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Transcript of SLM-Unit-06-MB0046
Marketing Management Unit 6
Sikkim Manipal University Page No. 103
Unit 6 Business Buyer Behavior
Structure:
6.1 Introduction
Learnaing Objectives
6.2. Characteristics of Business Markets
6.3 Differences between Consumer and Business Buyer Behavior
6.4 Buying situations in Industrial/Business Market
6.5 Buying roles in the Industrial Marketing
6.6 Factors that influence Business Buyers
6.7 Steps in Business Buying Process
6.8 Summary
6.9 Terminal Questions
6.10 Answers
6.11 Mini-Case
6.1 Introduction
On one side is the market for the final consumer whose behavior we
discussed in the previous unit. It will be interesting to find out the difference
in behavioral characteristics between the final consumer and what is known
as the „business consumer.‟ In case of a business to business marketing,
the marketing mix is applied differently.
This market includes organizational buying, institutional buying and
government buying. The buying may involve materials as final consumption
and materials for intermediate consumption. A company may buy stationary
for personal use and buy iron ore for making steel. Compared to the retail
consumer market t this market consists of fewer buyers but they purchase
in a much larger quantities-. These customers are concentrated in industrial
towns, tech parks and industrial area other than other business or
commercial center. The demand for the intermediate product in this market
is known as derived demand. For example, demand for car engines will
depend on the demand for cars. If the number of people who purchase car
declines in a particular month then demand for the engines also goes down.
This shows how engine companies are dependent on the final consumption
of cars. In case of a business opting for a purchase, the decision has to go
through several processes and people. This is where the behavior of people
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as a group needs to be understood. In an organizational context, both, the
individual and the group leave their affect during the process of procurement
or purchase. This unit deals in depth the various aspects of „buyer behavior‟
in the B2B market space.
Learning Objectives
After studying this unit, you will be able to:
Differentiate between consumer behavior and organization behavior.
Understand the nature of business markets
Discuss the different types of buying situations involved in the
organizational buying.
Understand the buying roles and their importance in industrial marketing.
Analyze the factors that influence the organization buying process.
6.2 Features or Characteristics of Business Markets
Following are some of the unique features of business markets where large
establishments purchase the required goods and services from other
businesses. Such B2B operations determine the organizations as buyers
and those organizations who supply the various requirements will be the
sellers or suppliers or service providers.
1. Few but bulk Buyers: The no. of buyers is few but they buy in large
quantity. For example, major airlines buy the necessary equipments
from the aircraft manufacturers
2. Geographical concentration of buyers: Buyers are geographically
concentrated. For example, shipping industries are located on the east
and west coasts of India than in any other places.
3. Variable demand: The nature of demand is fluctuating because the
demand is basically a derived one. Based on the requirements of the
consumer markets, organizations buy the goods and make the finished
goods available in the market for final consumption. Larger the
consumer demand, larger will be the organizational buying. For
example, mobiles are being used by a large population and so cellular
companies have to meet this rising demand.
4. Inelastic demand: The demand is also inelastic because organizations
cannot make rapid changes in the production structure and so prices
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remain constant in the short-term. For example, Shoe manufacturers will
not buy much leather if the price of leather is less neither will they buy
less leather if the price increases.
5. Systematic purchasing: The purchasing activity is directly between the
buyer and supplier organization which means there are no or very few
middlemen involved. Purchasing activity is usually undertaken by
purchase departments based on a proper structure and through various
mechanisms like having purchase requisitions from other sections,
inviting tenders and sending invoices from the suppliers, purchasing
agreements or contracts with the key suppliers, renewing agreements
etc. For example, Reliance Fresh has regular contracts with the
agricultural producers for smooth supply of fresh fruits and vegetables.
6. Multiple buying influences: there will be several parties involved in
deciding about the purchases because organizations will have several
departments and units functioning under it with different requirements.
So, unless they have the proper resources to work with there will be
problems in the departments. For example, purchase department in a
Hospital must be aware about the specific requirements in the clinical
wards, operation theaters, labs, etc.
7. Reciprocation: This means that when an organization buys goods from
another organization then the supplier organization also might need
certain other goods that are produced by the buyer organization. For
example, a stationery supplier will supply the necessary stationeries to
the paper manufacturer who in turn provides papers to the supplier.
8. Lease agreements: Most organizations take on lease the expensive
equipments required by them rather than buy it. So, in this way, they
reduce cost, get better service and the lessor or one who provides the
equipments will also profit from the rent or lease charges. For example,
TATA provides the transport trucks to other organizations on lease.
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6.3 Difference between Consumer and Business Buyer Market
Table 6.1
Characteristics Consumer Market Business market
1. Demand Direct Derived
2. No of customers Large Few
3. Location Dispersed Concentrated
4. Nature of buy Personal Profession
5. No of buying roles Few Many
6. Negotiations Easy Complex
7. Promotion Advertising Personal selling
The differences stated above may not exacting and water tight divisions.
Even in case of a business making a purchase for a regular stationary item,
the responsible employee may adopt an individualistic and direct approach.
Similarly industrial advertising may be effective. The differences lead to
behavior patterns which are also different. As an example, emotion plays a
major role in a purchase decision for an individual in a consumer market but
will hardly come into play in the business market.
6.4 Buying Situations in the Industrial/Business Market
Buying situations varies to a large extent in the industrial market as
compared to the consumer markets. Industrial marketing has to be
understood in the larger context of B2B marketing. We may ponder here
that „will the explanation be different in case of institutions which are not
businesses?‟ What about a government department or a voluntary
organization? We may consider all these under B2B markets. The
differences cited above induce some of the behavioral changes as
compared to the retail consumer market. The negotiation process and
vendor evaluation stages will change as per buying situation. It means for
each set of situation the buying process changes. Therefore in this section
we are discussing different situations involved in business buying. Industrial
marketing usually involves three different types of buying situations. They
are
1. New Task
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2. Straight re-buy and
3. Modified re-buy
1. New task: This is the stage in which an organization is purchasing a
major product for the first time. Therefore the company may have a
larger number of people involved in the decision making. In this situation
the seller tries to meet as many of these decision makers in the
organization and convince them. This may result in higher uncertainty
and cost for the seller. It may also happen that the promoter/s may be
involved directly in the decision making process for reasons of control
and execution.
2. Straight re-buy: In this situation an organization follows the routine step
of informing sellers about their requirements and supply specifications.
This is the simplest situation in the organization buying process. This
provides lot of flexibility to both buyers and sellers. The company may
already have a list of suppliers. It gets the information from the
departments/shop-floors about their requirements and the same is
conveyed to the supplier. After the advent of ERP software things have
become simpler and easier. An enterprise resource planning software
has a data base on vendors, materials, prices, and the channel of
approval for any procurement. At the front end it has requisition forms,
etc which the requisitionist fills up on line through the intranet and within
a given time frame the work is executed. The seller has to ensure that it
figures in the data base of the software of the procuring enterprise.
3. Modified re-buy: In this stage the buyers want either product
modification, price modification, terms modification or suppliers‟
modifications. For example, a company X is buying Rs 100,000 worth of
iron ore from company Y every month. Company would like to reduce
the cost of iron ore. It may negotiate with its suppliers on the new terms
and conditions.
6.5 Buying Roles in the Industrial/Business Marketing
Compared to the decision making process in the consumer market the
number of people involved in the decision making are more in industrial or
business marketing. Therefore many business organizations constitute an
exclusive buying center or buying committee. The buying center/committee
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may have the following characteristics depending on size and nature of the
organization;
1. Several individuals can entrusted with a given role (e.g. many users /
influencers) and one individual can assume multiple roles.
2. The buying center may include people outside the organization such as
government officials, consultants, technical advisors and other members
of the marketing channel.
3. Different members of the buying centre have different influences, for e.g.
the engineering department may be concerned with actual performance
of the product, whereas production floor may be more interested in the
ease of use and reliability of supply of materials.
4. Members of the buying centre have different personal motivations,
perceptions and preferences which in turn are dependent on - age,
income, education, job position, personality, attitudes towards risk and
culture.
Different buying roles played during buying process could be classified as
follows:
a. Actual users are people who actually use the product or the material
procured. Raw materials may be used by the production supervisor and
his team. Lathe machine is used by the shop floor employee. These
individuals can be a better judge of the specifications of the purchase
requirement than any other.
b. Influencers are people who provide the information required to evaluate
the vendor and his products. To purchase computers for the finance
department the staff from the IT department may be better decision
makers.
c. Buyers are individuals or groups who finally procure by placing the
order with necessary specification. These people also evaluate the
vendor and select him.
d. Deciders are those who finally give consent on the chosen supplier/s.
e. Gatekeepers acts as an agent between buying committee (i.e. the
Business Organization) and sellers (i.e. the service providers or
suppliers). The gatekeeper may facilitate the flow of information in the
process of buying and can be played by an office assistant.
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Self Assessment Questions
1. Any market in which customer buys the product for other than personal
consumption is called __________.
2. Common method used in promoting the product in the business
marketing is___________.
3. Derived demand exists in ________________ market.
4. ____________ plays the role of an agent between the buyer
Organization and the suppliers.
5. Business organizations are dispersed in many locations
a. True b. False.
6.6 Factors that influence Business Buyers
1. Economic developments: Purchasing of materials depend upon the
country‟s economic conditions. If the economy is growing rapidly
usually the consumption also grows proportionately then company
should source materials accordingly. The economic health of the
nation provides a mirror image for the organization too. In case the
economy is undergoing a recession as during the year 2008,
businesses typically tone down their own procurement. A government
introduced scheme like NREGA in India may provide opportunities for
a business linked to such a scheme.
2. Demand conditions: Raw materials required should be matched with
the demand position of the company‟s products or services. If there is
an irregular or seasonal demand the company should adjust its
supplies. Any shortage of the raw materials will force the company to
go out of the Market. A sugar manufacturing company has to procure
cane which is a seasonal crop. The company has to anticipate
demand for sugar and accordingly arrange for the supply of sugar
cane much before the harvest.
3. Political and Legal environment: An unstable government will have
unpredictable policies. Any change in the government policy will have
direct or indirect impact on a business. For example, When the Indian
government introduced the emission norms for automobiles,
automobile manufacturers like Marathi Dog Ltd had a difficult time as
they had to change engine specification accordingly and the previous
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stock of components had to be discarded or had to undergo
modifications. Similarly when the Delhi government introduced CNG
norms, providers of CNG equipment had to suddenly scale up their
operation.
4. Competitive environment: Business buying is very complex. The
numbers of buyers are fewer. Thus any technological change adopted
by a competitor should be carefully observed. If the company is
unable to do so, survival in the market place may prove to be difficult.
As supply chain management is increasingly being adopted by
businesses, the advantage of time, cost and flexibility is being reaped.
Not keeping pace with such adoption could prove costly for an
enterprise.
5. Culture and customs: Every country has its own culture, sub-culture,
and customs. While in India we have right hand driving device, it is the
opposite in the US. The suppliers of items relating to this have to keep
this in mind.
6. Organizational objectives: Purchasing objectives are derived from
the organization objectives. For example, an organization objective is
to reduce the overall cost of 20%. Its purchasing objectives take this
as benchmark and try to reduce the cost by 20%. The enterprise may
have a branding objective of catering to high net worth individuals and
thus the stationary in use would also have to be of a similar standard.
7. Organizational policies and procedures: Companies‟ policies like
centralization versus decentralization of buying and selling will have
direct impact on the company‟s procurement. A purchase decision
may be assigned to specific managerial levels based on value. A store
supervisor may be allowed to procure directly for say a value of
Rs.100, 000 whereas the same decision for a value of Rs 100,000-Rs.
500,000 may be taken directly by the production manager. A supplier
may sometime have to be aware of such procedures.
8. Organization structure and systems: Lesser the hierarchy the more
will be the flexibility in the organization. Companies with more number
of hierarchies will have plenty of problems to be addressed. The
approval of hierarchies may be a long winding process. Government
departments in India are typical examples of this kind of hierarchy. The
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purchase behavior exhibited by each approver in the group may be at
cross purposes or in conflict, for whatever reason. The purchase
process may not be able to eliminate subjective behavioral affectation.
9. Interpersonal factors: business buying will have different outcome on
the basis of authority, status, empathy and persuasiveness that
customers and organizations possess. A superior may not like to be
bypassed even if the subordinate has the authority to take decision. A
supplier may not be aware of such delicate situations and may get into
trouble.
10. Individual factors: Age, education, job position, personality, risk
attitudes of individual will determine the buying behavior of each
individual and in turn these changes will have direct impact on the
organization buying.
Exhibit 1
Retail Chains and Future of Business to Business (B2B) Trade in India
Author : Dr. Amit K. Chatterjee
(Amit worked in blue-chip Indian and MNCs for 15 years in various
capacities like Research and Information Analysis, Market Development,
MIS, R&D Information Systems etc. before starting his e-commerce
venture in 1997. The views expressed in this column are his own. He
may be reached at [email protected] )
Govt of India has decided to allow 51 percent FDI in retail chains. This
will certainly make the sector more attractive to foreign retailers who
want a controlling stake in their Indian ventures. Retailers who are
comfortable with ownership rather than franchises may look at the Indian
market with greater interest.
Entry of large foreign retail chains like Wal-Mart will have profound effect
not just on small retailers and Indian retail chains but also on business to
business (b2b) trade. Introduction of b2b cash-and-carry outlets by Wal-
Mart, Metro and possibly other retailers will bring significant changes in
large and fragmented Indian supply chain. Middlemen like wholesalers
and stockiest will increasingly be under pressure. Where do small and
medium manufacturers/exporters stand in this changing scenario?
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What is Cash-and-Carry Scheme?
Targeted at and open only to business customers - cash and carry
scheme focuses on small-wholesale customers who buy in bulk and pay
in cash. Unlike hypermarkets where any consumer can walk-in and buy
goods, cash-and-carry outlets allow only authenticated bulk buyers to
transact business. Medium-sized businesses such as retail stores,
hotels, restaurants, caterers, exporters etc can buy from cash-and-carry
outlets at prices much cheaper than market rate.
In its original form, owners of cash and carry outlets (i.e. large retail
chains) buy from producers directly at very high volume, dispensing with
middlemen like wholesalers and stockiest. They also establish their own
brands - asking producers to manufacture as per their product and
packaging specifications. Volume purchase and removal of middlemen
result in substantial cost reduction - a part of which is passed on to b2b
customers. So, b2b customers get products of assured quality
throughout the year at less than market price.
How Does Cash-and-Carry Outlets Affect your Business?
Large scale introduction of Cash-and-Carry outlets will definitely affect
and influence various players in Indian b2b supply chain. While it may
prove to be a boon for business buyers, manufacturers and producers
such as small-scale units and agricultural producers' cooperatives which
are not big or savvy enough to be able to dictate terms to established
supply chains - it may adversely affect wholesalers and other middlemen.
De-layering of Indian distribution system may pose threat to middlemen,
many of whom may be rendered redundant in the supply chain. Increase
in competition and cost cutting will bring more efficiency in the market
place - benefiting businesses.
Where does Small Scale Manufacturers and Exporters Stand?
Though it‟s too early to predict possible changes - large retail chains may
bring new opportunities for Indian manufacturers and exporters. While
small scale manufacturers may enter into collaboration with retails chains
- allowing them the chance to join a modern procurement chain that
thrives on efficient suppliers, it may have interesting influence on Indian
exporters.
Fragmented and largely un-organized sourcing channels pose a
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formidable challenge to small and medium exporters in Indian sub
continent. Some of the major hurdles in any export transaction are - lack
of assured and uniform quality standard, uncertainty about round the
year availability and wide fluctuation in market price. Exporters lose
lucrative overseas orders because of deficiency in supply chains - factors
completely out of their control. Organized supply chains such as Cash-
and-Carry outlets may bring new opportunities for small business
owners.
Conclusion
Exporters sourcing from organized channels such as Cash-and-Carry
outlets will benefit from more predictability in business, reducing
inventory levels and competitive price. The resultant cost benefit, if
passed on to buyers, can make Indian exports that much competitive.
6.7 Steps in Business Buying Process
Figure 6.1
Stage 1: Problem recognition
1. Problem can be identified from either internal stimuli or external stimuli.
Company would like to launch new product hence it searches for the
suppliers who can supply the material and equipments required for the
new product. A large printing company may find that it can set up an
exclusive design section as a profit center. For this it may want high end
design software and systems. It is possible that the system requirement
s can only be provided by Apple Macintosh.
2. External stimuli like trade show, conference also helps the company to
identify the problem.
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Stage 2: Need description:
After finalizing the problem, companies will define need description. The
need description includes
1. Characteristics and quantity of the needed item.
2. For the complex products team assessment is required.
3. The required items are assessed on the basis of reliability, durability,
price, and other attributes needed in the item.
Stage 3: Product specification:
Organizations develop detailed product specification with value analysis. In
the value Analysis Company analyzes the components and their production
process. Here emphasis is given to find the alternative methods of
producing the components and finding the optimum method that suits the
company.
Stage 4: Supplier search
The buyer now tries to identify the most appropriate suppliers. The buyer
can examine trade directories, do a computer search, phone other
companies for recommendations, watch trade advertisements, and attend
trade shows. The supplier‟s task is to get listed in major business
directories, develop a strong advertising and promotion program, and build a
good reputation in the marketplace. Suppliers who lack the required
production capacity or suffer from a poor reputation will be rejected. Those
who qualify may be visited to examine their manufacturing facilities and
meet their personnel. Qualified suppliers are shortlisted for further process.
Stage 5: Proposal solicitation
The buyer will now invite qualified suppliers to submit proposals. Some
suppliers will send only a catalog or a sales representative. Where the item
is complex or expensive, the buyer requires a detailed written proposal from
each qualified supplier. The buyer will invite qualified suppliers to make
formal presentations.
Thus business marketers must be skilled in researching, writing and
presenting proposals. Their proposals should be marketing documents, not
just technical documents. Their oral presentations should inspire
confidence. They should position their company‟s capabilities and resources
so that they stand but from the competition.
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Stage 6: Supplier selection
This stage is also known as vendor selection. During this stage companies
will prepare the checklist. Weightages are assigned against each checklist
point and evaluated. Some of the important attributes those commonly
found in the vendor evaluations are
a. Quality
b. Delivery
c. Communication
d. Competitive prices.
e. Servicing
f. Technical advice
g. Performance history
h. Reputation
Stage 7: Order routine specifications:
The buyer now negotiates the final order with the chosen supplier(s), listing
the technical specifications; the quantity needed, the expected time of
delivery, return policies, warranties and so on. In case of MRO items
(Maintenance, Repair and Operating items), buyers are increasingly moving
towards blanket contracts rather than periodic purchase orders. Writing a
new purchase order each time stock is needed, is expensive. Nor does the
buyer want to write fewer and larger purchase orders because that means
carrying more inventories. A blanket contract establishes a long-term
relationship where the supplier promises to re-supply the buyer as needed
on agreed price terms over a specified period of time. The stock is held by
the seller, hence the name stockless purchase plan. The buyer‟s computer
automatically sends an order to the seller when stock is needed. This locks
the supplier with the buyer and makes it difficult for out-suppliers to break in
unless the buyer becomes dissatisfied with the in-supplier‟s prices, quality or
service.
Stage 8: Performance review
In this stage organization review the performance of the suppliers. This will
help it to decide whether to continue with existing suppliers or should search
for the new vendor.
These eight stages are very much essential for new task but not necessary
for straight re-buy or modified re-buy. To know which stages are important in
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the new task, a straight re-buy or modified re-buy we will study Buy- grid
Model
Buy Grid model
Buy grid model is developed to understand the business buying process in
three different business buying situations:
Table 6.2
Buying process New task Modified re-buy Straight re-buy
1. Problem recognition
√
2. General need description
√ √( some times)
3. Product specification
√ √ √
4. supplier search √ (Sometime)
5. Proposal solicitation
√ √( some times)
6. Supplier selection √ √
7. order routine specification
√ √
8. Performance review
√ √ √
Activity 1:
Select any nearby industry or business establishment and with the
authorized permission of the concerned people in the organization, find
out:
a) What kind of supplies it needs to do business?
b) How often they need supplies?
c) From whom they get their supplies?
d) Buying procedure
e) People involved in the buying decision making process
f) Who makes the final decision to buy the goods?
g) Transport and storage facilities
h) The demand and supply gap
i) Problems (if any) recently faced by the business
j) Solutions or strategies
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Self Assessment Questions
6. Trade show is an internal stimulus
a) True b) False
7. Problem recognition is required in straight re-buy situation
a) True b) False
8. ___________ is also known as vendor selection stage.
9. In ___________ stage qualified suppliers are invited to make formal
presentations
10. The full form of MRO is __________________________.
6.8 Summary
Since business markets differ from consumer markets, there are several
differences between the organizational buying process/activity and
consumer buying process/behavior.
There are three buying situations in business buying – New task,
Straight re-buy and Modified re-buy.
The different buying roles in a business buying process include Actual
users, Influencers, Buyers, Deciders and Gate-keepers.
There are several stages or steps in business buying process – they are
Problem recognition, Need recognition, Product specification, Supplier
search, Proposal solicitation, Supplier selection, Order routine
specification and Performance review.
List of Key terms
Business market
Purchase requisition
Gate-keeper
Supplier search
Routine order
6.9 Terminal Questions
1. Differentiate between consumer and business buyer behavior.
2. Explain the buying situations.
3. Discuss the buying roles in the industrial marketing.
4. Write a note on factors that influence business buying.
5. Describe the stages of business buying process.
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6.10 Answers
Answers to Self Assessment Questions:
1. Business market or industrial market
2. Personal selling
3. Business
4. Gatekeeper
5. False
6. False
7. False
8. Supplier selection
9. Proposal solicitation.
10. Maintenance, Repair and Operating items.
Answers to Terminal Questions:
1. Refer 6.2
2. Refer 6.3
3. Refer 6.4
4. Refer 6.5
5. Refer 6.6
6.11 Mini-Case:
Demand-Supply mismatch:
Autoville’s ‘Parts’ Handicap – Auto-parts makers unable to sustain
supply after last year’s demand crunch:
The country‟s top carmakers are struggling to meet an unexpected spurt in
year-end demand with component-makers failing to match a sustained
surge in sales since August. Efforts by companies such as M&M, General
Motors India, Ford India and Tata Motors to step up production have been
throttled by a components shortage, resulting from capacity cuts by auto
parts makers that resorted to lay-offs during the demand slump last year.
“Our sales grew 49% in September and 15% in October. We would have
done much better if it wasn‟t for a serious parts supply constraint because of
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which we couldn‟t ramp up quicker to meet the increase in demand,” said
Karl Slym, President and MD of General Motors India.
The problem has been building up since late August when the car and SUV
sales went into an overdrive. The industry had already prepared itself for
single digit growth numbers, when the April-October period saw demand
growing at over 16% on the back of nearly 21% growth in September and
34% surge in October. Car sales in India grew just 0.31% in the financial
year ended March 2009.
“There‟s parts shortage and it has nothing to do with the recent labour
problems in Gurgaon. This has affected local companies like us,” Said
Michael Boneham, Chief Executive of Ford India.
A demand-supply mismatch is at the root of the problem. The slowdown in
demand that kicked off in October 2008 turned around so quickly that it took
everyone by surprise. “The uptick happened in just 3 months. Both the
vehicle makers and component manufacturers were caught unawares after
cutting back on capacity not so long back,” said Baba Kalyani of Bharat
Forge, the largest maker of automotive forgings in the world. In some cases
the cutback was in terms of investment, while in others it was more of a
question of manpower to run the extra shift.
Rajiv Dube, President – passenger vehicles at Tata Motors – the country‟s
largest maker of cars and trucks, attributes the components shortage to cuts
in manpower. “There‟s enough capacity build-up in the components
industry, but most suppliers had laid-off temporary workers during the
slowdown. So ramping up quickly by adding a shift can‟t happen overnight,”
he said. Not that all component makers resorted to lay-offs during the
downturn. Those who decided to take a hit rather than cutting manpower
benefited form the uptick in demand.
This explains the fact that car market leader Maruti Suzuki, which makes
every second sold in India, remains unaffected by the components shortage.
The demand-supply gap is not an easy one to fill as some component
makers will need to invest heavily to increase capacity. Nearly all major
players posted more than 20% sales growth in the festive season.
“That is not something the component industry was ready for. It will take
some time to catch up with the demand,” said Rajesh Jejurikar, Chief of
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Operations at the automotive division of M&M. The lag can range from just a
couple of months for those who simply need extra hands to a couple of
years for those who need serious capacity expansion. Component makers
admit that there is a problem. “We are adding new capacities and hiring is
also back in full swing. But it is difficult to put an estimate to that,” said
Jayant Davar, President of Automotive Component Manufacturers
Association of India (ACMA).
Henceforth, car-makers and component manufacturers are determined to
plan appropriate business strategies in order to avoid such crisis situations.
Can you suggest some of the business strategies?
(Source: The Economic Times – 16th November 2009)