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© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Analysis
2. Industrial buying behavior:
decision making in purchasing
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Program
Organizational buying behaviour: basic characteristics The purchasing process Major bottlenecks and problems The role of the purchasing department in the purchasing
process Models of industrial buying behaviour Buying behaviour considered as an interactive process
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Industrial vs. consumer markets
Buying objective Enable production Personal need satisfaction
Buying motive Mainly rational Also emotional
Purchasing function Professional buying Consumers
Decision making Many persons involved, much discussion
Often impulsive, without consulting others
Characteristics Negotiations, intense interaction
Often without negotiation, little interaction
Product & market knowledge
Large Limited
Order size Often large Mostly small
Demand Derived, fluctuation Autonomous, relatively stable
Price elasticity Rather inelastic Rather elastic
Number of customers Mostly limited Very large
Spread of customers Sometimes large geographic concentration
Large spread
Aspect Industrial market Consumer market
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Industrial markets: basic characteristics
Professional purchasing: professional buyers with education and experience who know their tasks and responsibilities
Derived demand: developments in industrial markets are often related to changes in the end-user markets upstream in the value chain
Inelastic, fluctuating demand: due to the derived demand, price-elasticity in industrial markets is frequently lower than in consumer markets
Geographical concentration: many industrial markets are geographical concentrated (e.g. Silicon Valley)
Large order quantities and large amounts of money involved Limited number of customers: industrial suppliers often supply only a few
companies compared to companies that deliver directly to consumers
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
The purchasing process
- Establish expediting routine
- Expediting
- 'Trouble- shooting'
- Vendor rating- Vendor
- EstablishOrder routine
- Developorderroutines
- Orderhandling
Order
Proc. Role
Elements
Documents
- Prepare contract
- Contractingexpertise
- Negotiatingexpertise
Contract
- Assure adequatesupplier selection
- Prequalification of suppliers
- Request forquotation
Supplier selectionproposal
Get specification
-
FunctionalspecificationTechnicalchanges Bring supplier
knowledge toengineering
-
-
-
-
-
FunctionalspecificationNorm/spec.control
Definespecification
Selectsupplier
Contractagreement
Ordering Expediting EvaluationFollow up
Overdue list
- Vendor performanceevaluation
- Settling contractproblems
evaluation
- Vendor balanced score card- Vendor profile- Vendor ranking
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
The purchasing process
Process approach: the various steps in the model are closely connected and the quality of the output of the preceding steps determines to a large extent the quality of the subsequent steps
Defining the interfaces: the output of each phase has to be clearly defined, preferably with a document
Determining responsibilities: purchasing is considered to be a cross-functional responsibility. Therefore, the tasks, responsibilities and authority of the parties involved should be clearly indicated in each phase
Combining different skills, different types of knowledge and expertise: key question is how to combine the different types knowledge, skills and expertise in such way that all parties involved arrive at an optimal solution for the company
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
The purchasing process
The added value of the professional buyer lies in the ability to actas a facilitator for the supply process:
Being involved in new product development and investment projects Preparing a list of approved suppliers, drawing up requests for quotations and
selecting a supplier together with the internal customer Preparing and carrying out contract negotiations setting up requisitioning and
ordering routines (e.g. through electronic buying catalogues, e-Procurement) in such a way that users can place orders themselves
Place orders at suppliers and maintain and monitor order, contract and supplier files
Monitoring outstanding orders and financial obligations Follow up and evaluation of supplier performance and maintaining relevant
supplier documentation
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Ad 4) Inkoopclassificatie
New task situatie• Completely new product from unknown suppliers• High uncertainty regarding outcome• (e.g. acquisition of capital goods)
Modified Rebuy
• New product from known supplier• Existing product, new supplier• Moderate uncertainty regarding outcome
Straight rebuy• Known product from known supplier• Low uncertainty regarding outcome • (e.g. consumable items like MRO)
Three types of purchasing situations:
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Examples of purchasing situations
Routine task
Low risk
Gas, w
ater, electricityC
leaning materials
Bulk chem
icals
Office
supp
lies
Spar
e par
ts
Elect
roni
c com
pone
nts
Compu
ter t
erm
inal
s
Telep
hone
syste
mPr
oduc
tion
equi
pmen
t
Office furniture
Courier services
Business cars
Com
puters
Buildings
New task
High risk
Straight rebuy Modified rebuy New task
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Major bottlenecks and problems
Supplier or brand specifications: most buyers are involved only to a minor extent in the specification phase, so the specifications of the user are often designed ‘towards’ a particular supplier
Inadequate supplier selection: Insufficient screening of suppliers on financial strenghts and technical capabilities leading to discontinuities of supply in delivery stage
Insufficient contracting expertise: leading to misunderstandings on how supplier should perform and difficulties in solving delivery and quality problems
Too much emphasis on price: Decisions need to be based upon total-cost-of- ownership (TCO) rather than price only
Administrative organisation: lack of clear procedures with regard to procurement or authorisation of orders, leads to lack of control on purchasing expenditure and costs
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
The role of the purchasing department
Many different items are not purchased by the purchasing department, but by management, accounting, administration etc.
The purchasing department usually is mainly involved in the procurement of indirect materials, somewhat less in production-related items and least in investment goods
The involvement of the purchasing department is limited during the first few stages of the purchasing process
Traditionally purchasing’s role focused on the last stage of the process, when contracts have to be drawn up and when orders have to be placed. This picture is changing, however…
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
The role of the purchasing department
Type of purchasing item
Key raw materials Computers and software Lease contracts Insurances Accounting services Advertising Catering Travel Licences Books and magazines Sales promotion items Temporary labour and training Cleaning materials MRO
Type of purchasing item
Key raw materials Computers and software Lease contracts Insurances Accounting services Advertising Catering Travel Licences Books and magazines Sales promotion items Temporary labour and training Cleaning materials MRO
Purchased by
Management Accounting, IT department Accounting Management, Accounting Management Sales, Marketing Facilities manager, Catering Administration R&D department Library Sales, Marketing Personnel department, HRM Facilities manager Technical maintenance
Purchased by
Management Accounting, IT department Accounting Management, Accounting Management Sales, Marketing Facilities manager, Catering Administration R&D department Library Sales, Marketing Personnel department, HRM Facilities manager Technical maintenance
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Four dimensions of the purchasing function
Purchasing function
Technical dimension
•Determine specifications•Audit suppliers’ quality organisation•Value analysis•Quality Control•Supplier selection•Draw up contract
Logistical dimension
•Optimisation of ordering policy•Order expediting and follow-up•Incoming inspection•Monitoring delivery reliability
Commercial dimension
•Supply market research•Supplier visits•Requests for quotations•Evaluate quotations•Negotiations with suppliers
Administrative dimension
•Order handling, expediting and filing•Checking supplier invoices•Checking payments to supplier
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Models of industrial buying behavior
1. Variables that affect the buying process Characteristics of the product Strategic importance of the purchase Sums of money involved in the purchases Characteristics of supply markets Degree of risk related to the purchase Role of the purchasing department in the organisation Degree to which the purchase product affects existing
routines in the organisation
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Models of industrial buying behavior
Finance andadministration
dominant
Cross-functionaldecision making
Purchasing departmentdominant
Engineering dominant
Low High
Product complexity
Low
High
Commercial uncertainty
•Standard product•Technically simple•Existing product•Repeat purchase•Easy to install & use•No after sales service required
•Customised product•Complex technology•New product•Initial purchase•Difficult to install •After sales service required
•Limited Investment•Small order size•Short-term impact•No organisational adaptation required•Low impact on financial results
•High Investment•Large order size•Long-term impact•Extensive organisational adaptation required•High impact on financial results
Fisher, 1970
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Models of industrial buying behavior
2.Variables that affect the buying decision
Task variables: variables that are related to the tasks, responsibilities and competences assigned by the organisation to the person involved in the purchase decision
Non-task variables: variables that are related to the professional’s personality
Webster and Wind, 1972
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Models of industrial buying behavior
Within the Decision Making Unit various roles can bedistinguished…
Users: people who will work with the product Influencers: people who are able to affect the outcome of the
purchasing process by means of solicited or unsolicited advice Buyers: people who will negotiate with the suppliers about terms
and conditions and who place the order Decisionmakers: people who actually determine the selection of
the supplier Gatekeepers: people who control the flow of information from the
supplier towards the other members of the DMU
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Webster and Wind, 1972
Models of industrial buying behavior
1. Identification of need
2. Establishing specification & scheduling the purchase
3. Identifying buying alternatives
4. Evaluating alternative buying actions
5. Selecting the suppliers
Use
r
Infl
uenc
er
Buy
er
Dec
ider
Gat
ekee
per
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Buying behavior: an interactive process
1. Johansson, Håkansson & WootzBased on the following physical characteristics, the interaction process between buyers and sellers can be described:
Number of times the parties make contact Properties of the object of exchange The degree in which the process is formalised Characteristics of the parties involved
Three aspects of this model:
Physical exchange
Social exchange
Adaptation
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Buying behavior: an interactive process
1
2
3
Requirementuncertainty
Transactionuncertainty
Marketuncertainty
Characteristics of buying situations:
1. Buying a standard product from an existing supplier
2. Buying a standard commodity from a new supplier
3. Buying a reactor for a new nuclear plant
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Buying behavior: an interactive process
The approach of Ford
The crucial element of industrial marketing is viewing the market as a network of relationships between organisations
Marketing policy should strive to maintain and expand a particular portfolio of concrete relationships with organisations… the same is
true for purchasing!
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Buying behavior: an interactive process
The network approach
The dyadic relationship between supplier and manufacturer is not only influenced by the characteristics of the product and the involved
organisations , but also by the relationship between these organisations and other organisations that are part of the supplier network
Effective purchasing and effective management of supplier relationships requires a thorough understanding of the cost structures and the
balance of power in the entire buyer-supplier network