Purchasing Power and Purchasing Strategies - Insights From the Humanitarian Sector

University dissertation from Lund University

Abstract: Popular Abstract in English Globalization and new technologies in transportation and communication have opened the doors for partnerships beyond the national and regional borders, making business survival more complex than ever before. We can see more companies outsourcing different aspects of their business in order to focus on one or a few core competencies, which would potentially gain them more market share. As a result, purchasing of what has been outsourced has become increasingly important; how to select partners, based on what aspects, where from, and for how long, are some of the questions that need to be answered. And so, firms get engaged with partners of different sizes and reputation in different frameworks and cultures. As business relationships are formed, partners get more or less dependent on each other. This dependence is not always equal though; for example, a big car manufacturer like Volvo is less dependent on its local small part supplier than the supplier might be on Volvo. At the same time, Volvo might be equally dependent on their engine supplier, which has gained know-how of what Volvo wants throughout the years. The powerful partners are often considered better off in business situations. A bigger firm, or one with a renowned brand within a certain sector, often has the leverage to push its partners, such as suppliers, into performing or delivering according to its wills. Thus, intuitively firms or organizations will always strive to gain more such leverage, or in other words to increase their power. This can create a business or even a market malfunction; the less powerful firms might be pushed into non-optimal or sub-optimal performance merely to maintain their relationship, or loose incentive, and might even be pushed out of the market. So, they have to either comply with the constraints or attempt to change them. Little is known about how they actually react towards their powerful partners; if they have the possibility to improve their situation, and if yes how. Examples of such unbalanced relationships can be seen in different sectors and industries; e.g. public sector organizations having to purchase medicine, PC manufacturers buying from the very few producers of operating systems, or in the airline industry in purchase of aircrafts. Another domain exhibiting several examples of such business relationships is the humanitarian sector, especially when organizations have to compete with the commercial sector firms for goods and services. Commercial, private sector companies often have more secured funding and more stable volumes to negotiate with, making them a more attractive business partner for the suppliers. In this dissertation, a number of less powerful buyers in the humanitarian sector were studied; with the aim to understand how these organizations purchase their required needs and how their practiced purchasing strategies impact their purchase conditions. The traditional perception that “the less powerful needs to either comply or safeguard” is challenged in this dissertation, and suggestions are provided for increase of purchasing power. However, the complexity of such an increase is also recognized, and the several aspects important for this increase, which should be considered in design and implementation of purchasing strategies, are highlighted. In the last 4.5 years, a pre-study, a multiple and a single case study were conducted on the topic and the results have been summarized in a licentiate thesis, 5 different scientific articles, and the Kappa of the dissertation. Challenges in the humanitarian sector The humanitarian sector is characterized by a large number of governmental and non-governmental organizations, predominantly non-profit institutions, with diverse legal mandates, interests and structures. These organizations interact with the commercial market when they purchase various aid and relief items or services for delivering goods to the public or beneficiaries. There are several situations, where they have to compete with multinational commercial companies for the same product or services, such as in purchase of transportation space or freight forwarding services. In such situations, demand is often considered comparably negligible. Humanitarian organizations such as UNICEF, have also realized that suppliers do not always find the specific needs of the sector attractive enough to invest in and that demand is not always sufficiently transparent. The result has historically been scarcity of supply for some products such as vaccines. On the other hand, shareholders and public citizens are increasingly requiring firms to act more responsibly towards societies, which has increased the firms’ interest to invest in the humanitarian sector. Purchasing in the humanitarian sector is mostly carried out in a fairly traditional manner; that is through bidding, arm’s length and on spot. Funding uncertainty and the unpredictability of demand, has resulted in more ad-hoc responses. Strict procurement regulations meant to ensure transparency, fair competition and best value-for-money purchases, further make innovation in strategies more difficult. Consequently, there has historically been an emphasis on independent, bidding practices. Recent calls for increased efficiency and effectiveness in the sector are, however, transforming purchasing practices, creating a strong push for innovation, coordination and alignment among organizations. While the studies in this dissertation are conducted within the borders of the humanitarian sector, and making the results most relevant to this sector, findings are also relevant to all buyers with limited purchasing leverage; that is organizations that are highly dependent on their suppliers. How can such buyers increase their purchasing power? Early on in the study, we found that buyers with limited power can in fact influence their supply channels and thus exert more control over their supply. Further investigations showed that managers were reacting to the constraints they faced in making purchasing choices, such as having limited options to choose from in the market or not being able to find the necessary information. These constraints are related to the factors that gave rise to higher or lower power, such as the limited options in the above example, making buyers more dependent on the few existing suppliers, or resulting in them having less power. For example, in the vaccine procurement study, most cases reacted to the concentrated state of the vaccine market and either tried to sign tighter contracts, develop their relationship with the suppliers, or invested in developing additional suppliers to expand the market. Only one of the case organizations, which had managed to somewhat improve its leverage, had started to react to the lack of information sharing and improvement of its reputational aspects. One of the contributions of this dissertation is to give a clearer picture of the factors that give rise to more or less purchasing power, which are labeled as “sources of power” and their indicators. Buyers with low purchasing power can use this list to form a better understanding of what aspects can improve their purchasing power. The studies also show that these buyers react differently to the constraints. They either 1) adapt to the constraints (e.g. in response to the prices in a highly concentrated vaccine market, strategies being shifted towards securing funding), 2) safeguard (e.g. more details being included in contracts to secure supply during the relationship), or 3) attempt to change the situation (e.g. investing in the development of new suppliers to increase options in the vaccine market, or gathering volumes and resources among multiple buyers to gain more leverage towards suppliers). Each of these purchasing strategies, in turn, affects the sources of power, which can possibly give rise to new constraints or purchasing power situations. For example, contracts with more details can create relationship norms and improve commitment, impact the transparency of information shared with suppliers, and thus relatively improve the purchasing power in the next negotiation. However, the effect might be lower than when buyers pool volumes and resources; i.e. in a strategy called cooperative purchasing. On the other hand, if for example the suppliers resist the cooperative purchasing strategy, or if information becomes too vague for them as a result of it, the overall outcome might not correspond to plans (i.e. purchasing power not increase or even reduced). In the cooperative purchasing strategy, several buyers pool their purchasing function and volumes in strive for better purchasing power. In our study, since some “sources of power” such as relationship with suppliers and transparency of information was distorted as a consequence of the practiced cooperative purchasing, the increase of volumes did not increase purchasing power of the group. We also found that lack of coordination between the buying members, coupled with a lack of a formal control mechanism in absence of full trust between them, increase the strategy’s likelihood of failure. What new have we learned? In sum, this dissertation adds to our knowledge of purchasing power, less powerful buyers, and purchasing in the humanitarian sector. The concept of “purchasing power” is introduced to the purchasing literature. In this view, the previous definition of power between two organizations is extended to the dependence of the buyer on its supply options or the supply market. The concept is further operationalized through “sources of power” and their indicators. These sources are connected to the purchase environment (e.g. number of suppliers or industry regulations), the organizations (e.g. reputation) and the individuals within organizations (e.g. interpersonal connections); thus, making the perception of individuals about their power very important. The dissertation also adds to the understanding of comparatively less powerful buyers by developing a framework that depicts how their purchasing strategies interact with their purchasing power, and thus what aspects should be considered to improve the purchasing power. Here, a number of purchasing strategies that can improve purchasing power for less powerful buyers are introduced. Furthermore, the dissertation shows the application of a theory developed in the commercial sector (i.e. resource dependency theory) to that of the humanitarian sector, and shows that the nonprofit buyers react relatively similar to the commercial firms in relation to power constraints. Insights from this dissertation add to our understanding of development projects and the dynamics of purchasing in the humanitarian sector. The adaptive strategies of buyers in the sector are challenged, and strategies with higher influence on supply channels are recommended. Where should we go from here? In the next step, studies need to test the suggestions of this dissertation in new industries and sectors. For example, the public sector, which has several similarities to the humanitarian sector, can benefit much from a more clear understanding of how they can increase their purchasing power. Replicating the study for small and local firms with, often, low power is an alternative arena. Another example is in the transport industry, to see how the sustainability agendas with relatively low power can become more prevalent and gain more leverage. Power distribution in a network of buyers and suppliers; supplier perceptions of purchasing power and purchasing performance; the impact and role of trust in power relations; the purchasing power within long-term relationships; the possible application and impact of portfolio models on purchasing power positions for supply strategies; are only a few of the arenas that can be further explored. Humanitarian logistics literature can also benefit from more studies on cross-sector relationships; extending the topic of the dissertation to the emergency relief context; and in general further empirical studies of barriers to performance, and areas of improvement.