57 Cvtjoftt!

Nbslfujoh

3 Organisational Buying and

Buying Behaviour

After studying this chapter you should be able to:

� Understand organisational buying objectives.
� Gain knowledge of organisational buying process, including different phases in the buying
decision process and the types of buying situations.
� Identify the members of decision making units (or buying centres).
� Understand some of the models of organisational buying behaviour.
� Know how organisational buyers choose and evaluate suppliers.

For developing effective marketing strategy, business marketers need to understand not only the
nature of business buying but also the business (or organisational) buying behaviour.
Buying (or purchasing) is the other side of the business marketing coin. Just as business marketers
seek customers, so the business buyers seek suppliers or vendors. Purchase (or materials) function
is an important function or department in an organisation. Purchase department of a firm develops
organisational buying objectives and performs certain activities so as to maintain an adequate flow of
goods and services into the operations.

PURCHASING OBJECTIVES
Generally, the purchase/materials management objective is defined as buying the right items in the
right quantity, at the right price, for delivery at the right time and place. It is the management’s problem
to define what is “right” for each dimension. The objectives of the purchasing function are briefly stated
as follows:
Delivery/Availability One of the prime objectives is to ensure that purchased goods and services
are available or delivered when and where needed. If not, the work will come to a grinding halt. This
will reflect badly on the performance of the purchase function. The corollary to this is that the vendor/
supplier reliability in delivery is the most important criterion while evaluating vendors in most of the
cases.
Product Quality The product quality should be consistent with the specifications and use of the
product. It can happen that a product may meet the Indian Standard (IS) or British Standard (BS) speci-
fications, but may fail on the shop-floor when used on a machine. It is important to ensure consistency
in product quality to reduce the cost of inspection, interruptions in production process due to rejections,
and arranging replacements of rejected material. Hence, product quality is considered as one of the
important objectives of purchasing.
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Lowest Price The buyers would like to buy at the lowest price consistent with availability and qual-
ity of the product. The buyers consider price as an important objective if delivery and quality objectives
are met, because low price is meaningless, if the product is not delivered when needed or if the quality
of the product is unacceptable.
Services The business buyers need many types of services accompanying the purchase of goods. These
services include (i) prompt and accurate information from suppliers, (ii) application or technical assistance,
(iii) spare-parts availability, (iv) repairs and maintenance capability, and (v) training, if required.
Supplier Relationship To develop a good long-term supplier/vendor relationship and to develop
new sources of supply.
The importance of achieving these purchasing objectives can be understood by the fact that manu-
facturing firms generally spend more than 50 per cent of their sales revenue on purchases.
Business marketers need to understand that purchasing objectives described above are based on the
company objectives. However, the buying members of an organisation are influenced by both purchas-
ing objectives of the firm and personal objectives.
Personal objectives of business buyers (or members of buying centres) include (a) higher status,
(b) job security, (c) salary increments, (d) promotions, and (e) social considerations (that is, friendship,
mutually beneficial relationships, and personal favours).
The business buyers try to achieve both organisational purchase objectives and personal objectives.
The business marketers should realise that it is important to satisfy not only the purchasing objectives
of a business firm but also the personal objectives of the buying members.

THE ORGANISATIONAL BUYING PROCESS

The organisational purchasing (or buying) process consist of various phases (or stages) of buying-
decision making process. The importance to be given to the various phases will depend upon the type
of buying situations. The business marketers should understand both the phases of decision making
process and the types of buying situations. Robinson, Faris, and Wind1 developed eight phases of
buying-decision process in business market in 1967, and called the process Buyphases.

Buyphases in the Business Buying-decision Process

Buying is an organisational-decision making process. There are eight phases (or stages) in the buying-
decision process, indicating the logical sequence of activities.

QIBTFT!JO!CVZJOH!EFDJTJPO!QSPDFTT
1. Recognition of a problem or need.
2. Determination of the application or characteristics and quantity of needed product.
3. Development of specifications or description of needed product.
4. Search for and qualifications of potential suppliers.
5. Obtaining and analysing supplier proposals.
6. Evaluation of proposals and selection of suppliers.
7. Selection of an order routine.
8. Performance feedback and post-purchase evaluation.
59 Cvtjoftt!Nbslfujoh

In consumer markets, consumers make buying decisions based on certain mental stages such as
problem (or need) recognition, information search, evaluation, purchase decision, and post-purchase
behaviour. However, in business markets the buying decision making process includes observable and
sequential stages (or phases) involving many people in the buying organisation. Understanding the
various phases of buying-decision making is useful to a business marketer as it helps in developing an
appropriate selling strategy.
Some researches2 have suggested that the eight phases of the buying process may not be sequential
due to complexity of buying situations. Some phases may be completed in parallel, like determining
characteristics and developing specifications. The organisational buying process is influenced by in-
ternal factors like changes in company priorities and external environmental factors, such as slowing
down of the economic growth and substantial increase in competition.
One question that is often asked: “Is the organisational buying process for services the same as that
for physical products?” According to research studies3, the buying processes of a product and service
are moderately similar. The major differences are as follows: (1) Difficulty in writing specifications for
services because of unclear nature of services; (2) Problems in forecasting when certain services will
be needed. For instance, a company may not be able to predict accurately when some of the services,
such as legal and medical, will be needed; (3) Lack of well developed planning systems, like ERP, for
services.
Phase 1: Recognition of a Problem (or Need) The recognition of a problem or need may origi-
nate within the buying firm or may also be recognised by a smart marketer. When the quality of material
supplied by the existing supplier is not satisfactory, or the material is not available when required, or the
machine supplied by the existing supplier breaks down too often, the buying organisation recognises
the problem. If a business marketer identifies a problem in the buying organisation and suggests how
the problem could be solved, there will be a better possibility of it being selected as a supplier. Consider
the case of a material handling equipment manufacturing company:
The sales executive of a material handling equipment company visited a car manufacturing company
in India, and while taking a walk on the shop floor of the car manufacturer, he noticed a long queue of
trucks waiting to unload the incoming components and parts. The operation of unloading was taking
a long time, as it was done in semi-manual way. He studied the operation and then suggested that he
could supply an automatic equipment (that is, Hydroelectric lift-table), which could reduce the time of
unloading substantially.
Phase 2: Determination of the Characteristics and Quantity of Needed Product Once the
problem is recognised within or outside the buying organisation, the next phase is how to resolve the
problem. The buying firm will try to answer questions such as: What type of products or services to
be considered? What quantity of the product needed? and so on. For technical products, the technical
departments (R&D, industrial engineering, production, or quality control) will suggest general solu-
tions of the needed product. For non-technical goods or services, either the user department or purchase
department may suggest products or services, based on experience and also the quantity required to
solve the problem. However, if the required information is not available internally within the buying
organisation, the same can be obtained from the outside sources.
Phase 3: Development of Specifications of Needed Product Phases 2 and 3 are closely related.
After the general solutions to the problem is determined in the second phase, the buying organisation,
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in the third stage, develops a precise statement of the specifications or characteristics of the product or
service needed. During this stage the purchase department takes the help of their technical personnel,
or if required, outside sources such as suppliers or consultants. Business marketers have a great oppor-
tunity to get involved at this stage by helping the buyer organisation to develop product specifications
and characteristics. It would give a definite advantage by ensuring that the needed product includes his
or her company’s product characteristics and specifications.

Early Supplier Involvement (ESI) Programme

Production (or operations) experts say that about 80 per cent of a product’s total costs are decided
before the commercial production. Once the commercial production starts, any change in the design
or specification would become very costly. It is, therefore, important that suppliers are involved in the
early stages to develop specifications. In addition, the purchasing persons of the company should also
be included in the design process.
More companies are involving purchasing persons as active members of cross-functional develop-
ment teams. This practice is also called as “Early Purchasing Involvement (EPI) Programme”. The
major contributions of purchasing to EPI programme includes (a) selecting right suppliers as partners;
(b) recommending alternatives on sourcing; and (c) identifying core competencies of the company.
Phase 4: Search for and Qualifications of Potential Suppliers In this phase the buying organi-
sation searches for acceptable suppliers or vendors. The first step taken by the buyer is to obtain infor-
mation on all the available suppliers and then, in the second step, decide on the acceptable or qualifying
suppliers. The search for potential suppliers is based on the various sources of information like trade
journals, sales calls, word-of-mouth, catalogues, trade-shows, and industrial directories. Now-a-days,
the internet is the most likely source of information, for searching potential suppliers. The amount of
time and effort invested in the supplier search will depend on the importance of the proposed product
or service and its effect on the company’s performance.
The qualifications of acceptable suppliers will depend on (a) the type of buying organisation (i.e.
government undertaking, private sector commercial organisation, or institutions), (b) the buying situ-
ation (described subsequently in this chapter), and (c) the decision making members (also described
subsequently in this chapter). However, generally the factors such as quality of product or service, reli-
ability in delivery, and service are considered in qualifications of suppliers.
Phase 5: Obtaining and Analysing Supplier Proposals Once the qualified suppliers are de-
cided, the buying organisation obtains the proposals by sending enquiries to the qualified suppliers. A
supplier’s proposal can be in the form of a formal offer, quotation, or a formal bid, submitted by the
supplier to the buying organisation. It should include (a) the product specification, (b) price, (c) deliv-
ery period, (d) payment terms, (e) taxes and duties applicable, (f) transportation cost (or freight), (g)
cost of transit insurance, and (h) any other relevant cost or free service provided.
For purchases of routine products or services, phases four and five may occur simultaneously, as the
buyer may contact the qualified suppliers to get the latest information on prices and delivery periods.
For technically complex products and services, a lot of time is spent on analysing proposals in terms
of comparisons on products, services, deliveries, and the landed costs (which includes the price after
discount plus excise duty, sales tax, freight, and insurance).
Phase 6: Evaluation of Proposals and Selection of Suppliers Before evaluation and selection
of one or more vendors or suppliers, the buying centre should decide on the desired attributes and their
61 Cvtjoftt!Nbslfujoh

relative importance. It will then evaluate the performance of each supplier on these attributes and by
using weightage (or importance) attached to each attribute, the most attractive suppliers are selected.
Buying centres often use “multiattribute model” for supplier/vendor analysis, as shown in Table 3.1

Table 3.1 A Vendor Analysis System

Attributes Weightage Supplier/Vendor Total Score

(or Criteria) (or Importance) Performance Rating

Product Quality 3 8 3 ¥ 8 = 24

Service Quality 3 7 3 ¥ 7 = 21

Price 2 6 2 ¥ 6 = 12

Reputation 1 8 1 ¥ 8 = 08

Flexibility 1 6 1 ¥ 6 = 06

Total 10 71

Performance rating scale: 1–10, with 10 being “excellent” and 1 being “poor”.
The choice of attributes and importance of different attributes vary with the type of buying situations,
such as new task, modified rebuy and straight rebuy (described later in this chapter). For example,
for a new purchase (or task) situation for a copying machine, supplier reputation, service quality and
product quality may be most important attributes for the buying organisation. For a modified rebuy situ-
ation, for instance, for a two-wheeler manufacturer wanting to change an existing tyre manufacturer
due to unsatisfactory delivery service, the most important attributes may be timely delivery service,
product quality and price. It should be noted that in case of buying situation of straight rebuy, the ques-
tion of evaluation and selection of a new supplier or vendor does not exit, as the buying centre places
repeated orders on the existing suppliers in a routine or automatic decision making process.
The vendor analysis shown in Table 3.1 is for one particular vendor. The same form can be used
for other suppliers. Multiattribute decision making, based on the vendor analysis system shown in
Table 3.1, can be used not only for evaluating potential suppliers or vendors, but also for analysing the
performance of current vendors. Buying centres or purchasing departments of most organisations use
formal rating forms to rate performance of different suppliers and their offerings. One must understand
that attributes and weightages shown in Table 3.1 would vary from one buying organisation to another.
The attribute ‘flexibility’ means the extent to which the supplier firm is flexible to adjust its deliveries
to the variations in the delivery schedules, due to changes in the demand for the buying organisation’s
product. Service quality refers to the quality of core service (e.g. courier or legal service) as well as
quality of supplementary service (i.e. additional service like obtaining stamp papers that is charged to
the customer) and basic customer service, such as typing on the stamp paper that is not charged to the
customer.
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The buying centre or purchasing committee may negotiate with short-listed suppliers for better
prices and payment terms before making the final selection. In a purchasing magazine survey, 92 per
cent buyers said that negotiating price was one of their top responsibilities as well as a key criterion
to select suppliers.
A salesperson would be benefited, if he obtains the information about the most important attributes
decided by the buying centre for purchasing a product or service and uses this information when the
proposal is made. If a competitor is rated higher on an important attribute, the sales person may work
to change the importance of the attribute in the minds of key members of the buying centre. If the buyer
asks for a lower price, the salesperson can counter the same by highlighting the value of superior qual-
ity of after-sales service as well as just-in-time delivery service. Another way of countering the request
for a lower price is to show evidence that the “life-cycle cost” of using the product is lower than that
of competitors’ products.

Evaluating Supplier Performance by Using “Balanced Scorecards” Technique

The Balanced Scorecard (BSC) is a new technique or framework that can be used to evaluate supplier
performance in information age companies. It translates a company’s mission and strategy into a set of
performance measurements. The framework is organised into four parts: (a) financial, (b) customer, (c)
internal business process, and (d) learning and growth,1 as shown in Fig. 3.1.
Out of the four parts shown in Fig. 3.1, the internal-business-process is relevant for evaluating
supplier performance. In the internal-business-process, company executives should identify the key
internal processes in which the company must excel, in order to (i) deliver superior customer value, and
(ii) satisfy shareholders with excellent financial performance. The internal-business-process includes
operations and innovation processes as shown in Fig. 3.2.
Buying products/services from suppliers is a part of operations processes, as shown in Fig. 3.2. In
addition to the traditional measurement of cost (or price) for measuring the offers of various suppli-
ers, the balanced scorecard approach is used to find additional measurements (or factors) that create
superior value to customers and that are specific to a company. For instance, an electrical engineering
company manufacturing and marketing electric motors to OEMs (original equipment manufacturers)
of pumps and compressors identified shorter and timely delivery time as key customer needs, in addi-
tion to usual performance evaluation factors of cost and quality. The company informed their suppliers
of components that performance evaluation factors will consist of quality, cost, as well as, shorter and
timely delivery.
Phase 7: Selection of an Order Routine In this stage, the mechanics of exchange of goods
and services between a buyer and a seller is worked out. The activities include (a) placement of orders
(i.e. purchase orders) with the selected suppliers, (b) the quantity to be purchased from each supplier,
(c) frequency of order placement by buyers and delivery schedules to be adhered to by the supplier,
(d) levels of inventory needed, (e) follow up of actual delivery to ensure it to be as per delivery sched-
ule, and (f) the payment terms to be adhered to by the buyer.
The user (or indenting) department would not be satisfied until the supplier delivers the required
item as per delivery schedule, and with acceptable quality.
63 Cvtjoftt!Nbslfujoh

Financial
To succeed financially,
Company should focus
on financial objectives
that will satisfy shareholders.

Internal-Business-Process
Customer
Mission To Satisfy shareholders
Which customer value
and and customers, what business
company should focus on,
Strategy process company must
to achieve its mission?
excel at?

Learning and Growth

How can company improve
and change to achieve
its mission?

Figure 3.1 The Balanced Scorecard Framework

Innovation Processes Operations Processes

Identify Design and Make/ Market Satisfy

Customer Develop Buy Products/ Customer
Needs and Product/ Products/ Services Needs
Market Service Services

Figure 3.2 Internal-Business-Process

Phase 8: Performance Feedback and Post-purchase Evaluation In this final phase, a for-
mal or informal review regarding the performance of each supplier (or vendor) takes place. The user
department gives a feedback on whether the purchased item solved the problem or not. If not, the members
of the decision making unit review their earlier decision and decide to give a chance to the previously
rejected supplier, or a new supplier.

Example: Organisational Buying Process

MTR Foods Private Limited follows the following steps or stages in the buying decision process.
• Recognition of a buying need, based on which an indent (i.e. a requisition or written demand) is
sent from the production department (or any other department who needs a product or service)
to the purchase department.
• The purchase department finds out from the store if the indented material is available in stock.
If the material is in stock, the same is supplied to the indenting department. If not, the purchase
department gets the specification and complete description of the material from indenting or
engineering department.
• Search for potential suppliers is undertaken by the purchase officers through the internet,
purchase journals, word-of-mouth and yellow pages of telephone directory.
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• Potential suppliers are asked to submit their quotations or proposals, including their financial
status, references of their existing customers, production capacity, and quality policy.
• Potential suppliers’ background verification is done. In addition, a technical team from MTR
foods visits the premises of prospective suppliers to examine production and quality processess,
hygiene and cleanliness. Based on above, some of the potential suppliers are qualified or
shortlisted.
• Negotiations are carried out with the qualified suppliers on prices and other commercial terms
like payments terms, transportation cost, transit insurance, and so on.
• Purchase orders are issued to selected suppliers indicating product specification, price, delivery
schedule, payment terms, and so on.

Marketing Implications
While understanding the various phases in the buying-decision making process (or buyphases), the
business salesperson should recognise that marketing effort is not over after the order is received. He
or she must monitor the feedback and evaluation process in the customer (buyer) organisation. In par-
ticular, the user satisfaction levels or complaints must be monitored by the business marketer so that
immediate corrective actions can be taken before a major damage is done. In fact, a quick response to
customers’ complaints can result in good buyer-seller relationship.
Before submitting the proposal in phase 5 of buying decision process, the sales person must get
all the relevant information about the customer and competitors. It is usually important to understand
clearly the customer firm’s needs, specific benefits and costs based on which the customer will evaluate
the suppliers’ proposals, the buying situation, buying centre members, key influentials, and perceptions
about various suppliers. The salesperson can make use of the information while preparing the proposal
or quotation. In such a case, the probability of getting the business or the order for the salesperson is
much higher than submitting the proposal, without collecting the relevant information, in a routine
manner. The conversion ratio of order receipts to quotations submitted is much higher for the salesper-
son who collects the above information and builds relationship with the business customer.
If a selling firm fails to get the order, particularly from a high potential prospective or existing cus-
tomer, the salesperson should be asked to keep in touch with the purchase executive of the buying firm
on a regular basis. There is a possibility that the user department of the buying firm may not be satisfied
with the performance of the supplier who had obtained the order. In such a case, the purchase executive
may give a chance to the supplier who had lost the order earlier.
The marketing strategy to be adopted will depend on the (a) type of products, (b) phase of the
buying-decision making process of customer firms, and (c) purchasing situations. To better understand
the buying process, it is necessary to consider different types of purchases or buying situations.

TYPES OF PURCHASES OR BUYING SITUATIONS

There are three common types of buying situations, called buyclasses: (i) New purchase (or New task),
(ii) Change in supplier (or Modified rebuy), and (iii) Repeat purchase (or Straight rebuy).

New Task
In this situation, the company is buying the item for the first time. The need for a new purchase may be
due to internal or external factors. For instance, when a firm decides to diversify into new products or
65 Cvtjoftt!Nbslfujoh

services, it necessitates the purchase of a new machine, materials, or parts. In the new purchase situa-
tions, the buyers have limited knowledge and lack of previous experience. Hence, they have to obtain a
variety of information about the product, the suppliers, the prices, and so on. In the new task decisions,
(a) the risks are more, (b) decisions may take longer time, and (c) more people are involved in decision
making.
In the new task buying situation, the buying centre (or buying committee) members adopt extensive
problem solving5 approach, involving all the phases of buying decision process. They gather a large
amount of information about alternative ways of solving the problem and different suppliers. They are
more concerned about finding a suitable solution than getting the lowest price. The key people who
influence the buying decision are usually the technical members of the buying centre. Consider the
following example.
In 1993–94, when Information Technology (Infotech) park was set up at Bangalore, India, by Kar-
nataka government in technical collaboration with a Singapore-based organisation, the purchase com-
mittee wanted to buy a number of equipment for loading and unloading of materials at various ware-
houses. They were not sure what kind of equipment could be used, who were the suppliers available
locally, and the quality of equipment and service. In response to their advertisement, the purchase
committee received a proposal from only one supplier. They waited for two months for other propos-
als to be received. When there was no response, they invited the technical members from Singapore to
visit Bangalore to evaluate the potential supplier and to decide. The commercial and technical members
visited the potential supplier’s manufacturing plant, inspected the manufacturing and quality control
processes. Thereafter, they asked the potential supplier to show their equipment working at one of the
supplier’s customer’s place. The supplier took the buying centre members to Ashok Leyland’s factory
(unit 2), where five such equipment were working. The Infotech Park members made detailed enquiries
with Ashok Leyland’s shop floor supervisors and workers, and only after they were satisfied that the
equipment’s performance and service were good and it would solve their loading and unloading prob-
lems, they negotiated the commercial terms like price, payment terms, installation service, delivery
period, warranty service, and thereafter placed a formal order on the supplier.
Sales Strategy The business marketing firm facing a new-task buying situation should ask its sales-
people to get involved in the first three phases of buying process. The selling firm will gain a competi-
tive advantage if their salespeople understand the buying firm’s requirements completely and clearly,
assist in developing specifications, and make the proposal or offer to meet the requirements better than
competitors. The salespeople should be trained to respond promptly to technical and commercial que-
ries and if needed, take the help of technical and industry (vertical) experts from the organisation during
initial discussions for understanding customer firm’s needs, preparation of the proposal or quotation,
and later for sales presentation and negotiation with the customer firm, as a part of team selling efforts.

Modified Rebuy
A modified rebuy situation occurs when the organisation is not satisfied with the performance of the
existing suppliers, or the need arises for cost reduction or quality improvement. The change in supplier
may also be necessary if technical people in the buying organisation ask for changes in the product
specification, or marketing department asks for additional features in the product to gain some com-
petitive advantage. As a result, search for information about an alternative source of supply becomes
necessary. Although certain attributes or factors can be used to evaluate the suppliers, there may be
uncertainty regarding which supplier can best meet the needs of the buying firm. However, the modi-
fied rebuy situation occurs mostly when the buying firms are not satisfied with the performance of the
existing suppliers. Consider the following example:
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A large multi-product, multi-location company took a decision to change the existing marketing
research firm because the company was not satisfied with the quality of report submitted by the market-
ing research firm on a chemical product. The company was planning to diversify and was keen to get
the information on competition, potential customers, long-term demand forecasting, and so on, from
the market survey report. However, the information given in the report by the marketing research firm
was vague and inaccurate. The senior executives of the company, therefore, took a decision to change
the supplier.
An illustration of change in supplier (modified rebuy situation) due to change in product specifica-
tions can be given when Crompton Greaves Ltd. received an export order from the US based customer
for ceiling fans with electronic speed regulators, instead of prevailing electrical speed regulators, since
the fans were required to run at a very slow speed to compress hot air from heaters in conference rooms
during very cold winter season. The existing suppliers of electrical speed regulators could not develop
electronic speed regulators to meet the specifications of the export market. Crompton Greaves had to
change the suppliers of speed regulators in the modified rebuy situation.
Finding a new supplier In a modified rebuy situation, an existing supplier is replaced by a new
supplier. However, finding a new supplier is not an easy task for the most buying organisations. Let us
consider an example of a multinational company manufacturing automobile components. The com-
pany wanted to replace the existing supplier of “battery charger”, since the supplier’s performance on
quality and delivery became unsatisfactory and also the supplier’s attitude changed to a kind of ar-
rogance. The company’s purchasing department went through the following steps, before finalising on
the new supplier.
• They obtained detailed and relevant information, such as mission, objectives, products,
production capacity, quality policy, market feedback, sales turnover and legal compliance from
prospective suppliers.
• Thereafter, a technical team visited prospective suppliers’ plants to find out production and
quality processes as well as safety measures taken.
• Prospective suppliers’ samples were field-tested, quotations were obtained, negotiations were
held on commercial issues like prices, transportation, transit insurance and payment terms.
• Orders were placed on two new suppliers for the supply of “battery charger”.
Sales Strategy The salespersons from the “in” (or existing) supplier should be continuously in touch
with the buying firm’s requirements. If the customer firm’s requirements change in terms of improve-
ment in quality standards or just-in-time (JIT) delivery, the salesperson of the supplier firm can im-
mediately take action by alerting his company well in time. In case of the “out” (or potential) supplier,
the salesperson should find out why the buying firm wants to change the existing supplier and then
make the proposal that gives the performance guarantees6. Understanding the buying firm’s purchase
needs clearly, the buying orientation, the purchase practices, criteria used for supplier selection, and
key buying influentials are important inputs to developing an effective sales strategy in modified rebuy
situation.

Straight Rebuy
This situation occurs when the buying organisation requires certain products or services continuously
and when such products/services have been purchased in the past. In such a situation, the buying or-
ganisation reorders/places repeat orders with the suppliers who are currently supplying such items. This
means that the product, the price, the delivery period, and the payment terms remain the same in the
reorder, as per the original purchase order. This is a routine decision with low risk and less informa-
67 Cvtjoftt!Nbslfujoh

tion needs, taken by a junior executive in the purchase department. Generally, the buying firms do not
change the existing suppliers if their performance (on the previously established performance criteria)
is satisfactory.
A typical example of straight rebuy situation could be given for the purchase of precision steel
tubes by Bajaj Auto’s (BAL’s) Pune factory, manufacturing two-wheelers. Once a year, negotiations
were held with the existing three suppliers, who indicated special net prices (after discount on the list
prices). BAL senior executives would review the performance with each supplier with respect to “per-
fect” delivery (i.e. on-time and ordered quantity delivery), consistency in quality, and flexibility (i.e. the
supplier’s response to the changes in the delivery schedules of steel tubes due to changes in demand for
different models of two-wheelers). Based on the supplier’s performance on the above three factors and
the price, BAL’s senior executives decided the percentage of share of business for the three suppliers
for the following financial year. Thereafter, the junior purchase executive released the quarterly (tenta-
tive), and monthly (firm) delivery schedules, based on the percentage share decision taken by the senior
executives for the different suppliers.
Electronic purchasing7 should be possible in the straight rebuy situation, with automatic reordering
systems that save the time and cost of purchase executives8. For supplier firms, an electronic market
place offers a low-cost distribution channel to reach and efficiently serve customers.
Sales Strategy For existing or “in” suppliers the sales strategy should be to maintain product and
service quality, good buyer-seller relationship, and be responsive to the changing needs of the customer
organisation. However, it is a difficult task for an “out” supplier to get business in the straight rebuy
situation. The strategy to be adopted by “out” suppliers include collecting information to exploit dis-
satisfaction with a current supplier, offer something new that gives large benefits to the buying firm, or
get a small order initially and then increase the purchase share over a period of time.

THE BUYGRID FRAMEWORK

Understanding organisational buying becomes easier if it is divided into different buying phases (called
buyphases) and these phases are analysed under different buying situations (called buyclasses).

Table 3.2 The Buygrid Framework for Organisational Buying Situations

Buy Classes (Buying Situations)
Buyphases (Phases in Buying Process)
New Task Modified Rebuy Straight Rebuy
1. Problem recognition Yes May be No
2. Characteristics and quantity of needed item Yes May be No
3. Description or specification of needed item Yes May be No
4. Search for and qualifications of potential suppliers Yes Yes No
5. Obtaining and analysing supplier proposals Yes Yes May be
6. Evaluation of proposals and selection of suppliers Yes Yes No
7. Selection of an order routine Yes Yes May be
8. Performance feedback and evaluation Yes Yes Yes
Source: Adapted from the Marketing Science Institute Series, Industrial Buying and Creative Marketing, by Pat-
rick J. Robinson, Charles W. Faris, and Yoram Wind. Copyright 1967 by Allyn and Bacon, Inc., Boston.
 Pshbojtbujpobm!Cvzjoh!boe!Cvzjoh!Cfibwjpvs 68

Robinson et al. have formulated the buygrid framework, which combines three types of buying
situations (buyclasses) with eight phases of buying decision process (buyphases). An analysis of the
buyphases in relation to the buyclasses gave interesting results, which are summarised below:

1. All eight phases of the business buying process are applicable to a new-task buying situation.
However, in case of modified rebuy and straight rebuy situations, only some of the buyphases
are applicable.
2. The most difficult buying situation occurs for a new-task in buyphases of problem recognition,
and determination of product characteristics and specification. This is because maximum
number of decision making members and influencers are involved.
3. Modified rebuy situations are not very difficult to handle.
4. Straight rebuy situations are handled in a routine manner.

MULTIPLE BUYING INFLUENCES

Salespeople selling products and services to business buyers must understand that the organisational
buying process is typically influenced by many individuals. The degree of involvement of individuals in
the buying process varies for different buying situations. If the business salesperson can answer the fol-
lowing questions correctly, he has a high probability of getting the business from a business customer.
• What type of buying situation the customer is in?
• Which individuals are involved in the purchase decision process (i.e. members of decision
making unit) and who are the key influentials?
• What criteria would be used by the decision-making unit and if this is not decided, then what
criteria are important to each member of the decision making unit?

The Buying Centre

The decision-making unit, in business marketing, is called as the buying centre9. The buying centre
consists of those individuals or members who participate in the buying decision and who share the
common objectives and risks arising from the purchase decision. The size of the buying centre varies
for different organisations10. It may be only one person, in case of a proprietary or partnership firm.
The buying centre may have fifteen to twenty individuals. However, the average size of a buying centre
will be four persons per purchase. The size of the buying centre may vary from one buying situation
to another, because business buying is a process and not a single action11. A more formalised buying
centre is referred to as purchase committee or buying committee in some organisations, when buying is
centralised. Institutions like hospitals and colleges often have buying committees to make buying deci-
sions. Usually, one or two individuals are most influential in the buying committee and other members
go along.
Example: Buying centre. MTR Foods Private Limited, which manufactures and markets a range of
food products, such as snacks, masala powder, pure spices, sweets, ready-to-eat curries, and so on, have
members of buying centre consisting of production officer, quality officer, purchase officer, purchase
manager and finance manager. In situations, where the purchase value is high, vice-president (finance)
and vice-president (SCM) (i.e. Supply Chain Management) are involved in negotiations with suppliers.
69 Cvtjoftt!Nbslfujoh

Most important attributes or factors considered by the buying centre of MTR Foods Private Limited
while making buying decisions are:
• Quality of the product
• Price of the product
• On-time delivery
• After-sales service
Other attributes of lesser importance, which are also considered, are:
• Financial position of suppliers
• Testimonials from the existing customers of suppliers
• Location of suppliers’ premises

The Buying Centre Roles

Members of the buying centre accept different roles during the buying process. These roles vary for
different stages of the buying process depending on the buying situation, complexity of the purchase
and the functions involved. Any one member of the buying centre may assume several roles, which are
as follows: users, buyers, influentials, deciders, and gatekeepers12.
Users They actually use the product and service. Their influence on the purchase decision varies
from minor to important. Sometimes users may initiate the purchase action and may develop the prod-
uct specifications.
Buyers They implement purchase procedures. They are the purchase executives, who do administra-
tion and coordination of all purchase activities. They have, in many organisations, formal authority for
negotiation and selection of suppliers.
Influentials Those individuals, inside or outside the firm, who influence the buying process by sup-
plying information or decision criteria for evaluating purchasing alternatives. Generally, persons from
technical departments, such as quality control, design, and industrial engineering, may have important
influence in the buying decisions. Sometimes, individuals outside the buying firm, such as technical
consultants, architects, and consulting engineers assume the role of influentials13.
Deciders These are the individuals or members who decide the supplier or the brand of a product.
For salespeople, it is important to identify the deciders, although sometimes it may be a difficult task.
Usually, for routine and small value purchases, buyers (or purchase executives) may be the deciders,
and for complex and high value purchases senior managers and directors may be the deciders.
Gatekeepers They control information to members of the buying centre, by spreading or control-
ling printed information or regulating salespeople who want to speak to members of buying centre.
Usually, the buyers or junior purchase executives may be performing this role.

Recognising Key Influentials

Recognising or identifying key buying influentials is an important and difficult task of salespeople.
Research shows that often key influentials are located outside the purchase department, and have great
power or influence over other members. For purchasing a highly technical product like CNC (Comput-
 Pshbojtbujpobm!Cvzjoh!boe!Cvzjoh!Cfibwjpvs 6:

erised Numerical Control) machine, design engineer and production manager may be the key influen-
tials. In purchasing component parts, such as a spark plug and battery for an automobile manufacturer,
again the technical department personnel, such as quality control and production, are often the key
influentials. However, for straight rebuy situations, where repeat purchases are made, purchase execu-
tives are the important influentials14.
Sales Strategy Salespeople should sell their product characteristics or quality to technical people of
the buying centre for product selection decisions, in which technical personnel like design (or Research
and Development—R&D), and production are key influentials. For supplier selection decisions, sales-
people should focus on purchase executives and managers, who are most influential15.

Identifying Key Members of Buying Centre

(or Decision Making Unit) in Buying Organisation
Top Management Persons The top management in a business organisation consists of managing
director, director, president, vice-president or general manager. They are generally involved in (a) pur-
chase policy decisions such as diversification into a new product/project, (b) approval of purchase or
materials department annual budgets and objectives, and (c) deciding the guidelines for purchase deci-
sions. For purchases of high value capital equipment, the top management in most firms get involved in
the supplier selection, as it may have a major impact on the firm’s operations.
Technical Persons (or Functions) The technical persons are design engineers, production man-
ager, maintenance manager, quality control manager, R&D manager, and industrial engineers. They are
generally involved in product specification or description, technical evaluation of offers received from
suppliers, negotiations with suppliers, performance feedback on products supplied, and so on. They
also visit the factories of potential suppliers to gain more information and assurance of manufacturing
capability.
Buyers/Purchasers (or Purchase/Materials Department) Buyers are the persons in the pur-
chase or materials department. They may be senior executives or managers, and also, at junior levels,
purchase officers or assistants. They are generally involved in most of the phases or steps of the pur-
chase activities. They coordinate with technical persons, top management, accounts or finance persons
within an organisation, as well as, with suppliers or vendors externally. Buyer’s influence on selection
of suppliers is considerable. They are conscious of keeping good relations with other decision making
members within the organisation and also with the suppliers.
Accounts/Finance Persons (or Department) The contribution of finance/accounts persons are
seen while finalising commercial terms such as modes of payment, issuance of bank guarantees, finan-
cial approval of capital purchases, issuing payments to suppliers, and so on.
Marketing Function When a purchase decision has an impact on the marketability of a firm’s
product, marketing people become influencers in the buying decision process. For example, a firm
manufacturing and marketing electric motors had to change its packing due to damages caused to the
product in transportation. This in turn affected the satisfaction level of the customers. The marketing
manager insisted that suppliers should use good quality and thicker wood for packing the motors to
minimise damage in transit.
71 Cvtjoftt!Nbslfujoh

MODELS OF ORGANISATIONAL BUYING BEHAVIOUR

Business buyers are influenced by many factors when they make buying decisions. Generally, business
buyers are influenced by organisational factors or task-oriented objectives (like best product quality,
or dependable delivery, or lowest price) and personal factors or non-task objectives (like promotion,
increments, job security, personal treatment, or favour). When the suppliers’ proposals are substantially
similar, organisational buyers can satisfy organisational objectives with any supplier, and hence personal
factors become more important. When suppliers’ offers differ substantially, business buyers pay more
attention to organisational factors in order to satisfy the organisational objectives.
There are two models (or framework) available to provide a comprehensive and integrated picture of
the major factors that combine to explain the organisational buying behaviour. These are: (i) The Web-
ster and Wind model, (ii) The Sheth model, shown in Figs. 3.3 and 3.4.

The Webster and Wind Model of Organisational Buying Behaviour

A comprehensive model of the organisational buying behaviour is developed by Webster and Wind, as
shown in Fig. 3.3. This model considers four sets of variables: environmental, organisational, buying
centre (or group forces), and individual.

Environmental Variables
Physical, Technological, Economic, Political, Legal, and Cultural

Organisational Variables

Technology Structure Goals and Tasks Actors (People)

(For purchasing) (Buying centre) (Buying tasks) (Buying centre members)

Buying Centre Variables

n Interpersonal interaction
n Group functioning: Buying task and non-task dimensions

Individual Variables
n Needs and desires
n Perceptions and learning

Buying Decision Process

n Individual decision making process Buying Decision
n Group decision making process

Source: Adapted from F.E. Webster, Jr. and Y. Wind, “A General Model of Organisational Buying Behaviour”,
Journal of Marketing, 36, 2 (April, 1972), 12–19. Reprinted with permission from the American
Marketing Association.
Figure 3.3 The Webster and Wind Model of Organisational Buying Behaviour
 Pshbojtbujpobm!Cvzjoh!boe!Cvzjoh!Cfibwjpvs 72

Environmental variables These variables include physical, technological, economic, political,

legal, and cultural factors. The environmental variables can change organisational buying plans. For
instance, political conflict in a nation can affect the growth rate of the economy which may influence
purchasing plans of companies. The economic environment influences a firm’s willingness and ability
to buy. For example, the recession in Bicycle industry in 1985 in India resulted in substantial reduction
in the purchase of steel components required for the manufacture of bicycles.
Technological changes influence buying decisions. One illustration is the change in technology
from jelly-filled telecommunication cables to fibre-optics cables. The department of telecommunica-
tions (DOT) in India reduced the volume of purchase of jelly-filled cables and increased buying of
fibre-optics cables, which have many benefits. Similarly, World Wide Web (WWW) has changed the
way business buyers and suppliers buy and sell to each other. Recent research16 also suggests that buy-
ers, who understand the rapid rate of technological change, will conduct more serious research efforts.
Marketing consequences of technological changes include changing product life-cycles, new sources
of competition and increased globalisation of markets17.
Organisational variables The Webster and Wind model gives importance to four sets of organi-
sational variables. These are: technology relevant to purchase, organisational structure, organisational
goals and tasks, and members of buying centre. These four variables (or subsystems) interact with one
another to determine organisational functioning and buying centre individuals’ attitudes, goals, and
assumptions used in buying decision making. The business marketing firms need to be aware of the
following organisational trends in the purchasing area.
• Some multi-divisional companies identify materials purchased by several divisions and buy
them centrally, resulting in substantial savings. Centralised purchasing units place more weight
on long-term (strategic) supply availability and partnering relationships with key suppliers. At
the same time, buying firms are decentralising small-value items. Decentralised buyers may
give importance to short-term issues like costs and profits. Thus, centralised and decentralised
procurement differ substantially18.
• Recent competitive pressures have resulted in upgradation of purchasing departments to
“strategic supply departments” with responsibility for global sourcing and partnering, instead of
old-fashioned purchase departments’ concentration of buying at the lowest cost. Some buying
firms have changed the purchasing departments’ name to “procurement departments” with focus
on seeking the best value from better and fewer suppliers19.
• Buying tasks are increasingly getting focused on accepting long-term purchase contracts with
reliable suppliers. Besides, business marketing firms are using the internet with key buying firms
to minimise the cost and time of transactions. In fact, some suppliers manage their customers’
inventory through a system, called “Vendor-managed inventory”, and replenish inventory levels
through “continuous replenishment programs”.

Buying Centre Variables The functioning of buying centre is analysed by interpersonal or social
interactions of participants and group functioning. The interpersonal or social interactions depend on
the role of each participant or individual member of the buying centre. The group functioning is influ-
enced by
1. individual member’s goals and personal characteristics,
2. the nature of leadership in the group,
73 Cvtjoftt!Nbslfujoh

3. the group tasks and structure, and

4. external influences, which include organisational and environmental variables.
The group functioning or process relate to buying tasks like best product quality, dependable deliv-
ery, or lowest price and also non-task dimensions, such as promotion, job security, good increment, or
personal favour.
Johnston and Bonoma20 found that complexity of buying tasks and uncertainty about product at-
tributes lead to vertical involvement (particularly, higher level executives) and lateral involvement (i.e.
other functions and departments) in the buying decision process. In another study by McCabe21, it
was found that high levels of uncertainty lead to narrowing of the structure of the buying centre. The
concept of the buying centre, one of the findings of this research, is useful in analysing business buy-
ing situations and planning sales and marketing strategies. The structure of buying centre varies from
company to company. It also varies from one buying situation to another22.
Individual Variables The Webster and Wind model mentions that individuals make buying deci-
sions in the organisational and interactional settings. Only individuals can define problems, make buy-
ing decisions, and act accordingly. The individual buying behaviour is motivated by individual needs,
desires, perceptions, learning, in complex interaction with organisational objectives. One study23 con-
firms that individuals who perceive that they have an important personal stake in the buying decision
will participate more powerfully than other members of the buying centre.
Individuals join companies for getting rewards for achieving organisational objectives and tasks.
Hence, there is a key interaction between individual member’s needs and his or her perceptions about
the performance, evaluation, and rewards.
Individual decision making merges into a group decision-making process, which includes bargain-
ing, negotiation, and persuasion. The Webster and Wind model does not present in detail these group
decision processes. The strengths of the model are that it is comprehensive, analytical, generally appli-
cable, and identifies many key variables which could be considered for developing sales and marketing
strategies. However, the model is weak in explaining the specific influence of the key variables.

The Sheth Model of Business Buyer Behaviour

Professor Jagdish N Sheth developed the Sheth model in 1973. This model, shown in Fig. 3.4, empha-
sises the joint decision-making by two or more individuals, and the psychological aspects of the deci-
sion making by individuals in the business buying behaviour.
The model includes three components and situational factors, which determine the choice of a supplier
or a brand in the buying decision making process in an organisation. The differences among the individual
buyers expectations (Component 1) are caused by the factors, such as (a) the background of individuals,
(b) their information sources, (c) active search, (d) perceptual distortion, and (e) satisfaction with past
purchases.
The background of individuals depend upon their education, role in the organisation, and life style.
The factor perceptual distortion means the extent to which each individual participant modifies his
perceptions to make it consistent with his existing beliefs and previous experiences. It is difficult to
measure perceptual distortion, although techniques such as factor analysis and perceptual mapping are
available for this purpose.
In Component (2), shown in Fig. 3.4, there are six variables which determine whether the buying
decisions are autonomous (i.e. single individual) or joint (i.e. two or more individuals). According to
 Pshbojtbujpobm!Cvzjoh!boe!Cvzjoh!Cfibwjpvs 74

the Sheth Model, larger the size of the organisation and higher the degree of decentralisation, more will
be the possibilities of joint-decision making.

Component (1) Component (2) Component (3) Situational

Factors

Differences among Variables that Methods used

individual buyers determine if the for conflict
caused by factors: buying decision is resolution in
autonomous or joint: joint-decision
n Background of making process:
individuals (A) Product specific
n Their information factors, including n Problem-
sources solving Supplier or
n Time pressure
n Active search n Perceived risk n Persuasion brand choice
n Perceptual n Type of purchase n Bargaining
distortion n Politicking
n Satisfaction with (B) Company specific
past purchases factors, including
n Company size
n Company
orientation
n Degree of
centralisation

Source: Adapted from Jagdish N. Sheth, “A Model of Industrial Buyer Behaviour”, Journal of Marketing, 37,
pp. 50–56, October, 1973. Reprinted with permission of the American Marketing Association.
Figure 3.4 The Sheth Model of Industrial Buyer Behaviour
The Component (3) in the model indicates the methods used for conflict resolution in joint-decision
making process. Problem-solving and persuasion methods are used when there is an agreement about
the organisational objectives. If there is no such agreement, bargaining takes place. Conflict about the
style of decision making is resolved by politicking.
Situation factors can be varied like economic conditions, labour disputes, mergers and acquisitions.
The model does not explain their influence on the buying process.

The Choffray and Lilien Model24

We have discussed earlier in the Webster and Wind model that the organisational buying behaviour is
influenced by four major elements or factors, such as environmental, organisational, buying centre or
group, and individual. The Choffray and Lilien model helps to conceptualise the group decision process
and also integrates the important aspects of the organisational buying process. The Choffray and Lilien
model is presented in Fig. 3.5. In this model, environmental factors (like technological and economic)
and organisational factors (such as technical, financial) are seen as constraints. These factors influence
the buying process by limiting the number of product alternatives, which satisfy organisational needs.
For instance, capital equipment like a material handling equipment has several alternative product of-
fers and those offers which exceed a particular initial cost may be excluded from further consideration.
The remaining product offers from suppliers become likely alternative offers for the buying firm. In-
dividual members of the buying centre form their preferences from the likely alternative offers. These
individual members have their own sources of information and evaluation criteria, which are used to
form their preferences. The interaction structure of the individual members of the buying centre, which
includes negotiation and group problem solving, leads to the formation of organisational preferences
and finally to organisational choice.
75 Cvtjoftt!Nbslfujoh

Individual Responsibilities, made up of Obtained set of

the Buying Centre Alternative Offers

Interaction Evaluation Sources of Organisational Environmental

structure criteria information constrainsts constraints

Likely alternative offers

Individual preferences formed

Organisational preferences

Organisational choice

Source: Jean-Marie Choffray and Gary L. Lilien, “Assessing Response to Industrial Marketing Strategy”,
Journal of Marketing 42 (April 1978), p. 22. Reprinted by permission of the American Marketing As-
sociation.
Figure 3.5 The Choffray and Lilien Model of Organisational Buying Behaviour

Choffray and Lilien have developed four models25 of multiperson decision making process, which
make organisational decisions. In brief, these models are: (i) a weighted probability model, where
weights show individual member’s power or authority in the buying centre; (ii) a proportionality model,
where all members of the buying centre have equal weight; (iii) a unanimity model, where the negotia-
tion process is continued until all the members of the buying centre come to an agreement; and (iv)
an acceptability model, where the final choice or the decision is such that it has least problems to the
individual member’s preferences.
Marketing Implications Understanding the organisational buying process and buying behaviour
are very important aspects of business marketing. It helps business marketers to make effective deci-
sions on selling, pricing, product design, and promotion.

DPOUFNQPSBSZ!QVSDIBTJOH!BDUJWJUJFT

Just-in-Time (JIT) Delivery It means that the materials arrive at the buyer’s factory exactly
when needed by the buyer. It minimises the inventory and increases the quality and productivity. The
goal of JIT delivery is zero inventory and excellent quality of the material delivered by the supplier.
This ensures nil rejection at the buyer’s factory. The JIT delivery means that the buying and selling
organisations work together closely to reduce costs.
 Pshbojtbujpobm!Cvzjoh!boe!Cvzjoh!Cfibwjpvs 76

A good example of just-in-time delivery was seen at Hero Cycles factory at Ludhiana, India.
Precision steel tubes suppliers used to cut the steel tubes in the required lengths, keeping in mind the
specifications of the product at their warehouses at Ludhiana and supply to Hero Cycles just before
the start of each shift of production. The suppliers also ensured good quality supplies, so that the
steel tubes could be sent to production lines without any inspection by Hero Cycles. This process
improved the production and productivity as well as reduced costs of bicycles produced by Hero
Cycles, which helped Hero Cycles to become number one in the world in terms of production and
market share of bicycles.
Outsourcing More companies are willing to buy more goods and services from outside suppliers
(or vendors), if they are cheaper and better. In other words, outsourcing implies purchasing a part of
the company’s operations, instead of producing (or making) internally.
Business firms develop and implement sourcing strategy. The company should identify its core
competencies, which are skills or knowledge, and not products or functions. The company should
insource, or produce itself, those parts or subsystems where it has core competencies or superior
expertise. The company outsources those systems or subsystems where it has become non-competi-
tive. For example, Dupont Textiles Fibers department focused its resources on its core competencies
of R&D and manufacturing and outsourced maintenance repairs, and purchasing. This has resulted
in a large amount of cost savings over a number of years.
In multisourcing strategy, the buyer (or customer) firm requests quotations from a number of
supplier firms, and places orders with two or three suppliers. By pitting one against the other, the
customer firm gains a lower price.
In a sole sourcing situation, only one supplier firm produces a product or service required by the
buyer firm. The examples may include a new technology, patented product, or a rare raw material.
There is no competition for some time and the customer firm may wait until competitors come out.
KPMG International in its survey26, covering over 659 companies with half of the respondents
having an annual turnover of more than $1 billion, said that 89 per cent respondents were expected
to maintain or increase current level of sourcing (or outsourcing). The majority of respondents,
the report indicated, believed that outsourcing improves their financial performance, shareholder
value and competitiveness. In another survey, carried out by A.T. Kearney 27, it was indicated that
offshore locations for services, such as Information Technology (IT), business processes and call
centres, would remain cheaper for another 20 years. India, closely followed by China, would lead
the outsourcing pack by a wide margin, with relative decline in cost advantage being offset by
improvements in talent supply and business environment. The Economic Times, India, survey28 of
2390 listed manufacturing companies in India showed that outsourced labour charges had jumped
a whopping 456 per cent in just two years, from a 13.56 billion in fiscal 2004 to a 75.41 billion in
fiscal 2006. The report further said that this trend in manufacturing sector would expand further as
cost-cutting and higher value addition became important. Apart from autocomponent and pharma
sectors, which led the outsourcing drive, the other sectors like non-renewable energy and non-
ferrous metals would also grow, stated the survey report.
A business firm may outsource the warehousing function to a “third party”, a company which
specializes in carrying out warehousing services for its customers. The benefits of third-party (i.e.
outsourcing) warehousing are reduced assets, professional work, and flexibility. In the chemical
77 Cvtjoftt!Nbslfujoh

industry, for instance, the work of distributors is changing because they are offering to their cus-
tomers logistics solutions, such as inventory management, just-in-time delivery, and repackaging29.
Many new application service providers have emerged to meet the outsourcing needs of all types
of organisations. These service providers can be accessed through the Internet to outsource various
functions and services, such as accounting, payroll, and even selling30. External marketing resources
have emerged as a strong new category in outsourced sales and marketing practices. For example,
Motorala, India, decided to fight back losing marketshare by outsourcing a substantial part of its
retail marketing effort31. Pepsi, India, wanted to introduce trolley based vending system as an alter-
native distribution channel. This was outsourced to Multiplier company for appointing distributors
and to set up sales teams.
Worldsourcing William J. Amelio, CEO of Lenovo PCs, argues about crucial differences be-
tween outsourcing and worldsourcing32. According to him outsourcing is a centralised, and top-
down strategy that is designed to save money on non-core operations. Worldsourcing, by contrast, is
a global, decentralised strategy that is designed to drive greater value and quality by distributing a
firm’s core functions across multiple global hubs of excellence. For example, Lenovo has a global
marketing hub in India, a global operations hub in Paris, fulfilling hub in North America, and facto-
ries in China, India, Latin America, and a new plant planned in Poland. The true flag of each global
company, according to Mr Amelio, is its brand. “The more a company reaches out to the entire world
for the best ideas, people, and processes, the more it becomes the refined essence of its brand. Its
attributes are the quality of its goods, services, governance, transparency, and degree of corporate
social responsibility. It is evaluated by the level of value it delivers to customers worldwide”, con-
cludes Mr Amelio in this thought-provoking article.
Single Sourcing Some of the business customers place orders with only one supplier, even
though alternative suppliers exist. This may sound against the old concept of placing orders with
two or three suppliers, so that “all the eggs are not in one basket”. However, single-sourcing practice
makes it possible for the buying and selling organisations to work closely together, involve the sup-
plier from the design stage, and utilise the supplier’s expertise.
Value Analysis The objective of value analysis is to reduce cost while maintaining product reli-
ability. It involves analysing a product item by the (a) function it performs, (b) value of the function,
and alternate methods of performing the same function. It uses creative technique like brainstorming
and includes members of various departments such as production, quality control, design, industrial
engineering, marketing, and purchase. The group uses some of the following questions during the
brainstorming session for value analysis. There can be many more questions.
ư Can the weight or thickness of the item be reduced?
ư Does the item have greater capacity than required?
ư Is unnecessary machining performed on the item?
ư If the item is non-standard, can a standard item be used?
Value analysis, which is also called as value engineering, is defined as follows:
A thorough assessment of all the elements like design, manufacture, and maintenance of an item
and its parts in order to achieve the needed performance of the item at lowest cost33.
 Pshbojtbujpobm!Cvzjoh!boe!Cvzjoh!Cfibwjpvs 78

Basic steps in Value Analysis derived from a study34 are as follows:

ư Item (or product) selection for value analysis is important because the value analysis process
is time consuming and requires hard work. Hence, typically the products or items which have
substantial cost or used in large volumes are used. For instance, in one electrical engineering
company the product which was bulky in design with much more material content, resulting in
higher cost, was selected for value analysis.
ư Cross-functional team, consisting of representatives from various functions or departments,
is formed with a team coordinator. Often the team includes purchase executives, design and
production engineers, finance and marketing executives.
ư The team has regular meetings, in which each activity or function of the product is discussed,
the cost is estimated, and relevant information is collected.
ư Brainstorming sessions are held so that the team members can suggest creative ideas to see new
ways of performing a product function, or reduction in costs. These ideas are recorded and later
the ideas are evaluated in terms of cost and feasibility.
ư The selected ideas are implemented, after approval from the management.
The main purpose of value in analysis is to find ways of improving products, lowering costs, or
both. For example, Ferro Corporation developed a new coating process that allowed its customer
to paint a refrigerator cabinet in ten minutes compared to the old process that took three hours. The
new process helped to reduce the cost substantially35.
Buying (or customer) firms may carry out value analysis to assess the value of proposals or of-
fers submitted by different suppliers. The use of value analysis (or value engineering) is increasing
with major applications in product modifications, including improving product quality, features, or
design to meet customer needs, cost reductions, and pricing flexibility.
Supplier Evaluation Many buying firms use some kind of supplier (or vendor) evaluation sys-
tem. The objectives of evaluating supplier performance are: (1) qualifying the potential suppliers
(i.e. phase 4 of the buying decision process, (2) selecting the suppliers for future supplies (i.e. phase
6 of the buying decision process), and (3) reviewing the performance of present suppliers.
Weighted-Point Technique A typical example of a technique used for supplier evaluation was
shown earlier in Table 3.1, which gives weights to each performance attribute or factor. Attributes
and weights vary from organisation to organisation. Hence, it is important for a salesperson to
understand the evaluation factors or criteria for each customer firm, particularly for those buying
firms who have high sales potential. Some of the best practiced buying organisations, use balanced
scorecards technique as shown in Fig. 3.1, to assess supplier performance.
The supplier rating, shown in Table 3.1, can provide an information to purchase executives of
the buying firms to discuss with present suppliers about their performance and how to improve the
same. Purchase executives should back-up the supplier performance score with factual data, such as
how many lots were received on-time with required quality and quantity.
Sales and marketing persons from supplier organisations must visit customer organisations to
better understand the supplier evaluation system followed. This information would help the selling
firm to make their offer or quotation in line with the factors or attributes that are important to the
customer organisation, resulting in a high probability of getting that business.
79 Cvtjoftt!Nbslfujoh

In addition, production and quality control personnel should also make visits to key customer
firms to understand how their products are used and evaluated. These steps would help to make the
business marketer a customer-oriented organisation.
To illustrate how a supplier (or vendor) evaluation is done, let us consider the process followed
by Bajaj Auto Ltd., Pune, for evaluating three suppliers, who were supplying precision steel tubes
(product classification: materials and parts) for two-wheelers produced at Pune and Aurangabad fac-
tories. These three suppliers were selected out of about seven manufacturers of steel tubes, based on
the three major factors: quality, delivery, and price. The three suppliers were evaluated again on the
basis of the three criteria mentioned earlier, plus one more criterion—viz. flexibility, which meant
how well the suppliers responded to the sudden changes in the delivery schedules, due to fluctua-
tions in the market demand for the various models of motor cycles and scooters. The weightages
given to the four factors were not informed to the suppliers, but the suppliers were told about their
overall ranking at the end of the financial year, during negotiations, when the percentage share of
business for the three suppliers were finalised.
It is interesting to know that for capital goods like material handling equipment, purchased by
Ashok Leyland, Chennai, for its three factories located at Chennai and Hosur, the buying crite-
ria used were different—viz: presales and postsales service, price, and performance of the equip-
ment. By combining the requirements of the three factories for material handling equipment, Ashok
Leyland used to take advantage of the large value of the order, and negotiate hard with suppliers to
get the benefit of large discount (or low net price after discount). The order would be placed on one
supplier, out of the three suppliers, after negotiations, based on the criteria mentioned earlier. Again
the weightages given to the three factors were not disclosed to the suppliers. Thus, the evaluation
factors and weightages may vary from company to company, type of product category, and the buy-
ing firm’s purchase policies.
Buying Committee A formalised buying centre (or decision making unit) is the buying commit-
tee. It is used in many business organisations including institutions (such as universities and hospi-
tals) and Government companies. Generally, in a typical buying committee, one or two individuals
dominate in the decision making. The salesperson must provide information to all the members
of the buying committee, and should target the real sales efforts to those dominant members who
influence the buying decisions. Identifying buying committee individuals, their technical and com-
mercial expertise, their individual needs, buying decision process, and the organisation structure are
the important tasks to be performed by the effective business marketer.

TVNNBSZ
The business marketers need to understand the purchasing objectives and purchasing activities of the
business buyers. The business buyers are influenced by both purchasing objectives of the firm and
personal objectives. The business purchasing activities include eight phases of buying-decision making
process, which are referred to as buyphases. There are three common types of buying situations (called
buyclasses) in business buying. Understanding business buying becomes easier by combining buy-
phases and buyclasses, and developing a conceptual model, called buygrid framework. The individu-
als involved in buying-decision process (referred to as buying centre members, or decision making unit
 Pshbojtbujpobm!Cvzjoh!boe!Cvzjoh!Cfibwjpvs 7:

members) have certain roles. The business marketers should identify the key members of buying centre
in each buying organisation. The business buyers are influenced by many factors when they make
buying decisions. The major factors are organisational and personal, but there are other factors such as
environmental and buying centre variables. There are two models of organisational buying behaviour.
These are The Webster and Wind Model and The Sheth Model.
The Choffray and Lilien model is another useful and simple model that helps to understand the
group decision process and to integrate major factors of organisational buying process. The business
marketers should also be aware of some of the contemporary purchasing activities, such as just-in-time
delivery, outsourcing and world-sourcing, single sourcing, value analysis, supplier evaluation, and buy-
ing committee.

LFZ!UFSNT

� Balanced scorecard � Multiattribute decision making

� Buy classes � Modified Rebuy
� Buygrid framework � New task
� Buying centre � Single sourcing
� Buyphases � Straight Rebuy
� Gatekeepers � World sourcing
Note: Glossary of the key terms is given at the end of the text.

DPODFQUVBM!RVFTUJPOT
1. At what phase(s) of the business buying process the business marketer should get involved and
why?
2. Is the organisational buying process for services the same as that for physical products? Explain.
3. Describe any one of the techniques used by customer organisations for evaluating performance
of suppliers? Why is it important for the sales person of the supplier firm to understand clearly
the supplier evaluation system followed by the customer organisation?
4. What is a buygrid framework? What are the major results or conclusions one can draw from the
analysis of buygrid framework?
5. What is a buying centre? Explain the major roles assumed by the members of a buying centre.
6. Describe any one of the models of the organisational buying behaviour.

PCKFDUJWF!UZQF!RVFTUJPOT
1. Buying situations (or type of purchases) are called: (a) buyphases, (b) buyclasses, (c) buygrid, or
(d) buying centre.
2. The buying situation which involves the purchase of something not purchased before is called:
(a) straight rebuy, (b) modified rebuy, (c) new task, or (d) none of the above.
3. The pathbreaking study by Robinson, Faris, and Wind found that the number of phases in the
buying decision process of business buying organisations are: (a) seven, (b) eight, (c) nine, or
(d) ten.
4. The objective(s) of evaluating supplier performance may be to: (a) qualify the potential suppliers,
(b) select the future suppliers, (c) review the performance of present suppliers, or (d) achieve all
the above.
81 Cvtjoftt!Nbslfujoh

5. Research indicates that in business buying organisations, the key buying influentials are most
often located: (a) inside the purchase department, (b) outside the purchase department, (c) in
both of them, or (d) in none of them.
6. The Webster and Wind model of organisational buying behaviour specifically considers four sets
of variables—environmental, organisational, individual, and one of the following: (a) the buying
centre, (b) situational variable, (c) cultural variable, or (d) technological variable.
7. The Sheth model of business buyer behaviour mentions four methods used for conflict resolution
in joint-decision making process: problem-solving, persuasion, bargaining and one of the
following: (a) negotiation, (b) mediation, (c) arbitration, or (d) politicking.
8. One of the techniques used in value analysis is: (a) bargaining, (b) persuasion, (c) brainstorming,
or (d) none of the above.
9. Outsourcing is designed to save money on: (a) core functions, (b) non-core activities, (c) both of
them, or (d) none of them.
10. The structure of buying centre: (a) remains same, (b) varies, or (c) becomes uncertain for
different buying situations.

BQQMJDBUJPO!RVFTUJPOT
1. A business marketer (who is ‘out’ or potential supplier) is keen to supply cold-rolled (CR)
steel coils to a major passenger car manufacturer, who has been buying the same material from
three other suppliers on regular basis for the past few years. As per the purchase policy, the car
manufacturer cannot buy any material from more than three suppliers. What should the business
marketer do to supply CR steel coils to the major passenger car manufacturer?
2. Large numbers of personal computers (PCs) are purchased by educational institutions in India
for use of their students. Identify the factors or criteria that may be used for evaluation and
selection of a supplier. Which technique of supplier evaluation would you suggest and why?
3. An international paint manufacturing company is setting up a new plant near Mumbai, India.
The company wants to buy a material handling system for handling raw material, work-in-
process, and finished goods for the first time. The company has appointed a technical consultant.
The total value of business is estimated at about a 5 million. Assume that you are the branch
sales manager of one of the three major suppliers of material handling equipment. You are keen
to get this business, and you want to apply the concepts and techniques that you had learnt at the
management institute, where you studied three years ago. What would you do and why? (Make
suitable assumptions, if need be).

SFGFSFODF!OPUFT
1. Robinson, Faris, and Wind, Industrial Buying and Creative Marketing (Boston: Allyn & Bacon,
Inc., and the Marketing Science Institute, 1967), pp. 13–18.
2. Anderson, Chu, and Weitz, “Industrial Purchasing: An Empirical Exploration of the Buyclass
Framework”, Journal of Marketing, 51 (July 1987): pp. 71–86.
3. This section is based on Pierre Wack, “Scenarios: Shooting the Rapids”, Harvard Business
Review (November–December 1985): pp. 139–150; de Geus, “Planning as Learning”; Paul J.H.
Shoemaker, “Scenario Planning: A Tool of Strategic Thinking”, Sloan Management Review
(Winter 1995).
 Pshbojtbujpobm!Cvzjoh!boe!Cvzjoh!Cfibwjpvs 82

4. Robert S. Kaplan and David P. Norton, The Balanced Scorecard, Harvard Business School
Press, 1996.
5. John A. Howard and Jagdish N. Sheth, The Theory of Buyer Behaviour (New York: John Wiley
and Sons, 1969), Chap. 2.
6. Mary Siegfried Dozbaba, “Critical Supplier Relationships: Converting Higher Performance”,
Purchasing Today (February 1999), pp. 22–29.
7. Ravi Kalkota and Marcia Robinson, e-Business: Roadmap for Success (Reading, Mass.: Addison
Wesley, 1999), pp. 237–38.
8. Mark Vigoroso, Buyers Prepare for Brave New World of e-Commerce, pp. S4–S16.
9. J. David Lichtenthal, “Group Decision Making in Organisational Buying: A Role Structure
Approach”, in Advances in Business Marketing, Vol. 3, ed. Arch G. Woodside (Greenwich,
Conn.: JAI Press, 1988), pp. 119–57 and Wesley J. Johnson and Jeffrey E. Lewin, “Organisational
Buying Behaviour: Toward an Integrative Framework”, Journal of Business Research, 35
(January 1996): pp. 1–15.
10. Robert D. McWilliams, Earl Naumann, and Stan Scott, “Determining Buying Centre Size”,
Industrial Marketing Management, 21 (February 1992): pp. 43–49.
11. Ghingold and Wilson, “Buying Centre Research and Business Marketing Practice”, Journal of
Marketing Research, 21 (February 1984): pp. 96–108.
12. Federick E. Webster, Jr. and Yoram Wind, Organisational Buying Behaviour (Englewood Cliffs,
N.J.: Prentice-Hall, 1972), p. 77; J. David Lichtenthal, Group Decision Making in Organizational
Buying, pp. 119–57.
13. Paul G. Patterson and Philip L. Dawes, “The Determinants of Choice Set Structures in High-
Technology Markets”, Industrial Marketing Management, 28 (July 1999), pp. 395–411.
14. John R. Ronchetto, Michael D. Hutt, and Peter H. Reingen, “Embedded Influence Patterns in
Organisational Buying Systems”, Journal of Marketing, 53 (October 1989): pp. 51–62; and
Ajay Kohli, “Determinants of influence in Organisational Buying: A Contingency Approach”,
Journal of Marketing, 53 (July 1989): pp. 50–65.
15. Jackson, Keith, and Burdick, Purchasing Agents’ Perceptions of Industrial Buying Centre
Influence, pp. 75–83.
16. Allen M. Weiss and Jan B. Heide, “The Nature of Organizational search in High Technology
Markets”, Journal of Marketing Research, 30 (May 1993): pp. 220–33.
17. Rashi Glazer, “Winning in Smart Markets”, Sloan Management Review, 40 (Summer 1999), pp.
56–69.
18. Joseph A. Bellizzi and Joseph J. Belonax, “Centralized and Decentralized Buying Influences”,
Industrial Marketing Management, 11 (April 1982): pp. 111–15.
19. Sara Lorge, “Purchasing Power”, Sales & Marketing Management (June 1998): pp. 43–46.
20. Wesley J. Johnston and Thomas V. Bonoma, “The Buying Centre: Structure and Interaction
Pattern”, Journal of Marketing, 45, 2 (Summer, 1981), pp. 143–56.
21. Donald L. McCabe, “Buying Group Structure: Constriction at the Top”, Journal of Marketing,
51, 4 (October, 1987), pp. 89–98.
22. Ghingold and Wilson, Buying Centre Research and Business Marketing Practice, pp. 96–108.
23. McQuisten and Dickson, The Effect of Perceived Personal Consequences on Participation and
Influence in Organisational Buying, pp. 159–77.
24. Jean-Marie Choffray and Gary L. Lilien, “Assessing Response to Industrial Marketing Strategy”,
Journal of Marketing, 42, 2, (April 1978), pp. 20–31.
83 Cvtjoftt!Nbslfujoh

25. Gary L. Lilien, Philip Kotler, K. Sridhar Moorthy, Marketing Models, 1992, Pearson Education,
Inc., Indian reprint, pp. 141–54.
26. The Economic Times, Bangalore, newsitem dated 8.2.2007.
27. The Economic Times, Bangalore, newsitem dated 16.03.2007.
28. The Economic Times, Bangalore, newsitem dated 28.03.2007.
29. Daniel J. McConville, “More Work for Chemical Distributors”, Distribution 95 (August 1996):
p. 63.
30. Lee Gomes, “Somebody Else’s Problem”, The Wall Street Journal (November 15, 1999), p. R8.
31. The Economic Times, Bangalore, newsitem dated 14.07.2007.
32. The Economic Times, Bangalore, an article dated 24.12.2007.
33. Adapted from Richard B. Chase and Nicholas J. Aquilano, Production and Operations
Management, Armed Services Procurement Regulations, Section 3–406.3 (Homewood, Iu.:
Richard D. Irwin, Inc., 1973), p. 567.
34. Basic steps in Value Analysis, prepared by the Value-Analysis-Standardization Committee,
Reading Association, National Association of Purchasing Agents, New York, pp. 4–18.
35. Elizabeth Baatz, “How Purchasing Handles Intense Cost Pressure”, Purchasing, 127 (October 8,
1999), pp. 61–66.

CASE 3.1

India Textiles Ltd.: Fulfilling Purchasing Objectives*

Mahindra Parikh, Senior Manager—Commercial, India Textiles Ltd., felt doubtful on bringing down
the delivery time from 60 days to 45 days, demanded by some international buyers of garments. The
company’s manufacturing unit at Bangalore produced garments like shirts, trousers, skirts and blouses
for domestic as well as international customers, including Walmart, J.C. Penny, and Gap.
The production process included various operations like dyeing of yarn, weaving, and processing.
The production was organised on three shift basis. The company had outsourced some of the operations
like processing because it did not have facility to do the processing, although it had adequate space.
Mahindra asked the market research manager to get the information about the competitors’ delivery
time for the garments. The market research manager informed him that only four out of about 100 gar-
ment (or apparel) manufacturing units were in a position to fulfil the important purchasing objectives
of 45 days delivery time and consistent product quality.
Mahindra applied a lot of pressure on the existing processing firms to bring down the delivery time.
However, he did not receive any positive commitments from them. Mahindra felt that it was very im-
portant to satisfy the delivery and quality objectives of the garment buying firms, in order to achieve the
company’s sales and profitability goals.

Question
1. If you were Mahindra Parikh, what would you do?

+
This case was prepared by Professor Krishna K. Havaldar, based on the case data provided by Pooja Jain,
Prakash Inani, Prithvi Hegde, and Sangeetha, MBA students of Alliance Business Academy, Bangalore.
 Pshbojtbujpobm!Cvzjoh!boe!Cvzjoh!Cfibwjpvs 84

CASE 3.2

JET India Company: Organisational Buying1*

Shabbir, proprietor of JET India Company, sat in his chair contemplating about the challenges and
hardships he would have to face in the coming months for procuring raw materials. He reflected upon
the increasing costs and stagnating profits which made him worried.
BACKGROUND
As an inquisitive child, Shabbir started to work at the age of 14 accompanying his father who had a
business in hydraulic pipes and valves. Capitalising on the knowledge he gained about carrying out a
business, he later started a business of his own, trading in support systems for construction industry
like M.S. (Mild Steel) rods, clamps, bolts and fasteners which are primarily used for construction of
buildings.
The boom of information technology (IT) industry in India resulted in growing opportunities in the
construction business. Hence, Shabbir vigilantly seized it by starting a small scale manufacturing firm
called ‘JET India’ for producing construction support system equipment.
ABOUT THE COMPANY
JET India is a small scale manufacturing company located in Bangalore, India. The company started
its operations in the year 2003 with a capital of a 5 lakh (US $10,000). The capital was raised from
the profits earned from the earlier trading business. Shabbir did not take loan from banks or financial
institutions as per his religious beliefs. The firm produces standardized products and its product-mix
includes:
• Support system for the construction line
• Pipe supports
• Fan supports
• Air Conditioner supports
Based on the knowledge of the construction industry, the target market segments identified by the
company are construction companies, builders, plumbing contractors, electrical contractors and air
conditioning contractors.
JET India has competition from many other small scale units manufacturing similar equipment.
However, the attributes of superior quality, timely delivery and competitive prices have created a strong
brand name for JET India which is reflected in good demand for its products in the market.
PURCHASING PRACTICES
The prime raw material used in manufacturing the company’s products is steel comprising the follow-
ing components:
• GI (Galvanized Iron) sheets of sizes .8 mm, 1 mm, 1.5 mm and 2 mm
• Wire rods of sizes 7 mm, 8 mm, and 10 mm
• CR (Cold Rolled) sheets of sizes 1.5 mm and 2 mm

1+
This case was prepared by Maryam Ezzy, an MBA student of Alliance Business Academy, Bangalore, under
the guidance of Prof. Krishna K. Havaldar for classroom discussion.
85 Cvtjoftt!Nbslfujoh

JET India company’s total monthly requirement of steel varies between 50 and 75 tons. The firm
primarily sources its raw materials from SAIL (Steel Authority of India Limited), JINDAL Steel and
TATA Steel. Under unavoidable circumstances, the company procures the same from the distributors or
dealers of steel in the open market.
The purchasing objectives of the company are to procure raw materials of good quality at low cost
and most importantly in a timely manner. However, these objectives are presented with challenges
which make it difficult to achieve the same.
The government policy with regard to steel industry is often inconsistent. The prices of steel vary
or fluctuate from time to time. Also, due to government regulations, the suppliers (SAIL and TATA
Steel) provide steel on the basis of ‘quota’ (a fixed quantity) which is, in turn, determined on the basis
of the production capacity of the manufacturing unit. However, due to limited availability of steel and
huge requirements from numerous manufacturers, the suppliers supply only about 40–50 per cent of
the manufacturers’ requirements. For example, if the company requires 75 tons to meet its monthly
production capacity, the quota given to it is only about 30–35 tons. JET India’s production capacity is
75 tons and it can store inventory up to 100 tons. Once the quota is fixed, the firm cannot obtain the steel
from the steel suppliers beyond the allocated quota. The larger the production capacity, the higher is the
quota given to them. Thus, small scale manufacturers like JET India are given a very small ‘quota’. Due
to this reason, only about 50 per cent of the steel can be procured from the steel manufacturers and the
remaining from the open market. Purchasing from dealers/distributors in the open market costs them
an additional 10 to 15 per cent.
The difficulties of JET India Company seem to increase when the steel suppliers propose a rise in
the prices of steel. They hold back supply of steel to sell at higher prices later. Large manufacturers are
given preference and a large quantity of steel is supplied to them, leaving the small-scale companies
like JET India in distress with a meagre quantity. In a situation like this, JET India has no choice but
to purchase a large quantity of raw material from the open market (i.e. dealers or distributors) at much
higher prices.
These hurdles have increased the cost of production and the company’s profits have started to de-
cline. At times, JET India sells below the cost of the product. Shabbir is looking for methods of reduc-
ing the cost and finding a solution to increase the company’s profits.

Question
What suggestions would you make to Shabbir to reduce costs and increase profits?

CASE 3.3

ABC India Limited: Purchasing Steel2*

The Indian bearing industry has been estimated to be above a 50 billion (i.e. about US $1 billion) in
the year 2008. While the organised bearing sector in India comprises 12 leading manufacturers who
contribute to over 55 per cent of the total turnover, the unorganised sector contributes to almost 15 per
cent of the total industry turnover. The remaining demand to the tune of 30 per cent is being imported,
essentially for industrial applications and special purposes.

2+
This case was prepared by Manasa P, an MBA student of Alliance Business Academy, under the guidance of
Prof. Krishna. K. Havaldar for classroom discussion.
 Pshbojtbujpobm!Cvzjoh!boe!Cvzjoh!Cfibwjpvs 86

ABC was founded in the early 1900’s and it grew at a rapid rate to become a global company. ABC
groups its technologies in five platforms: Bearings and units, seals, mechatronics, services and lubri-
cation systems. By utilising capabilities from all or some of the platforms, ABC develops tailor-made
offers for each customer segment, helping customers improve performance, reduce energy use and
lower total costs.
ABC does business mainly through the following divisions:
• Industrial Division: serving industrial original equipment manufacturers (OEMs)
• Automotive Division: serving automotive OEMs and aftermarket customers
• Service Division: aftermarket customers
• Electrical & Two-wheeler Division
The OEM market for bearing represents the demand arising out of the original vehicles and indus-
trial manufacturers. The demand for the OEM market directly depends upon the growth in the user
industry. OEM market accounts for 40% of total demand of bearing industry. This market is character-
ized by requirements of high quality, stringent delivery norms and lower margins. OEM’s have been
facing price competition in their own markets, and they continue to exert price pressure on the local
bearing suppliers.
The replacement market represents the demand arising on account of replacing the used and worn-
out bearings. The size of replacement market is dependent on equipment population and frequency of
maintenance. The margins in this market are relatively higher placed as compared to OEM market. The
replacement market is highly price sensitive. It has a higher number of unorganised players and cheaper
imported bearings. In 2008–09, Indian automobile and industrial sectors were facing a slowdown. This
had led to lower growth in OEM segment and higher growth in replacement demand. The organised
players were concentrating on improving share in the replacement market.
Since 2008, steel prices have appreciated significantly riding on the shortage of iron ore, one of
the principal raw materials for steel. The significant increase in steel prices has resulted in pricing and
margin pressures on bearing manufacturers.
ABC is facing procurement problems in recent times due to the ban in iron ore mining in Karnataka.
Karnataka had to suspend operations in about 50 mines affecting supplies to a host of steelmakers and
prompting large players such as JSW Steel and Tata Metaliks to consider a stoppage in production.
Karnataka has 9 billion tonnes of reserves accounting for nearly 38 per cent of India’s iron ore deposits.
The crackdown on illegal mining has come at a time when Karnataka has emerged as a much sought-
after location for major global steel sector companies planning to make inroads into India.
The tight supplies of iron ore have already led to a steep rise in the prices of iron ore. This has put
a pressure on ABC’s purchases. Steel and alloy steel form the basic material for the manufacturing of
bearings and accounts for almost 45 per cent of the total cost. Steel prices have, therefore, significant
impact on margins. To add on to this, the duty rates for steel have come down over the last few years
and a few countries like China, Russia, Eastern Europe dump their excess production of steel at a very
low price. This has lead to huge price differentials between the domestic and imported bearings (almost
40–50%), encouraging the inflow of imported bearings into India. ABC is now in the quest of other
alternatives to combat the current problem. Its purchase department is now engaged in a modified rebuy
situation to identify low cost sources. ABC has now resorted to importing steel. This seems to be an im-
mediate resort, but yet fluctuations in key raw material (steel) prices cannot be evaded in the long run.
87 Cvtjoftt!Nbslfujoh

The purchase manager of ABC India Ltd. was thinking about the various issues involved in the pur-
chase of steel and wondered how to achieve the purchasing objectives of getting good quality steel at
low prices with assured availability for the production of bearings.

Question
If you were the purchasing manager, what would you do and why?