The price a supplier can get for an item is unrelated to its costs because, the organization under, which the supplier is supplying goods, is very determined on maters to do with the cost reduction of the products that are produced in the company rather than the money paid to the supplier (Baier, Hartmann & Moser, 2008). The margins of the organization is what is highly considered to be highly improved to meet the future challenges, while the price a supplier gets is less considered as this is not in any way related to the cost of the item production. Long term contracts assist in ensuring that the cost of production is made right and not the price that the supplier is paid for supplies he has made to the organization at a given time (Chen & Paulraj, 2004). The operating profit of the organization will highly be impacted by the improvements that are made on the costs of products and not the price a supplier gains as they are not related in any given way. For the company to be in better position of mitigating the price increases the management have to obtain a good range of prices through the establishment of a supplier portfolio. When a supplier is in a better position of supplying quality goods to the organization, the company retains him and establishes good contracts with him and also gives him worth prices for his goods (Choy, Lee & Lo, 2004). In the case of Volkswagen company, they tries as much as possible in identifying the cost effective suppliers who are not expensive to work with for the sake of not spending much in the high prices demanded by the suppliers while on the other side they incur high costs with less profit at the end. The company has a good record of procuring goods from many cost effective suppliers as they prove to be easier to work with. Volkswagen Company is very smart in identifying suppliers who are most suited to the group’s global operations that are of high importance in the reduction of cost that is incurred in the company (Songailiene, Winklhofer, & McKechnie, 2011).
When an organization is operating under a high competitive end-user market focuses mostly on ensuring that it incurs lost cost of the goods that are produced within the its premises. This will clearly define the fact that cost of goods and the price that the supplier receives are not in any way related to each other as they operate differently (Dasgupta, Moser & Melliar-Smith, 2005). All the organizations supplies and purchasing are geared towards a detailed budget that has to be worked out in the company to ensure that the suppliers are timely paid to reduce the delay that may be caused as result of failure to give supplier prices on time (Van Horne, & Örge, 2013). The cost reduction projects are well prepared and well analyzed to avoid any failure that might occur during the production process. Volkswagen Company has reputable sourcing strategy that is applicable for its suppliers as it invites quotations from suppliers across the globe. This strategy aid the company in reduction of the cost that it incurs on the materials supplied to it by various suppliers. Over the years, Volkswagen scared a lot of suppliers away due to its strategy that was more focused on reduction of cost a factor that led to suppliers compromising on the quality of material that they supplied to the company. Suppliers decided to compromise on the quality of their supplies because they were given low prices in return thus, they had to do so to get returns to their work (Su, & Geunes, 2013). This contributed to the quality problems of the products that were produced by the company due to the use of low quality products as its raw material. At the end of the cost reduction strategy, Volkswagen was able to realize that its focus slowly drove its quality to lower levels than required by its customers. This is the reason as to why Volkswagen has devised more outsourcing strategies that prove to be more balanced in the cost effective and the price setting of the suppliers.
When carrying out its operations in the niche market, Volkswagen considers dealing with early suppliers who appear in the market so that they can secure all the required proprietary knowledge that will lead to low cost incurrence (Shih-Jui Tung, Ching-Chun, Wei & Yu-Hua, 2012). This will enable reduction of time that is spent in the market and lead to the development cost that will lead to high profit in the company due to the high sales made by the company. The supplies made by the supplier are ranked first together with all the innovations made as well and the cost of production comes latter then the price of the goods is set. Therefore, there is no way whatsoever the price a supplier gets on a given item that he has supplied to the company can be related to the cost of the item produced.