Introduction
Organisations are located within value chains where they interact with suppliers, customers and competitors, pursuing rents and revenue growth via differentiation and cost leadership. Galdiesh and Gibert (1998) engineered the concept of ‘profit pools’ in light of this thinking, with multiple examples demonstrating how large organisations seek more attractive stages of the chain. Moreover, buying organisations pursue the best value for money (VFM) from suppliers through their multiple procurement activities. Large buying organisations such as National Savings and Investment, Vodafone, Manchester Airport and Norvatis may suffer inefficiency and ineffectiveness if they embrace a laissez-faire approach. Given the framework, poor Internal Organization Buying Behaviour (IOBB) will result in a suboptimal return on investment. IOBB concerns how the buying organisation sets itself internally to handle suppliers, including the creation of technology infrastructure, collection and maintenance of demand and supply information, an appropriate organisation of the procurement function, a cross-functional and team culture and the adoption of process methodologies such as category management. Hence, the development of effective IOBB by a buying organisation (the buying organisation ‘getting its own house in order) can assist the effective undertaking of direct ‘external’ dealings with suppliers, reduce risks, and cost management, while ineffective IOBB can lead to demand-side problems such as over-specification, excessive fragmentation of spend and maverick buying.
Procurement Function, Cross-Functional and Team Culture and Suppliers Dealing
Buying organisations can effectively pursue external dealings with suppliers by getting their own house in order. These dealings encompass negotiations, designing contracts, running competitions and undertaking contract management via procurement function, a cross-functional and team culture. A well–structured procurement function ensures comprehension of market trends, a clear definition of negotiation strategies and awareness of legal and regulatory requirements. Complex high-value purchases require negotiation, which can be conducted through email, face-to-face, teams, or a combination. According to Watson and Lonsdale (2023), negotiation occurs during the sourcing stage and contract management and encompasses a matching negotiating approach to exchange circumstances. Sebeneus (1992) posit that multiple theoretical developments, such as negotiation analysis, can be employed by buying organisations since it accepts the rational condition of real-life negotiators and prescribes guidance to one negotiator that can boost their preparedness for alternative possible actions of the other party. Having the right personnel with the technical expertise, broader business perspective, legal and procurement expertise, necessary seniority, personality, and internal client backing may help the organisation secure the outlined key exchange features and nature of goods and services required.
Besides negotiation, the contract will be developed after selecting the supplier and comprises the terms and conditions and the schedules. Buying organisations seek to secure an arrangement with suppliers that represent an optimal value for money as much as possible given the available leverage and have a self-enforcing agreement. Engaging cross-cultural teams ensures a comprehensive deal that addresses the departments’ needs. In addition, collaboration assists in identifying hazards, including market concentration, strategic adverse selection, bluffing in negotiations, non-strategic delivery failure and cost overrun, strategic hold-up and moral hazards that may threaten the implementation of the initial and the original contract. According to Watson and Lonsdale (2023), buying organisations can manage these threats through reasonable deals, essential contract provisions and possession of self-enforcement mechanisms. Value can leak without proper contract management, and buying organisations employ Supplier Performance Management and Supplier Relationship Management (SRM) to optimise performance. PWC (2013) argues that SRM requires governance, may involve few suppliers and should be organization-wide. Nurturing a culture of open communication and partnership boosts the procurement function since personnel from diverse departments working together bring varied viewpoints, resulting in sound decision-making.
Vodafone exemplifies the benefits of a structured process combined with inter-cultural and team dynamics in effective contract design, negotiation and completion management. Vodafone has an elaborate internal set-up that manages diverse organisation, technology, and information aspects. Vodafone has a comprehensive supply chain policy that embraces the CLAN model to collaborate and coordinate the procurement process. CLAN is a hybrid arrangement with a small central procurement function allowing multiple process participants to operate. CIPS argues that the procurement team is responsible for negotiating and developing contracts, overseeing the entire procurement process and the supply base, and establishing robust relationships with the rest of the organisation. Consequently, Vodafone has a systematic procurement department led by the Chief Procurement Officer, who coordinates seventeen county offices and has led to universal pricing reference for all user items and improvement in the CLAN model, which was performing in a fragmented manner (Watson & Lonsdale, 2023). Hence, Vodafone requires efficient internal operational processes and logistics to secure goods and services for its daily operations and maintenance. Corruption and delays in the procurement process can hamper relationships and the quality of the procured goods and services.
Similarly, NS&I outsourced its business operations, including IT, call centre and processing, in 1997. The deal was supposed to adhere to the EU procurement provisions and was awarded to Siemens Business Services (SBS). The ten-year contract meant that SBS was responsible for reducing the yearly operation costs and providing financial products (Watson & Lonsdale, 2023). The outcome of the sourcing by NS&I’s procurement team was positive since the NAO audit revealed that NS&I had added value to the taxpayers by £220m in 2002-2003, reduced the customer response time from seven to three days and saved £530 million for NS&I since 1999 while avoiding redundancy expenses.
Procurement Infrastructure as a Risk Reduction Measure
Buying organisations can significantly reduce risks, including global sourcing risks, by investing in appropriate technology systems. Implementing technology in the internal firm processes can minimise errors, boost efficiency and streamline processes. Leveraging automated procurement systems, including e-tendering and e-auction, can facilitate adherence to provisions and minimise the risk of legal disputes emanating from global operations. According to Watson and Lonsdale (2023), global sourcing risks such as hidden costs, risk register stemming from contact law, actions of the nation-state, logistical issues, cultural differences, language barriers and even supply base concentration are forcing buying firms to prioritise global risk management process and reports adding to the practices related to currency and commodity hedging. Quinn and Hilmer assert that these global risk factors must be considered in supplier selection since they influence comparison and choices. Aspects such as an unreliable system of contract legislation, high logistical costs and language and cultural disparities may increase uncertainty and transaction costs. They may complicate the decision-making of the buying firms. Hence, automated sourcing methods and the incorporation of artificial intelligence (AI) ensure regulatory compliance by facilitating a transparent and auditable trail of procurement activities and maintaining proper documentation (Seivo, 2020). Appropriate software reduces risks through effective vendor evaluation, legal review, and cost optimisation through competitive bidding.
Large buying organisations, such as Vodafone and Novartis, have invested in good procurement infrastructure, populated with usable and updated data and integrated AI where appropriate. As a telecommunication firm, Vodafone must possess reliable internal billing, customer service and network management systems before signing contracts with suppliers for technology and infrastructure. According to PWC (2016), technology that provides buying firms with demand aggregation data and forecast and historical spend analysis helps ascertain the origin of source, fraud and actual category spend levels. Vodafone and Novartis relied on suppliers for data, making it challenging for the firms to obtain a clear picture of the overall spending, leading to inefficiencies and missed opportunities for cost optimisation. Consequently, Vodafone adopted Bravo Solution’s comprehensive suite of software and services to provide it with enhanced real-time spend visibility, centralised and standardised procurement data, reduced cycle times, and holistic efficiency (Watson & Lonsdale, 2023). Novartis implemented an e-procurement Ariba Network platform that automated the procurement process, boosted supplier collaboration and minimised cycle times. The online platform eliminates printing costs and allows full visibility of orders and the generation of legally compliant electronic invoices.
Demand Management Problems from Ineffective Technology
Failure to align the infrastructure to the needs of the buying organisation may lead to maverick buying, excessive fragmentation and over-specification that entails investing in non-essential features, resulting in increased costs and wasted resources. Watson and Lonsdale (2023) posit that over-specification is one of the IOBB problems that affect VFM secured by the buying organisation since it can potentially raise costs and reduce the number of qualified suppliers, thus reducing the negotiation bargaining power. In addition, large firms such as Vodafone and NS&I have diverse business units implementing different software. This fragmentation of spend across several suppliers may pose inefficiency and standardisation challenges, missed opportunities, and increased costs. Moreover, ineffective management of technology adoption may result in maverick buying, where individual procurement staff initiate their technology purchases, resulting in a loss of leverage, lack of coordination and exposure to opportunistic behaviour. Vodafone’s investment in Bravo Solution’s comprehensive suite of software and services, for example, facilitated enhanced real-time spend visibility, centralised and standardised procurement data, reduced cycle times, and holistic efficiency. However, Vodafone’s failure to implement the technology across various departments, resulting in inadequate standardisation procedures and fragmented processes, may have resulted in ineffective management of global risks, increased costs and inefficiencies.
Seamless Relationships and Creation and Collection of Demand and Supply Information
In IOBB, gathering and maintaining demand and supply data is essential for establishing a seamless supplier relationship. The buying firm can collect information on its internal demand for goods and services. This action may encompass evaluating market trends, forecasting future demands and examining historical purchasing patterns (Watson & Lonsdale, 2005). Continuous analysis and updates of the demand information assist in adapting to customer preferences, internal requirements and shifts in the market. Vodafone, for example, leverages the Bravo Solution platform to monitor its subscribers’ usage trends regularly and forecast the demand for network infrastructure and new mobile devices.
Moreover, data on the supply side entails the evaluation of the performance and capabilities of existing and potential suppliers. During the supplier selection process, buying organisations shortlist and select suppliers with the necessary levels of competence, confidence in the supplier regarding behaviour and reputation, power and the number of suppliers for the product or service. Watson and Lonsdale (2023) argue that the criteria for judging the level of competence during the sourcing process should align with the VFM proposition, including cost optimisation and several dimensions of functionality. In addition, buying organisations should appropriately design the sourcing criteria such as technology, quality, responsiveness, delivery and environment to prevent the exclusion of certain suppliers, including Small and Medium-Sized Enterprises. Trade-offs between the different aspects of supplier attributes are therefore crucial. Moreover, adopting process methodologies such as category management can assist in strategic sourcing since it helps identify key suppliers, evaluate the supply chain, and negotiate deals, leading to enhanced decision-making. Regular evaluation of the supply information ensures that the buying firm has up–to–date data on potential upstream risks and supplier capabilities. Manchester Airport, for example, leverages tools and techniques to maintain a database of its suppliers’ capability to deliver the required goods and services, including airport equipment. Thus, accurate and updated demand and supply data empowers large buying firms to communicate effectively with suppliers, leading to collaborative planning and facilitating supply resilience.
Inadequate Information and Problems of Poor Demand and Supply Knowledge and Monitoring
Inadequate information can adversely influence the capability of the buying organisation to plan and coordinate with suppliers. The reduced ability to operate supplier relationships is attributed to poor demand and supply data. This demand management issue can result in a ‘deal focus’ mentality because the firm may embrace a reactive rather than a proactive approach, influencing its supplier relationship. Additionally, insufficient information can lead to opportunistic behaviour from the suppliers and the buying organisations since the suppliers may take advantage of the firm’s weakness, and the organisation can exploit the supplier dependencies. Moreover, ineffective monitoring denoted by the organisation’s ‘set and forget’ tendency may result in overlooking supplier performance issues and signals of evolving market dynamics.
Conclusion
The statement ‘Before dealing with suppliers, buying organisations should seek, despite the difficulties, to get their own house in order’ emphasises the benefits of addressing internal structures, processes, and efficiency by large buying organisations such as NS&I, Vodafone, Manchester Airport and Norvatis to ensure effective sourcing. Procurement’s cross-organizational and cross-functional nature makes effective IOBB a demanding internal activity which may result in demand management challenges such as maverick buying. However, the Vodafone case demonstrated the importance of effective procurement infrastructure given the advantages such as enhanced real-time spend visibility emanating from utilising the Bravo Solution platform.
Reference List
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