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Purchasing

THE OBJECTIVES OF PURCHASING


1. PROVIDE APPROPRIATE LEVELS OF SUPPLY

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2. THE APPROPRIATE LEVEL OF QUALITY

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3. THE LOWEST TOTAL COST

WHAT COMPANIES REALLY PAY FOR OWNERSHIP


Cost of ownership goes beyond the price paid for a product
TOTAL COST OF OWNERSHIP = PRODUCT PRICE
+ + + + + + + DELIVERY INSTALLATION MAINTENANCE / REPAIR POWER COSTS SUPPLY COSTS OPERATING COSTS FINANCING

PURCHASING PARTNERSHIPS ARE MADE WITH VENDORS WHO PROVIDE:


High-purchase-volume materials, components or strategic products

Information and training for effective product use


Services requiring specialized knowledge for cost reductions and/or performance Materials unavailable elsewhere

Steps in the Business Buying Process


1. 2. 3. 4. 5. 6. 7. Recognizing the need Developing product specifications Soliciting bids from potential suppliers Making the purchase decision Issuing the contract Inspecting delivered goods for quality Evaluating vendor performance

MAKE-OR-BUY DECISION ANALYSIS


RISK ASSESSMENT FINANCIAL RISKS Resource Allocation Investment of Resources Accurate Cost Analysis Legal Issues MANUFACTURING RISKS Reliability Expertise Equipment Patent Protection MARKETING RISKS Customer Impact Supplier Impact

POLITICAL RISKS Management commitment/ willingness to partner Turf Battles Internal Strife

ACCEPTABLE RISK Buy the Products, Components or Services

UNACCEPTABLE RISK Retain Production and Provide Services

Types of Business Buying Situations


New-task buy:
Business buying situation that is new and very different from anything that the buyer has faced previously.

Straight rebuy:
Most common type of business buying situation; buyer purchases a part, material, or service routinely, with little thought going into buying process.

Modified rebuy:
Reevaluation of alternatives; necessary because buying requirements have changed such that relatively routine buy or purchase no longer is routine.

Examples of Products Purchased Using the Buy-Class


Straight Rebuy
Office Supplies Vehicles

Modified Rebuy
Consulting Services

New Buy
Installations

Pure routine
Electricity Gas/Water Bulk Chemicals

Electrical Components

Complete negotiation
Computer Systems
Moon Shot Insurance

Buy Grid Analytical Framework

Buy Classes
New Task B 1.Anticipation & Recognition of problem U (need) & a general Solution Y 2.Determination of Characteristics & Quantity P of needed items H A S E S 3.Description of Characteristics & Quantity of needed items 4.Search for & Qualification of potential sources 5.Acquisition & Analysis of Proposals Modified Straight Rebuy Rebuy

6.Evaluation of proposals & Selection of Suppliers


7.Selection of an order routine 8.Performance feedback & evaluation

Buy Grid Analysis

Buy Classes
New Task B 1.Recognition of problem (need) U Y 2.General need description Yes Yes Yes Yes Yes Yes Yes Yes Modified Straight Rebuy Rebuy May Be May Be Yes May Be May Be May Be May Be Yes No No No No No No No Yes

P 3.Product Specification H A S 4. Supplier Search E S 5.Proposals Solicitation


6.Selection of Suppliers 7.Selection of an order routine 8.Performance feedback & evaluation

Problem Recognition

Anticipate problem; use advertising & creative sales people to convince buyers of problem-solving capabilities

In supplier: maintain quality/service standards; out supplier: watch for developing trends

In supplier: maintain close relationship with users & buyers; out supplier: convince firm to reexamine alternatives

Solution Provide technical determination assistance & information

In supplier & Out Same as Phase 1 supplier: stress capability,reliability,& problem-solving capabilities Same as Phase 2 Same as Phase 1

Determining needed item

Provide detailed product/service information to decision makers In supplier:maintain dependability; out supplier:demonstrate ability to perform task

Searching for & Qualifying supplier

In supplier: watch for problems; supplier:demonstrat e ability to perform task

Same as Phase 1

Analyzing Proposals

Understand details of Understand details customer problem/ of customer

Make timely proposals

Buygrid Analysis Framework


New Buy Modified Rebuy Straight Rebuy

Need Recognition
Develop Product Specifications Solicit Bids Complexity of Buying Situation

Make Purchase Decision


Issue the Contract Inspect Goods for Quality Evaluate Vendor Performance

Buygrid Analysis Framework


New Buy Modified Rebuy Straight Rebuy

Need Recognition
Develop Product Specifications Solicit Bids Creeping Commitment

Make Purchase Decision


Issue the Contract Inspect Goods for Quality Evaluate Vendor Performance

A projected change in business conditions can drastically alter buying plan.

Forces Influencing Organizational Buying Behavior Economic Outlook:


Environmental Forces
Domestic & Global Pace of Technological Change Global Trade Relations Goals, Objectives, and Strategies Organizational Position of Purchasing Roles, relative influence, and patterns of interaction of buying decision participants Job function, past experience, and buying motives of individual decision participants

Organizational Buying Behavior

Organizational Forces

Group Forces

Individual Forces

Jagdish Sheth Model of Organizational Buyer Behaviour

Multi-Attribute Theory
Product offerings are bundles of attributes. Attributes provide benefits. Benefits satisfy needs. Buyers differ in their needs, therefore Buyers differ in the importance they place upon various attributes. Some buyers seek to maximize the set of attributes. Others seek to satisfy most important attributes first.

Role Theory
The differing roles people play (in business, society, or life in general) have differing norms and expectations. Examines how people interact in the Buying Center (more than one person is involved in the purchasing decision.) In many cases, the buying center is an informal, complex, changing group. In other cases, it is a formal part of the organization (such as cross-functional teams)

The Buying Center


Consists of those individuals
who participate in the purchasing decision and who share the goals and risks arising from the decision

Average buying center includes more than 4 persons per purchase

Roles of Buying Center Members


User
Will use product in question; minimal - major influence

Gatekeeper
Tight controller of information flow to other buying center members; can open/close gate for salespeople.

Influencer
Provides information to other members for evaluating alternative products or sets purchasing specifications; can operate within/outside buying center.

Decider
Makes buying decision; often difficult to ID.

Buyer
Assigned formal authority to select vendors and complete purchasing transaction.

The Influence of Gatekeepers

The Gatekeeper

Buying Center Dimensions


Time
Time fragmentation: length of time people are in the buying center. Limits members influence Can lengthen decision making time due to inexperience

Vertical
Layers of management involved

Horizontal
Number of departments involved

Buying Center Interaction Patterns


Vertical Involvement no of organizational levels in the hierarchy exerting influence & communicating within the buying center. Lateral Involvement No of departments, divisions, or functional areas that become involved in purchase decision Extensivity total no of individuals involved in the communication network of the buying center. Connectedness Degree to which buying center members directly communicate with one another regarding the purchase.

Joint Decision Making


The no of organizational members involved in joint decision making depends on :
- Characteristics of the firm (e.g, organizational orientation, size) - Available resources for handling the purchase (e.g, degree of centralization) - Type of purchasing situation (Routine Vs New Task) - Perceived importance of the product ( e.g, risk involved) (In the Sheth Model the first two are company specific factors; and the last two are product specific factors)

Psychological Factors influencing Individual Decision making


Differences in role orientation Differences in information exposure Perceived risk in the vendor selection process

Clues for Identifying Powerful Buying Center Members


Isolate the personal stakeholders Follow the information flow Identify the experts Trace the connections to the top Understand purchasings role

Individual Forces
Evaluative criteria
education, training, experience

Information Processing
selective exposure, attention, perception, and retention

Risk-Reduction Preferences
level of uncertainty about outcomes magnitude of consequences associated with incorrect choice

Selective Perception
Impacts how your buyer views and understands the world Impacts how your buyer views risk

Selective exposure. Selective attention. Selective retention.

Impact of Increasing Levels of Perceived Risk


Buying center becomes larger Higher level managers become involved Information search more active Wider variety of info sources accessed Buying center members exert more effort Sellers with proven track records tend to be more favored Product quality & after-sale service tend to become more important than price

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