Industrial Buying Process

Analyzing Business Analyzing Business MarketsMarkets

Industrial Buying Process (Eight Industrial Buying Process (Eight stage Process)stage Process)

Robinson & his associates identified Robinson & his associates identified eight stages & called them buy phases.eight stages & called them buy phases.

Stage 1:Stage 1: Problem Recognition:Problem Recognition: Problem or need Problem or need

for any goods or services are recognized for any goods or services are recognized by company & can be triggered by by company & can be triggered by internal stimuli or external stimuli.internal stimuli or external stimuli.

Internal stimuli might be the company Internal stimuli might be the company decides to buy a new equipment.decides to buy a new equipment.

External stimuli might be buyer get a External stimuli might be buyer get a new idea at a trade show.new idea at a trade show.

Stage 2: General need descriptionStage 2: General need description

General characteristics and quantity of the General characteristics and quantity of the product is described. product is described.

Staff members include Purchase manager, Staff members include Purchase manager, Production Manger, engineers, CEO of the Production Manger, engineers, CEO of the company for the higher priced goods or company for the higher priced goods or services.services.

Product durability, reliability, performance, Product durability, reliability, performance, price are discussed by the team.price are discussed by the team.

Stage 3:Product SpecificationStage 3:Product Specification

Product Value Analysis (PVA)Product Value Analysis (PVA) Tightly written specification will allow the Tightly written specification will allow the

buyer to refuse components that are too buyer to refuse components that are too expensive or that fails to meet specific expensive or that fails to meet specific standards.standards.

So in PA analysis the product is weighed So in PA analysis the product is weighed for all its components against the required for all its components against the required resources to judge weather to go for the resources to judge weather to go for the component or part of the product or not.component or part of the product or not.

Stage 4: Supplier SearchStage 4: Supplier Search

The buyer next tries to identify the The buyer next tries to identify the most appropriate suppliers through most appropriate suppliers through trade directories, contact with other trade directories, contact with other companies, trade advertisements, companies, trade advertisements, trade shows and the internet. trade shows and the internet.

Companies that purchase over the Companies that purchase over the internet are utilizing electronic internet are utilizing electronic marketplaces in several forms:marketplaces in several forms:

Catalog sitesCatalog sites: Companies an order : Companies an order thousands of items through electronic thousands of items through electronic catalog distributed by e-procuement catalog distributed by e-procuement software.software.

For e.g. Indiamart.comFor e.g. Indiamart.com Vertical markets: Companies buying Vertical markets: Companies buying

industrial products such as plastics, industrial products such as plastics, steel can go to specialized web sites.steel can go to specialized web sites.

Plastics.comPlastics.com

‘‘PurePlay’ Auction sitesPurePlay’ Auction sites: online : online marketplaces such as eBay.com marketplaces such as eBay.com could not be realized without internet. could not be realized without internet. On this website industrial goods such On this website industrial goods such as industrial spare parts, as industrial spare parts, commodities, raw materials etc. are commodities, raw materials etc. are auctioned online.auctioned online.

Spot Markets:Spot Markets: On spot market Price On spot market Price change at every minute. Chemicals such change at every minute. Chemicals such as benzene is traded online using sites as benzene is traded online using sites such as -Chcem.connect.com in bulk.such as -Chcem.connect.com in bulk.

Private Exchanges:Private Exchanges: Specially invited Specially invited partners and suppliers are trading using partners and suppliers are trading using private exchanges.private exchanges.

For e.g. Hewlett-Packard has its own For e.g. Hewlett-Packard has its own exchange called ‘HP exchange’.exchange called ‘HP exchange’.

Barter Markets:Barter Markets: Participants offer to trade Participants offer to trade goods/servicesgoods/services

Buying alliances:Buying alliances: Several companies Several companies buying the same good join together form buying the same good join together form an alliance called buying alliance.an alliance called buying alliance.

For e.g. Transora and Covisint.For e.g. Transora and Covisint.

Benefits of online business buyingBenefits of online business buying

Online business buying offers several Online business buying offers several advantages:advantages:

It shaves transactions costs for both buyers It shaves transactions costs for both buyers and suppliers.and suppliers.

It reduces time between order and delivery.It reduces time between order and delivery.It consolidates purchasing system.It consolidates purchasing system.It forges more direct relationship between It forges more direct relationship between

buyers and suppliers.buyers and suppliers.

Drawbacks of online business Drawbacks of online business buying systembuying system

Online business buying has less but Online business buying has less but serious drawbacks or adverse effects such serious drawbacks or adverse effects such as:as:

It may erode supplier buyer relationship.It may erode supplier buyer relationship. It may pause a threat to security.It may pause a threat to security.

E-Procurement:E-Procurement: Online availability o suppliers to the buyers may Online availability o suppliers to the buyers may

come in to different forms called ways of E-come in to different forms called ways of E-procurement.procurement.

1. Vertical Hubs: the hubs centered on industries 1. Vertical Hubs: the hubs centered on industries are called vertical hubs. For e.g. Plastic, steel are called vertical hubs. For e.g. Plastic, steel etc.etc.

Functional Hubs: The medium of smooth Functional Hubs: The medium of smooth transactions between industrial suppliers and transactions between industrial suppliers and industrial buyers form the part of functional industrial buyers form the part of functional hubs.hubs.

For e.g. Logistic, media etc.For e.g. Logistic, media etc.

Industries & E-procurement: Apart from Industries & E-procurement: Apart from websites industries can use E-websites industries can use E-procurement for different advantages procurement for different advantages like:like:

Set up direct extranet links to major Set up direct extranet links to major supplierssuppliers: for e.g. a company can have a : for e.g. a company can have a direct account at companies depo and direct account at companies depo and make purchases from there only.make purchases from there only.

for e.g. company’ account at Dell.for e.g. company’ account at Dell.

Form buying alliancesForm buying alliances: A large number : A large number of buyers form a buying alliance to of buyers form a buying alliance to integrate crucial business information and integrate crucial business information and processes between partners, customers processes between partners, customers and suppliers.and suppliers.

For e.g. Colgate PalmoliveFor e.g. Colgate Palmolive Set up Co. buying sitesSet up Co. buying sites: a trading : a trading

process unit is formed where company process unit is formed where company can post its request for proposals (RFP), can post its request for proposals (RFP), negotiate terms, and places orders.negotiate terms, and places orders.

GE has a Trading Process Unit.GE has a Trading Process Unit.

Lead generation: the suppliers task is Lead generation: the suppliers task is to ensure it is considered when buyer to ensure it is considered when buyer is or would be in the market.is or would be in the market.

So it has to develop a ’Sales ready’ So it has to develop a ’Sales ready’ approach.approach.

Knowing the exact demand of the Knowing the exact demand of the prospective buyer before the prospective buyer before the competitor and satisfy him competitor and satisfy him immediately helps any supplier to immediately helps any supplier to convert the generated lead.convert the generated lead.

Stage 5: Proposal SolicitationStage 5: Proposal Solicitation

Buyer asks qualified suppliers to send Buyer asks qualified suppliers to send their proposals or quotations.their proposals or quotations.

Detailed written proposal as well as Detailed written proposal as well as oral representation to the buyer must oral representation to the buyer must be impressive enough to make a be impressive enough to make a competitive existence.competitive existence.

Stage 6: Supplier SelectionStage 6: Supplier Selection

Before selecting a supplier, the buying Before selecting a supplier, the buying center will specify desired supplier center will specify desired supplier attributes and indicate the relative attributes and indicate the relative importance.importance.

To rate and identify the most attractive To rate and identify the most attractive suppliers, buying centers often use a suppliers, buying centers often use a supplier-evaluation model such as the one supplier-evaluation model such as the one shown in table.shown in table.

Customer Value Assessment method.Customer Value Assessment method.AttributesAttributes Rating ScaleRating Scale

ImportanceImportanceWeightsWeights

Poor(1)Poor(1) Fair(2)Fair(2) Good(3)Good(3) Excellent(4)Excellent(4)

PricePrice 0.300.30 yesyes

Product ReliabilityProduct Reliability 0.200.20 yesyes

Supplier Supplier ReputationReputation

0.300.30 yesyes

Service ReliabilityService Reliability 0.100.10 yesyes yesyes

Supplier flexibilitySupplier flexibility 0.100.10 yesyes

So, total Score: So, total Score: 0.30(4)+0.20(3)+0.10(2)+0.10(3)=3.50.30(4)+0.20(3)+0.10(2)+0.10(3)=3.5

The choice and importance varies according The choice and importance varies according to the buying situation.to the buying situation.

Thus using this model every supplier is Thus using this model every supplier is judged against total score and the final judged against total score and the final decision of choosing the supplier is made.decision of choosing the supplier is made.

Overcoming Price PressuresOvercoming Price Pressures

The buying center may attempt to The buying center may attempt to negotiate with preferred suppliers for negotiate with preferred suppliers for better prices and terms before making the better prices and terms before making the final decision.final decision.

The moves include The moves include A) strategic sourcingA) strategic sourcing B) partneringB) partnering C) participation in cross functional teamC) participation in cross functional team

Moves from the supplier to counter Moves from the supplier to counter reactreact

Apart from that marketers can counter Apart from that marketers can counter request for a lower prices in number of request for a lower prices in number of ways:ways:

The total cost of ‘ownership’ or ‘lifecycle The total cost of ‘ownership’ or ‘lifecycle cost’ of their product is lower than the cost’ of their product is lower than the competitor's.competitor's.

They can sought the value buyer receives They can sought the value buyer receives if it is superior to that of the competitor’s.if it is superior to that of the competitor’s.

Suppliers know-how ability and timely Suppliers know-how ability and timely marketing to the buyer can even reduces marketing to the buyer can even reduces the price pressure.the price pressure.

Some of the other solutions used by Some of the other solutions used by supplier (marketer) are as follows:supplier (marketer) are as follows:

Solutions to enhance customer Solutions to enhance customer revenues:revenues:

Well diversified company ITC ltd. Has Well diversified company ITC ltd. Has provided rural farmers with online data of provided rural farmers with online data of the local mandies daily trading. Even the local mandies daily trading. Even facilities like farmers can sell its facilities like farmers can sell its commodities t ITC on the last day closing commodities t ITC on the last day closing price was availed.price was availed.

Also farmers could know about latest Also farmers could know about latest techniques of farming, news of farming, techniques of farming, news of farming, details of fertilizers, seeds, pesticides and details of fertilizers, seeds, pesticides and could buy this online. could buy this online.

Solutions to decrease customer risks:Solutions to decrease customer risks: E.g. ICI Explosives formulated a safer way E.g. ICI Explosives formulated a safer way

to ship explosives.to ship explosives. Solutions to reduce customer costs:Solutions to reduce customer costs:

Material Management cost fundamental is Material Management cost fundamental is used by Tata Steel.used by Tata Steel.

Number of suppliersNumber of suppliers

Most of the buyer have reduced from 20-Most of the buyer have reduced from 20-80% of their suppliers.80% of their suppliers.

Single sourcing trend is even used by Single sourcing trend is even used by many large scale organizations.many large scale organizations.

Stage 7:Order Routine Stage 7:Order Routine SpecificationSpecification

After selecting suppliers, the buyer After selecting suppliers, the buyer negotiates the final order.negotiates the final order.

Delivery, price, warranties, product Delivery, price, warranties, product specifications etc are discussed.specifications etc are discussed.

In lease deal the lesee has several In lease deal the lesee has several advantages like:advantages like:

Conserving the capital, getting the latest Conserving the capital, getting the latest products, receiving better services, and products, receiving better services, and gaining some tax advantage.gaining some tax advantage.

The lessor gets large income and a chance The lessor gets large income and a chance to sell the customers who can’t afford the to sell the customers who can’t afford the outright price.outright price.

Blanket Order is the method where Blanket Order is the method where supplier will send you the inventory as supplier will send you the inventory as buyer’s computer gives the message that buyer’s computer gives the message that inventory stock is below limit.inventory stock is below limit.

Vendor managed inventory system Vendor managed inventory system supplier’s computer gives the message for supplier’s computer gives the message for sending new lot of inventory to the buyersending new lot of inventory to the buyer..

Stage 8:Performance Review:Stage 8:Performance Review: The product and services of the supplier The product and services of the supplier

are checked after the consumption.are checked after the consumption. Three methods are used for this:Three methods are used for this: Buyer may contact the end user of the Buyer may contact the end user of the

product.product. Supplier is ranked using weighted score Supplier is ranked using weighted score

method.method. Compromise for the quality is measured in Compromise for the quality is measured in

terms of price.terms of price.

Industrial Buying ProcessIndustrial Buying Process

Meaning: Webster & Wind define Meaning: Webster & Wind define organization buying as the decision-organization buying as the decision-making process by which formal making process by which formal organizations establish the need for organizations establish the need for purchased products & services and purchased products & services and identify, evaluate, and choose among identify, evaluate, and choose among alternative brands and suppliers.alternative brands and suppliers.

The Business Market versus the The Business Market versus the Consumer MarketConsumer Market

Fewer ,Larger Markets: The business Fewer ,Larger Markets: The business marketers with far fewer, large buyers than marketers with far fewer, large buyers than the consumers marketers does, in such the consumers marketers does, in such industries as aircraft engines and defense industries as aircraft engines and defense weapons. weapons.

Close supplier-customer Close supplier-customer relationshiprelationship

Because of the smaller customer base and Because of the smaller customer base and the importance and power of the larger the importance and power of the larger customers, suppliers are frequently customers, suppliers are frequently expected to customize their offerings to expected to customize their offerings to individual business customer needs.individual business customer needs.

Professional purchasingProfessional purchasing Business goods are purchased by a Business goods are purchased by a

trained purchasing agents.trained purchasing agents. They must follow organizations’ They must follow organizations’

purchasing policies, constraints and purchasing policies, constraints and requirements.requirements.

This means to be good seller business This means to be good seller business suppliers must provide greater technical suppliers must provide greater technical data about their product and its data about their product and its advantages over competitors’ product.advantages over competitors’ product.

Multiple buying influencesMultiple buying influences

Buying committees consists of technical Buying committees consists of technical experts and even senior management.experts and even senior management.

Business marketers need to send trained Business marketers need to send trained sales officer & trained sales team to deal sales officer & trained sales team to deal with well trained business purchaser.with well trained business purchaser.

Multiple sales callsMultiple sales calls Studies show that on an average it takes Studies show that on an average it takes

four to four & half calls to close an average four to four & half calls to close an average industrial sale.industrial sale.

For larger projects, in capital equipment For larger projects, in capital equipment projects it takes years from quotation–to-projects it takes years from quotation–to-delivery period.delivery period.

Derived DemandDerived Demand The demand for the business goods is The demand for the business goods is

ultimately derived from the demand for ultimately derived from the demand for consumer goods.consumer goods.

Business buyers must pay close attention Business buyers must pay close attention to final consumers buying patterns.to final consumers buying patterns.

current and expected future economic current and expected future economic conditions of final consumers affect to conditions of final consumers affect to great extent the buying behavior of the great extent the buying behavior of the consumers.consumers.

For instance, In recession business For instance, In recession business marketers can hardly do anything with the marketers can hardly do anything with the environmental factors, what they can do is environmental factors, what they can do is only increase or maintain their share of only increase or maintain their share of demand.demand.

But in boom if the demand for the housing But in boom if the demand for the housing sector increases the demand for the sector increases the demand for the construction machinery even increases to construction machinery even increases to a great extent.a great extent.

Inelastic DemandInelastic Demand The total demand for many business The total demand for many business

goods and services is inelastic.goods and services is inelastic. For e.g. shoe manufacturers are not going For e.g. shoe manufacturers are not going

to buy much more leather if the price of to buy much more leather if the price of leather falls.leather falls.

Demand is inelastic in short run because Demand is inelastic in short run because producers cannot make quick changes in producers cannot make quick changes in production methods.production methods.

Fluctuating DemandFluctuating Demand The business demand for goods is more The business demand for goods is more

volatile than consumer goods demand.volatile than consumer goods demand. For e.g. a rise of 10% demand in For e.g. a rise of 10% demand in

consumer goods may lead to more than consumer goods may lead to more than 200% increase in business demand.200% increase in business demand.

This is due to increased requirements of This is due to increased requirements of plant & machinery for producing increased plant & machinery for producing increased demand goods.demand goods.

Economist refers to this as the Economist refers to this as the ‘‘accelerating effectaccelerating effect’.’.

Geographically concentrated Geographically concentrated buyersbuyers

Different types of industries in India tend to Different types of industries in India tend to get concentrated in different regions. For get concentrated in different regions. For e.g. diamond industry in Surat, hosiery e.g. diamond industry in Surat, hosiery industry in Coimbatore.industry in Coimbatore.

The geographical concentration of The geographical concentration of producer helps to reduce selling costs.producer helps to reduce selling costs.

Direct purchasingDirect purchasing

Business buyers buy directly from Business buyers buy directly from manufacturers than intermediaries.manufacturers than intermediaries.

Especially when items are very complex or Especially when items are very complex or expensive like aircraft.expensive like aircraft.