Marketing Essentials Chapter 23: Purchasing

The Role of the Buyer SECTION 23.1 What You'll Learn The terms used to describe organizational buyers How planning purchases differs between an industrial market and a reseller's market The six-month merchandise plan and its calculations The concept of chain store buying

The Role of the Buyer SECTION 23.1 Why It's Important The purchasing function in any business is important because the costs associated with running a business are often a direct result of the competency of the person responsible for buying the goods and services required to run the business.

The Role of the Buyer SECTION 23.1 organizational buyers Key Terms organizational buyers wholesale and retail buyers six-month merchandise plan open-to-buy centralized buying decentralized buying

The Role of the Buyer SECTION 23.1 Planning Purchases Businesses, like consumers, must plan: what to buy how much to buy when and where to shop Organizational buyers buy goods for businesses. Much of what they buy requires technical knowledge and/or knowledge of the operations of the firm, especially in manufacturing and service operations.

The Role of the Buyer SECTION 23.1 Industrial Marketing In manufacturing and service businesses, the people responsible for purchasing may be called purchasing managers, industrial buyers, or procurement managers. They are often directly involved in production planning. Slide 1 of 2

The Role of the Buyer SECTION 23.1 Industrial Marketing A bill of materials is the list of everything needed to make a product. It helps the purchasing manager determine what to buy, and how much to buy. Materials requirement planning (MRP) helps determine when to buy, so supplies are ready when they are needed in the production schedule. Slide 2 of 2

The Role of the Buyer SECTION 23.1 Resellers Wholesale and retail buyers purchase goods for resale—they forecast customers’ needs and buy the necessary products. Buyers must plan far in advance of the selling season to know how much of each item to purchase.

The Role of the Buyer SECTION 23.1 Six-Month Merchandise Plan Buyers plan their purchases by preparing a six-month merchandise plan—or the budget that estimates planned purchases for a six-month period. First a buyer must determine planned sales, usually based on the previous year's sales. Slide 1 of 4

The Role of the Buyer SECTION 23.1 Six-Month Merchandise Plan Buyers must ensure that there is enough stock to accommodate the planned sales volume; this is also known as beginning-of-the-month (BOM) inventory. It is calculated: planned sales x stock-to-sales ratio = BOM The BOM for one month is the same as the end-of-the-month inventory (EOM) for the prior month. Slide 2 of 4

The Role of the Buyer SECTION 23.1 Six-Month Merchandise Plan The other number in the six-month merchandise plan is planned retail reductions, the reductions in the selling price and shortages of merchandise caused by clerical mistakes, employee pilferage, or customer shoplifting. This can be calculated: as a percentage of sales or as a percentage reduction from the prior year Slide 3 of 4

The Role of the Buyer SECTION 23.1 Six-Month Merchandise Plan In order to determine how much to purchase, buyers use this formula: (planned sales + EOM stock + reductions) - BOM stock = purchases Slide 4 of 4

The Role of the Buyer SECTION 23.1 Open-To-Buy During the buying season, a buyer may want to know the open-to-buy (OTB), or the amount of money left for buying goods. OTB is calculated as follows: purchases – (goods received + goods ordered) Slide 1 of 2

The Role of the Buyer SECTION 23.1 Open-To-Buy To determine the actual money the buyer has to spend, you must calculate markup percentage and deduct that figure from the retail value. 100% - markup % = % attributed to cost % attributed to cost X retail value = OTB at cost Slide 2 of 2

The Role of the Buyer SECTION 23.1 Planning Purchases for a Chain Store Operation Buying for all branches in a chain store operation is usually done in a central location (company headquarters), and is called centralized buying. Chain stores use centralized buying in order to create a unified image for the chain. Customers can expect to find the same goods in every branch. Slide 1 of 2

The Role of the Buyer SECTION 23.1 Planning Purchases for a Chain Store Operation Decentralized buying is used when chain stores want to have special goods in their stores that are not available elsewhere in the chain. In these cases, local store managers or their designated buyers are authorized to make special purchases for their individual stores. Slide 2 of 2

The Role of the Buyer SECTION 23.1 Government Markets Government units are the federal, state, or local agencies that are responsible for purchasing goods and services for their specific markets. There are approximately 85,000 government units in the U.S., including the Federal Aviation Administration and local school boards.

Reviewing Key Terms and Concepts ASSESSMENT 23.1 Reviewing Key Terms and Concepts 1. What are the differences between organizational buyers and consumers? 2. What products might an industrial buyer purchase? 3. What do wholesale and retail buyers purchase? 4. In a retail buying situation, what does a buyer prepare in advance of the selling situation? 5. Why do chain stores use centralized buying?

ASSESSMENT Thinking Critically 23.1 What would happen if a buyer computed a planned sales figure for the next planning period that was 20 percent too high?

The Purchasing Function SECTION 23.2 The Purchasing Function What You'll Learn The three types of purchase situations The criteria for selecting suppliers The factors involved in negotiating terms of a sale The various Internet purchasing methods

The Purchasing Function SECTION 23.2 The Purchasing Function Why It's Important Knowing the details of the purchasing function will give you a better idea of what is involved in the overall job description. It is especially important to recognize the impact of the Internet on the purchasing function. You can expect changes in job descriptions for buyers in the near future due to the significant increase in online purchasing.

The Purchasing Function SECTION 23.2 The Purchasing Function Key Terms want slips resident buying offices consignment buying memorandum buying reverse auction

The Purchasing Function SECTION 23.2 The Purchasing Function The Buying Process Planning purchases is the preliminary step in the buying process. The buying process involves several types of purchasing situations, selecting suppliers, negotiating terms, and sometimes using the Internet.

The Purchasing Function SECTION 23.2 The Purchasing Function Types of Purchase Situations There are three types of purchase situations: new-task purchase modified rebuy straight rebuy

The Purchasing Function SECTION 23.2 The Purchasing Function New Task Purchase A new-task purchase is a purchase that is made for the first time. This can be the most complicated purchase. It could be anything from a special item that a customer has requested and a store doesn’t carry to complex manufacturing equipment to be used to automate production.

The Purchasing Function SECTION 23.2 The Purchasing Function Want Slip Salespeople often prepare want slips and give them to the buyer for their department. Why are want slips so valuable to a buyer? What other information might a buyer need before making a new-task purchase? Item Required ___________ Brand Name __________ Size ________ Style __________ Quantity _________ Item Description _______________________________ ____________________________________________ Your Name ___________________________________ Address _____________________________________ (Street) (City) (State) (Zip Code) Telephone ( ) ______________________________ EMPLOYEE: PLEASE FORWARD IMMEDIATELY TO YOUR SUPERVISOR. Employee Signature ____________________________ Store No. _______ Dept. No. _______ Date ________

The Purchasing Function SECTION 23.2 The Purchasing Function Modified Rebuy In a modified-rebuy situation, the buyer has had experience buying the good or service, but some aspect of the purchase changes, such as purchasing from a new vendor. A buyer usually gets proposals from several vendors before making a buying decision.

The Purchasing Function SECTION 23.2 The Purchasing Function Straight Rebuy In a straight-rebuy situation, the buyer routinely orders the goods and services purchased from the same vendor(s) as in the past. Staple goods such as office supplies fall into the straight-rebuy category for wholesale and retail buyers.

The Purchasing Function SECTION 23.2 The Purchasing Function Selecting Suppliers The criteria for selecting suppliers fall into a few key categories: production capabilities past experience product and buying arrangements special services

The Purchasing Function SECTION 23.2 The Purchasing Function Production Capabilities When dealing with a source for the first time, buyers may request specific information about the source's production capabilities. They may visit the production facility, get references, and ensure the facility is not a sweatshop. A sweatshop is a factory characterized by poor working conditions and negligent treatment of employees.

The Purchasing Function SECTION 23.2 The Purchasing Function Past Experiences Many buyers maintain resource files that document past experiences with vendors, with basic information such as products carried, prices, and delivery and dating terms, to evaluations of products, delivery performance, and customer service.

The Purchasing Function SECTION 23.2 The Purchasing Function Special Buying Arrangements Two special types of sales and return policies are called consignment buying and memorandum buying. In consignment buying, goods are paid for only after they are purchased by the customer. Memorandum buying occurs when the supplier agrees to take back any unsold goods by a certain date.

The Purchasing Function SECTION 23.2 The Purchasing Function Special Services Businesses today demand more services from their suppliers than just the basic return policy. One common demand is placement of Universal Product Codes (UPCs) on goods, which makes it easier for businesses to track products.

The Purchasing Function SECTION 23.2 The Purchasing Function Negotiating Terms To evaluate suppliers, buyers must negotiate their prices, dating terms, delivery arrangements, and discounts. One common discount is dating terms, discounts for paying a bill before the due date. Buyers can negotiate for bigger discounts or a longer deadline for payment.

The Purchasing Function SECTION 23.2 The Purchasing Function Internet Purchasing Business-to-business electronic commerce has revolutionized the purchasing function for businesses in the industrial and reseller markets. Electronic exchanges allow registered users to buy and sell goods online, often within specific industries. Slide 1 of 2

The Purchasing Function SECTION 23.2 The Purchasing Function Internet Purchasing Online auction companies register parties interested in selling an item or a service. Usually a seller sets an asking price and buyers try to outbid each other. This type of auction is available through the online exchanges of many industries. In a reverse auction, companies post what they want to buy and suppliers bid for the contract. Slide 2 of 2

Reviewing Key Terms and Concepts ASSESSMENT 23.2 Reviewing Key Terms and Concepts 1. List the three types of purchase situations. 2. What four things can buyers do to stay abreast of industry trends? 3. Name four criteria buyers use in selecting supply sources. 4. What is the difference between consignment and memorandum buying? 5. What are electronic exchanges and in what types of industries are they found?

ASSESSMENT Thinking Critically 23.2 How do you see the job description of a buyer or procurement manager changing with the advent of Internet purchasing?

Graphic Organizer 23.2 Criteria for Selecting Suppliers Production Capabilities Selecting A Supplier Past Experiences Special Buying Arrangements Special Services