Doing business in today’s dynamic world has become much more complex and competitive. This is mainly due to the wide range of options available to a company in all aspects of running the business. This decision-making process becomes much more complex if the company is larger, since the complexity increases with the size of the company.
Cost considerations and choosing options that are profitable are very important to ensure that the business is profitable. Even in terms of purchase, there are several parameters to consider before finalizing the type of purchase by the determining authority of the company.
Recruitment, being an important aspect, should be decided on the company’s requirements in the most cost-effective way. The new school of purchasing classifies the purchasing process into two: transactional purchasing and relationship purchasing, based on the relationship and terms between the buyer and the seller.
What is transactional purchase?
Transactional buying, as the name suggests, is limited to buying one transaction at a time. In this type of buying, purchasing managers are primarily concerned with the “today” purchase that the buyer is currently thinking and acting on. Prices and sales conditions drive the buying process. The buyer negotiates aggressively with the service provider and tries to get a better deal for himself. The acquisition team often demands more concessions and garnishments from the purchase. Once the transaction is complete, the contract between the seller and the buyer ends.
From the seller’s perspective, the only exciting thing is the limited length of the service period. However, this type of purchase is not lucrative for the seller since the negotiation is difficult and the seller may end up giving many concessions than he originally decided. In the case of a purely transactional purchase, complex/critical tasks should be avoided.
There is another type of transactional purchase called ‘Pseudo Transactional Purchase’. Here, the service provider extends the services of the sold product over a longer period of time. They maintain the product ad hoc based on the need of the buyer. Here, the contract is limited to the single task(s), however, the buyer will make use of the services for a predetermined period of time.
What is relationship buying?
The goal of this type of purchase is to maintain a strong relationship with the seller over a long period of time. The buyer and seller tend to enjoy a mutually beneficial relationship. The seller is considered a business partner of the buyer. Buyer trust, along with seller delivery and proven experience, is the key to relationship buying success. Both parties look for a win-win situation before entering the partnership. As the relationship is longer term, the buyer must ensure that the seller also makes a good profit from the partnership and extends help and support to the seller.
We have mentioned that a large company, with complex operations, should not carry out a transactional purchasing process. Does this mean that a large company or even a midsize company should go for relationship buying and a small company should go for transaction buying? No, the decision of the hiring process does not depend solely on the size of the company. There are criteria to consider on the basis of which such decisions are made.
Some of the criteria are as follows:
Relational buying Transactional buying
Nature of work Complex Simple
Work volume High Low
Work frequency Daily/Weekly/Monthly (Periodic) Ad Hoc
Buyer involvement High Low
Transactional Purchase vs Relationship – Which is better?
In summary, a company, whether large, medium or small, can choose between transactional buying or relational buying or even pseudo-transactional buying. Considering the hassles of the contract creation process, many companies generally prefer relationship buying. The frequency of creating contracts is more in a purchase process by transaction than in a purchase process by relationship. However, due to constant pressure to reduce costs, transactional purchase is also being considered. This type of purchase comes to the rescue when there is a cost constraint. It is a boon for small or sole proprietorships as they find it easier to follow. Even large companies are not far behind in experimenting with this type of purchase. Larger companies are floating a separate unit/company so they can take advantage of transactional buying. Both transactional buying and relationship buying have their pros and cons. A good business manager should select the procurement process based on the company’s requirements. Considerations must be made based on what product should be obtained, whether it is periodic or not, how involved the company wants to be, and whether maintenance is complex or simple.
