Question

Address the following in 500 words:

Write an analysis that explains why power is important in purchasing and how it might impact the decisions made and outcomes achieved in your organisation or one with which you are familiar.

Also explain how the three levels of trust could potentially impact buyer-seller relationships in the organisation you chose.

Answer 1

Answer- Purchasing power plays a key role in enabling organizations get the lowest possible prices from its suppliers. Purchasing has become a cost saving function in organizations today. The organization relationship with its suppliers is mostly developed with cost saving strategy in mind. The cost cutting strategy comes through the improvement of buying process, improvement of products and even the supplier development efforts.

Purchasing power has huge impact on the bottom line of organizations especially in the manufacturing industry where a lot of inventory required in various production processes are purchased. The purchasing made by the organization has impact on the two major forces that influence and drive the bottom-line of the organization: sales and product costs. This thus makes purchasing power a core competency for any company in the manufacturing business and thus requiring organizations to find and develop supplier relationships that bring expertize in purchasing that will be highly valued by the organization in its negotiations with major suppliers. The fact that purchasing account for more than 50% of revenues an organization receives from its sales makes the purchasing power an important negotiation tool that will determine profitability of the organization both in the short run and long run. Most manufacturing companies spent their cash resources in purchasing raw materials and services necessary in its production processes. The amount spend in services is increasing gradually in most manufacturing companies, millions of dollars are spent on marketing, advertising, legal, information technology and logistics. All the services also constitute the purchase process although different from the purchase of materials. The purchase costs of the materials and services in the company thus need to be monitored and controlled to ensure that the costs of purchase does not drive down the net profitability of the organization. This makes the power of purchasing a critical factor that influences the success of any organization especially companies in the manufacturing industry. The proper management of the supply function of the company through the exercise of strong purchasing power is critical in the driving of sales up and costs down. This means that purchasing function has a great impact on the net income and return on investment by the company hence having a significant influence on the shareholder value of the company. Purchasing power of any company works to drive costs down. It is a cost reduction strategy that leads to the improvement of processes of production, discovery of alternative materials that a can be utilized in production process at minimal cost, and the looking a different locations or modes of transportation which reduce the cost of supplies.

Trust is a critical factor necessary in sustaining of business networks by any organization. The level of trust exhibited by the manufacturing company will impact on its relationship with suppliers. Trust enables the parties to the purchasing process to focus on the long term benefits of the relationship as a way of improving the company performance outcomes in the buyer –seller relationship. The three levels of trust include:

Personal trust. Trust on the suppliers is a critical factor for a company in manufacturing industry. It is essential in the building of successful trading relations that bring about buyer-supplier partnership necessary in enhancing the relationship between the parties.

Organizational trust. Manufacturing companies usually investigate the reputation of their first time suppliers by checking on their reputation in dealing with other companies. This is necessary to build trust and credibility. Contractual trust. This level of trust is critical in manufacturing industry. It the suppliers and the company do not maintain their trust in relation to the purchasing agreement, it could lead to disruption of production processes and thus culminating to losses.