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T he litmus test for an effective purchasing strategy is that it must be a non-zero-sum game or a win-win situation for the participants, says S. Venugopal, General Manager – Commercial, Brigade Enterprises Ltd, Bangalore ( >http://bit.ly/F4TVenuS ). A win-win situation will encourage buyers and vendors to build partnerships for mutual benefit, reasons Venu, during a brief interaction with Business Line. “It will permit the parties unhindered access to each other's knowledge bank and thereby respond to the market change in an efficient manner. Corporations will be able to renegotiate pricing or services to keep themselves and the vendors profitable.”
He highlights that, in contrast, any buying decision that relies heavily on pure commercial considerations is only a spot opportunity and thus a zero-sum game. “It is opportunistic and hence not sustainable in the long run.” My conversation with Venu continues over the email.
Excerpts from the interview.
What are the common inefficiencies in the purchasing strategies adopted by enterprises?
The common purchasing strategies adopted by corporations are vendor-partnering and competitive buying. The choice is a double-edged sword.
If the choice is vendor partnership, a sense of uncertainty prevails over the credibility of the chosen partner. There is a nagging doubt if the partnership has brought value to the purchasing company or ended up being a partner in the inefficiency of the vendor.
On the other hand, the process of competitive bidding brings lower cost of ownership to the buyer. But it raises some important questions: Does it bring the highest value to the corporations and their stakeholders including customers? Will buyers and vendors look at this as merely a spot opportunity, or look beyond this event to cooperate and partner in value creation?
For instance, in India, competitors in the telecom and automobile sectors have been fighting some of the fiercest battles in the market place. Justifying the reason for the price hike in the cell phone tariffs, a leading telecom firm stated: “Continuously declining margins, high 3G and BWA auction prices, constrained spectrum and rural rollout aspirations leave us with little choice but to make some price corrections.” This is evidence to the fact that competitive bidding alone may not necessarily bring the highest value to all stakeholders.
Would you like to discuss the research in this area?
Experts have carried out several studies in the area of vendor partnership. One of the important aspects that corporations desire from vendor partnerships is to differentiate their products among competitors in the marketplace at a low cost of production. The ultimate goal of all corporations is to deliver to the customer a product or service which is valuable, and to be able to do so while generating an acceptable profit level. The basic reason for entering into a partnership is mutual benefit. More so in tough times, corporations are able to renegotiate pricing or services to keep themselves and their vendors profitable. Further, during tough times, all parties must understand that things can change quickly. Hence, all parties need to be flexible to adapt to these changes. Vendor partnerships permit unhindered access to each other's knowledge bank and thereby respond to the change in an efficient manner.
How can we address some of the top problems in purchasing?
The need of the hour is a more reliable method of analysing purchasing risk. On one hand, vendor partnering brings long-term sustained mutual benefit; on the other, the process of competitive bidding helps to derive the lowest cost of ownership to corporations. And corporations are looking for both.
Hence, the solution lies in a combination method of vendor partnering and competitive bidding. Based on years of experience in the field of strategic procurement, I have developed this requirement in a model known as ‘value scoring model of buying.' Under this model, buying companies need to identify the “importance areas” and the “sub importance areas” of each buying decision. Each competing vendor is scored on the individual parameters. The vendor with the highest score eventually brings the highest value to the buying corporations.
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