Analysis Analysis 2 Industrial buying behavior decision making in purchasing

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Analysis Analysis 2 Industrial buying behavior decision making in purchasing Powered By Docstoc
2. Industrial buying behavior:
decision making in purchasing

   Organizational buying behaviour: basic characteristics
   The purchasing process
   Major bottlenecks and problems
   The role of the purchasing department in the purchasing
   Models of industrial buying behaviour
   Buying behaviour considered as an interactive process
Industrial vs. consumer markets
  Aspect                  Industrial market          Consumer market
  Buying objective       Enable production          Personal need satisfaction
  Buying motive          Mainly rational            Also emotional
  Purchasing function    Professional buying        Consumers
  Decision m aking       Many persons involved,     Often im pulsive, without
                         m uch discussion           consulting others
  Characteristics        Negotiations, intense      Often without negotiation, little
                         interaction                interaction
  Product & market       Large                      Lim ited
  Order size             Often large                Mostly small
  Demand                 Derived, fluctuation       Autonomous, relatively stable

  Price elasticity       Rather inelastic           Rather elastic

  Num ber of customers   Mostly lim ited            Very large

  Spread of custom ers   Som etim es large          Large spread
                         geographic concentration
    Industrial markets: basic
   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
            Define                   Select               Contract                                           Evaluation
                                                                          Ordering          Expediting
            specification            supplier             agreement                                          Follow up
                                                                                                         - Vendor
Proc. Role - Get               - Assure adequate      - Prepare       - Establish       - Establish        performance
             specification       supplier selection     contract        Order routine     expediting       evaluation
                                                                                          routine        - Settling contract
Elements    - Functional       - Prequalification     - Contracting   - Develop         - Expediting
              specification      of suppliers            expertise      orderroutines                    - Vendor rating
                                                                                        - 'Trouble-
            - Technical        - Request for          - Negotiating   - Orderhandling                    - Vendor
                                                                                           shooting'       evaluation
              changes            quotation               expertise
            - Bring supplier
              knowledge to

Documents - Functional          Supplier selection                                                       - Vendor
            specification       proposal                  Contract         Order         Overdue list      balanced score
          - Norm/spec.                                                                                     card
            control                                                                                      - Vendor profile
                                                                                                         - Vendor ranking
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
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
Ad 4) Inkoopclassificatie
Three types of purchasing situations:
     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)
  Examples of purchasing situations
       Straight rebuy Modified rebuy   New task

Routine task                                      New task

Low risk                                          High risk
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

   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                Purchased by
       Key raw materials                      Management
       Computers and software                 Accounting, IT department
       Lease contracts                        Accounting
       Insurances                             Management, Accounting
       Accounting services                    Management
       Advertising                            Sales, Marketing
       Catering                               Facilities manager, Catering
       Travel                                 Administration
       Licences                               R&D department
       Books and magazines                    Library
       Sales promotion items                  Sales, Marketing
       Temporary labour and training          Personnel department, HRM
       Cleaning materials                     Facilities manager
       MRO                                    Technical maintenance
Four dimensions of the purchasing
  Technical dimension                            Commercial dimension

  •Determine specifications                      •Supply market research
  •Audit suppliers’ quality organisation         •Supplier visits
  •Value analysis                                •Requests for quotations
  •Quality Control                               •Evaluate quotations
  •Supplier selection                            •Negotiations with suppliers
  •Draw up contract

                                  Purchasing function

  Logistical dimension                           Administrative dimension

  •Optimisation of ordering policy               •Order handling, expediting and filing
  •Order expediting and follow-up                •Checking supplier invoices
  •Incoming inspection                           •Checking payments to supplier
  •Monitoring delivery reliability
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
  Models of industrial buying behavior
                                                                          Product complexity
                                                       •Standard product                  •Customised product
                                                       •Technically simple                •Complex technology
                                                       •Existing product                  •New product
                                                       •Repeat purchase                   •Initial purchase
                                                       •Easy to install & use             •Difficult to install
                                                       •No after sales service required   •After sales service required
uncertainty                                                    Low                                       High

•Limited Investment                             Low
•Small order size                                                 Purchasing
•Short-term impact                                                                            Engineering
•No organisational adaptation required                                                         dominant
•Low impact on financial results

•High Investment
•Large order size                                                Finance and
•Long-term impact                                               administration
•Extensive organisational adaptation required                                               decision making
•High impact on financial results               High

                                                                                                       Fisher, 1970
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
Models of industrial buying behavior

Within the Decision Making Unit various roles can be

   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
Models of industrial buying behavior

1.   Identification of need

2. Establishing specification &
   scheduling the purchase
3. Identifying buying alternatives

4. Evaluating alternative buying
5. Selecting the suppliers

                                     Webster and Wind, 1972
    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:

                                                         Three aspects of this
   Number of times the parties make contact
   Properties of the object of exchange                  Physical exchange
   The degree in which the process is formalised          Social exchange
   Characteristics of the parties involved                  Adaptation
Buying behavior: an interactive process


                                              Characteristics of
                                              buying situations:
                            3                 1. Buying a standard product
                                              from an existing supplier

              2                               2. Buying a standard
                                              commodity from a new supplier

                                              3. Buying a reactor for a new
                                              nuclear plant

 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!
 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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