Commodity-Based Supplier Relationships:

Companies are often negligent in maintaining relationships with suppliers of commodities. Price is the major factor that influences the purchasing decision for commodity products. Other factors include the physical proximity of the supplier, customer service offered by him, the level of quality required and the quality maintained by the supplier. Most commodities required by the companies are available with several suppliers. Thus, the companies can easily switch from one supplier to another, in case of any problems with the existing supplier. Therefore, companies do not pay much attention to relations with commodity suppliers, so that they can retain their flexibility.

However, companies can obtain consistent quality and reliable delivery of commodities through strong relationships with commodity suppliers. They can also reduce costs by choosing different procurement methods for purchasing direct materials and indirect materials.

Traditional direct commodity relationships

Purchasing departments often focus more on the procurement of direct materials than indirect materials. They consider cost as well as the ability of the supplier to deliver products on time in their commodity purchasing decisions. They also have agreements with suppliers to ship the commodities on consignment, enabling them to pay only for the amount of material actually used in production. The department purchases from a particular supplier as long as he delivers the commodity at a price agreeable to the former. That is, the suppliers of commodities and suppliers of indirect materials are treated alike. Long-term relationships are not maintained by companies with either of them.

Companies require their suppliers to deliver the right products at the right time so that they do not have insufficient inventory at certain times and surplus inventory at other times. However, often, for various technical and non-technical reasons, companies are unable to communicate information about last minute changes in production schedules and material requirement, to the supplier. Sometimes, the supplier fails to ship the material on time. To accommodate such contingencies, companies and suppliers tend to maintain inventory levels higher than the required levels, leading to accumulation of inventory.

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