The buyer firm considers many factors in selecting the sources of supply. These sources are:
1. Assurance of supply
2. Size of supplier
3. Number of suppliers
4. Developing sources of supply
5. Buying locally
6. Manufacturer or distributor
7. Conflict of interests
9. Buying internationally
10. Miscellaneous considerations.
Reliability of supply is very important for both buyers and sellers firm. Hence, suppliers who suffer recurring shortages themselves must be utilised with great care regardless of their desirable capabilities. Long term sources for the raw materials and component parts should be developed by the .suppliers for meeting out the recurring shortages.
Size of supplier plays a very important role in making the supplier selection. Large manufacturers are able to manufacture goods cheaper because of economies of scale. They may have better production personnel and better quality control facilities, and have good sales organisation and would be in a good position to offer better after sales service.
On the other hand, a small manufacturer can supply the materials at the lower price because of less overheads and government also offers concessions and exemptions from excise duties to certain products of small industries which may ultimately lead to further reduction in the prices. A small manufacturer can give personalized attention to the buyer.
Judgement must be blended with theory in selecting a supplier of the right size. There are potential dangers in placing large orders with a small firm that constitute a high percentage of the firm’s total production. In such situations, the small supplier can become dependent on the buying company for its very survival.
This in turn, can place strong moral restraints on the buyer, whose actions can determine whether the small company prospers or fails. On the other hand, it is normally unwise to place orders with suppliers that are too large that they consistently tie of a large percentage of the suppliers’ total productive capacity.
If the entire business is allotted to one supplier, he might be able to quote lower prices because of the guaranteed business, continuity of production, effects of the learning curve, etc. Consistency off quality can also be assured.
Having two or more sources introduces an element of competition and motivation which may result in reduction of price and improvement of quality. There is the greater dependability. If one supplier fails may be because of the reason of strike, lock out, fire, floods, etc., availability of supply will not suffer. Criticality of the product, necessity to introduce competition, motivation, etc. should decide the issue.
In some cases, a buyer is not able to select the right of supply and hence must create a satisfactory supplier. If existing supplier cannot satisfy, a firm needs, a new supplier must be created.
Occasionally, a buyer’s company must create its own separate subsidiary corporation in order to have a reliable source of supply. The necessity for such action, for example, has occurred frequently in the machine shop area of the rapidly growing electronics industry.
Everything else being equal, a local supplier should be preferred. ‘This reduces costs due to transportation, insurance, packaging octroi etc. Deliveries would be quicker and dependable. Lead times will be low. Therefore, a balanced inventory should be possible. Because of the geographical proximity there will be closer coordination between the buyer and seller.
Disputes can be resolved with ease. The local supplier will be able to meet rush orders faster. For small and medium orders and also rush orders, because of the economy of price and other advantages as cited above, local suppliers are to be preferred.
In deciding whether to buy from a manufacturer or distributor, a buyer’s considerations should focus largely on the distributor’s capabilities and services, not on his location. It is not his location that is important rather it is the function he performs.
When the materials ordered from a distributor are shipped directly to the user by the manufacturer (a drop shipment), an additional buying decision becomes necessary. In this situation, the distributor does not handle the materials physically he only acts as a broker. Under such circumstances, a buyer is strongly motivated to buy directly from the manufacturer — if the manufacturer sells to him.
Buyers should be aware that distributors stock many manufacturers’ products. Hence, ordering from a distributor can significantly reduce the total number of orders a buyer must place to fill some of his material requirements.
If there were no distributors, orders for production as well as MRO (maintenance, Repair and Operating) requirements would all have to be placed directly with many different manufacturers.
This obviously would increase direct purchasing costs. Furthermore, for every additional purchase order placed an additional receiving, inspection, and accounts payable operation is created.
In selecting suppliers, buyers must be aware of potential conflicts of interest. A conflict of interest exists when buyers divide their loyalty between the firm which employs them and another firm. In purchasing, this situation usually occurs when a buyer is a substantial stock holder in supplier’s firm, and when he makes purchases from close friends and relatives.
Reciprocity in buying is a practice followed by many firms, which is essentially meant to keep the customers buying from company which is also a potential buyer which the buyer’s company produces. Although it is perfectly legal so long as it does not restraint trade unreasonably, it restricts the buyer’s freedom of choice and hence, tends to be uneconomical. Many buyers are therefore, opposed to this policy, but top-Management may like this. But when it becomes mandatory, it leads to wastes and proves to be an inefficient practice.
Evaluation of Reciprocity:
Most buyers disapprove the practice of reciprocity, even when legal, because it restricts their ability to achieve competition among vendors. Thus, it usually constrains purchasing opportunity to increase profits by reducing the cost of materials. Those opposed to reciprocity cite the following negative aspects of it:
1. Reciprocity does not follow sound principles of buying and selling on the fundamental criteria of quality, and service.
2. Companies may relax their competitive efforts in technical and production areas as a result of reduced competition. Consequently, purchasing costs may be higher.
3. Sales departments may develop a false sense of security, resulting in deterioration of a firm’s selling efforts.
4. New customers may be hard to find because of pre-established relationship with competitors.
5. Companies’ reputation may be impaired because of bad publicity resulting from reciprocity. Consequently, sellers of new, advanced products and processes will not waste their time with companies known to be tied up with reciprocal agreements.
6. Conspiracy and restraint of trade situations can develop, with their attendant legal dangers. Increasingly, the Antitrust Division of the Justice department is taking the position that purchasing and materials managers are responsible for their own illegal actions regarding reciprocity; they cannot longer transfer these responsibilities to top management.
Buying internationally through global tenders or through authorised agents of foreign firms in India is usually resorted to for materials where indigenous capacity is not available or is short. In a developing country like ours, very strict controls are exercised through import trade control and except where the items have been listed under open general licence (OGL), each case has to be cleared through the Director General, Technical Development (DGTD) and import licences have to be secured from Chief Controller, Imports and Exports (CCI & E). As long as the country is developing and the balance of payment position is against, such controls have to continue.
By the very nature of business, managers move up the executive ladder from functional to general management positions. Thus, it should not be surprising that all firms have a specific functional orientation or bias depending on the functional backgrounds of their top executives.
Some firms have a marketing orientation; others have a production; financial or engineering orientation. Competent buyers seek out suppliers having management orientations that best blend with the requirement of their own firms.
In searching for a new supplier, it is entirely possible that a routine vendor evaluation might result in the selection of an efficient supplier who is also the major supplier of the buyer’s major competitor.
This could create an extremely dangerous situation, during periods of shortages, economic pressures assuredly would use a seller to favour his older large customers at the expense of his newer— less important customers. Hence, a buyer should avoid such a situation.
In selecting suppliers, buyers also should consider the seller’s general product mix and the types of markets he serves. These factors should fit well with the needs of the buyer’s own company. How do the supply curves of the seller match the demand curves of the buyer? Would a long term relationship be economically beneficial to both? Clearly, a buyer seeks positive answers to such questions.