Page 165 - DMGT206_PRODUCTION_AND_OPERATIONS_MANAGEMENT

Production and Operations Management

Notes party’s well-being. They see the relationship as a zero sum game i.e. what one party wins, the
other loses.
The transactions are also seen as a series of independent deals. Each transaction is entered into
on its own merits. Therefore, there is limited contact between the buyer and the seller. There is
also little or no basis for collaboration and learning from each other.
Basic data relating to technical data, special features, costs, and forecasts, etc. are not shared. As
these are arm’s-length transactions, the focus is on price.

Example: DGS&D uses open tenders for each transaction. Both the buyer and the seller
try to get the best price. There is no openness in such a relationship.
If there is any cost analysis, it precedes the procurement transaction. It is done separately by the
buyer and the seller, and they do not share data. Since the prices are established by market
forces, neither buyer nor supplier will rush to the other’s assistance in bad times or when
problems arise.
Most of the procurement effort is in establishing rules, regulations, and procedures governing
such transactions. Therefore, little purchasing time and energy are required to establish prices,
as market forces establish prices in transactional relationships.

Advantages of Transactional Relationships
Though transactional relationships are formal and inflexible, in certain cases, they are
advantageous to the firm. The major advantage is that transactional purchases lend themselves
to e-procurement and, in some cases, reverse auctions.

In the case of conventional procurement transactions, there is relatively less purchasing time
and effort required to establish price, as these are established primarily by market forces. With
the vast majority of transactional procurements, judgment and managerial expertise are seldom
required. This is advantageous for commodity items as little purchasing time and efforts are
required to establish price. The transactions are mechanical and hence, lower skill levels of
procurement personnel are required.

Disadvantages of Transactional Relationships

The disadvantages of such relationships stem from the fact that the supplier recognizes the
transactional and price nature of the relationship and is not motivated to invest time and energy
in the development of the potential buyer’s products.
Transactional procurements tend to provide for products where quality is only as good as
required. It often results in more problems. As there are many unknowns about the seller’s
capabilities, considerable investment in expediting and the monitoring of incoming quality is
required to ensure timely delivery of the right quality. There is little incentive and opportunity
to improve quality and delivery in this type of relationship.
Transactional relationships are generally inflexible. Very often, flexibility may be required in
supplier-buyer relationships due to changing technology or changing market conditions. It is
generally not possible in transactional purchases.

Transactional suppliers tend to provide the minimum service required. There is little
communication between the buyer and the seller. Transactional suppliers have little to lose
from a dissatisfied customer, if they can meet with the contractual requirements of the buyers.
The risks and uncertainties present with transactional relationships reduce the likelihood of
investments in R&D and training as well as the procurement of new, more efficient equipment
focused on the customer firm’s needs.

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