4 the organizational buying process mcgraw-hill/irwin copyright © 2005 by the mcgraw-hill...

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The Organizational The Organizational Buying ProcessBuying Process

McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

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AgendaAgenda

Objectives of Business BuyersObjectives of Business Buyers Profile of a Professional BuyerProfile of a Professional Buyer The Changing Role of the BuyerThe Changing Role of the Buyer The Business Buying ProcessThe Business Buying Process Business Buying SituationsBusiness Buying Situations The Buying CenterThe Buying Center The Materials Management ConceptThe Materials Management Concept Purchasing and the InternetPurchasing and the Internet Environmental Forces and Buying DecisionsEnvironmental Forces and Buying Decisions Purchasing's Impact Upon Company ProfitPurchasing's Impact Upon Company Profit

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Square D Company has a Square D Company has a BuyerBuyer position available at position available at the Asheville, NC, location. Square D is a the Asheville, NC, location. Square D is a manufacturer of electrical control products. manufacturer of electrical control products. Responsibilities include: developing, communicating, Responsibilities include: developing, communicating, and implementing strategies and tactics to establish, and implementing strategies and tactics to establish, manage, and improve all aspects of supplier manage, and improve all aspects of supplier performance; acting as a liaison between the performance; acting as a liaison between the external supplier base and manufacturing operations; external supplier base and manufacturing operations; analyzing and developing strategies to manage analyzing and developing strategies to manage commodity availability and pricing market conditions. commodity availability and pricing market conditions.

(continued)(continued)

Typical Job AdTypical Job Ad

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Typical Job AdTypical Job Ad

Prefer a BS degree in business with knowledge of Prefer a BS degree in business with knowledge of a JIT environment. CPM or APICS certification a a JIT environment. CPM or APICS certification a plus. Experience in value analysis required. This plus. Experience in value analysis required. This position requires a highly motivated self-starter position requires a highly motivated self-starter with excellent verbal and written communication with excellent verbal and written communication skills and strong computer experience.skills and strong computer experience.

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Objectives of Business BuyersObjectives of Business Buyers

Product availabilityProduct availability Reliability of sellersReliability of sellers Consistency of quality, delivery, and Consistency of quality, delivery, and

priceprice

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The Changing Role of the BuyerThe Changing Role of the Buyer

Relationship MarketingRelationship Marketing a.k.a. alliances or strategic a.k.a. alliances or strategic

partnershipspartnerships

Process where a firm builds long-Process where a firm builds long-term alliances with prospective and term alliances with prospective and current customers so both sides can current customers so both sides can work toward a common set of goalswork toward a common set of goals

IntraindustryIntraindustry and and InterindustryInterindustry alliances possiblealliances possible

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Value Analysis Value Analysis The task of studying a product and The task of studying a product and

all of its components in order to all of its components in order to determine ways to produce it at a determine ways to produce it at a lower cost, to improve its quality, or lower cost, to improve its quality, or to make it with a material in greater to make it with a material in greater or more stable supplyor more stable supply

-or--or- Finding the best way to do a job at Finding the best way to do a job at

the lowest possible costthe lowest possible cost

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Make-or-Buy AnalysisMake-or-Buy Analysis An analysis that determines which An analysis that determines which

products should be made in-house products should be made in-house and which should be purchased.and which should be purchased.

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Steps in Value Analysis: Comparison of Steps in Value Analysis: Comparison of Function to CostFunction to Cost

• Select a relatively high-cost or high-volume Select a relatively high-cost or high-volume purchased item (part, material, or service).purchased item (part, material, or service).

• Find out how the item is used and what is Find out how the item is used and what is expected of it - i.e., its function in detail.expected of it - i.e., its function in detail.


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Steps in Value Analysis: Comparison of Steps in Value Analysis: Comparison of Function to Cost Function to Cost • Ask the following questions:Ask the following questions:

Does its use contribute value? Does its use contribute value? Is it cost-proportionate to usefulness?Is it cost-proportionate to usefulness? Does it need all its features?Does it need all its features? Is there anything better, at a more favorable price, for the Is there anything better, at a more favorable price, for the

intended use?intended use? Can the item be eliminated?Can the item be eliminated? If the item is not standard, can a standard item be used?If the item is not standard, can a standard item be used? If it is a standard item, does it completely fit the proposed If it is a standard item, does it completely fit the proposed

application, or is it a misfit?application, or is it a misfit?


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The Changing Role of the BuyerThe Changing Role of the Buyer Steps in Value Analysis: Comparison of Steps in Value Analysis: Comparison of

Function to Cost Function to Cost • Ask the following questions:Ask the following questions:

Does the item have greater capacity than required?Does the item have greater capacity than required? Is there a similar item in inventory that could be used Is there a similar item in inventory that could be used

instead?instead? Can the weight be reduced?Can the weight be reduced? Are closer tolerances specified than are necessary?Are closer tolerances specified than are necessary? Is needless machining performed on the item?Is needless machining performed on the item? Are unnecessarily fine finishes specified?Are unnecessarily fine finishes specified? Is commercial quality specified?Is commercial quality specified? Can you make it now? Can you buy it for less?Can you make it now? Can you buy it for less? If you are making it now, can you buy it for less?If you are making it now, can you buy it for less?


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Steps in Value Analysis: Comparison of Steps in Value Analysis: Comparison of Function to Cost Function to Cost • Ask the following questions:Ask the following questions:

Is the item properly classified for shipping purposes to Is the item properly classified for shipping purposes to obtain the lowest transportation rates?obtain the lowest transportation rates?

Can the cost of packaging be reduced? Can the cost of packaging be reduced? Are you asking your suppliers for suggestions to reduce Are you asking your suppliers for suggestions to reduce

costs?costs? Do material, reasonable labor, overhead, and profit total Do material, reasonable labor, overhead, and profit total

the item’s cost?the item’s cost? Will another dependable supplier provide it for less?Will another dependable supplier provide it for less? Is anyone buying it for less?Is anyone buying it for less?

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Steps in Value Analysis: Comparison of Steps in Value Analysis: Comparison of Function to Cost Function to Cost • Now:Now:

Pursue those suggestions that appear Pursue those suggestions that appear practical.practical.

Get samples of the proposed item(s).Get samples of the proposed item(s). Select the best possibilities and propose Select the best possibilities and propose

changes.changes.

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NegotiationNegotiation4-3

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Centralization Versus Decentralization Centralization Versus Decentralization of the Buying Functionof the Buying Function

• Centralized purchasingCentralized purchasing Advantages = standardization of purchased Advantages = standardization of purchased

parts, administrative duplication eliminated or parts, administrative duplication eliminated or reduced, order quantities can be increased, reduced, order quantities can be increased, buyer has better control over purchase buyer has better control over purchase commitments, fosters development of commitments, fosters development of specialization and expertise.specialization and expertise.

Disadvantages?Disadvantages?

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Centralization Versus Decentralization Centralization Versus Decentralization of the Buying Functionof the Buying Function

• Decentralized purchasingDecentralized purchasing Advantages = less inventory is required, cost Advantages = less inventory is required, cost

may be lower due to local economic may be lower due to local economic conditions, local buyers and sells can conditions, local buyers and sells can develop a relationship, buyers create develop a relationship, buyers create impression of being a good corporate impression of being a good corporate customer and neighborcustomer and neighbor

Disadvantages?Disadvantages?

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The Business Buying ProcessThe Business Buying Process

Recognizing the needRecognizing the need Developing product specificationsDeveloping product specifications Soliciting bids from potential suppliersSoliciting bids from potential suppliers Making the purchase decisionMaking the purchase decision Issuing the contractIssuing the contract Inspecting delivered goods for qualityInspecting delivered goods for quality Evaluating vendor performanceEvaluating vendor performance

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Quotations and ContractsQuotations and Contracts RFP:RFP: Request for Proposal Request for Proposal RFQ:RFQ: Request for Quotation Request for Quotation Boilerplate:Boilerplate: Standard legal clauses (fine print) on RFQs, your Standard legal clauses (fine print) on RFQs, your

bid, and the customer’s order. May contain terms of sale that bid, and the customer’s order. May contain terms of sale that contradict terms on your bid, and often contain penalties for contradict terms on your bid, and often contain penalties for nonperformance.nonperformance.

You may receive an RFP, send a proposal, receive an RFQ, You may receive an RFP, send a proposal, receive an RFQ, send a bid, receive an order, and ship products with an send a bid, receive an order, and ship products with an invoice. invoice.

A contract may be involved for long-term requirements.A contract may be involved for long-term requirements. If company-to-company EDI is used to order, customer’s If company-to-company EDI is used to order, customer’s

boilerplate may be sent once per year. boilerplate may be sent once per year. Internet purchases give seller an advantage, in that seller’s Internet purchases give seller an advantage, in that seller’s

boilerplate terms are presented, but not customer’s. A wise boilerplate terms are presented, but not customer’s. A wise buyer might add a reference to them. buyer might add a reference to them.

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Evaluating Potential VendorsEvaluating Potential Vendors

Basic Considerations in Evaluating Potential Basic Considerations in Evaluating Potential VendorsVendors• Performance ConsiderationsPerformance Considerations• Site VisitsSite Visits• Geographic LocationsGeographic Locations• CapacityCapacity

Vendor-Rating ApproachesVendor-Rating Approaches• The Categorical PlanThe Categorical Plan• The Weighted-Point PlanThe Weighted-Point Plan• The Cost-Ratio PlanThe Cost-Ratio Plan

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Business Buying SituationsBusiness Buying Situations

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

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

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

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A requirement or problem that has not arisen before. Little or no relevant past buying experience to draw upon.

A great deal of information is needed.

Must seek out alternative ways of solving the problem and alternative suppliers.

Continuing or recurring requirement, handled on a routine basis.

Usually the decision on each separate transaction is made in the purchasing department.

Formally or informally, a list of acceptable suppliers exists. No unlisted supplier is considered

May develop from either new task or straight rebuy situation.

The requirement is continuing or recurring, or it may be expanded to a significantly larger level of operations.

The buying alternatives are known, but they are changed. Some additional information is needed before the decisions are made.

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The Buying CenterThe Buying Center

Roles of Buying Center MembersRoles of Buying Center Members User:User: Person who will use the product in question; influence Person who will use the product in question; influence

can range from minimal to major. can range from minimal to major. Gatekeeper:Gatekeeper: Keeps tight control on flow of information to Keeps tight control on flow of information to

other buying center members; can open or close the gate for other buying center members; can open or close the gate for salespeople.salespeople.

Influencer:Influencer: Provides information to other members for Provides information to other members for evaluating alternative products or sets purchasing evaluating alternative products or sets purchasing specificationsspecifications

Decider:Decider: Makes buying decision; often difficult to identify.Makes buying decision; often difficult to identify. Buyer:Buyer: Assigned formal authority to select vendors and Assigned formal authority to select vendors and

complete purchasing transaction.complete purchasing transaction.

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The Materials Management ConceptThe Materials Management Concept

Materials management (a.k.a. logistics):Materials management (a.k.a. logistics): Grouping of functions involved in Grouping of functions involved in obtaining and bringing materials into a obtaining and bringing materials into a production operation. production operation.

Usually one manager responsible for Usually one manager responsible for planning, organizing, motivating, and planning, organizing, motivating, and controlling all the activities principally controlling all the activities principally concerned with the flow of materials into concerned with the flow of materials into an organization.an organization.

View material flow as a View material flow as a system.system.

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The Materials Management ConceptThe Materials Management Concept

Approaches to Materials ManagementApproaches to Materials Management• Traditional ApproachTraditional Approach• Just-in-Time (JIT) ApproachJust-in-Time (JIT) Approach• Integrated Supply StrategiesIntegrated Supply Strategies

Reasons for Adopting the Materials Reasons for Adopting the Materials Management ConceptManagement Concept• Improved communication and coordination Improved communication and coordination

between departmentsbetween departments Can balance conflicting interestsCan balance conflicting interests Faster, smoother material flowFaster, smoother material flow Lower inventory and logistics costsLower inventory and logistics costs

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Just-In-Time SystemsJust-In-Time Systems JIT JIT == Just-In-TimeJust-In-Time

Adopted and implemented by many original Adopted and implemented by many original equipment manufacturers (OEMs) and equipment manufacturers (OEMs) and suppliers of component parts and materials. suppliers of component parts and materials.

An operational philosophy thought to epitomize An operational philosophy thought to epitomize the relationship marketing model.the relationship marketing model.

Uses a “pull” approach; much more than Uses a “pull” approach; much more than material arriving just in time. material arriving just in time.

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JIT FeaturesJIT Features

Zero defects—Strict quality controlZero defects—Strict quality control Frequent, reliable delivery of quantities as neededFrequent, reliable delivery of quantities as needed Close locationClose location Advanced telecommunications, EDI.Advanced telecommunications, EDI. Single sourcing—CustomerSingle sourcing—Customer-s-supplier upplier

partnerships/alliancespartnerships/alliances Value analysisValue analysis Early supplier involvementEarly supplier involvement Evergreen contractsEvergreen contracts Customer access to financial and process Customer access to financial and process

informationinformation

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JIT SystemJIT System Pre-1985 U.S. Mfg.Pre-1985 U.S. Mfg.

Integrated JIT versus Integrated JIT versus U.S. ManufacturingU.S. Manufacturing (pre-1985(pre-1985))

What it isWhat it is An integratedAn integrated The way it has The way it has philosophy of philosophy of always been donealways been doneoperating a operating a businessbusiness

Raw material and Raw material and A liability to be A liability to be Protection againstProtection againstin-process inventoryin-process inventory eliminatedeliminated problems, necessary problems, necessary to to maximize maximize machine utilizationmachine utilization

Order sizeOrder size Immediate needs Immediate needs Based on EOQ andBased on EOQ andonly only efficient long efficient long

production runs.production runs.

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JIT SystemJIT System Pre-1985 U.S. Mfg.Pre-1985 U.S. Mfg.Production setup timeProduction setup time Fast at insignificant Fast at insignificant Low-priority concernLow-priority concern

cost; flexible cost; flexible (Ex: same die change(Ex: same die changemanufacturing manufacturing =5 hours) =5 hours)

(Ex: stamping die (Ex: stamping die change =5 minutes)change =5 minutes)

SuppliersSuppliers Part of the team-Part of the team- Adversary-multiple Adversary-multiple

single source single source sourcesource

DeliveryDelivery Must arrive within Must arrive within Arrives on due date Arrives on due date small small time window, time window, plus or minus, plus or minus,

go right to the line, go right to the line, packaged for packaged for packaged for packaged for warehouse storage warehouse storage

assembly efficiency assembly efficiency

Integrated JIT vs. Integrated JIT vs. U.S. Manufacturing U.S. Manufacturing (pre-1985)(pre-1985)

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JIT SystemJIT System Pre-1985 U.S. Mfg.Pre-1985 U.S. Mfg.PurchasingPurchasing Involve supplier in Involve supplier in Design in secret, Design in secret,

design; long-term design; long-term competitive competitive bidding; bidding; contracts at fixed contracts at fixed contract for currentcontract for current

pricesprices requirement; recognize requirement; recognize need for price increasesneed for price increases

Efficiency Efficiency Workers see as Workers see as Workers see as threat Workers see as threat improvements improvements strengtheningstrengthening

companycompany

Production control andProduction control and Demand “pull”—Demand “pull”— Forecast “push”— Forecast “push”— scheduling scheduling Kanban to minimize Kanban to minimize maximize machinemaximize machine

in-process inventoryin-process inventory utilizationutilization

Integrated JIT vs. Integrated JIT vs. U.S. Manufacturing U.S. Manufacturing (pre-1985)(pre-1985)

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MRP SystemsMRP Systems

MRP MRP = Materials Requirement Planning= Materials Requirement Planning

MRP systems:MRP systems: Large computer systems used to plan Large computer systems used to plan and schedule operations using a “push” approach.and schedule operations using a “push” approach.

Starting from the order due dates and forecast, MRP Starting from the order due dates and forecast, MRP considers every required raw material, operating considers every required raw material, operating supply, and component part, their order of use, and supply, and component part, their order of use, and what equipment they will occupy.what equipment they will occupy.

Backs into a schedule of what will have to be done Backs into a schedule of what will have to be done when, including what will have to be ordered when and when, including what will have to be ordered when and received when.received when.

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Purchasing and the InternetPurchasing and the Internet

Web-based purchasing Web-based purchasing continuing to win B2B convertscontinuing to win B2B converts• Why?Why?

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Environmental Forces Environmental Forces and Buying Decisionsand Buying Decisions

The Economic EnvironmentThe Economic Environment The Physical EnvironmentThe Physical Environment The Competitive EnvironmentThe Competitive Environment The Technological EnvironmentThe Technological Environment The Legal-Political EnvironmentThe Legal-Political Environment The Ethical EnvironmentThe Ethical Environment

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Purchasing’s Impact Upon Purchasing’s Impact Upon Company ProfitCompany Profit

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Single SourcingSingle SourcingBetween XYZ Corp., the buyer, and ___________, the seller. Between XYZ Corp., the buyer, and ___________, the seller. Term of contract: January 1, 2000, through December 31, 2002.Term of contract: January 1, 2000, through December 31, 2002.

1. 1. Seller shall furnish all goods and services listed as scheduled Seller shall furnish all goods and services listed as scheduled and released F.O.B. destination without additional charges.and released F.O.B. destination without additional charges.

XYZ Part #426F37 Revision A 125,000,000 units @ $55.00 XYZ Part #426F37 Revision A 125,000,000 units @ $55.00 per thousand unitsper thousand units

XYZ Part #426588 Revision D 5,000,000 units @ $15.78 XYZ Part #426588 Revision D 5,000,000 units @ $15.78 per thousand unitsper thousand units

XYZ Part #426C56 Revision E XYZ Part #426C56 Revision E 450,000 units @ $525.00 450,000 units @ $525.00 per thousand unitsper thousand units

2.2. Above quantities may be adjusted as necessary by XYZ Corp. Above quantities may be adjusted as necessary by XYZ Corp. over the term of the agreement.over the term of the agreement.

3. 3. Seller will provide technical support as required by XYZ Corp. Seller will provide technical support as required by XYZ Corp. at no additional cost.at no additional cost.


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4.4. Goods will meet all XYZ Corp. product and quality specifications.Goods will meet all XYZ Corp. product and quality specifications.

5.5. If delivery is not completed within the time specified, XYZ Corp. If delivery is not completed within the time specified, XYZ Corp. reserves the right to any or all of the following:reserves the right to any or all of the following:

A. Terminate the agreement.A. Terminate the agreement.B. Purchase replacement goods at seller’s expense.B. Purchase replacement goods at seller’s expense.C. Bill seller for all downtime costs.C. Bill seller for all downtime costs.

6.6. Seller will, at no cost to XYZ Corp., have their materials certified Seller will, at no cost to XYZ Corp., have their materials certified by an independent laboratory as meeting XYZ Corp. by an independent laboratory as meeting XYZ Corp. specifications.specifications.

7.7. Seller is restricted from making any changes in the product after Seller is restricted from making any changes in the product after sample approval is granted, including but not limited to materials, sample approval is granted, including but not limited to materials, production operations, and packaging.production operations, and packaging.

8.8. Sellers will allow XYZ Corp. personnel access to all areas and Sellers will allow XYZ Corp. personnel access to all areas and records necessary to verify compliance.records necessary to verify compliance.

Single SourcingSingle Sourcing


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9.9. Seller shall assume all responsibility in connection with liability Seller shall assume all responsibility in connection with liability based on seller’s performance and for the performance of their based on seller’s performance and for the performance of their goods, including, but not limited to patent infringement, civil goods, including, but not limited to patent infringement, civil liability, and criminal liability.liability, and criminal liability.

10.10. Seller shall treat as confidential all information, data, Seller shall treat as confidential all information, data, specifications, and processes involved in this agreement.specifications, and processes involved in this agreement.

11.11. XYZ Corp may terminate this agreement by way of written notice XYZ Corp may terminate this agreement by way of written notice with liability limited to products actually produced to a scheduled with liability limited to products actually produced to a scheduled delivery date 10 days in the future.delivery date 10 days in the future.

12.12. Part price is fixed for the term of the agreement; 24 months from Part price is fixed for the term of the agreement; 24 months from the agreement date.the agreement date.

13.13. Seller agrees that all terms expressed here are in addition to the Seller agrees that all terms expressed here are in addition to the terms of the Uniform Commercial Code, laws of the State, and terms of the Uniform Commercial Code, laws of the State, and laws of the United States.laws of the United States.

Single SourcingSingle Sourcing

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Strategic Alliances betweenStrategic Alliances betweenSuppliers and CustomersSuppliers and Customers

Bose CorporationBose Corporation• Reduced production costsReduced production costs• Reduced staffReduced staff• Allowed for just-in-time Allowed for just-in-time

deliverydelivery• Streamlined and cost-Streamlined and cost-

effective product effective product developmentdevelopment

• Consistently met customer Consistently met customer requirementsrequirements

Benefits to Bose Benefits to Bose SuppliersSuppliers• Evergreen contractsEvergreen contracts• Improved production Improved production

efficiencyefficiency• Elimination of sales Elimination of sales

callscalls• Improved Improved

communicationcommunication

4 the organizational buying process mcgraw-hill/irwin copyright © 2005 by the mcgraw-hill...

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