Bargaining Power

Bargaining power

      

   Bargaining power is the ability of consumers or buyers to have some degree of influence on the level of prices that are demanded for various goods or services. The term is also used in employment situations, and refers to the ability of a prospective employee to bargain for better employment wages and benefits based on his or her perceived value to the employer. The degree of bargaining power present will depend a great deal on the number of options open to consumers, or the number and quality of prospective employees who are competing for the same position.

      Buyers or customers always bargain or negotiate on the above given aspects. It always depends on the present requirement of customers on which they basically bargain. At times a customer could bargain on price but not on quick delivery of that product but some other times for fulfilling company’s needs or for bonus and premium; the customers could also negotiate on quicker delivery and not the price.

     Some of the customers who are new in the competitive business will always want that the right products are timely available and in reliable form so as to have good returns for the investments made by them in their projects for which they need these products. Hence, irrespective of the cost and time to deliver the products, they rather focus on the benefits and positive features that these products would have that would help accomplishing the projects, the failure cost of which is much higher than the buying cost.

    There are customers who totally concentrate on performance and efficiency of the products they have bought to control and minimize the repeating operating expenses. This is because they are so dependent on product performance that even a minimal down time of these products could cost them huge business loss. So they do not usually bargain on initial cost of the product and concentrate more on the operating cost and keep focus on the product performance and efficiency.

How to Choose Buyers Who Won’t Use Their Bargaining Power?

Factors to look out for when looking for buyers who are not sensitive to price and therefore less likely to use their bargaining power include:

•    Buyers for whom the cost of the purchase is small relative to the rest of the business –      who cares about the cost of paper clips when time is limited and there are more      important things to do.
•  Where the penalty for product failure is high – sometimes quality and reliability is much      more important than price.
•  The product will be an important part of the supplier’s product because it is a   factor standard – PC assemblers risk being excluded from consideration by their  customers if they don’t use Windows and Intel microprocessors.
•   The buyer wants a custom designed product and their are few suppliers with the    capabilities to deliver to the right standard.
•  The buyer is very profitable and is in a powerful position with its customers and can pass   on cost increases easily.
•   The buyer is poorly informed about the market.
  
  
  Two Major Factors Determine Relative Bargaining Power of Buyers

•         The price sensitivity of the customer to paying a high or low price.
•      The relative bargaining power that comes from a readiness to walk away from any deal      and go elsewhere.

                              Bargaining Power of Customers

There are several key factors that increase the bargaining power of customers:

•   Customers are more concentrated than sellers
•  Switching costs for customers are low
•  Customer is well educated regarding the product
•  Customer is price sensitive
•  A large portion of a seller’s sales is made up of customer purchases
•  The customer’s own product or service is affected
•   There is little differentiation between products
•  The threat of backward integration is high.

Pricing

Pricing is the process of determining what a company will receive in exchange for its product. Pricing factors are manufacturing cost, market place, competition, market condition, brand, and quality of product. Pricing is also a key variable in microeconomic price allocation theory. Pricing is a fundamental aspect of financial modelling and is one of the four Ps of the marketing mix. (The other three aspects are product, promotion, and place.) Price is the only revenue generating element amongst the four Ps, the rest being cost centres. However, the other Ps of marketing will contribute to decreasing price elasticity and so enable price increases to drive greater revenue and profits.

Pricing is the manual or automatic process of applying prices to purchase and sales orders, based on factors such as: a fixed amount, quantity break, promotion or sales campaign, specific vendor quote, price prevailing on entry, shipment or invoice date, combination of multiple orders or lines, and many others. Automated systems require more setup and maintenance but may prevent pricing errors. The needs of the consumer can be converted into demand only if the consumer has the willingness and capacity to buy the product. Thus pricing is very important in marketing.

Objective of purchasing management

v  To purchase the required material at minimum possible price by following the company policies.

v  To keep department expenses low.

v  Development of good & new vendors (suppliers).

v  Development of good relation with the existing suppliers.

v  Training & development of personal employees in department.

v  To maintain proper & up to date records of all transactions.

v  Participating in development of new material and products.

v  To contribute in product improvement.

v  To take Economic "MAKE OR BUY" decisions.

v  To avoid Stock- out situations.

v  To develop policies & procedure.

Principle of purchasing management

1.   Buying Material at right QUALITY.

2.   In the right QUANTITY.

3.   From the right SOURCE.

4.   At the right PRICE.

5.   Delivered at the right PLACE.

6.   At the right TIME.

7.   With right mode of TRANSPORT.

  Psychological pricing 

Psychological pricing (also price ending, charm pricing) is a pricing/marketing strategy based on the theory that certain prices have a psychological impact. Consumers tend to perceive “odd prices” as being significantly lower than they actually are, tending to round to the next lowest monetary unit. The theory that drives this is that lower pricing such as this institutes greater demand than if consumers were perfectly rational.

 

TQM

                             

                                       Total Quality Management
     
     Total Quality Management (TQM) is a comprehensive and structured approach to organizational management that seeks to improve the quality of products and services through ongoing refinements in response to continuous feedback. TQM requirements may be defined separately for a particular organization or may be in devotion to established standards, such as the International Organization for Standardization's ISO 9000 series. Every organization, both for profit and non-profit, can benefit from Total Quality Management (TQM). One definition for TQM is a management strategy aimed at embedding awareness of quality in all organizational processes. It has been widely used in education, government, manufacturing, and service industries. TQM processes are divided into four chronological categories: plan, do, check, and act (the PDCA cycle). In the planning phase, people define the problem to be addressed, collect relevant data, and discover the problem's root cause. Next in the doing phase, people develop and implement a solution, and decide upon a measurement to gauge its effectiveness. Third is the checking phase, where people prove the results through before-and-after data comparison. The final phase acting is where, people document their results, inform others about process changes, and make recommendations for the problem to be addressed in the next PDCA cycle (Green 2003).
        The large and growing importance of world trade is a major phenomenon of our time. This trend has been increasing from the merger of Europe into the European Union and by the rapid growth of a few of the less developed countries of Latin America, South America, and Asia. A customer needs assurance that quality products will be supplied while dealing assertively with any supplier. This assurance is principally important when customer and supplier are on a global basis, entailing separate legal systems and grievance procedures. Thus, the growth in world trade has been a major stimulus for developing successful ways for customers to feel certain about the quality of the goods supplied to them, since their customer could be thousands of miles across the ocean. A more appropriate approach would be to have certainty in the quality systems of the various suppliers around the world. There are two methods that can be used to gain this assurance.
       The first one is for the customer to evaluate each supplier's system before conducting any business.TQM stands for Total Quality Management. It is a managerial tool used to improve the efficiency and profitability of an organisation. TQM is a recent development in the field of management which emphasizes the management accounting function and tries to systematize the production management. It has three core aspects - Quality Control, Quality Assurance & Quality Management. Quality Control, deals with analyzing the past to take steps to reduce the defective production. Quality Assurance is concerned with the establishment of systems within the production process to prevent defects. Quality Management is a process of continuous improvement in the products and services offered by the organisation.
      TQM seeks to increase customer satisfaction by finding the factors that limit current performance. The practice of TQM in manufacturing environment has produced improvements in efficiency and profitability. In the late 1950s Japanese products were defamed in the west for their poor quality and unreliability. The transformation in the reputation of the Japanese goods started after applying TQM. It started in the fields of electronic and automobile sectors by application of latest Management principles. Their ability to do so was due to the restructuring °f unions and institutions following Second World War, allowing the use changes necessary like Just in Time (JIT), Value Added Management (VAM) & Total Quality Management (TQM).TQM assumes potentially greater importance as tool improved ^efficiency in service areas. By focusing on the management accounting 'unction it is possible to devise a process through which quality improvement methods might be used to highlight problem areas and facilitate their solution.

JUST IN TIME

Just in time (JIT) is a production strategy that strives to improve a business' return on investment by reducing in-process inventory and associated carrying costs. To meet JIT objectives, the process relies on signals or Kanban between different points, which are involved in the process, which tell production when to make the next part. Kanban are usually 'tickets' but can be simple visual signals, such as the presence or absence of a part on a shelf. Implemented correctly, JIT focuses on continuous improvement and can improve a manufacturing organization's return on investment, quality, and efficiency. To achieve continuous improvement key areas of focus could be flow, employee involvement and quality.

Goal of just in time (JIT)

·          reduce delivery lead times,

·         cut inventory,

·         reduce the amount of defects,

·         improve staff productivity and

·         Make sure products are delivered on time.

Benefit of just in time (JIT)

·         Reduced setup time. Cutting setup time allows the company to reduce or eliminate inventory for "changeover" time. The tool used here is SMED (single-minute exchange of dies).

·         The flow of goods from warehouse to shelves improves. Small or individual piece lot sizes reduce lot delay inventories, which simplifies inventory flow and its management.

·         Employees with multiple skills are used more efficiently. Having employees trained to work on different parts of the process allows companies to move workers where they are needed.

·         Production scheduling and work hour consistency synchronized with demand. If there is no demand for a product at the time, it is not made. This saves the company money, either by not having to pay workers overtime or by having them focus on other work or participate in training.

·         Increased emphasis on supplier relationships. A company without inventory does not want a supply system problem that creates a part shortage. This makes supplier relationships extremely important.

·         Supplies come in at regular intervals throughout the production day. Supply is synchronized with production demand and the optimal amount of inventory is on hand at any time. When parts move directly from the truck to the point of assembly, the need for storage facilities is reduced.

·         Minimizes storage space needed.

·         Smaller chance of inventory breaking/expiring.

Risks

Just-in-time inventory is not without risks. By nature of what it is, companies using JIT intend to walk a fine line between having too much and too little inventory. If company buyers fail to adjust quickly to increased demand or if suppliers have distribution problems, the business risks upsetting customers with stock outs. If buyers over compensate and buy extra inventory to avoid stock outs, the company could experience higher inventory costs and the potential for waste.

JOINT VENTURE

Joint Venture

                                                

      A joint venture is a contractual business undertaking between two or more parties. It is similar to a business partnership; with one key difference a partnership generally involves an ongoing, long-term business relationship, whereas a joint venture is based on a single business transaction. Individuals or companies choose to enter joint ventures in order to share strengths, minimize risks, and increase competitive advantages in the marketplace. Joint ventures can be distinct business units (a new business entity may be created for the joint venture) or collaborations between businesses. In a collaboration, for example, a high-technology firm may contract with a manufacturer to bring its idea for a product to market; the former provides the know-how, the latter the means.

      All joint ventures are initiated by the parties' entering a contract or an agreement that specifies their mutual responsibilities and goals. The contract is crucial for avoiding trouble later; the parties must be specific about the intent of their joint venture as well as aware of its limitations. All joint ventures also involve certain rights and duties. The parties have a mutual right to control the enterprise, a right to share in the profits, and a duty to share in any losses incurred. Each joint ventures has a fiduciary responsibility, owes a standard of care to the other members, and has the duty to act in Good Faith in matters that concern the common interest or the enterprise. A fiduciary responsibility is a duty to act for someone Else's benefit while subordinating one's personal interests to those of the other person. A joint venture can terminate at a time specified in the contract, upon the accomplishment of its purpose, upon the death of an active member, or if a court decides that serious disagreements between the members make its continuation impractical.

        Joint ventures have existed for centuries. In the United States, their use began with the railroads in the late 1800s. Throughout the middle part of the twentieth century they were common in the manufacturing sector. By the late 1980s, joint ventures increasingly appeared in the service industries as businesses looked for new, competitive strategies. This expansion of joint ventures was particularly interesting to regulators and lawmakers.

        The chief concern with joint ventures is that they can restrict competition, especially when they are formed by businesses that are otherwise competitors or potential competitors. Another concern is that joint ventures can reduce the entry of others into a given market. Regulators in the Justice Department and the Federal Trade Commission routinely evaluate joint ventures for violations of Antitrust Law; in addition, injured private parties may bring antitrust suits.