Marketing Essentials
Purchasing
Chapter 23 n Purchasing
1
SECTION 23.1
The Role of the Buyer
What You'll Learn
 The terms used to describe organizational
buyers
 How planning purchases differs between an
industrial market and a reseller's market
 The six-month merchandise plan and its
calculations
 The concept of chain store buying
Chapter 23 n Purchasing
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SECTION 23.1
The Role of the Buyer
Why It's Important
The purchasing function in any business
is important because the costs associated
with running a business are often a direct
result of the competency of the person
responsible for buying the goods and
services required to run the business.
Chapter 23 n Purchasing
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SECTION 23.1
The Role of the Buyer
Key Terms






organizational buyers
wholesale and retail buyers
six-month merchandise plan
open-to-buy
centralized buying
decentralized buying
Chapter 23 n Purchasing
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SECTION 23.1
The Role of the Buyer
Planning Purchases
Businesses, like consumers, must plan:
 what to buy
 how much to buy
 when and where to shop
Organizational buyers buy goods for
businesses. Much of what they buy requires
technical knowledge and/or knowledge of the
operations of the firm, especially in
manufacturing and service operations.
Chapter 23 n Purchasing
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SECTION 23.1
The Role of the Buyer
Industrial Marketing
In manufacturing and service businesses,
the people responsible for purchasing may
be called purchasing managers,
industrial buyers, or procurement
managers. They are often directly involved
in production planning.
Slide 1 of 2
Chapter 23 n Purchasing
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SECTION 23.1
The Role of the Buyer
Industrial Marketing
A bill of materials is the list of everything
needed to make a product. It helps the
purchasing manager determine what to
buy, and how much to buy.
Materials requirement planning (MRP)
helps determine when to buy, so supplies
are ready when they are needed in the
production schedule.
Slide 2 of 2
Chapter 23 n Purchasing
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SECTION 23.1
The Role of the Buyer
Resellers
Wholesale and retail buyers purchase
goods for resale—they forecast customers’
needs and buy the necessary products.
Buyers must plan far in advance of the
selling season to know how much of each
item to purchase.
Chapter 23 n Purchasing
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SECTION 23.1
The Role of the Buyer
Six-Month Merchandise Plan
Buyers plan their purchases by preparing a
six-month merchandise plan—or the
budget that estimates planned purchases for
a six-month period. First a buyer must
determine planned sales, usually based on
the previous year's sales.
Slide 1 of 4
Chapter 23 n Purchasing
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SECTION 23.1
The Role of the Buyer
Six-Month Merchandise Plan
Buyers must ensure that there is enough stock to
accommodate the planned sales volume; this is
also known as beginning-of-the-month (BOM)
inventory. It is calculated:
 planned sales x stock-to-sales ratio = BOM
The BOM for one month is the same as the
end-of-the-month inventory (EOM) for the
prior month.
Slide 2 of 4
Chapter 23 n Purchasing
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SECTION 23.1
The Role of the Buyer
Six-Month Merchandise Plan
The other number in the six-month
merchandise plan is planned retail
reductions, the reductions in the selling
price and shortages of merchandise caused
by clerical mistakes, employee pilferage, or
customer shoplifting. This can be
calculated:
 as a percentage of sales or
 as a percentage reduction from the
prior year
Slide 3 of 4
Chapter 23 n Purchasing
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SECTION 23.1
The Role of the Buyer
Six-Month Merchandise Plan
In order to determine how much to purchase,
buyers use this formula:
 (planned sales + EOM stock +
reductions)
- BOM stock = purchases
Slide 4 of 4
Chapter 23 n Purchasing
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SECTION 23.1
The Role of the Buyer
Open-To-Buy
During the buying season, a buyer may want
to know the open-to-buy (OTB), or the amount of
money left for buying goods. OTB is calculated as
follows:
 purchases – (goods received + goods ordered)
Slide 1 of 2
Chapter 23 n Purchasing
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SECTION 23.1
The Role of the Buyer
Open-To-Buy
To determine the actual money the buyer has
to spend, you must calculate markup
percentage and deduct that figure from the
retail value.
 100% - markup % = % attributed to cost
 % attributed to cost X retail value =
OTB at cost
Slide 2 of 2
Chapter 23 n Purchasing
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SECTION 23.1
The Role of the Buyer
Planning Purchases for a Chain Store
Operation
Buying for all branches in a chain store
operation is usually done in a central location
(company headquarters), and is called
centralized buying. Chain stores use
centralized buying in order to create a unified
image for the chain. Customers can expect to
find the same goods in every branch.
Slide 1 of 2
Chapter 23 n Purchasing
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SECTION 23.1
The Role of the Buyer
Planning Purchases for a Chain Store
Operation
Decentralized buying is used when chain
stores want to have special goods in their
stores that are not available elsewhere in the
chain. In these cases, local store managers or
their designated buyers are authorized to make
special purchases for their individual stores.
Slide 2 of 2
Chapter 23 n Purchasing
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SECTION 23.1
The Role of the Buyer
Government Markets
Government units are the federal, state, or
local agencies that are responsible for
purchasing goods and services for their
specific markets. There are approximately
85,000 government units in the U.S.,
including the Federal Aviation Administration
and local school boards.
Chapter 23 n Purchasing
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23.1 ASSESSMENT
Reviewing Key Terms and Concepts
1. What are the differences between
organizational buyers and consumers?
2. What products might an industrial buyer
purchase?
3. What do wholesale and retail buyers
purchase?
4. In a retail buying situation, what does a buyer
prepare in advance of the selling situation?
5. Why do chain stores use centralized buying?
Chapter 23 n Purchasing
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23.1 ASSESSMENT
Thinking Critically
What would happen if a buyer computed a
planned sales figure for the next planning
period that was 20 percent too high?
Chapter 23 n Purchasing
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SECTION 23.2
The Purchasing Function
What You'll Learn
 The three types of purchase situations
 The criteria for selecting suppliers
 The factors involved in negotiating terms of
a sale
 The various Internet purchasing methods
Chapter 23 n Purchasing
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SECTION 23.2
The Purchasing Function
Why It's Important
Knowing the details of the purchasing
function will give you a better idea of what is
involved in the overall job description. It is
especially important to recognize the impact
of the Internet on the purchasing function.
You can expect changes in job descriptions
for buyers in the near future due to the
significant increase in online purchasing.
Chapter 23 n Purchasing
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SECTION 23.2
The Purchasing Function
Key Terms
 want slips
 resident buying offices
 consignment buying
 memorandum buying
 reverse auction
Chapter 23 n Purchasing
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SECTION 23.2
The Purchasing Function
The Buying Process
Planning purchases is the preliminary step
in the buying process. The buying process
involves several types of purchasing
situations, selecting suppliers, negotiating
terms, and sometimes using the Internet.
Chapter 23 n Purchasing
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SECTION 23.2
The Purchasing Function
Types of Purchase Situations
There are three types of purchase situations:
 new-task purchase
 modified rebuy
 straight rebuy
Chapter 23 n Purchasing
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SECTION 23.2
The Purchasing Function
New Task Purchase
A new-task purchase is a purchase that is
made for the first time. This can be the most
complicated purchase. It could be anything
from a special item that a customer has
requested and a store doesn’t carry to
complex manufacturing equipment to be
used to automate production.
Chapter 23 n Purchasing
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SECTION 23.2
The Purchasing Function
Want Slip
Item Required ___________ Brand Name __________
Size ________ Style __________ Quantity_________
Item Description_______________________________
____________________________________________
Your Name___________________________________
Address _____________________________________
(Street)
Telephone (
(City)
(State)
(Zip Code)
) ______________________________
EMPLOYEE: PLEASE FORWARD IMMEDIATELY TO YOUR
SUPERVISOR.
Employee Signature____________________________
Salespeople often prepare
want slips and give them to
the buyer for their
department. Why are want
slips so valuable to a
buyer? What other
information might a buyer
need before making a
new-task purchase?
Store No. _______ Dept. No. _______ Date ________
Chapter 23 n Purchasing
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SECTION 23.2
The Purchasing Function
Modified Rebuy
In a modified-rebuy situation, the buyer
has had experience buying the good or
service, but some aspect of the purchase
changes, such as purchasing from a new
vendor. A buyer usually gets proposals
from several vendors before making a
buying decision.
Chapter 23 n Purchasing
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SECTION 23.2
The Purchasing Function
Straight Rebuy
In a straight-rebuy situation, the buyer
routinely orders the goods and services
purchased from the same vendor(s) as in
the past. Staple goods such as office
supplies fall into the straight-rebuy category
for wholesale and retail buyers.
Chapter 23 n Purchasing
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SECTION 23.2
The Purchasing Function
Selecting Suppliers
The criteria for selecting suppliers fall into a
few key categories:
 production capabilities
 past experience
 product and buying arrangements
 special services
Chapter 23 n Purchasing
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SECTION 23.2
The Purchasing Function
Production Capabilities
When dealing with a source for the first time,
buyers may request specific information
about the source's production capabilities.
They may visit the production facility, get
references, and ensure the facility is not
a sweatshop. A sweatshop is a factory
characterized by poor working conditions and
negligent treatment of employees.
Chapter 23 n Purchasing
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SECTION 23.2
The Purchasing Function
Past Experiences
Many buyers maintain resource files that
document past experiences with vendors,
with basic information such as products
carried, prices, and delivery and dating
terms, to evaluations of products, delivery
performance, and customer service.
Chapter 23 n Purchasing
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SECTION 23.2
The Purchasing Function
Special Buying Arrangements
Two special types of sales and return policies
are called consignment buying and
memorandum buying.
 In consignment buying, goods are paid
for only after they are purchased by the
customer.
 Memorandum buying occurs when the
supplier agrees to take back any unsold
goods by a certain date.
Chapter 23 n Purchasing
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SECTION 23.2
The Purchasing Function
Special Services
Businesses today demand more services
from their suppliers than just the basic
return policy. One common demand is
placement of Universal Product Codes
(UPCs) on goods, which makes it easier
for businesses to track products.
Chapter 23 n Purchasing
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SECTION 23.2
The Purchasing Function
Negotiating Terms
To evaluate suppliers, buyers must negotiate
their prices, dating terms, delivery
arrangements, and discounts. One common
discount is dating terms, discounts for paying a
bill before the due date. Buyers can negotiate
for bigger discounts or a longer deadline for
payment.
Chapter 23 n Purchasing
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SECTION 23.2
The Purchasing Function
Internet Purchasing
Business-to-business electronic commerce
has revolutionized the purchasing function
for businesses in the industrial and reseller
markets. Electronic exchanges allow
registered users to buy and sell goods
online, often within specific industries.
Slide 1 of 2
Chapter 23 n Purchasing
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SECTION 23.2
The Purchasing Function
Internet Purchasing
Online auction companies register parties
interested in selling an item or a service.
Usually a seller sets an asking price and
buyers try to outbid each other. This type of
auction is available through the online
exchanges of many industries.
In a reverse auction, companies post
what they want to buy and suppliers bid
for the contract.
Slide 2 of 2
Chapter 23 n Purchasing
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23.2 ASSESSMENT
Reviewing Key Terms and Concepts
1. List the three types of purchase situations.
2. What four things can buyers do to stay abreast
of industry trends?
3. Name four criteria buyers use in selecting
supply sources.
4. What is the difference between consignment
and memorandum buying?
5. What are electronic exchanges and in what
types of industries are they found?
Chapter 23 n Purchasing
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23.2 ASSESSMENT
Thinking Critically
How do you see the job description of a
buyer or procurement manager changing
with the advent of Internet purchasing?
Chapter 23 n Purchasing
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Graphic Organizer
23.2
Criteria for Selecting Suppliers
Production
Capabilities
Past
Experiences
Special Buying
Arrangements
Selecting
A
Supplier
Special
Services
Chapter 23 n Purchasing
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