What is Organizational Buying Process?
While organizational buying is best viewed as a decision process, the steps that make up the process differ across companies and products. Steps needed in a new task or modified rebuy decision may not be necessary for straight rebuy decisions.
Over a period of time, each organization evolves its own procedures for making purchase decisions. However, we can develop a generalization of the decision process for a better understanding of the organizational decision process.
Table of Contents
Buying Decision Process
- Recognizing an Organisational Need
- Determining Product Specifications
- Identifying Suppliers
- Information Search and Supplier Evaluation
- Negotiation of Purchase Orders
- Evaluation of Supplier Performance
Recognizing an Organisational Need
Organizational purchasing starts with the identification of demand for products and services. While there are different kinds of needs, most needs arise out of situations related to the operation of the business. Need recognition is not always as complicated or involved as it is in the new tasks and modified rebuy decisions.
It can be very routine, particularly in a straight rebuy situation. A large construction company may negotiate a contract with a steel beam supplier to replenish inventory on demand. Purchase orders are automatically written and sent to the supplier when the inventory reaches a pre-specified mark. Such routine buying situations offer the best opportunities to use computer-based database management systems.
The purchase manager or buying center anticipates the pending need or recognizes a consumption problem in the production process and then starts initiating processes for fulfilling the need by identifying ways of solving the problem.
He determines the nature and characteristics of the needed goods and services and then decides on the set of people who will be responsible for buying and the desired authority level required to make a buying decision.
Determining Product Specifications
Subsequent to the identification of the responsibility center, he also specifies exact product and service descriptions for procurement. It is also necessary to estimate the exact quantity required and the period in which these quantities need to be delivered with an estimate of what are other associate services required for the purchase of specified goods and services.
Well-developed specifications come from studying the anticipated uses of a product. Input from primary users may be obtained at this point. Technical experts write the final set of specifications with help from interested users.
The such collaboration worked well for a college of business at a large state university. The college allocated money for a large number of microcomputers that were to be used by both faculty and students. A committee was formed constituting of people from the university’s computer center and faculty with extensive experience with microcomputers.
One of its findings was that faculty and students wanted to be able to develop an interface between the microcomputers with the university’s main server. As a result, a specification could be developed and documented that required compatible equipment and programs.
If there are many suppliers on the list, a screening procedure is needed that bases its decisions on certain predefined criteria. The information gathered enables the organizational buyer to quickly look for suppliers that can meet minimum requirements.
These requirements might be delivery time, capacity to meet the buyer’s quantity needs and breadth of the product line. Failure to meet a minimum requirement usually means that a supplier will not be included in the list of acceptable suppliers, no matter how well that supplier stacks up on other criteria.
For special reasons, however, a rule may be bent. Because of good past service to the company, a purchasing agent may, for example, put a supplier on the list though he does not meet the minimum requirements.
At this stage, the buying centers search for different suppliers and try to find out their qualifications or eligibility by collecting information on their performance and capability from various sources. It then notifies or requests proposals from possible suppliers and sends these proposals for evaluation to the standing committee on purchase.
Information Search and Supplier Evaluation
A buying center may have to evaluate several product types for a particular use before suppliers can be selected. If products are complicated, technically trained people sort through the alternatives to recommend those that meet previously developed product specifications.
For instance, many companies deal with the rapidly changing technology of computer products (both hardware and software) by creating task forces that keep themselves abreast of current product developments. A task force recommends product types that are suitable for particular applications.
Negotiation of Purchase Orders
An organizational buyer may negotiate a contractual agreement with a supplier. An agreement of this kind can cover a single purchase of a product or a repurchase of the product over a period of time. Contracts are commonly used in straight rebuy situations.
The buying center of a large supermarket chain enters into contracts for purchases of frequently sold products like soap, toothpaste, and peanut butter over a period of a year or more.
Buying centers negotiate terms of payment, credit, and delivery during this stage to arrive at a specified order routine, which the supplier is required to honor under the negotiated agreement. Normally a term of the contract is signed between both parties.
Evaluation of Supplier Performance
Organizational buyers usually want to know how well suppliers comply with the purchase agreement. Thus, an important part of organizational purchasing is the evaluation of suppliers after purchase. This task is typically assigned to the purchasing department. The criteria used for supplier selection become the performance standards for this evaluation.
Information is collected on the performance of the product or service in use. A questionnaire may be sent to users of the product to obtain their input. Other technical measures of performance may also be devised.
A manufacturer that purchases aerosol packaging, for instance, may select a sample of the packaging and test it for pressure and evenness of application. The buying center develops a provision for feedback and evaluation on a continuous basis and also develops systems and procedures to have regular communication with the suppliers.