Applied Channel Design Concepts

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Applied Channel Design Concepts

1. What are three key “applied channel systems” themes and messages your group has picked up from the negotiation exercise? Support your position.

In the negotiating exercise, three key themes of ‘Applied Channel Systems’ are applicable. Each one of them is discussed briefly below:

Environmental Bounds – significant environmental bounds exist for Alpha and Beta Pharmaceuticals in the negotiation scenario of Ugli oranges’ supply chain. Ugli oranges are grown in the specific geographical region of the South American country, and the buyers cannot seek alternative procurement channels for the raw material. The particular pharmaceutical product can only be created from this specie of oranges. The environmental bounds have restricted the choice of sourcing channel for procurement managers of the respective companies (Coughlan et al.’s, 2007). The impact of this environmental bound is significantly high in this negotiating exercise and plays an important role in the determination of outcome for this exercise.  

Managerial Bounds – The purchasing managers of Beta Pharmaceuticals are granted only a limited budget for procurement of the raw material for pharmaceutical production. Also, the decision making needs to be approved by the finance managers of the organization. The presence of managerial authority constraints creates a compromising situation for the relevant procurement staff (Coughlan et al.’s, 2007). Managerial bounds have enhanced challenges for the procurement managers of Beta Pharmaceuticals in the case.

Demand-Side Gaps – Demand-side gaps refer to both excess supply and excess demand. In this case study, a demand-side gap of excess demand is present since two pharmaceutical organizations – Alpha Pharmaceuticals and Beta Pharmaceuticals – are vying to secure supply from an exporting company. Also, the fact that both Cardoza and Cadona of Gamma Exporting were quite inflexible in their approach exhibits the impact of demand-side gap in the outcome of the negotiation.

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2. Should past reputation of the seller and the buyer(s) raise concerns in the way your group manage and handle this potentially, new relationship? Explain why or why not?

The past reputation of both seller and buyer is information which should be highly important during the negotiation process. Firstly, the information about the character and trustworthiness of each negotiation party is the key information which is sought by both sides of the table. It saves time and waste of resources to learn about something which could have already been learned from other’s experience. One should not seek to reinvent the wheel, rather seek wisdom from others.

In this particular case, the general reputation about South American companies is that they are not good at keeping their word. This was key learning for the team during the negotiation process, and we sought financial commitment from Gamma Exporting, rather than a written contract only. A key fact of the negotiation is that trade relations between the two geographical regions – Australia and South American country – are in nascent stages. Therefore, even in the short-run there is a threat to the importer that the exporter may back out of its commitment to supply Ugli oranges if the price of the commodity gets too high in the international market. For this reason, the past reputation of the seller to be weak towards keeping commitments becomes highly relevant. It should raise the concern about the likely outcome of the deal at hand.
 

3. In what sense can a demand – side gap and supply - side gap exists over the course of your negotiation exercise? Support your position citing examples of such gaps.

There is a significant demand-supply gap in the negotiation scenario, even though it may not be apparent to the seller at the present moment. The example of the demand-side and supply-side gap is that Ugli oranges are demanded by two pharmaceutical companies; however, the supplier of Ugli oranges is only one. Alpha Pharmaceuticals and Beta Pharmaceuticals are buyers, while Gamma Exporting is the supplier. The demand and supply gap is not only reflected in the number of buyers and sellers only, rather the quantity of oranges demanded and supplied is also unequal. The quantity of Ugli oranges which is sought by Beta Pharmaceuticals is five tons alone. This is roughly equal to the quantity which can be supplied by Gamma Exporting. If the demand, by Alpha Pharmaceuticals is roughly equal to Beta Pharmaceuticals, then the cumulative demand for Ugli oranges will be greater than the supply of Ugli oranges by a multiple of two. This demand and supply gap has considerably impacted the negotiation process and led Beta Exporting to sign a legal contract with advance payment at the end of the negotiation.
 

4. “Within the context of negotiation exercise, short-term opportunistic, relational behavior on the part of the buyers and the sellers is not only expected but also encouraged.” Do you agree or disagree with this statement? Support your position.

We agree with the above mentioned statement for perfectly competitive markets which are characterized by suppliers of a large numbers of buyers and sellers. The presence of greater choices amongst buyers and suppliers is likely to lead to short-term opportunistic relationships. In a perfectly competitive industry, where the entry and exit from the industry is relatively easier for supplier, it makes greater sense for the supplier to focus only on the short-term outcome to maximize their respective returns. Low et al.’s (1996) quotes example of OEM suppliers to state, ‘such an environment provides the ideal impetus for short-term opportunistic relationships where a choice of OEM partners is available to buyers keen to enter into a relationship’. The supplier will not be dependent on the same buyer for continuity of its business, and there is no economic incentive for the supplier to create a longer-term relationship with the buyer.

The statement given above does not hold true in a situation where the product is highly technical or minimum quality standards exists. In such scenarios, the buyer will still choose to create a long-term relationship for it will lead to considerable cost savings. In the scenario of Ugli oranges, the product is not a manufactured product and no technical specifications need to be complied. If the product is semi-manufactured like purchase of automobile parts by an automotive company, the buyer would choose to create long-term relationship with the supplier for the strategy would minimize the risk associated with trying new suppliers or sourcing parts compatible with its production system. Secondly, when the supply of product is uncertain, then it favors buyer to create a longer-term relationship with the supplier. For instance, if the supply of Ugli oranges varies each year, then Beta pharmaceuticals fares well by having a positive relationship with Gamma Exporting. This will help Beta Pharmaceuticals to secure a supply of raw materials even when the cumulative demand in the market exceeds cumulative supply. The relationship with Gamma Exporting will ensure a reliable trading partner; even when innumerable other suppliers are present in the market. Similar principles hold true for complexity of the transaction. In foreign trade, it is far easier to carry out Letter of Credit transaction with the same trade partner, rather than a new one each time. In short, the scenario of Ugli oranges’ negotiation favors long-term relationship making, rather than following short-term opportunistic behavior.
 

5. Moving forward, are there any possibilities for conflict to exist between buyer and seller, assuming the successful completion of the current transaction [note your response to the item 2 above]? What can the buyers and sellers do to prevent conflict from happening?

After the successful completion of this transaction, there still exists a possibility for conflict between buyer and seller. Low et al.’s (1996) speaks about short-term opportunistic approaches being encouraged in industrial marketing. Yet, the author emphasized that even in such short-term transactions; there is considerable expectation from both transacting parties to seek longer-term benefits from one another. Theories of international trade also confirm that there are longer-term implications for one-time transactions.

Conflict may arise in a number of manners between the two trade partners even when the particular transaction is completed successfully. Trade relations between two countries are in developing stages. Hence the seller may require the buyer to give out positive reviews about the company. If the Australian buyer does not agree to act accordingly, then conflict may very well arise between the buyer and seller. Other sources of conflict after the current transaction can be problems with the release of LC payments from beneficiary banks or discovered quality control issues with Ugli oranges after delivery has been made.  

The buyers and sellers can take a number of measures to resolve these issues. Firstly, written commitment should be made about each minutest aspect of post transaction relationships. For instance, if the supplier expects LC payment to be released within 2 weeks, then it should be confirmed with the buyer. The maximum acceptable percentage of defects should be written in the contract and, if the seller expects positive referrals from the buyer, then it should be mentioned during the negotiation process. In short, attention to detail during the negotiation process will ensure that possibilities of conflicts after the transaction should be minimized.    

Bibliography

Koon, B. & Low, H. 1996. Long-term Relationship in Industrial Marketing: Reality or Rhetoric. Industrial Marketing Management. New York: Elsevier Science Inc., Vol. 2(5), 23-25.
Coughlan, A., Anderson, E., Stern, W., & El-Ansary, A. 2007. Marketing Channels. Pearson Prentice Hall: USA. 

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