interests of his company and the supplier company (Taherdoost & Brard, 2019). The most essential qualities of a professional buyer are the ability to articulate and justify requirements, convince the supplier, and achieve what a company needs.
When deciding whether to award a contract, the manager must consider each supplier’s qualifications, as well as the terms of the contract they offer, such as price. Supplier qualifications are generally considered exogenous; for example, a supplier’s reputation is based on historical performance and cannot be changed in the short term (Ghadge et al., 2020). That also correlates with the “defective goods in deliveries” indicator in Table 1. On the other hand, the contract terms can be negotiated between the buyer and the supplier. In the course of negotiations, the buyer tries to get favorable terms from suppliers, and in the same way, suppliers try to get favorable terms from the buyer (Ghadge et al., 2020). There are many possible negotiation processes, but achieving conditions that benefit a company is essential.
Negotiations do not always involve a zero-sum approach. Buyers and suppliers benefit if they realize their incentives are aligned rather than conflicting. Research to help buyers and suppliers pursue common interests has led to numerous advances in programmatic “expressive bidding” in combinatorial auctions. For example, in transport auctions for the purchase of trucks, both the shipper (buyer) and the carrier (supplier) benefit if the shipper’s bidding routes complement the carrier’s existing transport networks in a way that minimizes empty truck traffic.
Supplier Negotiation Strategies
The strategy for negotiating with suppliers is developed by the enterprise based on the analysis’s capabilities, as well as the capabilities of counterparties in terms of applying the market strength. Depending on this criterion, there are three possible negotiation strategies:
- the strategy of force;
- compromise strategy;
- strategy of concessions (Thomas et al., 2018).
If an organization cannot exercise its bargaining power in negotiations with suppliers, it is compelled to follow a concessions strategy. In this case, the principle of “who needs whom more” applies (Thomas et al., 2018). The customer, realizing their disadvantageous position in relation to the supplier, is initially ready to make concessions and accept some burdensome conditions from the supplier, thereby gaining his favor. As a rule, in this case, the supplier can find another customer, and the customer cannot find another supplier.
At the same time, customers themselves often have great market power. First of all, it manifests itself in a significant market share, in a good reputation in the market, in the presence of a good reputation. In this case, a power strategy can be implemented; that is, the customer can already set certain conditions for suppliers (Schiele, 2018).
For example, the condition of payment is only after the actual receipt of the purchased materials at his disposal. Suppose the market power of the supplier and the customer is approximately the same. Then, their mutual intransigence can lead to a conflict, resulting in both negotiating parties suffering. Therefore, a reasonable way out of this situation is a compromise strategy. Thanks to this, both parties will be equally satisfied with the results of the negotiations.
Conclusion
Effective procurement management in an enterprise is one of the most critical processes, and the quality of the process depends on a business’s financial condition. Optimizing and automating processes can significantly improve a company’s financial results. Correctly building a procurement strategy is necessary to achieve a high level of enterprise development. It will allow for sound procurement and supply management, which includes competent procurement management in the enterprise and the correct selection and evaluation of suppliers.
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