In a commercial negotiation, a procurement professional believe that the larger the order quantity from buyer, the lower the supplier’s average costs. Is this assumption true?

In a commercial negotiation, a procurement professional believe that the larger the order quantity from buyer, the lower the supplier’s average costs. Is this assumption true?
A . No, because supplier’s average costs will rise as the buyer’s demand increases
B . No, because the supplier may need to invest in new facility to meet buyer’s demand
C . Yes, because larger order quantity will bring a considerable profit to supplier
D . Yes, because larger order quantity will always enable the supplier to reach its economy of scale

View Answer

Answer: B

Explanation:

In some markets, suppliers experience peaks and troughs in demand and so buyers can increase their leverage through developing an understanding of how busy their vendor are at particular time during the year or business cycle and targetting atquieter period. Similarly, if a buyer can develop an understanding of supplier capacity and to what extent have they covered their fixed cost, they may be able to target suppliers when their average costs are likely to be lowest. Vendor’s average costs will be higher at low and high capacity utilisation.

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