Purchasing

THE OBJECTIVES OF PURCHASING

1. PROVIDE APPROPRIATE LEVELS OF SUPPLY

+

2. THE APPROPRIATE LEVEL OF QUALITY

+

3. THE LOWEST TOTAL COST

WHAT COMPANIES REALLY PAYFOR 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. Recognizing the need

2. Developing product specifications

3. Soliciting bids from potential suppliers

4. Making the purchase decision

5. Issuing the contract

6. Inspecting delivered goods for quality

7. Evaluating vendor performance

MAKE-OR-BUY DECISION ANALYSIS

ACCEPTABLE RISKBuy the Products,

Components or Services

UNACCEPTABLE RISKRetain Production and

Provide Services

RISK ASSESSMENT

FINANCIAL RISKS

Resource Allocation

Investment of Resources

Accurate Cost Analysis

Legal Issues

MARKETING RISKS

Customer Impact

Supplier Impact

MANUFACTURING RISKS

Reliability

Expertise

Equipment

Patent Protection

POLITICAL RISKS

Management commitment/

willingness to partner

Turf Battles

Internal Strife

Quotations and Contracts

• RFQ: Request for Quotation

• RFP: Request for Proposal

• Boilerplate: – Standard legal clauses (fine print) on

RFQs, your bid, and the customer’s order.

– May contain terms of sale that contradict terms on your bid, and often contain penalties for nonperformance.

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

Pureroutine

Completenegotiation

StraightRebuy

ModifiedRebuy

NewBuy

ElectricityGas/Water

OfficeSupplies

BulkChemicals

Vehicles ConsultingServices

ElectricalComponents

ComputerSystems

Installations

Moon ShotInsurance

Insurance for the Apollo 11 Moonshot

Buygrid Analysis Framework

StraightStraight RebuyRebuy

ModifiedModified RebuyRebuy

NewNewBuyBuy

Need RecognitionNeed Recognition

Develop Product SpecificationsDevelop Product Specifications

Solicit BidsSolicit Bids

Make Purchase DecisionMake Purchase Decision

Issue the ContractIssue the Contract

Inspect Goods for QualityInspect Goods for Quality

Evaluate Vendor PerformanceEvaluate Vendor Performance

Complexity of Complexity of Buying SituationBuying Situation

Buygrid Analysis Framework

StraightStraight RebuyRebuy

ModifiedModified RebuyRebuy

NewNewBuyBuy

Need RecognitionNeed Recognition

Develop Product SpecificationsDevelop Product Specifications

Solicit BidsSolicit Bids

Make Purchase DecisionMake Purchase Decision

Issue the ContractIssue the Contract

Inspect Goods for QualityInspect Goods for Quality

Evaluate Vendor PerformanceEvaluate Vendor Performance

CreepingCreepingCommitmentCommitment

Forces Influencing Organizational Buying Behavior

EnvironmentalForces

OrganizationalForces

GroupForces

IndividualForces

OrganizationalBuying

Behavior

•Economic Outlook: 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 buyingdecision participants

•Job function, pastexperience, and buyingmotives of individualdecision participants

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

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

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 purchasing’s 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

Selective exposure.Selective attention.Selective retention.

•Impacts how your buyer views and understands the world

•Impacts how your buyer views risk

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