© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Analysis 2....

© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)

Analysis

2. Industrial buying behavior:

decision making in purchasing


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


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


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


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



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



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


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:


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


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


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…


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


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


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



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



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



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


Webster and Wind, 1972


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


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



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



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!



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

© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Analysis 2....

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