QI: Difference Between Distributive and Integrative Bargaining
Purchasing and supply chain management in organizations is a complex set of relationships. Based on the size, scale and business strategy companies can choose to develop local, national, international and even global supply chain. This choice outlines the complexity of the purchasing operations along with the product and downstream operations of the companies. The role of purchasing department to adds value and optimizes the costs of the organization, but ensuring most effective and productive negotiation and purchasing process with the upstream and middle stream suppliers.
There are two major approaches to the negotiation in any type of situations. These approaches are characterized by distributive and integrative negotiation techniques. While both of them are useful and effective, the choice, application, and effectiveness of each of them depends on the specific context, timing and goals of the purchasing party. A simple example to differentiate the strategies is the comparison of a product purchase with a simple price negotiation on a “spot market” at a given point in time, outlining the distributive bargaining and the on-going negotiation, where we engage in bargaining deals on continuous basis demonstrates how the integrative bargaining works in a social context.
First of all, it is important to understand the concept and tactics of each of the techniques. One of the major distinguishing characteristics of distributive bargaining is the fact that it deals with limited resources, where one party gains at a cost for another one. Common purchase decisions, once the competitive parties for the product are not known to each other will employ distributive negotiation. One of the simplified examples for such negotiation is the purchase of freight on a container ship, where the number of container slots is limited by the capacity of the vessel and once one organization confirms the purchase, it is no longer available for another party (Herausgeber 2011).
When it comes to effective techniques in distributive negotiation, therefore, it is critical that the negotiating parties aim at increasing their information base, by minimizing the amount of information given to the other party in the bargaining process. This often generates multiple offers and counter-offer negotiation process, where the educated guess is the key to reaching the desired price and quality.
Integrative bargaining occurs in the situations, when both negotiating parties can potentially benefit from producing a better, larger or greater outcome together, rather than acting individually. Companies, which rely on raw materials often use forward buying to obtain lower price. This bargaining strategy is common for the organizations, which have strong partnering relationships or are willing to develop one. Some of the most common examples include manufacturers and designers. As such, Dell and Airbus, Apple and their upstream supplier Foxconn and other upstream partnerships outline the whole concept of integrative bargaining process (Thomson et al. 1996).
A tactical approach to integrative negotiation process is commonly based on assumptions about the priorities of the other party and clear understanding of your organizational goals. This type of negotiation generally is significantly more transparent than distributive as the major priority for one party can be a little concession from another side and can determine the success of the negotiation process in general. It is a common practice to develop a negotiation in a way that both parties are looking for solutions to the issue and try to compromise in order to build on a greater outcome.
The above outline of the two negotiation strategies outlines the major differences and potential situations in which the approaches can be utilized and negotiation parties can benefit from both of them. It is important to note that companies and purchasing department should have skills and competence for both strategies, depending on a given situation.
QII: Comparison of Purchasing in Horizontal and Vertical Organizations
Organizational structure and the decisions with regards to the governance in the company affect all levels of relationships and demand different approaches to the operational and tactical strategies. The approach that the company takes to the management will affect the future growth, relationships with the clients and other stakeholders as well as the corporate culture in general. Business and academic literature recognize two major approaches to organizational structure, vertical and horizontal. Small businesses traditionally start with the horizontal structure, as the size of the company and the scope of operations does not demand complex matrix hierarchy and decision-making process. Many organizations change to mixed and further vertical approach, accompanying the growth and development of the business. To better understand the similarities and differences in purchasing decisions within vertical and horizontal structures, it is important to clearly define the concepts of both approaches.
Vertically structured organization is a more complex approach, involving the top management, generally with the Chief Executive Officer (CEO) as the head of the organization, senior, middle and junior management roles and regular level employees. Horizontal structure, on the other hand, also called "flat" governance structure, aims at eliminating the middle-management level employees from the hierarchy, involving top management in day-to-day operations of the company. This makes top managers more involved in customer relationships and direct supervision of front-line staff (Davies 2006).
Bloomfield (2013) notes that vertical companies are characterized by a better capacity to design tasks and delegate strategic goals down the organizational hierarchy, translating them to operational and tactical goals. The decision-making process is generally more defined as the responsibilities are clear and more segmented between the departments and responsible parties. At the same time, the decision-making process effectiveness as well as structure is dependent and reliant on a strong leadership. Poor top management can have the destructive impact on the decision-making capacity. Additionally, vertical structures are more difficult to manage when it comes to the information flow as each organizational layer tends to muddle information. Horizontal companies, in contrary to vertical offer more flexibility and decision-making authorities to individuals, fostering higher employee motivation. At the same time, it is difficult to effectively manage the horizotal structure in growing companies as the culture of teamwork should be developed, while employees are less sure about boundaries of their position and exact responsibilities and roles.
We touched upon all the above to specifically look at the ways purchasing process differ between the two organizational structures. Similarly to other elements, the decision-making process is critical for the purchasing department. In vertical structures, this process is better organized and the decisions on purchases and supply are taken faster. Horizontal structures tend to have more bureaucracy as there is less clarity with regards to the decision-making authority and more stakeholders involved in each purchasing decision. Another important differential is the segmentation of purchasing process. In vertical organizations with the higher level of division of work and separation of departments, purchasing process is also more segmented and the responsibilities are divided between individuals and groups according to the specialization. Horizontal companies generally give more authority to the fewer umber of employees with regards to the purchasing decisions, making the scope of work of the department or individuals within it wider. The level os specialization, budget and the scale of decision-making authority are the core differential of the purchasing process in horizontal and vertical companies. Both can be equally effective if the structure and approach to governance are adequate for the size and ambitions of the organization.
QIII: Value-adding Activities of Purchasing Department
Most of the contemporary organizations in private and public sector have own procurement and purchasing departments, providing the backbone service for manufacturing, retail and other sectors of an economy. The core functions of purchasing department in organization include procurement of materials for production and other daily operations of a company; ensure price evaluation and analysis for best procurement decisions and strategies; complete accounting and documentation function on upstream and downstream activities related to procurement; and, finally, ensure the alignment of the organization with the internal policy and external regulations.
One of the most recent trends in building on a strategic function of the purchasing department is value-added purchasing, which differentiates the traditional approach and role of purchasing as cost-saving and efficiency. While most of the organizations see purchasing department as the strategic value-added element, only a few organizations actually differentiate and understand the ways in which procurement can contribute towards an improvement of organizational performance and the bottom line. As the modern organizations ore and more focus on "value" creation as the core customer proposition, the competency of purchasing decisions can have the tremendous impact on the added value to the company. The understanding of value added n purchasing is grounded upon the elimination of non-value added activities. As such some of the major contributions include many aspects. First of all, purchasing professionals benefit from technological advancements, such as e-commerce platforms and intranet to transfer the operational activities directly to users and concentrating on strategic decisions and value-added activities (Talgen and Sitar 2001). Secondly, purchasing departments streamline the entire procurement process, focusing on the elimination of waste in operational activities and reducing headcount, complexity of decision-making process and building on a lean structure in supply chains. Thirdly, procurement professionals can offer a tighter control over the entire process of purchasing, by introducing Standard Operating Procedure (SOPs) and integrated purchasing systems, communicating directly with suppliers. Finally, purchasing department can hold a tremendous database, which contains not only the information on suppliers, pricing and trends but also give an organization an insight into customers' purchasing behavior and the better understanding of consumer psychology. This enables more flexible and specific management reporting and tools (Talgen and Sitar 2001).
Talgen and Sitar (2001) offer an interesting view on the value-added activities of purchasing through the analysis of the purchasing function over the decades. The authors suggest that the first stage of evolution is the value created from the continuity of supply. The second stage focuses on the cost-effectiveness in goods and material procurement. The third stage of evolution transforms the value-added of purchasing to unit coordination and the pre-negotiated contracts and universal purchasing practices. Further, the organizations started to see the value-added service from purchasing department in its contribution towards reducing the total system cost and satisfying the internal stakeholders. This brought to the attention of the purchasing professionals such elements as strategic supplier selection, long-term partnership relationships, and integrative bargaining. Finally, the most recent development is to build the most effective and efficient value chain to serve the final customer through effective integration of the purchasing into other strategic activities of the organization.
QIV: “Hedging” in Relation to Strategic Purchasing
The concept of hedging is widely used in various industries. The basic definition of hedging is the simultaneous purchase and sale of a single commodity to eliminate or reduce the affect of exchange and interest rate variations (Mieghem 2003). One of the major functions of hedging is buying and holding the securities to reduce the portfolio risks of the organizations or individuals. While the term is used majorly in the context of financial operations, hedging is an applicable concept for the purchasing departments and their strategies within the organizations. Properly used, “hedging” can significantly reduce the uncertainty within the strategic purchasing practices and improve the potential rate of return from pre-negotiated contracts and non-regular procurement materials.
One of the interesting examples to evaluate the impact of hedging strategies within the supply chain is the oil and gas sector and coffee markets. Companies in these sectors widely apply hedging strategies to reduce dependence on material and commodity prices and ensure longer term planning for the costs within the supply chain. One of the major contributions of hedging in the context of supply chain and manufacturing industry is the ability to mitigate the risks, associated with interest and currency rate fluctuation. There are several ways of hedging in the industry. One of the common practices is the customer surcharge, where the organization passes over part of the commodity price fluctuation on to the direct consumer. Another way of hedging is to set a price protection and price guarantee, which comes in a form of pre-negotiated term contracts with suppliers and set fixed prices for specific contract items. Finally, when the above hedging strategies re not applicable to the purchasing department, the companies have another option of buying hedging instruments on the financial market. For the natural gas and coffee, as in the example above, companies use futures options. Additionally, these companies can negotiate the over-the-counter mechanisms.
The business, which relies on derivative products, such as electronic industry, shipyards and other heavy manufacturers with significant material costs embedded in their client contracts benefit from governmental policies protecting and favoring hedging their financial risks. What is in the focus of the risks for the manufacturing companies The truth is that upstream cost-efficiency is absolutely essential for these companies. Such elements as fuel surcharges, oil spikes, currency fluctuations and skyscraping raw material costs are just some of the elements building on the complexity of the business structure of all manufacturing companies.
Another side of hedging strategy are the operational hedgings mechanisms, such as direct-to-customer service and postponement strategies. Operational hedging in the context of manufacturing industries and the long-term competitive strategies have been extensively studied over the past decade. To better understand and illustrate the discussion on hedging mechanisms and the role of operational hedging in the industry, it is important to use a real life and recent example. A manufacturing firm, operating in the international environment is exposed to demand and exchange rate risks. To address these risks, the company can use financial tools, such as options and forwards, or operational risk hedging instrument, such as postponement. While the finanical instrument is effective in addressing the currency risks, the postponement strategy will affect the demand-related risk exposure. Some of the recent successful examples of the direct-to-customer service include Dell and Lenovo laptop production lines, where the organizations reduce their risks and immediate investment in production, based on effective delivery and assembling strategies, based on partnership agreements with suppliers. Benetton postponement strategy is another impressive example of the operational hedging strategy, which allowed the organization to optimize the purchasing costs by increasing the volume at reduced variety and postponing the final product to eliminate waste in clothing sales (Mieghem 2003).
Works Cited
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Bloomfield S. Theory and Practice of Corporate Governance: An Integrated Approach. New York: Cambridge University Press. 2013.Print.
Talgen J. and Sitar P.K.. Possible Kinds of Values Added by The Purchasing Department. The 10th International Annual IPSERA Conference. 2001. Web 1 Jan 2001. http://doc.utwente.nl/42595/1/ValuesAddedByPD.pdf [Accessed 21 June 2016].
Leenders, M, and Schiele, J. Meaningful Involvement of a Public Sector Purchasing Department: the Case of Consulting Services. Proceedings 9th IPSERA Conference, London, Ontario, Canada, 672-683. 1999. Print.
Mieghem V. Capacity Management, Investment, and Hedging: Review and Recent Developments. Manufacturing & Service Operations Management. 5(4). 269-302. 2003. Print.
