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
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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
MARKETING RISKS
Customer Impact
Supplier Impact
MANUFACTURING RISKS
Reliability
Expertise
Equipment
Patent Protection
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
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
Modified
Rebuy
Straight
Rebuy
Office
Supplies
Pure
routine
Vehicles
Consulting
Services
Installations
Complete
negotiation
Electrical
Components
Electricity
Gas/Water
Bulk
Chemicals
New
Buy
Computer
Systems
Moon Shot
Insurance
Insurance for the Apollo 11 Moonshot
Buygrid Analysis Framework
New
Buy
Modified
Rebuy
Straight
Rebuy
Need Recognition
Develop Product Specifications
Solicit Bids
Make Purchase Decision
Issue the Contract
Inspect Goods for Quality
Evaluate Vendor Performance
Complexity of
Buying Situation
Buygrid Analysis Framework
New
Buy
Modified
Rebuy
Straight
Rebuy
Need Recognition
Develop Product Specifications
Solicit Bids
Make Purchase Decision
Issue the Contract
Inspect Goods for Quality
Evaluate Vendor Performance
Creeping
Commitment
Forces Influencing Organizational Buying
Behavior
•Economic Outlook:
A projected change in
business conditions
can drastically alter
buying plan.
Organizational
Buying
Behavior
Environmental
Forces
Domestic & Global
•Pace of Technological
Change
•Global Trade Relations
Organizational
Forces
•Goals, Objectives, and
Strategies
•Organizational Position
of Purchasing
Group
Forces
•Roles, relative
influence, and patterns
of interaction of buying
decision participants
Individual
Forces
•Job function, past
experience, and buying
motives of individual
decision participants
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
•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
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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