JEDDAH – In a highly competitive business environment, knowing and understanding the critical roles played by both the buyers and suppliers are vital not just to the survival of a business entity but to its expansion and growth, Eng. Atif O. Sindi, Vice President & Head of Procurement Division, Bank AlJazira, said at the 4th annual “Strategic Procurement & Contracting Conference MENA 2013” held recently in Dubai. Recent research revealed that just 30 percent of CEOs believed procurement was adequately networked with other departments, while the CPO sat on the board or executive management team in just one in 10 companies. Strategic procurement delivers the lowest total cost of materials and services, while improving service quality and typically, 1 percent purchasing cost reduction has the same impact on profit as a 10 percent increase in turnover. As globalization changes the basis of competition, strategic procurement is moving from the periphery of corporate functions to the core. In his presentation titled “Does Strategic Relationship with Suppliers Mean High Risk?”, he highlighted it by expounding on “Porter's Five Forces” industry analysis – a powerful tool for understanding where power lies in a business situation. Its helpful as it helps understand both the strength of a business current competitive position, and the strength of a position it considering moving into. Sindi said that in procurement, it is “critical to enable joint continuous opportunities, develop mutual business goals… encourage supplier to explore opportunities for continuous improvement.” He underscored that is essential to “build and maintain long-term relationship” that can be achieved by “maintaining an open, transparent and basic relationship.” Moving further, he enumerated qualities of good suppliers, such as performing technically in the industry – go/no go criteria; providing a product or service that is compliant with the specification; providing continuity of supply; maintaining acceptable levels of quality; delivering the best ‘service package'; controlling, managing and reducing costs; providing innovation, creativity, solutions; financial and commercial stability; developing and managing internal systems; and utilizing and developing ‘key' people. Porter's Five Forces is used to identify whether new products, services or businesses have the potential to be profitable. However it can be very illuminating when used to understand the balance of power in other situations. Five Forces Analysis assumes that there are five important forces that determine competitive power in a business situation. These are:
* Supplier Power: assesses how easy it is for suppliers to drive up prices. This is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control over you, the cost of switching from one to another, and so on. The fewer the supplier choices you have, and the more you need suppliers' help, the more powerful your suppliers are. * Buyer Power: the role of buyers in driving prices down. Again, this is driven by the number of buyers, the importance of each individual buyer to your business, the cost to them of switching from your products and services to those of someone else, and so on. If you deal with few, powerful buyers, then they are often able to dictate terms to you.
* Competitive Rivalry: the influence of number and capability of competitors. Many competitors offering equally attractive products and services create a situation where suppliers and buyers will go elsewhere to get a good deal. Threat of Substitution: This is affected by the ability of customers to find a different way of doing what suppliers do. If substitution is easy and substitution is viable, then this weakens one's power.
* Threat of New Entry: Power is also affected by new players in the market. If it costs little in time or money to enter the market and compete effectively, if there are few economies of scale in place, or if there is little protection for key technologies, then new competitors can quickly enter the market and weaken old player's position.
On the other hand, Sindi explained that it is equally essential to know the bargaining power of buyers, noting that a buyer needs to recognize its size when dealing with a new supplier/vendor. He said if the buyer has different subsidiaries, it is recommended to have all the services/products to be channeled through a centralized procurement division to have higher bargaining power of buyers. If the buyer purchases the same service/product from different suppliers, then the buyer needs to critically analyze the need, and the vendor performance, and have a deal with the best vendors. Likewise, the buyer needs to seal yearly deal instead of on-demand purchases to secure better rate/price, Sindi pointed out, adding that the low value tickets are an excellent source of saving i.e. the printers ink. “We need to understand the vendors'/suppliers' pricing strategies in order to decide on proceeding with the contract or not for a new supplier,” Sindi stressed. For the current suppliers, “if we are changing the services/products, we need to understand their strategies as well in order to take the correct decision,” he added. — SG
