Purchasing and Inventory Management

Quite obviously, alliances are not always appropriate. The five major reasons for a buyer not to pursue an alliance with a supplier are briefly given below:

Stability of the prices, market, and buyer’s demand:

Commodities traded on open markets that have significant price volatility. The problem for a partnership/alliance is how to share risks and benefits that may result from price volatility. If the buying firm’s needs are not predictable, the supplier must deal with the likelihood of overstock or stock out or erratic productions schedules. Purchases that involve changing technology or critical quality or other characteristics where there are at the same time no strong suppliers may indicate a high likelihood of needing to switch in spite of high switching costs. In such cases, maximum flexibility is desirable.

Capability of potential suppliers:

Depending on the material or service required, there may be regions where a partnership or alliance is not possible on account of lack of a competent supplier in that region. Situations of rapid industry wise technological change where the buyer would be disadvantaged if locked into one supplier . The buyer must have assurance that technology (either that which is being purchased, or that which the supplier uses in its production, or both) is maintained at the state of the art required by the buyer’s industry. Not all suppliers have the capability to remain technologically competitive.

Competition in the supply market:

There might be the situations where extreme dependency on a particular supplier would be created by a partnership or strategic alliance. If the buying company is relatively small compared to the selling company and the buyer’s business is not vital to the seller, the buyer may be at risk of future supply. Competition in the supply market can create situations where suppliers appear to be using partnerships/alliances as a marketing ploy to eliminate competition and reduce industry capacity.