In corporate purchasing, competitive scrutiny is typically limited to suppliers of items that are directly related to end products. With “indirect” purchases (such as computers, advertising, and legal services), which are not directly related to production, corporations often favor “supplier partnerships” (arrangements in which the purchaser forgoes the right to pursue alternative suppliers), which can inappropriately shelter suppliers from rigorous competitive scrutiny that might afford the purchaser economic leverage. There are two independent variables‐availability of alternatives and ease of changing suppliers‐that companies should use to evaluate the feasibility of subjecting suppliers of indirect purchases to competitive scrutiny. This can create four possible situations.
In Type 1 situations, there are many alternatives and change is relatively easy. Open pursuit of alternatives‐by frequent competitive bidding, if possible—will likely yield the best results. In Type 2 situations, where there are many alternatives but change is difficult—as for providers of employee health-care benefits—it is important to continuously test the market and use the results to secure concessions from existing suppliers. Alternatives provide a credible threat to suppliers, even if the ability to switch is constrained. In Type 3 situations, there are few alternatives, but the ability to switch without difficulty creates a threat that companies can use to negotiate concessions from existing suppliers. In Type 4 situations, where there are few alternatives and change is difficult, partnerships may be unavoidable.
According to the passage, which of the following factors distinguishes an indirect purchase from other purchases?
The ability of the purchasing company to subject potential suppliers of the purchased item to competitive scrutiny
The number of suppliers of the purchased item available to the purchasing company
The methods of negotiation that are available to the purchasing company
The relationship of the purchased item to the purchasing company’s end product
The degree of importance of the purchased item in the purchasing company’s business operations