Week 8 - LAQ's

2. Explain the process of industrial purchasing in detail.

In consumer marketing, consumers make buying decisions based on certain
mental stages such as need recognition, information search, evaluation, purchase
decision, and post-purchase behavior. But, in industrial markets the buying
decision making process includes observable sequential stages involving many
people in the buying organisation. The understanding of these steps/phases of
buying-decision making is helpful to an industrial marketer to develop an
appropriate selling strategy.
The purchasing activities of industrial buyers consist of various steps/phases in
buying decision making process. The importance of each step depends upon the type
of buying situation. The industrial marketers should understand both (step in
decision-making process and the type of buying situations) to market the product or
service.
These phases or steps in industrial buying process are elaborated as follows:
1. Recognition of Need of Industrial Buyer
A smart marketer recognizes the need/problem of industrial buyer originated
within the firm. If the material supplied by the existing supplier is not satisfactory in
terms of quality, or the material is not available as per requirement, or the machine
supplied by him breaks down too often, the buying organisation recognizes the
problem. If an industrial 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.
2. Determination of the Characteristics and Quantity of Needed Product
If the problem is recognized within or outside the buying organisation, then 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 solutions 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. Nevertheless, if the required information is not available
internally within the buying organization, the same can be obtained from the outside
sources.
3. Development of Specification of Needed Product
Stage 2 and 3 are closely related. After the general solution to the problem is
determined in the second phase, the buying organisation, 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. Industrial
marketers have a great opportunity 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.
4. Search the Qualified Potential Suppliers
In this stage, the buying organisation searches for acceptable suppliers or vendors.
Firstly, they have to obtain information about all available suppliers and secondly,
they have to decide the qualifying suppliers. The search for potential suppliers is
based on the various sources of information like trade journals, sales calls, work-of-
mouth, catalogues, trade-shows, industrial directories. The qualifications of
acceptable supplies may depend on the type of buying organization such as
government undertaking, private sector commercial organisation, or institutions,
and the buying situation, and the decision-making members. Furthermore, the
factors like quality of product or service, reliability in delivery, and service are
considered in qualifications of suppliers.
5. Obtaining and Analyzing Supplier Proposals
If the qualified suppliers are decided then 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 must include the product specification, price, delivery
period, payment terms, taxes and duties applicable, transportation cost (or freight),
cost of transit insurance, and any other relevant cost or free service provided. For
purchases of routine products or services, the stages 4 and 5 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 in analyzing proposals in terms of comparisons on
products, services, deliveries, and the landed costs: includes the price after discount
plus excise duty, sales tax, freight, and insurance.
6. Evaluation of Proposals and Selection of Suppliers
The industrial buyers evaluate the proposals of competing suppliers and selects one
or more suppliers. Further negotiations may continue with selected suppliers on
prices, payment terms, deliveries, and so on. The decision makers in the buying
organization may evaluate each supplier on a set of agreed-upon attributes or factors.
Each supplier is evaluated on each attribute by giving a weightage to each attribute
proportionately or on rating scale basis. The supplier(s) who get the highest total
score receives the business or the order from the buying organisation. If a buying
firm faces a make-or-buy decision, the supplier’s proposals are compared with the
cost of producing the needed item within the buying organization. If it is decided to
make the item within the buying organization, the buying process is stopped at this
stage.
7. Routine Order Selection
In this stage the procedure of exchange of goods and services between a buyer and a
seller is worked out. The activities include placement of orders (i.e. purchase orders)
with the selected suppliers, the quantity to be purchased from each supplier,
frequency of order placement by buyers and delivery schedules to be adhered to by
the supplier, schedule, and the payment terms to be adhered to by the buyer. The
user department would not be satisfied until the supplier delivers the required item
as per delivery schedule, and with acceptable quality.
8. Performance Feedback and Post-Purchase Evaluation
In this final phase a formal 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. The industrial vendor should recognize that marketing effort is no
over after the order is received. He or she must check the feedback and evaluation
process in the customer (buyer) organisation. In particular, the industrial marketer
must monitor the user satisfaction levels or complaints so that immediate corrective
action can be taken before a major damage. In fact, a quick response to customers’
complaints can result in good buyer-seller relationship. The type of products, the
phase of the buying-decision making process of customer firms, and the purchasing
situations also influence the marketing strategy of industrial seller.
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3. Identify any company who purchase their requirement

through tender process. Come out with their detailed activities.

OJEU (Official Journal of the European Union) - Tender

Stages of the tender process
Advertising the requirement
Selection Stage / Pre Qualification Questionnaire (PQQ)
Evaluation of selection Stage / PQQ
Invitation to Tender (ITT)
Evaluation of the tender submissions
Award of contract
Advertising the requirement

The opportunity may be advertised in a range of ways, but will, at least include the
following:

E-tendering portal
OJEU (Official Journal of the European Union) notice if required
Other websites (e.g. Supply to Surrey)
Trade publications
Other social media forums e.g. Twitter
Selection Stage / Pre Qualification Questionnaire (PQQ)

The selection stage may be carried out separately to the full tender process and is
then referred to as a Pre-Qualification (PQQ). It can also be done in a single stage
together with gathering tender information.

At selection stage bidders are requested to provide information online within a set
timescale. This gathers information about your business to ensure you meet
minimum requirements to allow the buyer to ensure that your organisation is able to
provide its requirements and to either progress your tender submission for full
evaluation or to shortlist for the Invitation to tender stage (ITT).

It assesses:

Capacity
 Capability
Experience

Supporting information on company finances and relevant experience / references

and insurance information may all be sought at this stage. There are two
complementary documents that formalise the standards of ethical behaviour we
expect from our suppliers. The council's Ethical Procurement Statement and
Supplier Code of Conduct can be viewed on the Surrey County Council website.

Evaluation of selection Stage / PQQ

Evaluates submissions to ensure suppliers progressing for the evaluation of
their full tender submission (in the case of a single stage or open tender) or to
shortlist and selects those suppliers most able to meet the requirements to be
invited to the ITT (Invitation To Tender) stage in the case of a two-stage or
restricted tender process.
Decision communicated to suppliers.
Invitation to Tender (ITT)

Depending on the procedure followed the ITT may be open to all suppliers (open or
single-stage process) where selection and tender information are combined or only
those who have successfully passed the selection / PQQ stage.

The ITT assesses the offer and the requirements as set out in the specification.

Bidding suppliers will be asked to complete online questionnaires and provide

supporting documentation. All tenders documents are available for download on the
portal and will contain all or some of the following:

Instructions to tenderers
Specification
Pricing schedule
Contract conditions – defining the relationship between the public body and
the supplier/contractor
Tender evaluation model – how we intend to evaluate the submission
Supporting documentation – depending on the contract requirements
Evaluation of the tender submissions

This is completed by an evaluation panel.

Award of contract
All suppliers that submitted a tender will be informed of the decision to
award the contract via the portal. Decision letters should give details of the
successful supplier/s and score achieved in the evaluation of tender submissions.
If the tender is has been published in the Official Journal of the European
 Union (OJEU) a Contract Award Notice will be published.
_______________________________________________________
1. A company manufactures two wheeler passengers’ helmets.
The initial stock on hand is 5000 units. The carrying cost is Rs.
2 per helmet per week and the lead time is two weeks. The
ordering cost per order is Rs. 5000. The MPS of the final
requirements is shown below. Develop a Material Requirement
Plan (MRP I) by using EOQ method and determine the total
inventory cost for the same.

Solution:
Initial stock on hand is 5000 units
Carrying cost is Rs. 2 per helmet
Lead time is two weeks
Ordering cost per order is Rs. 5000
 Total
Projected Ordering
Week Carrying 2*D*S (2*D*S)/C Sqrt((2DS)C)
requirements Cost
Cost
1 10000 20000 5000 100000000 5000 70.71067812
2 8000 16000 5000 80000000 5000 70.71067812
3 15000 30000 5000 150000000 5000 70.71067812
4 7000 14000 5000 70000000 5000 70.71067812
5 16000 32000 5000 160000000 5000 70.71067812
6 5000 10000 5000 50000000 5000 70.71067812
7 15000 30000 5000 150000000 5000 70.71067812
8 11000 22000 5000 110000000 5000 70.71067812

EOQ - 70.72
TC

D/EOQ (D/EOQ)OC EOQ/2 (EOQ/2)CC

1 141.4213562 707106.7812 35.35533906 707106.7812 1414213.562

2 113.137085 565685.4249 35.35533906 565685.4249 1131370.85

3 212.1320344 1060660.172 35.35533906 1060660.172 2121320.344

4 98.99494937 494974.7468 35.35533906 494974.7468 989949.4937

5 226.27417 1131370.85 35.35533906 1131370.85 2262741.7

6 70.71067812 353553.3906 35.35533906 353553.3906 707106.7812

7 212.1320344 1060660.172 35.35533906 1060660.172 2121320.344

8 155.5634919 777817.4593 35.35533906 777817.4593 1555634.919

12303657.99

2734146.221