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Summary - Chapter 2 - Purchasing and Supply Chain
Management 6th Edition
Internationales Supply-Chain-Management (Hochschule für Wirtschaft und Recht Berlin)
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Summary: Purchasing and Supply Chain Management
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CHAPTER 2: INDUSTRIAL BUYING BEHAVIOR: DECISION MAKING IN PURCHASING
ORGANIZATIONAL BUYING BEHAVIOR: BASIC CHARACTERISTICS
Buying process: Includes determining the purchasing needs, selecting the supplier, arriving at a prober price,
specifying terms and conditions, issuing the contract or order, and following up to ensure proper delivery and
payment. Examples of industrial buying behavior are:
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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
Models of industrial buying behavior
Aspect
Industrial market
Consumer market
Buying objective
Enable production
Personal need satisfaction
Buying motive
Mainly rational
Also emotional
Purchasing function
Professional buying
Consumers
Decision making
Many persons involved, much
discussion
Often impulsive, without
consulting others
Characteristics
Negotiations, intense interaction
Often without negotiation, little
interaction
Product & market knowledge
Large
Limited
Order size
Often large
Mostly small
Demand
Derived, fluctuation
Autonomous, relatively stable
Price elasticity
Rather inelastic
Rather elastic
Number of customers
Mostly limited
Very large
Spread of customers
Sometimes large geographic
concentration
Large spread
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Summary: Purchasing and Supply Chain Management
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THE PURCHASING PROCESS
The variables that influence the outcome of the purchasing process can be classified into (1) variables that
affect the buying process and (2) variables that affect buying behavior.
(1) Variables that affect the buying process:
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Characteristics of the product: Differences could be: Financial importance, technological complexity
and the supply risk involved when purchasing the product.
Strategic importance: The higher the importance, the more likely the general management will get
involved in the purchase decision.
Sums of money involved
Characteristics of the purchasing market
Degree of risk related to the purchase
Role of the purchasing department in the organization
Effect of purchase on existing routines
(2) Variables that affect the buying decision:
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Task variables: Relate to tasks, responsibilities and competences assigned to a person making the
decision
Non-task variables: Relate to the professional’s personality
The purchasing process:
The purchasing process (usually) contains the following steps:
1.
2.
3.
4.
5.
Specification
Supplier Selection and Assessment
Negotiation and contracting
Order process & Expediting
Evaluation & Follow up
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ASPECTS OF THE PURCHASING PROCESS:
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Business needs are leading: Business needs and requirements are the input for the purchasing
process model
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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
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Defining the interfaces: the output of each phase has to be clearly defined, preferably with a
document
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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
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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 ADDED VALUE OF THE PROFESSIONAL BUYER:
The added value of the professional buyer lies in the ability to act as a facilitator for the supply process:
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Identifying new, potential suppliers and business partners for the company’s changing business needs
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Being involved in new product development and investment projects
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Supporting internal customers in defining purchasing specifications
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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
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Setting up requisitioning and ordering routines in such a way that the users can place orders
themselves
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Place orders at suppliers and maintain and monitor orders, contracts and supplier files
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Monitoring outstanding orders and financial obligations
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Follow up and evaluation of supplier performance and maintaining relevant supplier documentation
TYPES OF PURCHASING:
(1) New-task situation: Situation when the organization decides to buy a completely new product,
supplied by an unknown supplier.
(2) Modified rebuy: Relates to a situation when the organization wants to purchase a new product from
a known supplier or a known product from a new supplier.
(3) The straight rebuy: Relates to the acquisition of a known product from a known supplier (routine
buy). Ordering often takes place through an E-procurement solution (All web-enabled solutions aimed
at supporting the purchasing process and all electronic data exchange that is needed for efficient
transaction processing).
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THE PURCHASING PROCESS STEP-BY-STEP:
1.
The specification phase:
During the purchasing process, the purchasing requirements are determined and the company is also faced
with the ‘make-or-buy’ decision. Purchasing managers differentiate between functional specifications and
technical specifications. Those contain:
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Quality specifications
Logistics specification
Maintenance specification
Legal and environmental requirements
Target budget
The specification is part of a wider concept, which is referred to as the purchase order specification.
2.
Supplier selection and supplier assessment
Supplier selection relates to all activities which are required to select the best possible suppler and includes
determining on the method of subcontracting, preliminary qualification of suppliers and drawing up the
‘bidders’-list, preparation of the request for quotation and analysis of the bids received and selection of the
supplier.
One important decision is if the company should decide to go for turnkey subcontracting or partial
subcontracting (also referred to as full / partial outsourcing):
The decision for fixed-price or a cost-reimbursable contract concerns the following factors:
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Comprehensiveness of the specification, absence of specifications makes a fair comparison impossible.
Available time, is there enough time for a tender procedure and price negotiations?
Technical expertise, when specialized knowledge and skills are required a cost-reimbursable contracts
is often preferred.
Degree of knowledge of the industry, about methods and price arrangements
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Summary: Purchasing and Supply Chain Management
3.
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Negotiating and contracting
In general the buyer should insist on a fixed price, arrived at through competitive bidding or negotiation, which
is acceptable to both principal and supplier. In practice, different price arrangements are used in purchase
agreements:
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Fixed-price plus incentive fee: This type of contract is designed to motivate suppliers by means of
rewards to execute the work above the agreed standard.
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Cost-plus contract: Cost-plus contracts are used in situations where the work cannot be specified
adequately, or when a fixed price constitutes too big a risk for both the supplier and the buyer.
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Cost-reimbursable: This type of contract is usually based on fixed hourly rates for labor and
equipment. Without a bonus or penalty clause these contracts provide little incentive to minimize
labor hours or costs.
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Agreement with price-adjustment: This type of contract is used mainly for agreements with a longterm delivery, or when very specific, market-sensitive materials are processed.
The terms of payment always also need to be looked at and can play a crucial role by influencing the final price,
4.
The ordering process and expediting
After the terms and conditions of the contract have been agreed and recorded, the order can be placed. A
purchase usually is initiated electronically through a purchase order requisition or a materials requisition.
The buyer usually closely monitors the performance of the buyer. There are several ways of expediting:
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Exception expediting: buyer only takes action when the organization sends out signals of material
shortages
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Routine status check: preventing materials supply and quality problems – few days before promised
delivery, the buyer contacts the supplier to confirm delivery date
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Advanced status check: for critical purchase parts – a detailed production plan will be handed over to
the buyer and during the process the buyer will carry out periodic checks
In addition, when the products or equipment are delivered for the first time they will have to be checked to
ensure that they meet the specified requirements. There are three ways of acceptance testing a product
before using on a regular basis:
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1. An Acceptance test at the supplier’s site before shipment
2. An Acceptance test at the user’s site after delivery
3. An Acceptance test when the equipment is put into operation for the first time
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Summary: Purchasing and Supply Chain Management
5.
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Follow up and evaluation of the buying process
The buyer’s role continues after the new product has been taken into production or the installation has been
put into operation.
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Compare invoice with the original order
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Solve delivery issues
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Supplier assessment:
o
Keep track of supplier’s quality, delivery record, competitiveness and innovativeness
E-PROCUREMENT
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Electronic market places: make searching for suppliers more easy like www.chemconnect.com for
chemicals and plastics or www.aeroxchange.com for the aviation industry
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Electronic auctions: the electronic trade exchange is the most popular e-solution
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Electronic catalogue and ordering systems: offer buyers greater opportunities for more efficient order
handling.
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Efficient order processing, logistics and payment systems
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Transactions without human interference
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Substantial cost reduction because of a.o. transaction costs
FORMS OF E-AUCTIONS:
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Open Request for information (RFI) / request for proposal (RFP):
o
Qualification before auction
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Supplier is invited based on the offer
Reversed auction
o
input price determined by buyer
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offers are visible, suppliers can see how far away they are from the best offer
Forward auction:
o
Vendor determines the price
o
Several buyers announce their offer to the auctioneer
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Summary: Purchasing and Supply Chain Management
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MAJOR BOTTLENECKS AND PROBLEMS
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Too much emphasis on price: Especially buying capital equipment buying decisions need to be based
upon total-cost-of-ownership (TCO) rather than on price only.
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Poor administrative processes: Putting a sound administrative system in place could lead to
significant savings.
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Problems in delivery phase: over time or incomplete delivery, quality problems can put the continuity
of the business process in danger.
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Suppliers are not systematically assessed: This results in unprofessional suppliers and repeating
problems.
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Too detailed specification: The specifications of the user are sometimes written to the capabilities of
specific suppliers
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Inadequate supplier selection: Failure to check the supplier's (bank) references, can produce very
unpleasant surprises like bankruptcy
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Personal relationships: Purchase orders are placed with suppliers with whom the user has a friendly
relationship; As a result such suppliers may not be as competitive.
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Contracts are too general, incomplete, drafted up by the supplier or not present at all.
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