market sensing - b2b

1. CHAPTER 3 – UNDERSTANDING FIRM AS CUSTOMERS
1. INTRODUCTION
A detailed comprehension of firms as customers gives to a supplier the opportunity of
focus efforts on those customer managers who matter the most in a purchase
decision. The supplier wants to tailor its information to the preferences of those
managers, and to persuasively demonstrate why the supplier’s market offerings
deliver superior customer value.
The objective of this chapter is to examine the process of understanding firms as
customers, by learning how companies rely on a network of suppliers to add value
to their offerings, how they integrate purchasing activities with those of other
functional areas and outside firms, and how they make purchase decisions.
2. UNDERSTANDING PURCHASING ORIENTATION
Purchasing is the process of acquiring resources and capabilities for the firm from
outside providers.
Purchasing orientation is the philosophy that guides managers who make
purchasing-related decisions and delineates their domain and span of influence.
It´s important for the industry (business) know that all business buyers (or industrial
customers) do not have the same purchasing orientation, or overall purchasing
philosophy, which guides them through their buying decisions.
Business buyers can choose one of three purchasing orientations – Buying,
Procurement, or Supply Chain Management.
2.1.THE BUYING ORIENTATION
Buying concerns executing discrete transactions, often for a single item at a time,
with suppliers. A buying organization’s main objective is to reduce its annual total
spend or the monetary amount of acquisitions in a given year. The buyers often have
little if any input concerning what to acquire, in what quantity, and when.
The central
pursuits of the buying orientation are:
• Obtaining the best deal - obtaining the best deal in terms of price, quality, and
availability from suppliers
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2. • Maximizing power over suppliers - utilizing commoditization to turn off the
product´s points of differentiation and utilizing multisourcing.;
• Avoiding risk wherever possible – by following established procedures and
rely on proven vendors.
• Developments in buying – by using target pricing, global sourcing and
cooperative pricing.
2.2.THE PROCUREMENT ORIENTATION
The buyers, with procurement orientation, look for both quality improvements and
cost reductions through the integration of procurement activities such as order
processing with such other functions as materials handling, logistics, and physical
distribution, and through more cooperative relationships with suppliers. The
procurement group focuses on acquiring total solutions or offerings comprised not
only of products and services but also technology and knowledge.
The central pursuits of the procurement orientation are:
• Improving quality – Improve the conformance to specifications that
result in a product which meets customers’ expectations.
• Reducing total cost of ownership – Reduce the sum of purchase price
plus all expenses incurred during the productive lifetime of a product or
service minus its salvage or resale price.
• Cooperating with suppliers –Standardization (process of of establishing
agreement on uniform identifications for define characteristics of quality,
design, performance, quantity, service, and so on), integrative negotiation
(resources can be expanded to benefit both parties) and target costing
(try to reduce the total cost of ownership by having cooperation with the
supplier).
2.3.THE SUPPLY MANAGEMENT ORIENTATION
Managers recognize they are not just acquiring a product or solution from a supplier,
they are building a long-term relationship. The idea of purchasing for supply
management is further expanded to become more value-adding, and strategic
operations. It includes coordination and integration of purchasing function with other
functions within the company and also with other organizations in the whole value
chain, like customers, customers’ customers, intermediaries, suppliers, and suppliers’
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3. suppliers. The company with supply chain management orientation focuses on how
to improve the whole value chain from raw materials to end users.
Supply chain management has four purchasing philosophies, as following.
• Focus on end-users – Participate in market research projects, customer
advisory councils and personnel exchange programs.
• Craft a sourcing strategy – The company has focus on having superior
expertise and stands to gain a high rate of improvement and major
technological advancements from their continued production.
• Build a supply network – Rely on a network of direct suppliers and a
larger number of second-and-third-tier suppliers, share critical information
across functions within and between firms, practice just-in-time
management, and participate in codesign projects.
• Sustain highly collaborative relationships with select suppliers -
Value in Use indicates the difference in value minus the difference in
price between competitive offerings, and can be calculated as follows:
VIU = (Value f – Value a) – (Price f – Price a)
On the other hand, Value in Use Price indicates the monetary amount at which the
customer has no preference between offerings, and can be calculated as following:
VIU price f = Price a – (Value f –Value a)
• Apply purchasing portifolio Management – Supply managers
categorize acquire offerings as either generics (e.g., MRO items),
leverage items (e.g., raw materials), bottleneck items (e.g., essential
spare parts), or critical (e.g., new technology).
2.4.Putting Knowledge of Purchasing Orientation to Use
Business market managers gain significant insights from understanding a customer
firm´s purchasing orientation. A better understanding of how their firm´s purchasing
strategies and activities contribute to or hinder the completion of business processes
helps business market managers pinpoint ways to improve their organization´s ability
to create and deliver value to the marketplace.
3. UNDERSTANDING HOW PURCHASING WORKS WITH OTHER FUNCTIONS
AND FIRMS
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4. In this part, the focus is examine how purchasing provides greater value to end-users
by working closely with other functions as well as other firms. First, it discuss value
management. Then, the buying team as the major tool for cross-functional
coordination. Finally, how purchasing expertise can add value in the new offering
realization or existing offering modification processes.
3.1.Value Management as a Cooperative Framework
Value management entails the systematic use of value techniques as a general
problem-solving method in business, research, and administration. It´s practiced at
all levels of the organization and allows a firm to better focus and efficiently sustain
its operations, to gain a clearer understading of the needs and priorities of its
customers, and to deliver optimal value to the customer with trade-offs between
performance and cost.
Value analysis is a method of value assessment that customer firms use to evaluate
supplier offerings.
After adopting a value management philosophy, a company then sets into place a
value management system (VMS). It´s composed of an operating structure,
management, and methods that are responsive to the external environmental.
3.2.Adding Value to the Purchasing Process Through Buying Teams
The buying team “refers to all those members of an organization who become
involved in the buying process for a particular product or service.”
3.2.1. Team Member Roles
Roles are the responsibilities of buying team members. Successful business market
managers gain a deep understanding of the distribution and performance of buying
roles within each customer firm, besides that, they must learn whether all members
of the buying team are aware of the total value of the supplier´s offering.
3.2.2. Buying Situations
The distribution and performance of team roles is often a function of purchase
situations. There are three recurring purchase situations: straight rebuy, modified
rebuy, and nex task. In a new task buying situation, the firm confronts a novel
requirements. In a modified rebuy, the customer firm has had experience securing
the product or service, but managers need to reevaluate alternatives. In a straight
rebuy situation, the company has considerable buying experience and requires little
or no new information about the offering.
3.2.3. Buying Team Tasks
Buying teams perform both strategic and tactical tasks. Commodity procurement
strategy (CPS) teams develop a comprehensive strategy for the acquisition of entire
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5. product or service categories, assemble and cultivate a supplier base for the
category, and identify suppliers that can solve difficult technical problem related to
the category.
3.3.Working with Suppliers and Across Functions
Business market managers integrate purchasing activities with those of suppliers and
other functions to develop supply resources, improve existing offerings, and
contribute to new offering realization.
3.3.1. Developing Supply Resources
Managers contacts and experience can help purchasing managers find and qualify
new suppliers from around the world. Technical service personnel can provide
consulting and training to strengthen supplier service.
3.3.2. Improving Existing Offerings
Progressive customer firms conduct joint value or TCO assessment to find process
improvements and materials substitutions. They also determine the most economic
lot-sizing for supplier production and establish long-term contracts for dedicated
production lines to meet specific customer firm requirements. And, they rethink and
reallocate tasks from supplier firm to customer firm, or vice versa.
3.3.3. Contributing to New Offering Realization
After production begins, the costs associated with changing product or service
specifications become extremely high. To reduce the total costs, these firms partner
with vendors through early supplier involvement (ESI) programs and include
purchasing personnel in the design process via early purchasing involvement
programs.
4. UNDERSTANDING THE PURCHASE DECISION PROCESS
Now, it´s explained how firms secure products and services, technology, and
knowledge from other organizations. Once business market managers know the
customer firm´s purchasing process, they are in a far better position to develop
marketing strategies, sales presentations, and promotional efforts that can
successfully inform and influence purchasing decisions.
4.1.Understanding Customer Requirements and Preferences
Customers requirements and preferences serve as an essential guideposts for all
business market management efforts. The fewer the suppliers offering high-quality
solutions, the more the buyer will be willing to pay.
4.1.1. Converge on Customer Requirements
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6. Customers use the product or service and are often in a better position to define their
requirements in terms of functionally and performance in specific applications. At the
same time, suppliers often know more about the offering´s technology and can better
match solutions to problems customers don’t anticipate.
4.1.2. Map Customer Activity and Value Cycles
Some managers assume that the value of an offering remains stable over its lifetime.
But for some, worth may actually ebb and flow. The activity cycle refers to the steps
required to produce, productively use, recycle, and dispose an offering, whereas the
value cycle captures the changes in worth across these steps. Business market
managers can map both cycles with the tools of business process engineering and
value assessment.
4.2.Learning the customer´s Purchase Process
Many companies follow a structured and orderly process for acquiring goods called
BuyGrid Framework. The process begins with problem recognition. Then the
employee provides a written general need description. This statement clearly
identifies the problem or opportunity at hand and suggests a general solution. After,
the purchasing manager translates this need into product specifications and conduct
a supplier search to identify potential sources of the repair part. The next stage is
proposal solicitation. At the last one, the purchasing manager conducts a formal
performance review of the supplier.
4.3.Evaluating Supplier Performance
Best practice companies are employing balanced scorecards, which assess
performance using a set of pertinent measures. However, the evaluations numbers
may come from subjective judgments that can be influenced by social or personal
considerations. Supplier performance evaluation systems tend to vary by purchasing
prientation.
4.3.1. Reviewing Price, Quality, and Availability
Companies that subscribe to the buying orientation evaluate suppliers largely in
terms of realized price, quality, and availability. They draw on four types of analyses.
To convert the items into a single objective index of performance, managers would
allocate a certain number of points for meeting acceptable performance standards for
each price, quality, and availability measure; calculate; and report the grand mean as
the supplier´s performance index.
4.3.2. Scrutinizing Total Costs
When firms migrate to a procurement orientation, they create performance measures
that focus on TCO. There are two cost-based supplier evaluation approaches. The
first one, companies review the costs associated with supplier nonperformance. In
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7. the second one, customers audit and then calculate the TCO for a product or service
during a prespecified time period. The results are used by procurement managers to
determine how much each supplier has reduced the firm´s total costs.
4.3.3. Tracking Supplier Value
The objective is to assess the impact of supplier contributions on end-user
satisfaction. Then, supply managers can better focus on redirect the efforts of the
entire supply network toward the delivery of superior value to end-users.
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