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Market Tracker4th Batch, MBA 2nd SemesterSession-2013-14

The Purchasing Function

Chapter-03Business MarketingRobert • Tanner

The Importance of Purchasing

Purchasing is a strategic weapon Value can be increased by delivering more benefits or by lowering costs

Business marketers can also make contributions to the value delivered by their customers

1.Purchasing’s Contribution to the Firm

Three important elements of the purchasing department’s function are to

1. Providing supply2. The correct level of quality 3. The lowest total cost

1.1 Providing Supply Provide the right product or service in the correct amounts when needed

Purchasing has the responsibility to ensure that the right product or service is provided

Availability (Just-in-Time-JIT) Concurrent Manufacturing

1.2 The Correct Quality A critical issue in purchasing today is ever-increasing quality specifications from the customer

Choosing the right level of quality is an important element in the purchasing function

Many companies recognize the importance of providing the right level of quality

1.3 The Lowest Total Cost Controlling the cost of supply can have a significant effect on a firm’s profitability

Several concepts are used by purchasing departments to examine and compare costs; these are the

1.Total cost of ownership2.Economic order quantity and3.Value analysis

1.3.1 Total cost of ownership

Total cost of ownership, the total amount expended in order to own a product or use a service

It includes 1. Delivery and installation costs2. Service costs to maintain and repair the equipment

3. Power costs to run the equipment4. Supply costs and 5. Other operating costs over the life of the equipment

1.3.2 Economic Order Quantity

A method of evaluating ordering and inventorying costs is to determine the economic order quantity.

The economic order quantity (EOQ)= the quantity that minimizes both ordering and storing costs

Forward buying= buying in larger quantities than are currently needed because the discount is greater than the carrying cost

Separate the order quantity from the shipping quantity through an annual contract

1.3.3 Value Analysis Value analysis is a method of comparing the benefit, function, and cost of materials, components, and work processes.

It can be used to reduce costs or improve design

Complexity management is the process of identifying links among components that raise costs if any changes are made

2.0 Supplier Evaluation

Evaluate potential suppliers and their offerings

Understanding the process is like understanding the rules of any game

1.Buy-Grid Model 2.Buy-Grid and Marketing Practice

2.1 Buy-Grid Model The buy-grid model is a version of a theory developed as a general model of rational organizational decision making, explaining how companies make decisions about

The buy-grid model has two parts: 1.The buy-phase model and 2.The buy-class

2.1.1 The Buy-Phase Model

Buy-phase model suggests that people go through a series of steps (or phases) when making a decision, beginning with problem recognition

They then search for alternatives, evaluate the alternatives, and select a solution, which is then implemented and evaluated

2.1.1 The Buy-Phase Model

Step-01 Recognition of Need

Step-02 Definition of Product Type Needed

Step-03 Development of Detailed Specifications

Step-04 Search for Qualified Suppliers

Step-05 Acquisitions and Analysis of Proposal

Step-06 Evaluation of Proposals and Selection of a Supplier

Step-07 Selection of an Order Procedure

Step-08 Evaluation of a Product Performance

Figure 3-4: Steps in the Buying Process (Buy-Phase Model)

Buy-class refers to the type of buying decision, based on the experience of the buyer with a purchase of a particular product or service

New Buy Straight Re-buy Modified Re-buy In-suppliers Out-suppliers

2.1.2 The Buy-class Model

2.2 Buy-Grid and Marketing Practice

More information is needed by the buyer to make a new buy than when making a modified re-buy, and almost no information is needed for a straight re-buy

Degree to which a market is buying a product for the first time

2.2 Buy-Grid and Marketing Practice

Phase-03 Straight rebuyNeed recognition and purchase are the only steps used

Phase-01 New TaskAll Steps of buying process are taken, with emphasis on product definition an development of product specification

Phase-02 Modified rebuyLess emphasis is on product definition and more emphasis is on search and evaluation of suppliers

Exhibit 3.5 Marketing Implications of the Buy-Grid

2.3 Multiattribute Decision Making

The multiattribute model is based on the idea that people view products as a collection of attributes or “bundle of benefits” and provides a picture of how alternatives are evaluated

Where this model fits the buy-grid model is in the evaluation of alternatives stage for new or modified rebuys

Each need is more or less important than other needs, depending on the organization or individual making the purchase

A marketer would use information by first determining what the most important attributes are, and then designing the product to rate the highest on those attributes

It not just for evaluating potential suppliers. Companies use it to analyze the performance of current vendors, too

2.3 Multiattribute Decision Making

3.0 Trends In Purchasing Purchasing departments are very important to the success of an organization. As companies select and implement various strategies, purchasing is always involved as resources are gathered to support those strategies

The trends are:1. Downsizing 2. Outsourcing 3. Stronger Relationships with Sellers 4. Cross-Functional Teams 5. Professionalism in Purchasing

3.1 Downsizing Economic factors have caused many companies to downsize, or to lower the number of employees through early retirement and layoffs. In a recent study of purchasing agents, 41 % said their departments had been moderately to radically downsized

Purchasing agents Reducing the number of vendors Other electronic purchasing mechanisms

3.2 Outsourcing Process of finding another organization to supply the buying organization with a product or service, usually one that was previously created in house

It is a strategic trend, caused in part by a trend in strategy where companies focus on their core businesses

Make-or-buy decision Early supplier involvement (ESI)- Companies use suppliers to help design new products or processes

3.3 Stronger Relationships with Sellers

Companies are trying to reduce the number of vendors and increase the amount of business with each vendor.

Communication channels have changed greatly as a result of this trend. With direct communication, buyers can talk directly to key personnel and know that their needs will be met

Supply Chain Management

3.4 Cross-Functional Teams

Cross-functional sourcing teams are purchasing teams that include members of various functional areas within the firm, and sometimes include personnel from suppliers and customers too

Cross-functional teams work best when given the resources needed, when suppliers participate, and when the team is given the authority to run itself

3.5 Professionalism in Purchasing

The National Association of Purchasing Managers has contributed much to the development of professionalism by encouraging and providing certification for purchasing managers

Certified as professional purchasing managers must pass a battery of tests that indicate knowledge to the profession’s code of ethics as well as procedures of purchasing

4.0 Ethical Issues Facing Purchasing

Fair competition means that any competitor has equal opportunity to sell to the buyer and equal access to information from the buyer

Responsibility to the buying organization

These two dimensions of equal access and responsibility are the basic guidelines for evaluating ethical actions in purchasing

4.1 Receiving Gifts Gifts of some type are accepted by an estimated 97 % of all buyers, and gift giving has long been an accepted practice. Most businesses believe that giving gifts is an effective activity

When gifts are given is another issue. The same gift sent out after the purchase, with no prior knowledge among the purchasers, might have been acceptable because the gift could not have swayed the decision

4.2 Access to Information Buyers have access to a lot of information. Having that information can be a competitive advantage. How that information is used can become an ethical issue

Shill bidding- this practice involves getting bids from companies with no expectation of doing business with them, in order to drive down prices from the companies that you do want to do business with

Nondisclosure agreements

4.3 Encouraging Ethical Conduct

Ethical conduct is a major contributor to effective purchasing; unethical purchasing can damage a firm because it will pay too much for lower quality products

Breach of trust Selling organizations have to trust their buyers on many levels, and trust is particularly important in building long-term partnerships

Senior management of most companies wants their companies to operate ethically