Appendix 1 the theory of effective marketing-resource allocation




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Major Influences on Business Buyers


Business buyers are subject to many influences when they make their buying decisions. Some marketers assume that the most important influences are economic; others see buyers as responding to personal factors such as favors, attention, or risk avoidance. In reality, business buyers respond to both economic and personal factors. Where there is substantial similarity in supplier offers, business buyers have little basis for rational choice. Since they can satisfy the purchasing requirements with any supplier, they will place more weight on the personal treatment they receive. Where competing offers differ substantially, business buyers are more accountable for their choice and pay more attention to economic factors.

In general, the influences on business buyers can be classified into four main groups: environmental, organizational, interpersonal, and individual (Figure 7-2).16



FIGURE 7-2 Major Influences on Industrial Buying Behavior

Environmental Factors. Business buyers are heavily influenced by factors in the current and expected economic environment, such as the level of demand for their product, the economic outlook, and the interest rate. In a recession economy, business buyers reduce their investment in plant, equipment, and inventories. Business marketers can do little to stimulate total demand in this environment. They can only fight harder to increase or maintain their share of demand.

Companies that fear a shortage of key materials are willing to buy and hold large inventories. They will sign long-term contracts with suppliers to ensure a steady flow of materials. Du Pont, Ford, Chrysler, and several other major companies regard long-term supply planning as a major responsibility of their purchasing managers.

Business buyers are also affected by technological, political/regulatory, and competitive developments in the environment. The business marketer has to monitor all of these forces, determine how they will affect buyers, and try to turn problems into opportunities. For example, the greening of corporate America has added a new criterion to some organizational buying decisions: that a product or service must not damage the environment. Thus a printer might favor paper suppliers that have a wide selection of recycled papers or ink vendors who use chemicals that are made through environmentally sensitive processes. Interestingly, socially responsible buying is rarely initiated by purchasing departments but rather comes about either through the actions of a policy entrepreneur (a person who plays a key role in putting social issues on the corporate agenda) or because the organization is already dedicated to being socially responsible. Buyers in socially responsible organizations will put pressure on suppliers to be socially responsible as well. One manager explains, "We push suppliers with technical expertise to be more socially conscious. We say, 'You're a successful company. Tell us why we should continue to do business with you. Tell us what difference you're going to make.' We don't tell them how to make a difference."17

Organizational Factors. Each buying organization has specific objectives, policies, procedures, organizational structures, and systems. The business marketer has to be familiar with all of these. Business marketers should be particularly aware of the following organizational trends in the purchasing area:

  • Purchasing-department upgrading: Purchasing departments commonly occupy a low position in the management hierarchy, in spite of managing often more than half of the company's costs. However, recent competitive pressures have led many companies to upgrade their purchasing departments and elevate their administrators to vice-presidential status. These departments have been changed from old-fashioned "purchasing departments" with an emphasis on buying at the lowest cost to "procurement departments" with a mission to seek the best value from fewer and better suppliers. Some multinationals have even elevated them into "strategic materials departments" with responsibility for sourcing around the world and working with strategic partners. At Caterpillar, functions such as purchasing, inventory control, production scheduling, and traffic have been combined into one department.
    In addition, many companies are looking for top buying talent and offering higher compensation. Once considered a corporate backwater, purchasing has begun to attract some of the best young executives. At General Motors, for instance, G. Richard Wagoner served as both CFO and head of worldwide purchasing in 1993 and 1994. His experience in procurement helped elevate Wagoner to the top post in GM's $90-billion-a-year North American operations. At AT&T, purchasing chief Daniel Caroll was a former CEO of the $6-billion-a-year division that manufactures switching equipment. When he was asked to take the chief purchasing job in 1993, it was considered a promotion.18 The upgrading of purchasing means that business marketers must correspondingly upgrade their sales personnel to match the higher caliber of the business buyers.

  • Centralized purchasing: In multidivisional companies, most purchasing is carried out by separate divisions because of their differing needs. Recently, however, some companies have started to recentralize some of the purchasing. Headquarters identifies materials purchased by several divisions and buys them centrally, thereby gaining more purchasing clout. The individual divisions can buy from another source if they can get a better deal, but in general centralized purchasing produces substantial savings for the company. For the business marketer, this development means dealing with fewer and higher-level buyers. Instead of the business marketer's sales forces selling at separate plant locations, the marketer may use a national account sales force to deal with large corporate buyers. National account selling is challenging and demands a sophisticated sales force and marketing planning effort.

  • Decentralized purchasing of small ticket items: At the same time that many companies are centralizing their purchasing processes, they are also decentralizing some purchasing operations by empowering employees to purchase small-ticket items such as duplicate keys, coffee makers, or Christmas trees. This revolution has come about through the availability of corporate purchasing cards issued by credit-card organizations. Companies distribute the cards to foremen, clerks, and secretaries; the cards incorporate codes that set credit limits and restrict where they can be used. A factory worker, for example, might carry a card limited to the local hardware emporium. National Semi-conductor and AlliedSignal are two companies that are using Visa and American Ex-press purchasing cards, with great cost-cutting effect. National Semiconductor's pur-chasing chief has noted that the cards have cut processing costs from $30 an order to a few cents. The additional benefit, for both buyers and suppliers, is that with less time to spend on paperwork, purchasing departments have more time for building partnerships.19

  • Long-term contracts: Business buyers are increasingly initiating or accepting long-term contracts with reliable suppliers. For example, General Motors wants to buy from fewer suppliers, who are willing to locate close to its plants and produce high-quality components. In addition, business marketers are supplying electronic data interchange (EDI) systems to their customers. The customer can enter orders directly on the computer, and the orders are automatically transmitted to the supplier. Many hospitals order directly from Baxter in this way, and many bookstores order from Follett's in this way.

  • Purchasing-performance evaluation and buyers' professional development: Many companies have set up incentive systems to reward purchasing managers for good buying performance, in much the same way that sales personnel receive bonuses for good selling performance. These systems are leading purchasing managers to increase their pressure on sellers for the best terms.

Purchasing managers are also spurred by competition within their field. In 1992 Purchasing magazine started the first annual Cost Savers' Hall of Fame competition. The winners included two purchasing managers at General Binding Corp. who investigated recycled paper as a means of cost reduction. Their efforts resulted in an estimated annual savings of $733,450 on paper, not to mention the marketing leverage of offering recycled goods.20

The emergence of just-in-time production systems promises to have a major impact on organizational purchasing policies. Its ramifications are described in the Marketing Insight on pages 214-215 titled "Lean Production Changes the Face of Business Buying."

MARKETING INSIGHT

Lean Production Changes the Face of Business Buying


Many manufacturers today are moving toward a whole new way of manufacturing called lean production. Lean production enables a company to produce a greater variety of high-quality products at lower cost, in less time, using less labor. It permits more rapid model changes and performance improvements, and allows companies to enter new markets.

Lean production is changing business customers' attitude toward the selection and management of suppliers. It is imperative that business-to-business marketers recognize and adapt to the changes implied by lean production. The major elements of lean production that companies are now adopting include:

  1. Just-in-time (JIT) production: JIT is a production method that brings together all materials and parts needed at each stage of production at the precise moment that they are required.The goal of JIT is zero inventory with 100% quality. JIT means that materials arrive at the customer's factory exactly when needed. This calls for a synchronization between supplier and customer production schedules so that inventory buffers are unnecessary.
    Some companies are now going beyond JIT and pursuing JIT II--empowerment of suppliers. For instance, at Foxboro Company in Foxboro, Massachusetts, orders for personal computing equipment are satisfied by a full-time on-site representative from supplier Computopia, and Honeywell has empowered suppliers on-site in such diverse areas as printing services, printed wiring boards, and waste management.

  2. Strict quality control: Maximum cost savings from JIT and JIT II are achieved if the buyer receives perfect goods from the supplier. This means that the suppliers must apply strict quality-control procedures before shipping their products. Motorola teams tour suppliers' plants every two years, grading them on how well they stack up against their competitors on both quality and timeliness. Motorola's suppliers welcome these ratings, which often help the companies find ways to cut costs anywhere from 12 to 20 percent.

  3. Frequent and reliable delivery: Daily delivery is frequently the only way to avoid inventory buildup. Increasingly, customers are specifying delivery dates rather than shipping dates with penalties for not meeting them. This means that suppliers must develop reliable transportation arrangements. 3M has speeded delivery of its office products to Boise Cascade (which distributes office products), while Kasle Steel makes around-the-clock deliveries to General Motors.

  4. Closer location: Suppliers should locate close to their important customers because closeness means more reliable delivery. This means that suppliers must make large commitments to major customers. Kasle Steel set up its blanking mill within Buick City to serve the General Motors plant there. Sometimes distributors must even be prepared to move their plants onto the customer's premises. Arrow Electronics, once headquartered in Long Island, New York, now has a warehouse in the factory of Ohio-based Bailey Controls. Bailey provides the space, and the warehouse is stocked with Arrow inventory according to Bailey's twice-monthly forecasts.

  5. Telecommunication: New communication technologies permit suppliers to establish computerized purchasing systems with their customers. Such systems allow for just-in-time online ordering at the lowest prices. These technologies reduce transaction costs but put pressure on business marketers to keep their prices competitive.

  6. Stable production schedules: Customers provide their production schedule to the supplier so that the delivery is made on the day the materials are required. Navistar provides one of its suppliers a six-month forecast and a firm 20-day order. If any last-minute changes are made, the supplier bills Navistar for the additional costs. This system helps reduce the uncertainty and costs faced by the suppliers.

  7. Single sourcing and early supplier involvement: JIT and JIT II imply that the buying and selling organizations work closely together to reduce costs. Business buyers realize that suppliers are experts in their field and should be brought into the design process. Business customers often award a long-term contract to only one supplier. The payoff is high for the winning supplier, and it is very difficult for other competitors to subsequently get the contract. Contracts are almost automatically renewed, provided the supplier has met delivery schedules and quality standards. In 1993, for instance, AlliedSignal's 150 plants bought valves, pipes, and fittings from no fewer than 400 suppliers. In 1994 the company packed all that business into a $10-million-a-year contract with Van Leeuwan, a Dutch-owned manufacturer and distributor. The endless paperwork associated with pipe orders disappeared.

All these elements of lean production add up to a closer relationship between the business customer and the business marketer. "It's like a marriage," says one big-league purchasing agent. A less sentimental top industrial manager says, "It's like committing to one relationship instead of sleeping around." Because of the time invested by the parties, joint location decisions, and telecommunications hookups, the costs of switching partners are high. A major implication is that business marketers must improve their skill in relationship marketing as compared with transaction marketing. Business marketers must plan for profit maximization over the entire relationship period rather than over each transaction.

Sources: See "JIT II Comes of Age," Purchasing, October 20, 1994, pp. 41-44; Myron Magnet, "The New Golden Rule of Business," Fortune, February 21, 1994, pp. 60-64; Shawn Tully, "Purchasing's New Muscle," Fortune, February 20, 1995, pp. 75-79, 82-83; Rahul Jacob, "Why Some Customers Are More Equal Than Others," Fortune, September 19, 1994, pp. 215-161; John E. Murray, "The EDI Explosion," Purchasing, February 16, 1995, pp. 28-30; and James P. Womack, Daniel T. Jones, and Daniel Roos, The Machine That Changed the World (New York: Macmillan, 1990).
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