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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.

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Presentation on theme: "© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Analysis 2. Industrial buying behavior: decision making in purchasing."— Presentation transcript:

1 © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Analysis 2. Industrial buying behavior: decision making in purchasing

2 © 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

3 © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Industrial vs. consumer markets AspectIndustrial marketConsumer market

4 © 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

5 © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) The purchasing process - Establish expediting routine - Expediting - 'Trouble- shooting' - Vendor rating - Vendor - Establish Order routine - Develop orderroutines - Orderhandling Order Proc. Role Elements Documents - Prepare contract - Contracting expertise - Negotiating expertise Contract - Assure adequate supplier selection - Prequalification of suppliers - Request for quotation Supplier selection proposal Get specification - Functional specification Technical changes Bring supplier knowledge to engineering - - - - - Functional specification Norm/spec. control Define specification Select supplier Contract agreement OrderingExpediting Evaluation Follow up Overdue list - Vendor performance evaluation - Settling contract problems evaluation - Vendor balanced score card - Vendor profile - Vendor ranking

6 © 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

7 © 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 act as 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

8 © 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:

9 © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Examples of purchasing situations Routine task Low risk Gas, water, electricity Cleaning materials Bulk chemicals Office supplies Spare parts Electronic components Computer terminals Telephone system Production equipment Office furniture Courier services Business cars Computers Buildings New task High risk Straight rebuyModified rebuyNew task

10 © 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

11 © 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…

12 © 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

13 © 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

14 © 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

15 © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Models of industrial buying behavior Finance and administration dominant Cross-functional decision making Purchasing department dominant Engineering dominant LowHigh 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

16 © 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

17 © 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 be distinguished… 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

18 © 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 User Influencer Buyer Decider Gatekeeper

19 © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Buying behavior: an interactive process 1. Johansson, Håkansson & Wootz Based 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

20 © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Buying behavior: an interactive process 1 2 3 Requirement uncertainty Transaction uncertainty Market uncertainty 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

21 © 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!

22 © 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


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