Presentation on theme: "Chapter 2 Industrial buying behavior: decision making in purchasing"— Presentation transcript:
1 Chapter 2 Industrial buying behavior: decision making in purchasing
2 Program Organizational buying behavior: basic characteristics Models of industrial buying behaviorThe purchasing processThe specification phaseSupplier selection and supplier assessmentNegotiating and contractingThe ordering process and expeditingFollow up and evaluation of the buying processE-procurementMajor bottlenecks and problems
3 Organizational buying behavior: Professional purchasing: professional buyers with education and experience who know their tasks and responsibilitiesDerived demand: developments in industrial markets are often related to changes in the end-user markets upstream in the value chainInelastic, fluctuating demand: due to the derived demand, price-elasticity in industrial markets is frequently lower than in consumer marketsGeographical concentration: many industrial markets are geographical concentrated (e.g. Silicon Valley)Large order quantities and large amounts of money involvedLimited number of customers: industrial suppliers often supply only a few companies compared to companies that deliver directly to consumers
4 Organizational buying behavior: AspectIndustrial marketConsumer marketBuying objectiveEnable productionPersonal need satisfactionBuying motiveMainly rationalAlso emotionalPurchasing functionProfessional buyingConsumersDecision makingMany persons involved, much discussionOften impulsive, without consulting othersCharacteristicsNegotiations, intense interactionOften without negotiation, little interactionProduct & market knowledgeLargeLimitedOrder sizeOften largeMostly smallDemandDerived, fluctuationAutonomous, relatively stablePrice elasticityRather inelasticRather elasticNumber of customersMostly limitedVery largeSpread of customersSometimes large geographic concentrationLarge spread
5 Models of industrial buying behavior Variables that affect the buying process:Characteristics of the productStrategic importanceSums of money involvedCharacteristics of the purchasing marketDegree of riskRole of the purchasing department in the organizationAffect of purchase on existing routines
6 Models of industrial buying behavior Variables that affect the buying decision:Task variablesRelate to tasks, responsibilities and competences assigned to a person making the decisionNon-task variablesRelate to the professional’s personality
8 Aspects of the purchasing process Business needs are leading: Business needs and requirements are the input for the purchasing process modelProcess 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 stepsDefining the interfaces: the output of each phase has to be clearly defined, preferably with a documentDetermining 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 phaseCombining 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
9 The purchasing process The added value of the professional buyer lies in the ability to actas a facilitator for the supply process:Identifying new, potential suppliers and business partners for the company’s changing business needsBeing involved in new product development and investment projectsSupporting internal customers in defining purchasing specificationsPreparing 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 themselvesSetting up requisitioning and ordering routines in such a way that the users can place orders themselvesPlace orders at suppliers and maintain and monitor orders, contracts and supplier filesMonitoring outstanding orders and financial obligationsFollow up and evaluation of supplier performance and maintaining relevant supplier documentation
10 Purchasing situations Three types of purchasing situations:New task situationCompletely new product from unknown suppliersHigh uncertainty regarding outcome(e.g. acquisition of capital goods)Modified RebuyNew product from known supplierExisting product, new supplierModerate uncertainty regarding outcomeStraight rebuyKnown product from known supplierLow uncertainty regarding outcome(e.g. consumable items like MRO)
12 The specification phase Purchase order specificationQuality specificationsLogistics specificationMaintenance specificationLegal and environmental requirementsTarget budgetFunctional specificationsTechnical specificationscontains
13 Supplier selection and assessment The selection step contains a number of separate steps:Determine the method of subcontractingPreliminary qualification draw up bidders listPrepare request for quotation and analysis of the bidsSupplier selection
14 Negotiation and contracting Fixed-price plus incentive fee: This type of contract is designed to motivate suppliers by means of rewards to execute the work above the agreed standard.Cost-plus contract: Cost-plus contracts are used in situations where the work cannot be specified adequately, or when a fixed price constitutes too big a risk for both the supplier and the buyer.Cost-reimbursable: This type of contract is usually based on fixed hourly rates for labor and equipment. Without a bonus or penalty clause these contracts provide little incentive to minimize labor hours or costs.Agreement with price-adjustment: This type of contract is used mainly for agreements with a long-term delivery, or when very specific, market-sensitive materials are processed.
15 Fixed-price or cost-reimbursable? The decision for fixed-price or cost-reimbursable contracts concerns the following factors:Comprehensiveness of the specification, absence of specifications makes a fair comparison impossible.Available time, is there enough time for a tender procedure and price negotiations?Technical expertise, when specialized knowledge and skills are required a cost-reimbursable contracts is often preferred.Degree of knowledge of the industry, about methods and price arrangements
16 Ordering and expediting Three types of expediting:Exception expediting: buyer only takes action when the organization sends out signals of material shortagesRoutine status check: preventing materials supply and quality problems – few days before promised delivery, the buyer contacts the supplier to confirm delivery dateAdvanced status check: for critical purchase parts – a detailed production plan will be handed over to the buyer and during the process the buyer will carry out periodic checks
17 Follow up and evaluation The buyer’s role continues after the new product has been taken into production or the installation has been put into operation.Compare invoice with the original orderSolve delivery issuesSupplier assessment:Keep track of supplier’s quality, delivery record, competitiveness and innovativeness
18 E-procurement solutions Electronic market places: make searching for suppliers more easy like for chemicals and plastics or for the aviation industryElectronic auctions: the electronic trade exchange is the most popular e-solutionElectronic catalogue and ordering systems: offer buyers greater opportunities for more efficient order handling.Efficient order processing, logistics and payment systemsTransactions without human interferenceSubstantial cost reduction because of a.o. transaction costs
19 E-procurement solutions Forms of E-auctions:Open Request for information (RFI) / request for proposal (RFP):Qualification before auctionSupplier is invited based on the offerReversed auctioninput price determined by buyeroffers are visible, suppliers can see how far away they are from the best offerForward auction:Vendor determines the priceSeveral buyers announce their offer to the auctioneer
20 E-procurement solutions Most popular method under buyers is the reversed auction:High volumes to cover the auction costsSufficient competitionEqual opportunities for all suppliersThe buyer has to be interesting for the supplierGenerally e-auctions realize a cost reduction between 5% and 40%Suppliers do not like these methods because their margins will decrease
21 E-procurement solutions Transparencyof Supply MarketTraditionalSourcingeSourcing2064030Supplier Qualification (RFI)eRFI633020Initial negotiations (RFP/Q)eRFP/eRFQ31201Final negotiationseAuction or multi round eRFP/eRFQ
22 Major bottlenecks and problems (1) Too detailed specification: The specifications of the user are sometimes written to the capabilities of specific suppliersInadequate supplier selection: Failure to check the supplier's (bank) references, can produce very unpleasant surprises like bankruptcyPersonal relationships: Purchase orders are placed with suppliers with whom the user has a friendly relationship; As a result such suppliers may not be as competitive.Contract are too general, incomplete, drafted up by the supplier or not present at all.
23 Major bottlenecks and problems (2) Too much emphasis on price: Especially buying capital equipment buying decisions need to be based upon total-cost-of-ownership (TCO) rather than on price only.Poor administrative processes: Putting a sound administrative system in place could lead to significant savings.Problems in delivery phase: over time or incomplete delivery, quality problems can put the continuity of the business process in danger.Suppliers are not systematically assessed: This results in unprofessional suppliers and repeating problems.
24 ConclusionIndustrial buying behavior was discussed from different perspectives:Organizational perspectiveModels that regard the interaction between two or more partiesPurchase process model offers organizations a tool for structuring their purchasing processes.E-procurement solutions offer the purchasing professional many opportunities to deal with problems.