Character of Business Marketing

• NAICS = North American Industrial Classification System• Replaces SIC (Standard Industrial Classification) codes• Common for NAFTA countries• NAICS hierarchical structure:

XX Industry sector XXX Industry subsectorXXXX Industry groupXXXXX IndustryXXXXXX U.S., Canadian, or Mexican national

specific

http://www.naics.com/cgi-bin/search.pl

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Classifying Commercial Enterprises

Divides economy into 20 major industry sectors (at two-digit level):

11 Agriculture, Forestry, Fishing, 54 Professional, Scientific, and Technical and Hunting services

21 Mining 55 Management of Companies and Enterprises22 Utilities 56 Administrative and Support, Waste 23 Construction Management, and Remediation Services 31–33 Manufacturing 61 Education Services 42 Wholesale Trade 62 Health Care and Social Assistance 44–45 Retail Trade 71 Art, Entertainment, and Recreation 48–49 Transportation 72 Accommodation and Food Services 51 Information 81 Other services (except Public Administration)52 Finance and Insurance 92 Public Administration53 Real Estate, Renting,

and Leasing

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NAICS Codes

Example of additional digits making the product more specific:

Sector 31–33 Manufacturing

Subsector 334 Manufacturing computer and electronic products

Industry group 3346 Manufacturing of magnetic and optical media

33461 Manufacturing of magnetic media

334611 Software reproduction

NAICS Codes

Supply Chain Management

• Technique for linking manufacturer’s operation with those of all its strategic suppliers, key intermediaries, and customers.

Supply Chain Characteristics

• Supply chains– Are multi-tiered– Are customer driven– Exist externally AND internally

• Require a cross-functional effort

– And their management are ongoing journeys – not destinations

– Require good procurement activities

Source: Roberts, Julie S. (2003) “The Buzz About Supply Chain,” Inside Supply Management, (July), 24-28.

Supply Chain Example

Source: Roberts, Julie S. (2003) “The Buzz About Supply Chain,” Inside Supply Management, (July), 24-28.

Procurement (Purchasing) GoalsUninterrupted Flow of MaterialsManage InventoryImprove QualityDevelop & Maintain Supplier

RelationshipsAchieve Lowest Total CostReduce Administrative CostsAdvance Firm’s Competitive Position

Evaluating Potential Vendors

Basic ConsiderationsPerformance ConsiderationsPlant VisitsGeographic LocationsCapacity

Performance Considerations

Must predict supplier’s total ability to fulfill the contract as it relates to:

pricedeliveryqualityservice

Plant Visits

Be sure to visit the supplier’s plant if possible

Try to gain insight into the:type of facilitypersonnelhousekeepingprocedures

Serves as indication of vendor’s ability to provide necessary pre- and post-sale service

Geographic Location

Long distance shipments increase the chance ofaccidentsstrikesacts of God

Geographic disadvantages can be overcome withspecial transportation

arrangements inventory make-and-hold service

Capacity

Must consider several itemsPhysical plant and facilitiesSupplier’s technical skillsSupplier’s managerial skills

Vendor Rating Systems

The Categorical PlanThe Weighted-Point PlanThe Cost-Ratio Plan

Buyers keep notes on supplier dealings as events occur

Buyers compare notes (usually at monthly buyer meetings)

Suppliers are categorized as being in the good, neutral, or unsatisfactory category

Highly subjective, but easy to use & understand Disadvantage is it’s subjectivity:

relies on memory, personal judgment, and the experience/ability of the buyers.

The Categorical Plan

Vendor Cost Quality Speed Total

A Good(+) Unsatisf(-) Neutral(0) 0

B Neutral(0) Good(+) Good(+) ++

C Neutral(0) Unsatisf(-) Neutral(0) -

Categorical Method Example

Assign weights (importance) to quality, price, and service (or other relevant criteria)

Should fit buying organization’s needsSellers are rated on each factorSimple, but effective plan that can be

modified to suit specific conditionsSomewhat more objective than the

categorical plan

The Weighted Point Plan

Vendor

Lots Received

Lots Accepted

Lots Rejected

% Acc. * Factor

Quality Rating

A 60 54 6 90.0 * 40 36.0

B 60 56 4 93.3 * 40 37.3

C 20 16 4 80.0 * 40 32.0

Weighted Point Plan Example:Quality

Vendor

Unit Price

- Dis

+

Tran Chg

Net

Low

/ Net

%

* Factor

Rate

A 1.00 10% 0.90 .03 .93 .93 0.93 100% 35 35.0

B 1.25 15% 1.06 .06 1.12 .93 1.12 83% 35 29.1

C 1.50 20% 1.20 .03 1.23 .93 1.23 76% 35 26.6

Weighted Point Plan Example:Price

Vendor

Promises Kept

Service Factor

Service Rating

A 90% 25 22.5

B 95% 25 23.8

C 100% 25 25.0

Weighted Point Plan Example:Service

Rating Vendor A Vendor B Vendor C

Quality 36.0 37.3 32.0

Price 35.0 29.1 26.6

Service 22.5 23.8 25.0

Total 93.5 90.2 83.6

Weighted Point Plan Example:Composite Total

All activities regarding a supplier’s performance are valued in terms of dollars

Total cost of buying is determined including:letters, telephone calls, visits, etc

Total (real) cost varies from vendor to vendor based on vendors’ skills & dependability

Future vendors selected on basis of lowest total cost incurred

The Cost-Ratio Plan

Initial costs associated with Quality, Delivery, and Service are determined

Each cost is then converted to a ratioRatio expresses cost as a percentage of

the total value of the purchaseSum the three individual cost rates to

obtain overall cost ratioApply overall ratio to quoted unit price

Cost Ratio Plan Process

Vendor

Quality Cost Ratio

Delivery Cost Ratio

Service Cost Ratio

Total Penalty

Quoted Price/ Unit

Net Adjusted

Cost A 1% 3% -1% 3% 86.25 88.84

B 2 2 3 7 83.25 89.08

C 3 1 6 10 85.10 93.61

Abbreviated Example:Cost-Ratio Plan

Governments & Institutions

• Compliance Programs– Must maintain affirmative action

programs for minorities, women & disabled

• Set-Aside Programs– % of contracts offered only to small

or minority-owned businesses

• Other aspects of non-profit buying will be addressing in Pricing

Two Types of Contracts

1.Fixed-price contracts• A price is agreed to before contract is

awarded and payment is made at conclusion of work.

• Provides for the greatest profit potential.

• Poses greater risks.

2.Cost-reimbursement contracts• Reimbursement for allowable costs may

be allowed and sometimes a number of dollars above costs as profit is allowed.

Relationship Marketing

• All marketing activities directed toward

• establishing, developing, and maintaining

• successful relational exchanges

• for the mutual benefit of all involved parties.

FocalFocalFirmFirm

GoodsSuppliers

ServicesSuppliers

Competitors

Non-Profits

GovernmentUltimate

CustomersIntermediateCustomers

Employees

BusinessUnits

FunctionalDept.’s

SupplierSupplierPartnershipsPartnerships

BuyerBuyerPartnershipsPartnerships

LateralLateralPartnershipsPartnerships

InternalInternalPartnershipsPartnerships

Partners in Relational Exchanges

Value of RM to Sellers

• Helps to ensure substantial and reliablereliable purchase volumes at adequate margins.

• Helps to determine the buyer’s choice the next time around.

Value of RM to Buyers

• Costs of carrying safety stocks, and those of high return rates, numerous reorders, & long lead times have steadily risen.

• RM helps to eliminate waste and improve system economies.

–inventory reduction

–decreased line shutdowns

–purchasing labor savings

REQUIREMENTS FOR HIGH PERFORMANCE RELATIONSHIPS

• BEYOND THE FINANCIAL CONSIDERATIONS:

– INTEGRITY

– FAIRNESS

– LOYALTY

– FLEXIBILITY

– INPUT INTO YOUR PARTNER’S STRATEGY

– PARTNER’S INPUT INTO YOUR STRATEGY

– COMPLIANCE WITH PROCEDURES AND AGREEMENT

– HONOR COMMITMENTS

– STAND BEHIND YOUR PRODUCTS

Role of Trust in the Relationship

CooperativeStrategies

BenefitsFor Both

Unless LackOf Trust

Why is Trust So Important?Why is Trust So Important?

• The parties have confidence in their relational partner’s reliability and integrity

• Without trust, there is NO commitment

• Without commitment, future exchanges are questionable at best

• Without trust and commitment, negotiation costs are increased

• Without trust and commitment, monitoring costs are increased

Types of Relationships

• Discrete Transactions– have a distinct beginning, short duration, and

sharp ending by performance.

• Value-Added Exchanges– Focus shifts from attracting customers to

keeping customers. Begin focusing more closely on understanding & fulfilling needs.

• Relational Exchange– traces to previous agreements, and is longer in

duration, reflecting an ongoing process.

Synthesis and Extension Model of Synthesis and Extension Model of Relationship ManagementRelationship Management

RelationshipRelationshipCommitmentCommitment

TrustTrust

RelationshipRelationshipTerminationTermination

CostsCosts

RelationshipRelationshipBenefitsBenefits

SharedSharedValuesValues

CommunicationCommunicationTrustTrust

DimensionsDimensions

InvolvementInvolvement

KnowledgeKnowledge

OpportunisticOpportunisticBehaviorBehavior

Constraint-BasedConstraint-BasedRelationshipRelationship

Dedication-BasedDedication-BasedRelationshipRelationship

The ConsequencesThe Consequences

Constraint-BasedConstraint-BasedRelationshipRelationship

Dedication-BasedDedication-BasedRelationshipRelationship

PropensityPropensityTo LeaveTo Leave

Interest inInterest inAlternativesAlternatives

AcquiescenceAcquiescence

CooperationCooperation

EnhancementEnhancement

IdentityIdentity

AdvocacyAdvocacy

Different Customer Motivations

• Constraint-Based Relationships–One party believes it cannot exit the

relationship due to economic, social, or psychological costs.

–The strength of the constraints is a function of the party’s perceived dependence upon the other.

Different Customer Motivations

• Dedication-Based Relationships–Party remains in relationship

because he/she is committed to the relationship and wants to remain.

–Dedication generally arises due to dependence and/or trust.

Outcomes Associated with Constraint-Based Relationships

• Interest in Alternatives– lasts only as long as constraints– individuals in constrained relationships

attempt to restore freedom to chose.– increased attempts to identify alternative

suppliers.– more environmental monitoring– more receptive to competitors’ relationship

offers.

Outcomes Associated with Constraint-Based Relationships

• Acquiescence–degree to which partner

accepts or adheres to another’s specific requests or policies.

–passive agreement to maintain the relationship.

Outcomes Associated with Dedication-Based Relationships

• Cooperation–active participation for mutual benefit

• Enhancement–broaden/deepen relational bonds

• buying additional services• providing capital, information, labor, or other resources

• participating in company events

Outcomes Associated with Dedication-Based Relationships

• Identity–thinks of relationship partnership

as a team and considers the partner in proprietorial terms.

Outcomes Associated with Dedication-Based Relationships

• Advocacy–ultimate test of relationship–promote relationship partner to others–defend relationship partner against

detractors–main purpose is to, of course, benefit

from positive word-of-mouth.

SUGGESTIONS FOR MAKING B2B RELATIONSHIPS LAST

• Make on-site visits to your partner

• Trade personnel and offices

• Manage total dependence with an alternate supplier

• Make the pledge of continuous service

• Develop a relational contract

• Provide ownership by bringing functions or technology within boundaries of partner’s firm