Managing a Business/management of machines and materials
5. Explain with the help of block diagram the purchasing decision making process in an engineering organization. Briefly discuss the process of vendor rating.
Explain with the help of block diagram the purchasing decision making process in an engineering organization. Briefly discuss the process of vendor rating.
BUYER BEHAVIOURS BY STAGES
For each buying stage, there is a corresponding
Organizational buyer behavior.
1.Recognition of problem or need
2.Determination of product characteristics
3.Description of product characteristics
4.Search for suppliers
5.Acquisition and analysis of
6.Evaluation of proposals supplier
7.Selection of an order routine
8.Performance feedback and evaluation
Contrasting behavior of the organization BUYER
FOR each stage
1.Purchases are planned and needs are anticipated
2.Systematic, cost benefit analysis
4.Regional or national
5.Proposals and bids formally solicited
6.Extensive ~comparislon and ranking of suppliers
7.Time and place of delivery and frequency of order specified as part of the contract
8.Active file maintained on supplier and product performance
A BASIC MODEL OF
ORGANIZATIONAL BUYING DECISION
Product buying centre
Criteria to evaluate products
Criteria to evaluate suppliers >>>>>>Evaluation
Expectations >>>>>>alternative products >>purchase
>>>>>>alternative suppliers>> decision
About alternative products
About alternative suppliers
Trade newspapers / Word of mouth
This model can add value to the customer buying by
-creating product awareness
-making product availability
-providing after sales service
-providing effective customer service
-special pricing terms
-special inventory terms
-special delivery terms
-controlled order cycle time
-special credit terms
BUYERs PARTICIPANTS IN THE BUYING PROCESS
1 Structure: The 'who' factor who participates in the decision making process, and their particular roles.
2.Process: The 'how' factor the pattern of information gathering, analysis, evaluation and decision making which takes place as the purchasing organisation moves towards a decision.
3.Content: The 'why' factor the evaluative criteria used at different stages of the process and by different members of the buying centre.
An essential point to understand in organizational buying is that the buyer
or purchasing officer is often not the only person who influences the decision,
or who actually has the authority to make the ultimate decision. Rather,
the buying centre as a whole is involved although it is not necessarily a fixed entity.
The buying centre will be made up of different people for different products;
and these may change as the decision making, process continues.
Thus the production staff may not be involved in office equipment decisions,
and only at certain stages concerning general equipment. Also,
a managing director may be involved in the decision that new equipment
should be purchased, and may eventually formally approve the purchase,
but may not be involved in the decision as to which manufacturer to purchase from.
Roles played out by members of the buying centre
And some examples.
1.Users. Users are the members of the organization who will actually use the
product being purchased. For example, the office staff might well establish the
evaluative criteria for the purchase of a new word processing system (such as user
friendliness, number of fonts available, keyboard feel and printer speed).
2 Deciders: Deciders are organizational members who have the power, either formally or informally, to decide which product and supplier to select. Buyers are usually the deciders, but there can also be other deciders. The purchasing department staff might be both the buyer and decider, but their decision could be reversed if top management disagrees for budgetary or other strategic reasons. There can also be multiple deciders, such as groups and committees who make
recommendations to top management.
3.Influencers: Influencers are those who provide information and add decision criteria throughout the process. They are members of the organization who do not use the product but can influence the evaluative criteria, either directly or indirectly. They can also provide information or opinions about the alternatives. For example, a firm's maintenance personnel could influence the type of carpet selected to redecorate an office because they know which carpets are easier to clean and maintain.
4. Buyers: Buyers are those who have authority to execute the contractual arrangement.
They are usually in the purchasing department and are those members of
the organization who have the formal authority to make the purchase decision.
They are normally involved in the face to face negotiations with suppliers.
5. Gatekeepers: Gatekeepers are organizational members who control the flow of
information to other members of the buying centre. By controlling the flow of
information, they can prevent some suppliers or products from being considered.
Purchasing department employees are usually gatekeepers, as are personnel such
as secretaries and engineers. They may attempt to be the sole interface between
their firm and the sellers, thus allowing them to maintain control of information.
One of the most important things to recognise about the five types of organisational
members who influence purchase decisions is that each member is likely to have a very
dif¬ferent set of evaluative criteria to the others. Herein lies the logic of the buying centre from
the point of view of the buyer organisation. Consider, for example, the purchase of a new
computer system. The people who will use the computer might be concerned with speed
and reliability. The manager of the physical plant (an influencer) might be concerned about
the space the machine will require and its tolerance of humidity and temperature variations.
The purchasing department staff (the buyer) may be concerned with the amount of dis¬
count given and whether the machine will have a guaranteed trade in allowance if the
company decides to trade up to a larger, more powerful model in the future. The managing
director (the decider) might be concerned with maintenance costs, the warranty and the
payment terms. Finally, the data processing manager (user) might want to maintain supply
from their existing supplier, or alternatively, move to a more cutting edge firm.
CRITERIA FOR EVALUATION
Vendor performance is usually evaluated in the areas of pricing, quality, delivery, and service. Each area has a number of factors that some firms deem critical to successful vendor performance.
Pricing factors include the following:
Competitive pricing. The prices paid should be comparable to those of vendors providing similar product and services. Quote requests should compare favorably to other vendors.
Price stability. Prices should be reasonably stable over time.
Price accuracy. There should be a low number of variances from purchase-order prices on invoiced received.
Advance notice of price changes. The vendor should provide adequate advance notice of price changes.
Sensitive to costs. The vendor should demonstrate respect for the customer firm's bottom line and show an understanding of its needs. Possible cost savings could be suggested. The vendor should also exhibit knowledge of the market and share this insight with the buying firm.
Billing. Are vendor invoices are accurate? The average length of time to receive credit memos should be reasonable. Estimates should not vary significantly from the final invoice. Effective vendor bills are timely and easy to read and understand.
Quality factors include:
Compliance with purchase order. The vendor should comply with terms and conditions as stated in the purchase order. Does the vendor show an understanding of the customer firm's expectations?
Conformity to specifications. The product or service must conform to the specifications identified in the request for proposal and purchase order. Does the product perform as expected?
Reliability. Is the rate of product failure within reasonable limits?
Reliability of repairs. Is all repair and rework acceptable?
Durability. Is the time until replacement is necessary reasonable?
Support. Is quality support available from the vendor? Immediate response to and resolution of the problem is desirable.
Warranty. The length and provisions of warranty protection offered should be reasonable. Are warranty problems resolved in a timely manner?
State-of-the-art product/service. Does the vendor offer products and services that are consistent with the industry state-of-the-art? The vendor should consistently refresh product life by adding enhancements. It should also work with the buying firm in new product development.
Delivery factors include the following:
Time. Does the vendor deliver products and services on time; is the actual receipt date on or close to the promised date? Does the promised date correspond to the vendor's published lead times? Also, are requests for information, proposals, and quotes swiftly answered?
Quantity. Does the vendor deliver the correct items or services in the contracted quantity?
Lead time. Is the average time for delivery comparable to that of other vendors for similar products and services?
Packaging. Packaging should be sturdy, suitable, properly marked, and undamaged. Pallets should be the proper size with no overhang.
Documentation. Does the vendor furnish proper documents (packing slips, invoices, technical manual, etc.) with correct material codes and proper purchase order numbers?
Emergency delivery. Does the vendor demonstrate extra effort to meet requirements when an emergency delivery is requested?
Finally, these are service factors to consider:
Good vendor representatives have sincere desire to serve. Vendor reps display courteous and professional approach, and handle complaints effectively. The vendor should also provide up-to-date catalogs, price information, and technical information. Does the vendor act as the buying firm's advocate within the supplying firm?
Inside sales. Inside sales should display knowledge of buying firms needs. It should also be helpful with customer inquiries involving order confirmation, shipping schedules, shipping discrepancies, and invoice errors.
Technical support. Does the vendor provide technical support for maintenance, repair, and installation situations? Does it provide technical instructions, documentation, general information? Are support personnel courteous, professional, and knowledgeable? The vendor should provide training on the effective use of its products or services.
Emergency support. Does the vendor provide emergency support for repair or replacement of a failed product.
Problem resolution. The vendor should respond in a timely manner to resolve problems. An excellent vendor provides follow-up on status of problem correction
Vendor performance is usually RATED in the areas of pricing, quality, delivery, and service. Each area has a number of factors that some firms deem critical to successful vendor performance.
Quality factors include: [ 35 ]
Compliance with purchase order.
Conformity to specifications.
Pricing factors include the following: [30 ]
Advance notice of price changes.
Sensitive to costs.
Delivery factors include the following: [ 20 ]
Service factors to consider: [ 10 ]
Sincere desire to serve.
Support factors to consider: [ 5 ]
*Competitiveness of terms/ conditions
*level of assistance
pricing, quality, delivery, and service are suitable for supplies that are not essential to the continued success of the buying firm, a more comprehensive approach is needed for suppliers that are critical to the success of the firm's strategy or competitive advantage. For firms that fall into the latter category performance may need to be measured by the following 7 C's.
1. Competencyanagerial, technical, administrative, and professional competence of the supplying firm.
2. Capacityupplier's ability to meet physical, intellectual and financial requirements.
3. Commitmentupplier's willingness to commit physical, intellectual and financial resources.
4. Controlffective management control and information systems.
5. Cash resourcesinancial resources and stability of the supplier. Profit, ROI, ROE, asset-turnover ratio.
6. Costotal acquisition cost, not just price.
7. Consistencyupplier's ability to exhibit quality and reliability over time