Reciprocity

Organizations resort to reciprocal buying when they find it difficult to do business in

highly competitive environment. Reciprocal buying is buying form one’s own customers.
If this is done in conditions of competition, there should not be anything wrong about
this. But, in this situation one tries to take care of the other as each one keeps changing
the role of customer & supplier. This leads to over all deterioration of product quality and
downfall of the pair.
Systems contract
Purchase order is used as a single document during the course of completing entire
transaction. Same document is used as delivery challan at the time of delivery. The
document is updated at every stage of the process. Reduction in number of documents
and documents preparation is major saving in administration expenses. This results in
cost reduction to the value chain.
Importance of source
Source is the place from where we procure our inputs. These inputs may be in the form of
raw materials, out sourced components or semi finished items. Manufacturing companies
out source large number of items as they slim down processes.
As outsourcing is gaining importance in business, importance of source is becoming high.
Following reasons are considered to be making source an important element in materials
management.
1. Source of market intelligence: source is a window through which the buyer
organization looks at the world outside. Source provides access to the real time
information about the phenomenon. Information about current trends and industrial
climate is obtained from the sources.[market conditions, industrial climate, what is
new?]
2. Crucial for product quality: buyer organizations depend on out sourced components
for producing the product which central to the objectives business. Reliance on
capabilities of supplier to meet tough quality standards is very high in current
business environment.
3. Member in the value chain: supply source is an important element in the value
chain. Any cost added to the value chain reaches the end user as price. Hence
effectiveness and efficiency of the source becomes vital to business.
4. Import substitution, cost reduction, value improvement: as indigenization of sub
assemblies, components and spare parts is necessary to reduce the cost of product in
competition, buyer organizations turn to supply sources to develop these items.
Several trials and corrections may be required to finalize the substitute. In house
capacity is generally not available for this kind of trials. A resourceful supplier is very
useful in this process. Same logic holds good in other exercises for cost reduction and
value improvement. It is quite logical that entire process is not outsourced but isolated
developmental activities are invariably done. It is common knowledge that many
small scale companies do not have full fledged tool rooms but rely on sources for all
tool room activities.
Searching for source
Trade magazines: Source being such an important element in the value chain searching
for a reliable source assumes importance. A buyer constantly looks for sources as new
requirements keep cropping up to meet the challenges of business. You will find desks of
purchase managers stacked with national and international trade magazines. These
magazines carry information about who makes what and where.
Telephone directory: yellow pages in telephone directory is full of telephone numbers
and addresses of manufacturers and service providers
Trade shows: trade shows are held periodically by industry organizations and or
government to bring sources for various industrial products on one forum to demonstrate
their products for the benefit of users. Sources set up their stalls and expert know how is
provided at these stalls. Buyer companies get the benefit of viewing products of
competitive sources at one place. Technical and some times even commercial decisions
are facilitated at such places. Eg. IMTEX at Godrej.
Publications by offices of DGTD [Director General for Technical Development],
DGS&D [Director General for Supply and Disposal]: these two are central
government organizations dealing with technical development. They publish details of
various supply sources they deal with.
Internet: this is a rich source of information for products and services.
Inquiries by buyers and request by suppliers: buyers float inquiries in the market to
find potential source, some times formally through advertisements or direct mailing or
informally through friends and other acquaintances. Responses received to these inquiries
and visits of sales representatives who come to promote the products of their companies
are sources of information needed by a buyer.
Meetings and or visits subsequently help buyers to identify capable suppliers.
preliminary screening and selection
sources of supply discussed above are quite large in number. A buyer short lists supply
sources by evaluating them with respect to some critical factors like physical separation
and any other feature. This would short list the sources to a manageable size. The sources
so selected should visited by buyer’s representatives to conduct a preliminary screening
to further short list them. During this exercise the buyer rates the supplier on various
critical factors on a zero to ten scale. Various factors generally selected for evaluation are
listed below. A buyer may identify other factors as critical and add them to the list, or
delete some of them if considered superfluous.
• general house keeping and maintenance: cleanliness and general upkeep. Specific,
well marked places for all items, general feeling of orderliness and sleekness. Upkeep
of building and equipment.
• production and technical competence: technical qualification and experience of
employees.
• quality control and inspection facilities: in house facility to check quality parameters
specific to the product buyer has in his mind.
• financial resources: general worth of the company, may be in terms of share value,
bonus and other emoluments paid to the employees.
• other companies supplied to: an up to date client list, the status of the clients in the
market.
• Progressiveness of management: Does the management attach importance to training?
Are there any initiatives to improve total quality? ISO certification? Inventory
reduction? Etc.
• Morale of the work force: are the workmen proud of the company?
• Ability to meet QCD expectations: evidence of existence of systems in the company
to handle QCD demands of customer.
• Cordial relations and courtesy: how are the visitors treated? Same curtsey to suppliers
and customers?
Individual factors can be awarded weightage as per relative importance of the selected
factors for evaluation. Marks scored on a 0 to 10 scales are to be multiplied by this
weightage factor. Total the scores for all factors. Compare the total scores of all sources
visited. A simple ABC analysis would reveal top 2 or 3.
Negotiations and trial orders
Call the top two or three supply sources and negotiate with them for a trial order. Terms
of delivery, price and quality are negotiated and finalized. A trial order is placed for a
small quantity to gauge mutual acceptance between supplier and customer.
What strengthens customer supplier relations?
 Clear cut need described fully, quantity and technical needs are clear. A constant
source of irritation between supplier and customer is rejection. Incomplete and
ambiguous specification is at the root of rejection. Nothing should be left to the
judgment of supplier in terms of customer’s QCD expectations.
 personal rapport between buyer & supplier for establishment of communication.
 vendors’ meet to discuss performance of supplied materials, quality and technical
performance: many good buyers organize an annual meet for suppliers. A forum is
provided where performance of suppliers product on customers production lines is
discussed with individual supplier. Supplier can easily draw up a list of corrective and
preventive actions to iron out the problems faced by customer. Supplier also gets a
forum to place forward his/her problems with customers systems.
Vendor rating
Vendor rating is a system generally used for eliminating or blacklisting a bad supplier.
This is also used to apportion buyers need of supplies to various suppliers. Vendor rating
is allotment of marks based on QCD performance to suppliers.
How evaluation is done?
As discussed earlier, evaluation is done on QCD performance of supplier.
1. Delivery performance: delivery performance has two aspects, time and quantity.
a. adherence to time schedule: Proportion of consignments reaching the customer on
time to total consignments sent during a specific span of time is a measure generally
accepted to assess delivery performance with respect to time.
b. Adherence to quantity schedule: Proportion of quantity received by the customer to
the quantity demanded by the customer during a specific span of time is a measure
generally accepted to assess adherence to quantity schedule.
2. Quality performance: Proportion of consignments meeting mutually accepted
standard of performance on customers production lines to total consignments sent during
a specific span of time is a measure generally accepted to assess quality performance.
3. Price performance: proportion of price expected by the customer to the price
accepted by the supplier during a specific span of time is a measure generally accepted to
assess price or cost performance.
Special aspects in source selection
Local sources and outstation sources, merits demerits: local sources are easily
accessible to the customer. The fact that they are physically close to the customer places
them at an advantage over the suppliers away. A rapport easily develops between these
suppliers and customer. They respond to the customer’s need promptly. These sources
can easily be reached in situations where the customer needs any help for fulfilling urgent
requirements. If you observe the industrial map of India, you will find that there are
isolated areas who excel in production and supply of specific items, like ko;hapur for
castings, mumbra for sand, kokan for mangos, panjab for sports goods. If we stick to
local suppliers we shall be deprived of the expertise available elsewhere.
subcontracting - better utilization of man power, better scheduling of facility for critical
operation
Small suppliers and big suppliers, merits, demerits: small suppliers are always keen
to serve the customer as they are small and would like to expand their business. They
generally do not have many customers. They are readily accessible and take extra efforts
to satisfy the customer. Response time to customer is very short. A big supplier always
has number of customers and not very keen to spare extra efforts for one customer. He is
not as keen as a small supplier to run an extra mile to please a customer. But a big
supplier has better infrastructure, well organized systems for quality performance and
R&D setup. This makes a big supplier more competent than a small one to meet QCD
expectations.
Make or buy decisions
What do we make? Why & When do we make?
♦ Whatever is crucial to the quality of final out put of the organization is always made
in house. Such operations should be carried out under direct supervision of
manufacturer.
♦ Core competence of the company: Core competence is developed around the critical
operations to the product quality. Operations falling within the core competence of
the organizations are always done in house.
♦ Propritorial knowledge and confidential design: operations with respect to these
issues are never outsourced but done in house as these are to be guarded against
competition in the interest of company. Just as weapon design should never reach the
enemy.
♦ Special skills and technology: such operations are done in house as the skills and
technology is available only in house.
♦ In house capacity is unutilized: when the capacity in house is unutilized outsourcing
would only add cost to the product.
♦ Fear of monopoly by supplier: if the operation is such that supplier can hold the
buyer to ransom after product development of product, one should never resort to
outsourcung.
♦ Suppliers are unreliable and not transparent: unreliable suppliers make the customer
company vulnerable in the market with respect to their customer’s QCD expectation.
A supplier who is not transparent also is equally undesirable. In the context of
 modern business supplier and customer collectively add value to the supply chain.
Reluctance to be transparent obviously hides cost sources that ultimately makes the
product uninteresting to the price paying customer.
♦ Order quantity is small: a small order quantity is not viable commercially as the
supplier would certainly quote high price.
what & Why do we out source or buy?
♦ Important but not critical: only such operations that are not critical but important to
the final product are outsourced by an organization.
♦ Core competence of supplier: if the operation happens to belong to the area that is in
the core competence of the supplier, it is sent out as there is advantage of quality.
♦ High overheads of buyer organization make production in house very expensive. So
noncritical operations are always made outside.
♦ To balance the production line outsourcing is a known method. In this case we
exploit full potential of production line by balancing.
♦ Planned maintenance programs render the equipment unavailable for production
during maintenance schedule. During this period one has to plan outsourcing to meet
the commitments given to the customer.
♦ Sudden breakdowns send production schedules haywire and purchasing department
comes under pressure to procure material from outside until the breakdown is set
right.